Investor Lawyers Blog

FINRA Securities Activities: SRO Withdraws Proposal to Make Financial Firms Link to BrokerCheck, Gets Request from SIFMA to Modify ‘Inability to Pay’ Rule, and Says Broker-Dealers Can Give Investors PIP Data About ETPs

Published on: May 15, 2013 | by Shepherd Smith Edwards & Kantas, LLP

SRO Says Brokerage Can Institutional Customers PIP Data About ETPs Under Certain Conditions

Financial Industry Regulatory Authority staff have determined that under certain conditions, broker-dealers are permitted to include pre-inception performance information in communications with institutional investors about exchange-traded products, also known as ETPs. Staffers said that FINRA Rule 2210, which governs institutional communications, allows for the use of this data in the way that a fund company is proposing. ALPA Distributors is proposing using the PIP information just in institutional communications, per FINRA Rule 2210 and subject to certain criteria.

However, in “applying the suitability standards” for recommendations to institutional customers,” the SRO said brokerage firms should be cautious about putting too much “weight” on PIP information, while taking into consideration the correlation between performance of other, similar ETPs managed by the investment adviser, sponsor, or index provider and the PIP data. The staff’s letter was in response to a letter written by the fund company, which sees value in giving institutional investors the information for ETPs analysis.

SEC Sues Traders Over Alleged Scam Involving Bribe Paid to Venezuelan Official to Get Bond Trading Business

Published on: May 15, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The SEC is suing four traders affiliated with brokerage firm Direct Access Partners for their alleged involvement in a financial scam that involved millions of dollars paid in illicit bribes to a Venezuelan banking official to obtain that bank’s bond trading business.

According to the regulator, DAPs’ global markets group made fixed income trades for clients in foreign sovereign debt, generating revenue of over $66M from markup/markdown transaction fees on principal trade executions in Venezuela bonds sponsored by the state for BANDES (Banco de Desarrollo Económico y Social de Venezuela). The bank’s finance VP, María de los Ángeles González de Hernandez is accused of allegedly authorizing the illicit trades and receiving part of the revenue.

The securities scam is said to have taken place between October 2008 and at least June 2010. Because of the purported kickbacks paid to Gonzales, DAP was given the bank’s profitable trading business, while she was provided with incentives to get into trades with DAP at significant markdowns and markups regardless of the prices that BANDES paid. The traders are also accused of fooling DAP’s clearing brokers, inter-positioning one broker-dealer to cover up their involvement in the transactions, performing internal wash trades, and taking part in huge roundup trades to bulk up revenue.

Per the Commission regarding the trades: Thomas Bethancourt executed the trades that were fraudulent and kept track of the illicit markdowns/markups; Iuri Bethancourt was given over $20M in illicit proceeds through his shell company, which would pay Gonzales; Hurtado, who allegedly earned over $6M in kickbacks, was the one who paid Gonzales and acted as her intermediary with the traders; and Hurtado’s wife, Haydee Pabon, purportedly was given about $8M in markdowns/markups on BANDES trades under the guise of finders’ fees.

Read the Complaint (PDF)

More Blog Posts:
SEC Commissioner Aguilar Calls For the Abolishment of Mandatory Arbitration Agreements, Stockbroker Fraud Blog, April 21, 2013

Federal Records Act Lawsuit Seeking to Make the SEC Reconstruct About 9,000 Enforcement-Related Documents is Dismissed, Institutional Investor Securities Blog, February 5, 2013

Two Men Sentenced in Texas Securities Case Involving $30 Million Promissory Note Fraud that Bilked Investors Via Ponzi Scam

Published on: May 14, 2013 | by Shepherd Smith Edwards & Kantas, LLP

In Harris County state District Court, two men have received prison terms of a decade each for running a Texas Ponzi scam that involved life insurance policy death benefits. Gregory F. Jablonski and Howard Glen Judah are accused of orchestrating a nearly $30M scam involving their National Life Settlements LLC, which sold securities that weren’t registered and which they falsely claimed were benefits-backed. Both of them pleaded guilty to selling an unregistered security and securities fraud.

Investors with National Life Settlements were paid using the money of new investors. The company made false promises, causing customers that they would get an 8-10% yearly return through the promissory notes. Active and retired state employees were among those targeted, and millions of dollars were taken from retirement plans and invested through the firm.

The National Life Settlements used insurance agents, many of whom did not have securities dealer licenses, as it sellers. The agents would go on to make $4M commissions.

SEC Roundup: Regulator Addresses CDS Portfolio Margin Program & Ex-Commission Officials Want DC Circuit to Grant SIPC Protection to Stanford Ponzi Scam Victims

Published on: May 14, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Ex-Commission Officials, Others Want DC Circuit to Grant Stanford Ponzi Scam Victims SIPC Protection

Former SEC Officials, law professors, and trade groups are among those pressing the U.S. Court of Appeals for the District of Columbia Circuit to reject the regulator’s bid to compel Securities Investor Protection Corporation coverage for the investors who were bilked in R. Allen Stanford’s $7 billion Ponzi scam. Inclusion under the Securities Investor Protection Act would allow the fraud victims to obtain reimbursement for losses.

However, SIPC, which is a federally mandated non-profit corporation, doesn’t believe that the Stanford investors, who purchased certificates of deposit from Stanford International Bank Ltd. in Antigua, fall under this protection. Following a failure to act on the SEC’s request to initiate liquidation proceedings for brokerage firm Stanford Group Co., the regulator asked the court for a novel order that would make the organization comply.

Wells Fargo Settles Securities Lawsuit Over Medical Capital Holdings Ponzi Scam for $105M

Published on: May 11, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Wells Fargo & Co. (WFC) has consented to pay $105M to investors of the now failed Medical Capital Holdings Inc. The bank had served as trustee for Medical Capital securities.

The medical receivables financing company got about $2.2 billion from thousands of investors between 2001 and 2009 via the private placement offerings that were promissory notes. The private placement was a high commission financial instrument that promised annual returns of 8.5% to 10.5%. Per court filings, investors paid Medical Capital nearly $325 million in administrative fees. Dozens of independent brokerage firms sold the notes.

It was in 2009 that the SEC accused affiliates of Medical Capital of committing securities fraud against investors. The financial scam was quickly shut down and the company soon entered receivership but investors got back just half their money. Many of them would go on to file a securities lawsuit against trustees Bank of New York Mellon Corp. (BK) and Wells Fargo accusing the financial firms of failing to fulfill their role as trustees by neglecting to detect the fraud. Meantime, many of the brokerage firms that sold the MedCap notes are no longer in business because they sank from the securities arbitration payments and legal costs that followed as a result.

$500M MBS Settlement Reached Between Countrywide and Investors

Published on: May 10, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Class action securities plaintiffs, led by the Iowa Public Employees’ Retirement System, have settled their mortgage-backed securities lawsuit against Countrywide for $500 million. This is the largest federal class action MBS securities case in the US that has been resolved to date, even exceeding the $315 million settlement reached with Bank of America’s (BAC) Merrill Lynch (MER) last year.

Per the investors, Countryside, which was acquired by BofA, sold them billions of dollars in MBS certificates that were backed by defective loans. Toward the end of 2008, nearly all of the certificates were relegated to junk bond status.

The plaintiffs allege that offering documents for the mortgage-backed bonds failed to disclose that Countrywide was ignoring its own guidelines regarding home loan originating. In their consolidated class action securities case, investors sought over $351 billion of the Countrywide MBS that had been downgraded after the subprime collapse in 2007. (A district judge would go on to narrow the mortgage-backed securities lawsuit to $2.6 billion in bonds and Bank of America was dismissed as a defendant.)

Lawmakers Tackle Investment and Securities Matters

Published on: May 10, 2013 | by Shepherd Smith Edwards & Kantas, LLP

US Senators John Thune (R-SD), Richard Burr (R-NC), and Tom Coburn (R-Okla) have introduced a bill that would mandate that public pension plans reveal more information about the way they calculate liabilities and assets or place at risk the favorable tax treatment for bonds that are issued by the states and cities. S. 799 is a companion legislation to a bill that was recently unveiled in the US House of Representatives.

Like S. 799, SRLR 710 would make pension plans notify the Treasury Department about what assumptions and methods they use to determine assets, debt, and liabilities. Failure to abide by these tougher disclosure requirements would lead to the revocation of tax exemptions for specific bonds put out by municipalities and states. The senators’ bill also would prohibit federal bailout for any public pension funds.

Another Republican, Rep. Ann Wagner from Missouri, recently presented HR 1626, which would prohibit the Securities and Exchange Commission from being able to make companies reveal their political spending. The legislation, co-sponsored by Rep. Scott Garrett (R-N.J.), would amend the 1934 Securities Exchange Act.

Merrill Lynch Settles New Jersey Securities Fraud Lawsuit over State’s Stock Purchase for $45 Million

Published on: May 9, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Bank of America Corp’s (BAC) Merrill Lynch & Co. (MER) will pay the state of New Jersey $45 million to settle securities charges that it committed misconduct related to a stock purchase that the latter made in 2008. The investment bank is accused of breaching a contract provision that determined how the state was to exchange Merrill Lynch preferred stock for common stock.

New Jersey’s Division of Investments had purchased $300 million in preferred Merrill Lynch stock (Merrill Series 1 9% Mandatory Convertible Preferred Shares) in 2008. In 2009, the state’s attorney general at that time filed a NJ securities case against the financial firm contending that it had given “better terms” to at least another investor over the conversion of shares and issued misleading information about its financial state. By settling, Merrill Lynch is not denying or admitting to committing any wrongdoing.

If you think you may have been the victim of securities fraud, contact our Shepherd Smith Edwards and Kantas, LTD, LLP right right away. SSEK represents both individuals and institutions with arbitration claims and lawsuits against financial firms, brokers, investment advisers, and others.

Standard & Poor’s Seeks Dismissal of DOJ Securities Fraud Lawsuit Over RMBS and CDO Ratings Issued During the Financial Crisis

Published on: May 9, 2013 | by Shepherd Smith Edwards & Kantas, LLP

In the U.S. District Court for the Central District of California, Standard & Poor’s Financial Services LLC is asking for the dismissal of a US Department of Justice securities fraud lawsuit accusing the ratings firm of knowing that it was issuing faulty ratings to collateralized debt obligations and residential mortgage-backed securities during the financial crisis. S & P is contending that the claims are against judicial precedent and don’t establish wrongdoing.

The government sued the credit rating giant and its parent company McGraw-Hill Companies Inc. (MHP) earlier this year. It claims that S & P took part in a scheme to bilk investors by wrongly representing that its ratings for collateralized debt obligations and residential mortgage backed securities were independent and objective, purposely giving artificially high ratings to specific securities, and ignoring the risks involved. Submitted under the 1989 Financial Institutions Reform, Recovery, and Enforcement Act, this is the first federal legal action filed against a rating agency related to the economic crisis.

Now, however, S & P is arguing that the DOJ’s RMBS lawsuit does not succeed in alleging fraud. The credit rater says that it shouldn’t be blamed for not having been able to foresee the financial crisis of 2008.

Gemstar Capital Group Owner Sued for Texas Securities Fraud in $40 Ponzi Scam He Ran with Ex-Dallas Cowboy Football Player Gets 10-Year Prison Sentence

Published on: May 8, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Gemstar Capital Group owner Jeffrey J. Sykes has been handed a 10-year federal prison sentence for the $40 million Ponzi scam he ran with ex-Dallas Cowboy Michael Kiselak. Although the former NFL player has not been criminal charged, he was found liable for more than $20 million in 2009 over his involvement in the Texas securities fraud portion of the scheme. Now, the federal government is confirming that Kiselak defrauded investors of at least $24 million dollars in the financial scam run by Sykes.

In 2007, Sykes and Kiselak set up Kiselak Capital Group to pursue investors. According to the US Attorney’s Office, Kiselak used information given to him by Sykes to get investors to put in over $20 million. The ex-pro football player took out fees for himself and then gave the money to Sykes even though both Gemstar and Kiselak didn’t engage in Treasury note trading, which is what they told investors they were doing.

Instead, contend prosecutors, the two men used some of the funds for personal spending and in ventures that investors didn’t know about. While some of the funds did go back to investors, in certain instances, Sykes made false claims that the money was profit from T-Bill trading programs or their capital returned.

In the SEC’s securities fraud case against Kiselak, Sykes, and Gemstar, the regulator claimed that Kiselak promised 2.25% monthly returns to investors, falsified documents, dumped 95% of their funds in Gemstar, and failed to disclose that a 35% performance fee was levied on Gemstar profits.

Since Sykes put most of investors’ money in money market accounts, the latter were able to get back some of the funds, which they invested between 2007 and 2009. However, they lost approximately $12.9 million.

“Our firm has represented a number of high-profile athletes with securities fraud claims and we have also taken action against former athletes and the financial firms they represent,” said Shepherd Smith Edwards and Kantas founder and Texas securities fraud attorney William Shepherd. “I have been asked whether an unusually high number of former athletes become involved in such scandals. It is true that when an athlete’s career ends their income can fall precipitously. It is also true that many enter sales, including securities sales because of their ability to reach high net worth clients. But I do not believe former athletes are more likely than others to commit harmful acts. I do believe that when they become involved in problem situations these are far more heavily publicized.”

Owner of California private equity company pleads guilty in more than $40 million Ponzi scheme involving Texas investors, Dallas News, January 11, 2013

More Blog Posts:
Texas Senator’s Bill Would Make Plaintiffs’ Attorneys in Private Securities Cases Disclose Possible Conflicts Of Interest That Might Have Affected Client Retention, Stockbroker Fraud Blog, April 5, 2013
Texas Securities Criminal Case Against Oil and Gas Company Executive Can Proceed, Rules Fifth Circuit, Stockbroker Fraud Blog, February 6, 2013
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