Investor Lawyers Blog

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
Continue Reading ›

Ex-Employer Wants Would-Be Whistleblower’s Appeal Dismissed In Light of the US Supreme Court’s Ruling Over Alien Tort Statute Claims

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

In light of the US Supreme Court’s decision in Kiobel v. Royal Dutch Shell Petroleum Co., the attorney for GE Energy (USA) wants the Court of Appeals for the Fifth Circuit to dismiss would-be whistleblower Khaled Asadi’s appeal to have his lawsuit, contending that his firing violates the protections provided to him under the 2010 Dodd-Frank Act, reinstated. Asadi filed his complaint against the company last year claiming that his former employer had violated the whistleblower anti-retaliation provisions. The dual Iraqi and US citizen says that he was let go from his job after he told GE Energy’s ombudsman and his supervisor about a hiring situation that could violate the Foreign Corrupt Practices Act.

A district court, however, threw out his case, finding that, per the Supreme Court’s ruling in Morrison v. National Australia Bank Ltd., applying the anti-retaliation provisions to behavior that happened abroad is precluded. Asadi then went to the Fifth Circuit, arguing that Dodd-Frank protects employees that report violations of any rule, law, or regulation that is under SEC jurisdiction. He claims that these protections extend to US citizens who work abroad and report information about securities violations.

Asadi believes that the way Dodd-Frank incorporates the FCPA supports his claim that the whistleblower protections do have “extraterritorial applicability.” He noted that the anti-corruption statute has a “clear statement rule” that is applicable to individuals and companies outside the US.

FINRA Notifies Brokerage Firms About Non-traded REIT Information that Can Mislead Investors

Published on: May 6, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is alerting broker-dealers that the way they market certain non-traded real estate investment trusts could be misleading investors. The regulator said its recent reviews of brokerage firm communications with the public about these investments showed “deficiencies.” The SRO has been trying to improve the sales practices related to illiquid REITs and increase their transparency.

Among the identified information shortcomings:
• Inaccurate and misleading statements about the benefits of investing • Failure to adequately explain the risks involved • Describing a real estate security as a “yield,” which can incorrectly suggest that it is a bond
FINRA said it is necessary for brokerage firms to provide “fair and balanced” distribution rates, while explaining that distribution payments are not a given. The regulator observed that some broker-dealers are prone to highlight these payments, which are given to investors as soon as the nontraded REITs are sold, but fails to inform that some distributions are the return of their principal or borrowed money. FINRA reminded broker-dealers that they have to wait until an REIT has paid distributions for six months before it can make claims about the instrument’s yearly return rate.

The SRO noted that data about related or affiliated REITs should be as prominently visible as other information, and past performance information about REITs involving the current investment being promoted cannot be cherry picked.

REITs and Non-traded REITs
REITs invest in commercial real estate, which gives investors a chance to benefit from the increase in property values, and they are publicly traded. Non-traded REITs, which don’t trade on securities exchange, can be tough to sell in secondary markets or illiquid. Investors usually have to pay higher fees for them.

FINRA has been targeting the improper-sale of non-traded REITs for some time now. This latest notification to brokerage firms doesn’t mention how many broker-dealers it looked at (or which ones) to reach its conclusions.

Our REIT lawyers represent investors throughout the US. For over two decades, Shepherd Smith Edwards and Kantas, LTD LLP has helped thousands of investors recoup their investment losses by going through arbitration via FINRA, NYSE, NASD, and AAA, as well as through the state and federal courts.

FINRA Provides Guidance on Communications With the Public Concerning Unlisted Real Estate Investment Programs, FINRA.org (PDF)

More Blog Posts:
Majority of Non-Traded REITs Underperform Compared to Benchmarks, Reports New Study, Stockbroker Fraud Blog, August 25, 2012
Private REITs: The Need for Tougher Oversight?, Institutional Investor Securities Blog, June 28, 2011
Apple REIT Arbitration: FINRA Rules Against David Lerner Associates in First of Hundreds of Cases, Stockbroker Fraud Blog, May 26, 2012 Continue Reading ›

Investor Files Securities Case Against Fidelity Over Float Income Investments Involving 401(K)s

Published on: May 6, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Investor Korine Brown is seeking class action status on behalf of those that also participated in General Motors Inc.’s Personal Savings Plan for hourly employees in her securities case against Fidelity Investments Institutional Operations Co. Inc. and Fidelity Management and Research Co. She is alleging breach of fiduciary duty. This is just the latest investment fraud case over Fidelity’s handling of money that came from planned assets, as well as against other 401k providers.

As of the end of 2011, the plan Brown has been a participant in contained about $46 billion in assets for over 100,000 account holders. The plaintiff claims that Fidelity Research breached its duty when it invested float income into Fidelity funds found in the plan menu.

Float income is money generated from redemptions, contributions, and transfers of planned assets when they are briefly put in in interest bearing accounts. Brown believes that Fidelity Investments Institutional Operations breached its duty when it used the float income, which she says is a plan asset, to take care of operating costs. She claims that Fidelity didn’t let participants and the fiduciaries tasked with administrating the plan know about how the float income was being used.

Congress Regulates the Securities Regulators

Published on: April 30, 2013 | by Shepherd Smith Edwards & Kantas, LLP

At a hearing in the US House of Representatives about putting the Jumpstart Our Business Startups Act into effect, Rep. Patrick McHenry (R-N.C.) expressed worry that the Securities and Exchange Commission has lost the power to enforce the private offerings general solicitation ban because the rulemaking for the statutory deadline has come and gone. Per the JOBS Act’s Title II, the SEC could write rules to lift the ban for offerings that take place under Rule 144A and Regulation D Rule 506.

The SEC, which put out a proposal, has yet to make a final rule. SEC Chairman Elisse Walter defended the agency’s actions, noting that a comment period is normal. The Commission has been criticized by Republicans and industry members, who contend that its decision to vote on a proposal instead of interim final rules is a way of kowtowing to investor groups. Walter maintains that she has always favored notice and comment rulemaking to put a provision into effect (per the Administrative Procedure Act).

Meantime, Rep. Maxine Waters (D-Calif.), a ranking member of the House Financial Services Committee, once again introduced a bill that would use industry user fees to fund the SEC’s investment adviser examinations. HR 1627 would make advisers under the Commission’s oversight pay fees to cover the “funding gap” in the oversight program. A similar bill that she previously had presented did not move forward, in part because it was competing with former Committee Chairman Spencer Bachus (R-Ala.)’s legislation to place investment advisers under the oversight of a regulator. That bill, too, did not progress.

State Courts Securities Litigation: Va. County Can Sue Over Bond Offering Advice, Plaintiff’s Breach Claim Against Brother to Go to Jury, & Ruling Affirms that Investment Bank’s Offer to Buy Minority Shares Triggered Company’s First Refusal Rights

Published on: April 30, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Fluvanna County, VA Can Sue Over Bond Offering Advice, Says Supreme Court of Virginia

Virginia’s highest court has reinstated a securities fraud lawsuit filed by Fluvanna County, Virginia Board of Supervisors against Davenport & Co. The county claims that the investment concern gave it faulty bond offering advice about the building of a new high school.

The Board said that it depended on this investment advice when deciding to put out standalone bonds that caused it to incur $18 million in excess payments. It then sued Davenport in circuit court, making numerous contentions, including breach of fiduciary duty, gross negligence, and Virginia securities law violations. That court ‘sustained the demurrer with prejudice’ and would not let the board make amendments to pleadings. It said that the separation of powers doctrine won’t let the court resolve the securities case because then it would have to look into the Board’s motives. The latter then appealed.

SEC Accuses Victorville, CA, Underwriter, and Others of Municipal Bond Fraud

Published on: April 29, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The SEC has filed securities fraud charges against the city of Victorville, CA, one of the city’s officials, the Southern California Logistics Airport Authority, and Kinsell, Newcomb & DeDios, which underwrote the bonds. The SEC claims that they bilked investors by inflating valuations of property that secured a 2008 municipal bond offering.

According to the regulator, city official Keith C. Metzler and KND owner Jeffrey Kinsell and VP Janees L. Williams are to blame for misleading and false statements put out in the Airport Authority’s bond offering in April 2008. The SEC is also accusing KND of misusing over $2.7 million in bond proceeds to stay in business.

The Commission says that the Airport Authority took on a number of redevelopment projects and financed them by putting out tax increment bonds, and by April 2008 it had to issue even more bonds to refinance a portion of the debt incurred to keep going with these endeavors.