Investor Lawyers Blog

Many Investors Find that Securities Arbitration Can Be Better than Court

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

The dismissal of an Apple REIT class action lawsuit against David Lerner Associates Inc. in U.S. District Court for the Eastern District of New York should have little effect on the Apple REIT arbitration cases that are being resolved through Financial Industry Regulatory Authority arbitration. In fact, most investors are likely to recoup their losses via this avenue.

Per Bloomberg, Investors are contending that they were defrauded in the underwriting and sale of more than $6.8 billion Apple Real Estate Investment Trusts (REITs), which were marketed as suitable for conservative investors. Meantime, Lerner Associates earned over $600 million in commissions and fees as five Apple REITs made above $6 billion.

Last year alone, FINRA told David Lerner to pay $12 million in Apple REIT Ten restitution to investors. The financial firm allegedly targeted elderly investors, misleading them while failing to properly disclose the risks involved in the securities.

Previous Dissent by Arbitrator is Not Reason to Vacate Award Morgan Keegan Was Ordered to Pay Investors, Says District Court

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

The U.S. District Court for the Middle District of Florida is holding that an arbitration award granted to investors cannot be vacated under the Federal Arbitration Act just because an arbitrator exhibited obvious partiality when failing to reveal that he wrote a dissent in an unrelated arbitration that allegedly showed he had prejudged issues of law. The securities case is Antietam Industries Inc. v. Morgan Keegan & Co.

Petitioners Antietam Industries Inc., Janice Warfel, and William Warfel contend they sustained financial losses over their RMK fund investments. In 2011, they filed a Financial Industry Regulatory Authority arbitration case claiming that their money was lost because Morgan Keegan had made misrepresentations while failing to disclose how risky the funds were.

Last year, the panel awarded the petitioners $100,000 in compensatory damages and $100,000 in punitive damages, plus fees and interest, for negligence, breach of fiduciary duty, and other claims. When they sought to confirm the award, Morgan Keegan submitted a motion to vacate, pointing to FAA and contending that arbitrator Christopher Mass allegedly showed partiality and “misbehavior” with his failure to disclose his previous dissent. The court, however, rejected Morgan Keegan’s argument, saying it was not convinced that Mass was predisposed or had prejudged.

Federal Workers’ Privacy Rights if STOCK Act Provision Mandating Online Disclosure of Financial Data Goes Into Effect, Says District Court Judge

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

In Senior Executives Association v. United States, U.S. District Court for the District of Maryland Judge Alexander Williams said that the privacy rights of thousands of senior federal workers could be violated if a Stop Trading on Congressional Knowledge Act provision, which mandates that these employees’ financial information is disclosed online, goes into effect.

The court noted that exposure from disclosure online is greater than what existed under the old regime of disclosure. Under the old requirements, per the Ethics in Government Act, federal employees’ financial reports had to individually requested, while the requestor had to name itself. Information about the legal parameters of use was provided.

Meantime, a Congressionally mandated study, which was recently released, reports that broad online disclosure of government workers’ financial data is possibly dangerous and should be indefinitely delayed. Conducted by a National Academy of Public Administration panel, “An Independent Review of the Impact of Providing Personally Identifiable Financial Information Online” found that the STOCK Act’s disclosure requirement could hurt federal agency missions, as well as workers. Among the worries brought up: possible identity theft and potential exploitation by foreign intelligence services and others. There were also concerns that access to what has normally been private financial formation, including debt and other financial losses, could now be used to suss out who might be most vulnerable to bribes and other financial inducements. The study recommends that lawmakers indefinitely suspend this provision.

Noting that only approximately 450 financial reports for senior federal employees were sought over two years under the old disclosure regime, Judge Williams suggested that the privacy of over 28,000 workers eclipses the privacy loss “associated with” the old system.

“The goal of the legislation was to place the same type restrictions on Congresspersons and Senators, their staff, and other government workers that the rest of us face: No trading on insider information!” Said Securities Lawyer William Shepherd. “Folks in Washington get lots of inside information, such as how laws will effect companies, who is getting government contracts, etc. This is information we could all get rich on – and many do! So, what happens when one writes a law to prevent themselves from an unfair advantage over you and me? Well, they could write a law that is unconstitutional so the courts will throw it out. This way, they appear to be taking action – but nothing happens in the long run. The result is that they can keep making money unfairly without worrying about breaking the law.”

Senior Executives Association et al v. United States of America et al, Justia

More Blog Posts:
Previous Dissent by Arbitrator is Not Reason to Vacate Award Morgan Keegan Was Ordered to Pay Investors, Says District Court, Stockbroker Fraud Blog, April 8, 2013

Morgan Keegan Settles Subprime Mortgage-Backed Securities Charges for $200M, Stockbroker Fraud Blog, June 29, 2011

Texas Senator’s Bill Would Make Plaintiffs’ Attorneys in Private Securities Cases Disclose Possible Conflicts Of Interest That Might Have Affected Client Retention

Published on: April 5, 2013 | by Shepherd Smith Edwards & Kantas, LLP

On March 22, Senator John Cornyn (R-Texas) introduced S. 652, which would mandate that plaintiffs’ lawyers in private securities actions reveal via sworn certification any fees or other conflicts of interest that might have impacted their retention of clients. Dubbed the “Securities Litigation Attorney Accountability and Transparency Act,” the bill would mandate that the courts review the certifications and disqualify any lawyers that had wielded such influence from the case.

Some plaintiffs attorneys feel that S. 652 disregards the effect that Private Securities Litigation Reform Act has had on securities cases. The bill has been referred to the Senate Banking Committee.

Meantime, another Texas lawmaker, House Financial Services Committee Chairman Jeb Hensarling , is asking the Securities and Exchange Commission to account for how it used resources in Gabelli v. SEC, a US Supreme Court case that affirmed the statute of limitations standard the regulator must abide by when bringing a civil penalty. Representatives Hensarling and Rep. Scott Garrett (R-N.J.), who chairs the HFSC’s Capital Markets subcommittee, wrote a letter to Commission chairman Elisse Walter expressing worry over how the regulator expends resources on “dubious legal theories” while failing to meet deadlines for rulemaking.

SEC Submits Request for Data on Whether to Make Brokers & Investment Advisers Abide by Uniform Fiduciary Standard

Published on: April 4, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has put out its request for information to help it decide whether to impose a uniform standard of care on both investment advisers and broker-dealers that give advice to retail customers. The comment period ends 120 days after the data request, which was issued on March 1, is published in the Federal Register.

Responding to the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 913, the SEC conducted a study on the effectiveness of the current standards for investment advisers and brokers. Following its examination, Commission staff recommended that the regulator take part in rulemaking to establish a uniform fiduciary standard for those that provide customized retail investments. However, last year, after then-SEC Chairman Mary Schapiro announced that the agency was putting together a request for information so it could decide whether to follow this recommendation, the initiative had to be delayed due to a lack of support from other commissioners.

Now, in this latest request request, the Commission was quick to stress that it has yet to decide whether such a rulemaking needs to happen or what one would entail. It also asked for data regarding others areas impacting both investment advisers and brokers that could benefit from harmonization, including business conduct rules, licensing advertising, registration, and books and records.

RMBS Lawsuit Against Deutsche Bank Can Proceed, Says District Court

Published on: April 4, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Southern District of New York is refusing to throw out the shareholder securities fraud lawsuit filed against Deutsche Bank (DB) and three individuals over their alleged role in marketing residential mortgage-backed securities and mortgage-backed securities before the economic crisis. The court found that the plaintiffs, led by Building Trades United Pension Fund, the Steward International Enhanced Index Fund, and the Steward Global Equity Income Fund, provided clear allegations that omissions and misstatements were made and there had been a scam with intent to defraud.

The RMBS lawsuit accuses Deutsche Bank of putting out misleading and false statements regarding its financial health prior to the financial crisis. The plaintiffs contend that the financial firm created and sold MBS it was aware were toxic, while overstating how well it could handle risk, and did not write down fast enough the securities that had dropped in value. Because of this, claim the shareholders, the investment bank’s stock dropped 87% in under 24 months.

U.S. District Judge Katherine Forrest said that the plaintiffs did an adequate job of alleging that even as Deutsche Bank talked in public about its low risk lending standards, senior employees at the firm were given information showing the opposite. She said that there are allegations of recklessness that are “plausible.” The district court also found that the complaint adequately alleged control person and antifraud violations involving defendants Chief Executive Officer Josef Ackermann, Chief Financial Officer Anthony Di Iorio, and Chief Risk Officer Hugo Banziger, who are accused of making material misstatements about the risks involved in investing in CDOS and RMBS while knowing they were less conservative than what investors might think. Claims against defendant ex-Supervisory Board Chairman Clemens Borsig, however, were thrown out due to the plaintiffs’ failure to allege that he made an actual misstatement.

SEC OCIE Finds Custody-Related Deficiencies Involving Investment Advisers

Published on: April 3, 2013 | by Shepherd Smith Edwards & Kantas, LLP

According to the Securities and Exchange Commission Office of Compliance Inspections and Examinations, it discovered “significant deficiencies” related to custody issues with a third of the investment advisers that it examined, including:

• Failure of an investment adviser to recognize when it has custody • Failure to satisfy the rule’s surprise exam requirements • Failure to fulfill the rule’s qualified custodian requirements

Custody by investment advisers refers either to the holding of securities or client funds or the authority to possess them, including the power of attorney to get securities or funds from client accounts. The 1940 Investment Advisers Act’s Rule 206(4)-2 regarding custody prescribes specific requirements for client asset safety.

“Substituted Compliance” Should Regulate Cross-Border Swaps, Says SEC Chairman Elisse Walter

Published on: April 3, 2013 | by Shepherd Smith Edwards & Kantas, LLP

According to Securities and Exchange Commission Chairman Elisse Walter, the best way to regulate global over-the-counter derivatives regulation is via “substituted compliance.” Such an approach would let a market participant comply with domestic requirements in a certain area through compliance with comparable foreign regulation while also allowing the domestic regulator to keep applying specific policy requirements of local law when the foreign one fails to impose requirements or protections that compare.

Per its Dodd-Frank Wall Street Reform and Consumer Protection Act Title VII mandate, the SEC intends to put forth a proposal on how to tackle cross-boarder issues. Although the Commission hasn’t figure out how it will go forward with this proposal, Walter stressed that “substituted compliance” could act as a “a reasonable and necessary middle ground” between making foreign participants abide by domestic regulation and widely recognizing foreign swap regimes. She believes that while efforting to give the maximum substituted compliance possible, properly tailored cross-border regulation would take care of the potentially significant regulatory gaps that are likely to exist between jurisdictions.

Walter believes that regulators need to be participating in the world debate on how to cut down systemic risk. Also, noting that brokerage firms, investment advisers, and other market participants that the SEC oversees differs from traditional banking institutes, Walter cautioned that failure to identify these key differences ups the risk that there will be weaker financial institutions and less options for businesses looking for investment capital.

Galleon Group Founder’s Brother Pleads Not Guilty to Insider Trading

Published on: April 2, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Rajarengan “Rengan”, the brother of Galleon Group founder Raj Rajaratnam, has entered a not guilty plea to federal fraud charges accusing him of securities fraud and conspiracy to commit securities fraud. The indictment stems from the same insider trading that landed Raj behind bars for 11 years and resulted in convictions for over two dozen co-conspirators.

The government had accused Raj of making up to $75 million dollars by trading on insider information given to him by other money managers or the employees of public companies. Now, federal prosecutors claim that Rengan made close to $1.2 million on illegal trades made in 2008 involving Advanced Micro Device and Clearwire Corp. He allegedly obtained insider tip about the securities of Hilton Hotels, Polycom, Akamai Technologies, Clearwater Corporation, and AMD from Raj.

In its related civil case, the Securities and Exchange Commission also is charging Rengan. The agency contends that between 2006 and 2008, Rengan repeatedly obtained insider information from his brother, making over $3 million in illicit gains not just for the hedge funds he oversaw at Sedna Capital Management, which he co-founded, and Galleon, but also for himself. The SEC is accusing Rengan of Securities Exchange Act of 1934 Section 10(b) and Rule 10b-5 violations.

Deutsche Bank Settles Massachusetts CDO Case for $17.5 Million

Published on: April 1, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Deutsche Bank Securities Inc. has consented to pay $17.5 million to the state of Massachusetts to settle allegations by that it did not disclose conflicts of interest involving collateralized debt obligation-related activities leading up to the financial crisis. Secretary of the Commonwealth William Galvin also is accusing the firm of inadequately supervising employees that knew about the conflicts but did not disclose them. DBSI, a Deutsche Bank AG (DB) subsidiary, has agreed to cease and desist from violating state securities law in the future.

In particular, the subsidiary allegedly kept secret its relationship with Magnetar Capital LLC. Galvin claims that DBSI proposed, structured, and invested in a $1.6 billion CDO with the Illinois hedge fund, which was shorting some of the securities’ assets. In total, Deutsche Bank Securities and Magnetar are said to have invested in several CDOs worth approximately $10 million combined.

The state of Massachusetts’s case focused on Carina CDO Ltd., of which Magnetar was the sponsor that invested in the security’s equity and shorted the assets that were BBB-rated. Ratings agencies would go on to downgrade the collateralized debt obligation to junk. Galvin contends that it was Deutsche Bank’s job to tell investors what Magnetar was doing rather than keeping this information secret.