Investor Lawyers Blog

Morgan Stanley Hit with $5 Million Securities Fraud Lawsuit Involving Alleged Superannual Account Losses Related to Risky Option Trading

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

In Australia, two Morgan Stanley (MS) customers are suing the financial firm for $5 million because they say that is much their superannual accounts lost because of alleged misrepresentations made by broker Kate Kearney. Helen Sedman, 74, and Sally Middleton, 61, claim that Kearney deceived them into thinking that an option trade that they made was low risk.

Middleton and Sedman are business partners. They believe that because of the high-risk option trade and fees they had to pay, over 97% of Middleton’s account was wiped out (from $1.2 million to $34,000), while Sedman’s went down 90% (from $4.8 million to $950,000) in just eight weeks. The plaintiffs say they paid Morgan Stanley $1.1 million in fees.

According to the women’s securities attorney, the business partners wanted long-term safe investments for their super funds. Instead, what they purportedly got was an “aggressive” trading plan that cost them close to $5 million, while Kearney earned $379,000 in commissions from Sedman and $188,000 from Middelton. Their lawyer says that because of Kearney’s reassurances, their lack of knowledge about how much risk was really involved, and their difficulty in fully comprehending their trading position, they ended up moving forward with trades that they otherwise would not have gotten involved in.

Number of Banks At Risk of Failing Goes Down

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

According to The Dealmaker’s Journal, the list of banks in danger of failing has gotten smaller. Bank observers are speculating whether the failures have decreased because of election year politics, the industry is becoming more robust, regulatory agencies have changed leadership, or other factors.

Regulators tend to shut down banks with low capital, and last month alone, data analysis firm Trepp reported a rise in bank failures. That said, the rate of failures has gone down in the last few years. Last year 51 banks failed. By April for this year, 10 banks had failed. However, 651 institutions are still on the Federal Deposit Insurance Corp’s list of problem banks.

Over just the course of a quarter following exams and credit writedowns, there have been banks that have gone from appearing well capitalized to seized. This was especially true 2009 and 2010 when certain bankers were reluctant to admit that credit quality had gone down until regulators forced them to lower the value of their portfolios.

California AG Files Lawsuit Against JP Morgan Chase Alleging Debt Collection Abuse Over 100,000 Credit Card Cases

Published on: May 16, 2013 | by Shepherd Smith Edwards & Kantas, LLP

According to California Attorney General Kamala Harris, JP Morgan Chase (JPM) filed about 100,000 credit card debt collection lawsuits between 2008 and 2011 without conducting sufficient research to properly assess the cases’ merits. The bank reportedly submitted 200 lawsuits over 15 weeks in 2011, including 32 lawsuits on January 5, 2011. Now, Harris is suing the banking giant, accusing it of “debt collection abuse” while victimizing tens of thousands of state residents.

Per the complaint, Chase prioritized saving money and speed, even “robo-signing” legal documents without sufficiently evaluating the evidence and engaging in other “unlawful practices.” The state points to questionable documents and incomplete records that were purportedly used to back up the cases. Harris, who contends that JPMorgan’s “debt collection mill” abused the state’s judicial process, wants damages for borrowers.

Meantime, JPMorgan is cooperating regulators, including the Office of the Comptroller of the Currency, which is getting ready to file an enforcement action against it ,also over its handling of credit card debt collection. The firm reviewed its debt collection procedures in 2011 and it is no longer filing credit card lawsuits.

Hedge Fund Manager Philip Falcone Consents to $18M Securities Fraud Settlement

Published on: May 16, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Hedge fund billionaire Philip Falcone and his Harbinger Group (HRG) have reached an $18 million securities fraud settlement, an agreement in principle, with the SEC over allegations that he fraudulently took a $113 million loan from one of his funds to cover his taxes, manipulated the market, and gave preference to certain clients, including Goldman Sachs (GS). Falcone, who will personally pay $4 million, is settling the financial fraud case without admitting or denying wrongdoing. Although he can remain has CEO of his group and stay associated with Harbinger Capital Partners, he is barred from raise new money or using his hedge funds to make investments for two years.

The ban, however, doesn’t apply to the nine investment advisers that Falcone runs through the company. (This, some say, is so that Falcone can unwind the hedge fund without hurting investors.) The pending deal is once again raising questions about whether the SEC is doing enough to take action against wrongdoers in the industry.

For instance, Harbinger Group’s business that involves Falcone acting as a private equity investor in different companies is not really impacted by the SEC settlement. Also, the independent monitor selected by the SEC to watch the firm is one who was on a list that Falcone recommended.

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.)