Investor Lawyers Blog

Texas Securities Case: SEC Alleges Ponzi Scam Involving Virtual Currency Bitcoin

Published on: July 28, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is suing Trendon Shavers and his company Bitcoin Savings & Trust, accusing the two of them of running a Ponzi scam involving Bitcoin. In its Texas securities fraud case, the regulator contends that Shavers offered and sold the denominated investments online with the use of the names “pirateat40” and “Pirate,” purportedly raising at least 700,000 Bitcoin in BTCST investments.

Bitcoin is a virtual currency that is traded on online exchanges. Based on its average price in 2011 and 2012 when Bitcoin was on the market, the virtual currency at issue was worth over $4.5 million. Today, their value is greater than $60 million.

The SEC believes that Shavers told customers they could make up to 7% weekly interest due to BTCST’s “Bitcoin market arbitrage activity,” when actually BTCST was a Ponzi scheme that involved Shavers using Bitcoin from new investors to cover purported investor withdrawals on outstanding investments and interest payments. He also allegedly used investors’ Bitcoin to engage in day trading in his account while trading in some of their Bitcoin for US dollars to cover his own expenses.

Thornes & Associates Inc. Investment Securities’ Head Gets Industry Bar for “Lending” $4.2M of His Clients’ Assets to Friends

Published on: July 27, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority says that Thornes & Associates Inc. Investment Securities President John Thomas Thornes lent $4.2 million in client assets to two friends. Following the resolution of the FINRA arbitration case, the California broker is barred from the securities industry and his broker-dealer has been suspended, as well was expelled as a member of the SRO.

The friends who received the “loans”-over 50 transactions-allegedly spent the assets on cars, vacation homes, and plane and jet rentals. Over $262,000 is said to have been turned into cashier’s checks and used at an Indian casino.

Per FINRA’s complaint, however, calling the transfer of money a “loan” was not an accurate characterization, and not only were they unsecured and undocumented transactions but also they were never paid back.

UBS to Pay Fannie Mae and Freddie Mac $885M to Settle RMBS Lawsuit

Published on: July 27, 2013 | by Shepherd Smith Edwards & Kantas, LLP

UBS (UBS) will pay $885 million to settle Federal Housing Finance Agency to settle allegations that it misrepresented mortgage-backed bonds during the housing bubble. $415 million of the mortgage settlement will go to Fannie Mae, while $470 million will be paid to Freddie Mac, both government-sponsored enterprises, over the $200 million in mortgage-backed securities that were sold to them.

According to FHFA, UBS misrepresented the quality of loans that were underlying residential mortgage-backed securities worth billions of dollars that Freddie Mac and Fannie Mae ended up buying. Both firms were seized in 2008 when losses from subprime mortgages brought them close to insolvency. They still are under US conservatorship.

UBS is the third to settle with FHFA over RMBS allegations. Citigroup (C) and General Electric Co. (GE) were the first.

FINRA Reports Losses After Squandering Profit From NYSE Payment

Published on: July 23, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Last month, the Financial Industry Regulatory Authority put out its yearly report for 2012. According to the results, the self-regulatory organization is hurting. Its operating losses are huge-nearing $90 million for the second year straight. Meantime, its staff has grown 13%, with benefits and compensation rising 41% in the last five years to hit $628.9 million last year. That’s a significant jump from 2007 when the SRO’s compensation and benefits was $446.1 million. Retirement and pension expenses have risen 89% in the last five years.

While observers say that FINRA’s operating losses are not an immediate danger, no one can say for sure. Some are even asking how could a regulator facing potential financial trouble do its job and protect investors? Unlike its last five yearly reports, FINRA’s 2012 report pointedly says that the will keep observing the changing economy and assessing any effect on the organization. If there were to be a huge market collapse, however, FINRA’s equity would take a beating.

The private SRO is the National Association of Securities Dealer’s successor. NASD’s merger with the New York Stock Exchange (NYSE) Regulatory Division is one reason for the increase in FINRA’s compensation. After its merger with the NYSE Regulatory Division, NASD soon changed its name to the Financial Industry Regulatory Authority (FINRA).

DOJ’s $5B Securities Lawsuit Against Standard & Poor’s Can Proceed, Says Judge

Published on: July 22, 2013 | by Shepherd Smith Edwards & Kantas, LLP

U.S. District Judge David O. Carter for the Central District of California has turned down Standard & Poor’s bid to have the Justice Department’s $5 billion securities lawsuit against it dismissed. This affirms Carter’s recent tentative ruling earlier on the matter.

S & P is the largest credit rating agency in the world. It is a McGraw Hill Financial Inc. unit.

According to the US government, the credit rater fraudulently misrepresented its ratings process as objective and independent when it was, in fact, stymied from issuing ratings because of its desire to please banks and other clients. Instead, between 2004 and 2007, S & P purportedly issued AAA ratings to certain poor quality mortgage packages, including residential mortgage-backed securities, collateralized debt obligations, and subprime mortgage-backed securities. Now, prosecutors want to recover the losses that credit unions and federally insured banks allegedly suffered because of these inaccurate ratings that it contends upped investor demand for the instruments until the prices soared and the market collapsed, contributing to the global economic meltdown that followed.

SEC Charges SAC Capital Hedge Fund Adviser Stephen Cohen With Failure to Stop Insider Trading

Published on: July 20, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is charging Stephen A. Cohen with failure to supervise two portfolio managers and stop them from insider trading. Cohen is the SAC Capital. The SEC wants to ban the hedge fund mogul from supervising investor funds. A spokesperson for SAC says the securities case is meritless and Cohen always behaved appropriately.

According to SEC Division of Enforcement Co-Director Andrew Ceresny, even though it is the job of a hedge fund manager to properly supervise his/her employees and make sure that everyone is in compliance with securities laws, Cohen failed to act after finding out about red flags indicating that portfolio managers Michael Steinberg and Mathew Martoma may have been engaged in insider trading. The agency says that Cohen received “highly suspicious information” that should have compelled any reasonable hedge fund manager to look into the basis for trades made by Steinberg and Martoma. Instead, he purportedly let them execute the trades and even gave Martoma a $9 million bonus. Because of the illegal trades, the SEC contends, Cohen’s hedge funds made profits while avoiding $275 million in losses.

Already, SAC Capital affiliates have agreed to pay the SEC more than $615 million over the insider trading charges. The Commission says that, Martoma, affiliate CR Intrinsic Investors’ portfolio manager, received confidential data about an Alzheimer’s drug from a doctor who told him about clinical test results before they became public. Martoma and the affiliate then sold over $960 million in securities of Wyeth and Elan Corp., the two pharmaceutical companies that developed the drug, in the span of the week.

To settle the SEC’s case, CR Intrisinc said it would pay $275 million penalty, $275 million in disgorgement, and $52 million in prejudgment interest. Another SAC Affiliate, Sigma Capital, said it would pay $14 million over insider trading allegations to the SEC.

As for Steinberg, he is accused of insider trading in Dell securities. The SEC says that rather than find out whether Steinberg had material non-public information and was insider trading, Cohen followed Steinberg’s recommendation and sold his own shares in Dell. Meantime, Steinberg allegedly used that insider information as the basis for short-selling of Dell shares in his portfolio with Sigma Capital. Shortly after. Dell made its earnings announcement on August 28, 2008, its stock prices dropped. Funds overseen by Cohen’s firms, however, either made money or avoided losing at least $1.7 million.

The SEC is accusing Cohen of violating the Exchange Act’s Section 10(b) and Rule 10b-5 thereunder. He could be ordered to pay financial penalties and be barred from the industry.

SEC Charges Steven A. Cohen With Failing to Supervise Portfolio Managers and Prevent Insider Trading, SEC, July 19, 2013

CR Intrinsic Agrees to Pay More than $600 Million in Largest-Ever Settlement for Insider Trading Case, SEC, March 15, 2013

More Blog Posts:
New Stream Capital LLC Hedge Fund Executives Face Criminal Securities Fraud Charges, Stockbroker Fraud Blog, February 28, 2013

Hedge Fund Manager Philip Falcone Consents to $18M Securities Fraud Settlement, Institutional Investor Securities Blog, May 16, 2013

Investment Advisors Report: SEC Division Reviews Application of Investment Advisers Act, New Commission Unit Will Watch For Adviser Risk, & Just 1 in 10 SEC Exams Leads to Enforcement Action, Stockbroker Fraud Blog, March 26, 2013

Nontraded REIT News: Securities America Stops Selling American Realty Capital Trust V and Advisor Group Ends Selling Deal with Cole Holding

Published on: July 18, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Securities America Stops Selling Nontraded REIT ARC V

Securities America Inc. has severed ties with American Realty Capital Trust V Inc., a top-selling nontraded REIT. The independent broker-dealer blamed this on an overconcentration risk and its own exposure to real estate programs that AR Capital, a brokerage firm, distributes.

The nontraded real estate investment trust, known as ARC V, was the number one seller last month with about $10.8 million in daily sales. Already, between April, when the REIT launched, through the end of June, brokers have sold $406 million of them.

Detroit Becomes Largest US City to File Bankruptcy Protection

Published on: July 18, 2013 | by Shepherd Smith Edwards & Kantas, LLP

In what is now the country’s largest public bankruptcy, the city of Detroit has filed for Chapter 9 bankruptcy. Michigan Governor Rick Snyder, who filed for the protection along with Emergency Manager Kevyn Orr, said that that there was no other alternative.

Investors who purchased securities issued by the city of Detroit at the recommendation of a financial advisor may have a claim to recover some or all of their losses. Please contact our securities fraud law firm to request your free case assessment.

At a joint news conference held by the two men, Snyder spoke about the need to bring to a halt to the city’s 60-year decline. He noted that 38% of Detroit’s budget is going to debt service, pensions, and other “legacy costs.” He also said 40% of street lights don’t work and, unlike the police response time national average of 11 minutes, the city’s police take nearly an hour to show up.

Detroit’s total liabilities are about $18 billion. Orr has already stopped paying about $2 billion of the city’s debt. His reorganization plan involves reducing $11.5 billion in debt to $2 billion, with retirees and investors getting just 17% of what is due to them.

According to CNN, public employee unions are expected to oppose the filing. They contend that Detroit did not exhibit good faith negotiation and it should not be able to get out of commitments it made to retirees and employees.

Needless to say, city employees and retirees won’t be happy if any of their pension benefits are cut. While the Pension Benefit Guarantee Corp. will usually intervene to offer minimum benefits when employees of a business that has gone bankrupt lose the pensions promised to them, the federal agency isn’t responsible for pensions in the public sector.

Deals are also in the works for the city to potentially pay bond holders Bank of America (BAC) and Merrill Lynch (MER) 75 cents on the dollar—that’s close to $340 million in secured debt, report some sources.

The Wall Street Journal says that per media reports and public filings, while it is not known at this time which of the city’s assets would have to be sold, possible contenders include a Van Gogh painting, the Detroit Zoo, Fort Wayne, or even all its assets.

Orr plans for the bankruptcy to be completed by the “summer or fall” of 2013. The process could cost Detroit hundreds of million dollars in financial and legal expenses.

Detroit’s bankruptcy filing will likely cause reverberations. Bankruptcies could make it harder for towns and cities to raise the funds to construct schools, bridges, and other infrastructures. Individual investor-held municipal bonds could also take a hit.

Chapter 9 Bankruptcy
Per the US Courts website, Chapter 9 bankruptcy protection is for municipalities. It enables them to come up with a plan so they can deal with their debts. It is up to a city or its to decide whether to liquidate its assets.

Detroit files for Chapter 9 bankruptcy protection, My Fox Detroit, July 18, 2013

Detroit’s bankruptcy could spell good-bye for Howdy Doody, CNN, July 19, 2013

More Blog Posts:
UBS, Morgan Stanley, Merrill Lynch, and Other Brokerage Firms Subpoenaed by Massachusetts Securities Regulator in Probe of Complex Investments Sold to Seniors, Stockbroker Fraud Blog, July 8, 2013

New Hampshire Investment Adviser Focus Capital Wealth Management Accused of Elder Financial Fraud to Pay Exchange Traded Fund Victims $2.4M, Stockbroker Fraud Blog, March 14, 2013

The 21st Century Glass-Steagall Act Seeks to Separate Investment and Commercial Banking Again, Institutional Investor Securities Blog, July 12, 2013

Highland Capital Sues Credit Suisse For $350M Over Resort Loans

Published on: July 17, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Entities of Highland Capital Management LLP are suing Credit Suisse Group AG (CS) for over $350M. The plaintiffs are Haygood LLC and Allenby LLC. They claim that the financial firm marketed loans for high-end residential communities using appraisals that were deceptive and not reasonable. The disagreement is related to dividend capitalization loans for the Turtle Bay Resort, the Yellowstone Club, Ginn Clubs & Resorts and Rhodes Homes and the Park Highlands Master Planned Community. The securities case was filed in New York State Supreme Court.

According to the financial fraud lawsuit, managed investment funds that served as the loans’ lenders assigned the plaintiffs the claims. The latter are accusing Credit Suisse of working with “compliant stooges” in global appraisal firms to overvalue the communities that secured the loans so that lenders would invest in under-collateralized loans that would go on to fail.

A spokesperson for Credit Suisse says that Texas-based debt manager Highland Capital Management and entities related to it are behind this securities case and that this is one sophisticated investor’s “unfounded” effort to wrongly use the legal system to get back losses. The investment bank says it will fight the case.

Insurance Companies Experiencing Sellers’ Regret Over Variable Annuities

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

According to The New York Times, a number of insurance companies that sold variable annuities with healthy death or income benefits prior to the financials crisis are regretting this decision. One reason for this is that they are finding it hard to meet the obligations-payouts of at least 6% or guaranteed returns-that come with them.

Now, some insurers are currently trying to get annuity owners to agree to buyouts or move into investments that have lower returns. In some cases, the penalty for not complying is the loss of the payment that was guaranteed to them. Unfortunately, says The Times, the notice of these changes and potential ramifications are not being made explicitly clear to annuity owners, who may be hearing them via generic-seeming notices sent in the mail that don’t show no indication that the letter might be urgent.

One company, The Hartford, has notified advisers and clients that they have until October to change the asset allocation in specific variable annuities. This is to decrease the balance of the client, which would lower how much the company has to pay out. Rather than a 5% lifetime guaranteed payout, the annuity’s owner would receive a lower payout according to a decreased account value. Failure to comply will result in the loss of the rider that guaranteed payment no matter what the annuity’s value in cash. (A spokesperson for The Hartford, which is exiting the annuities business, said that the investment changes only apply to owners with contracts where such changes are allowed.)