Investor Lawyers Blog

Controversial Democratic Appointee Pushes SEC for Less Talk About Investor and Securities Market Protections and More Action

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

According to Securities and Exchange Commissioner Luis Aguilar, the growing number of registered investment advisers, the increasing complexity of the financial instruments they use, and the recent trends in securities examinations show that there is a need for the regulator to up the vigorousness of its investment adviser examinations and enforcement activities. He noted that even as the SEC is working to give the regulated community best practices and guidance to enhance compliance, it also intends to increase its scrutiny of advisers, including more exams (especially for private fund advisers). Alternative investment managers will also get more attention.

Aguilar pointed out that with the number SEC registered investment advisers having gone up about 50% to over 10,000 last year, the value of the assets that they manage also increasing from about $22 trillion in 2002 to approximately $44 trillion in 2011, as well as a rise in the number of complex financial instruments that advisers use, there are more chances for “mischief” to happen. Hence, there is the need for more robust enforcement.

Also, as our securities fraud law firm mentioned in a previous blog post, the SEC commissioner wants there to be an end to mandatory arbitration agreements. Per the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC now can prohibit or limit pre-dispute arbitration agreements, which have become standard fare for brokerage firms. Aguilar is concerned that they are also becoming routine for investment advisory firms. He wants the government to ponder the possibility of adopting rules that would stop or limit broker-dealers and investment advisers from mandating that customers sign clauses in their agreements with one another that prevents them from filing securities fraud lawsuits and instead only resolve their disputes via arbitration.

FINRA Plan May Dramatically Change The Way Brokerage Firms Report On Nontraded REITS & Other Illiquid Investments on Client Statements

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

The Financial Industry Regulatory Authority’s board of governors has a plan that could radically modify the way brokerage firms report illiquid investments’ value on the account statements of clients. The SRO, which wants to give investors more transparency in regards to the actual value of such investments, has been trying to modify its rules about REITs and private placement valuations on client statements for well over a year.

Earlier this month, in changes it is proposing to Rule 2340, the FINRA board presented two reporting alternatives for brokerage firms. With the first option, a brokerage firm wouldn’t need to have the per-share estimated value of an REIT or a private placement that is unlisted included in customers’ account statements. The second choice lets a brokerage firm chose from three options:

• A valuation done by an external service at least one time every three years.

Just Because Supreme Court’s Rulings in Amgen and Halliburton Give Defendants Less Tools to Beat Weak Class Certifications But Doesn’t Mean Plaintiffs Can Rest Easy

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

The US Supreme Court’s ruling earlier this year in Amgen, Inc. v. Connecticut Retirement Plans and Trust Funds (and also in Erica P. John Fund, Inc. v. Halliburton Co.) decreases the tools that defendants of federal securities fraud lawsuits have to win against the class certification of weak claims. In Amgen, the Court found that plaintiffs don’t have to prove an alleged misrepresentation’s materiality to certify a class under the fraud-on-the-market theory, while in Halliburton, the Court held that plaintiffs don’t have to prove loss causation to garner class certification.

That said, although the Court’s rulings in recent years often have been considered “pro-plaintiff,” it actually has given securities defendants help in getting rid of the weaker securities fraud cases early on. For example, Bell Atlantic Corp. v. Twombly and Ashcroft v. Iqbal mandate for plaintiffs to demonstrate that their interpretation of specific facts are plausible and beyond merely possible. Also, even with Amgen and Halliburton decreasing the chances of class certification being defeated on the grounds of loss causation or materiality, these issues can still be addressed in motions for partial summary judgment early on. Such a motion might even be submitted simultaneously as one opposing certification.

Our securities fraud law firm represents institutional and individual investors throughout the US. We believe that filing your own securities case increases your chances of recovering as much of your lost investment back. Over the years, Shepherd Smith Edwards and Kantas, LTD LLP has helped thousands of investors recoup their losses.

MF Global Holdings Bankruptcy Trustee Files Lawsuit Against Ex-CEO Corzine and Other Former Executives

Published on: April 26, 2013 | by Shepherd Smith Edwards & Kantas, LLP

According to bankruptcy trustee Louis Freeh, former MF Global Holdings (MFGLQ) CEO Jon Corzine and other former executives did not act in good faith when they were in charge of the company. The ex-FBI director is suing them in bankruptcy court for gross negligence and breach of fiduciary duty. (Corzine is also a former Goldman Sachs (GS) CEO and he previously served as a US Senator and the Governor of New Jersey). Also named as defendants are the firm’s ex-COO Bradley I. Abelow and ex-CFO Henri J. Steenkam. MF Global’s collapse left customers wondering where about $1.6 billion dollars of their funds had gone missing.

Per Freeh’s lawsuit, after becoming CEO, Corzine and the other executives “dramatically changed” MF Global’s business plan but failed to update certain systems, including poor controls that made it impossible for the company to figure out liquidity levels. Corzine then allegedly made the company place large bets on bonds put out by countries in Europe. Freeh believes that the executives knew the risks involved but ignored them.

The case comes after Freeh submitted a report about Corzine and other executives. The former FBI director had said he was going to hold off and try resolving the securities claims via mediation, but even with this process still ongoing, Freeh believes that moving ahead with the lawsuit is in creditors’ best interest.

Investors Duped in $150M Investment Scam Offering US Citizenship Prospect To Recoup Funds, Says SEC

Published on: April 25, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The SEC says that investors who were bilked in a $150 million financial scam that offered foreigners a possible path to becoming an American will get back their money from the bogus securities offering. This news comes after the SEC filed civil charges against Anshoo R. Sethi.

Sethi is accused of creating Intercontinental Regional Center Trust of Chicago and A Chicago Convention Center in an alleged scheme to sell over $147M in securities that were supposed to go toward financing the building of a conference center and hotel close to Chicago’s O’Hare airport. Instead, contends the SEC, Sethi and his companies deceived Chinese investors, who were made to believe investing could up their chances of obtaining legal residency in this country via the EB-5 Immigrant Investor Pilot Program, which gives foreign investors a way to obtain this through their involvement in projects in this country that will help preserve or create a certain amount of jobs for our workers. Foreign investors may be able to get a green card if they put in $1 million (or $500,000 if in a “Targeted Employment Area” that has an unemployment rate that is high).

The Commission says that although Sethi and the companies had promised that the over $11M administrative fees paid by investors would revert back to them if their applications for visas didn’t go through, the three of them have already actually spent over 90% of this money. Also, approximately $2.5M purportedly ended up in Sethi’s personal account.

Police Retirement System of St. Louis Also Suing JPMorgan Chase Executives Over “London Whale” Scandal

Published on: April 25, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Police Retirement System of St. Louis is suing JPMorgan Chase (JPM) CEO Jamie Dimon and several other senior bank officers over the “London Whale” scandal. The pension fund, which owns 39,000 of the investment bank, is one of numerous investors seeking compensation. Dimon and the other JPMorgan executives are accused of disregarding the red flags indicating that the London-based operation was engaged in taking large scale risks that ultimately resulted in close to $6 billion in losses last year.

In its derivatives lawsuit, the Police Retirement System of St. Louis contends that the defendants “eviscerated” the risk controls of JPMorgan’s London unit to up profits. Even after the media reported that one of the bank’s traders in London was making big bets (that trader was eventually dubbed the “London Whale”), Dimon downplayed the news to investors. The pension fund contends that the executives and others breached their duties to shareholders by not stopping the risky trades.

In March, US lawmakers sought to understand the multimillion-dollar trading loss. At a hearing before Congress, they questioned past and current JPMorgan executives about the financial scandal. Their interrogation came a day after the release of a damning 300-page Congressional report that blamed the bank’s lax culture while also criticizing the Office of the Comptroller of the Currency for also failing to follow up on warning signs.

The executives tried to defend themselves, saying their attempts to lower risks were countered by traders that purposely undervalued bets to conceal an increase in losses. Among the executives that gave testimony was ex-JPMorgan chief investment office head Ina Drew, whose group was in the middle of the debacle. She too blamed lower-level traders and others, while contending that she had been given inaccurate information. Drew said she didn’t know that traders were upping their bets.

Withering Questions at Senate Hearing on JPMorgan Loss, New York Times, March 15, 2013

JPMorgan hit with new investor lawsuit over “Whale” losses, Reuters, April 15, 2013

More Blog Posts:
JP Morgan Sued by Dexia in $1.7B MBS Lawsuit, Institutional Investor Securities Blog, February 11, 2013

JPMorgan, Goldman Sachs, Bank of New York Mellon, Charles Schwab Disclose Market-Based NAVs of Money Market Mutual Funds, Stockbroker Fraud Blog, February 7, 2013

Three Cedar Brook Financial Partners Brokers’ Licenses Are Suspended Over Allegedly False & Misleading Statements About Subprime Mortgage-Backed Security IMH Fund and Medical Capital Holdings Inc.

Published on: April 24, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Regulators have suspended the securities licenses of Cedar Brook Financial Partners brokers Howard Slater and Michael Perlmuter and firm executive Azim Nakhooda in the wake of allegations that they issued false statements about Medical Capital Holdings Inc. and the IMH Fund, a subprime mortgage-backed security. The sanctions are part of the settlements they reached with the Financial Industry Regulatory Authority.

According to the SRO, Slater, Perlmuter, and Nakhooda also allegedly modified three customer accounts to show false net worth information. Inflating the account balances on paper made the areas of the clients’ portfolios that were in risky funds drop below Cedar Brook’s guidelines that such investments are not to go up over 20% of a person’s holdings. Inaccurate statements were purportedly made via email.

All three men agreed to settle the FINRA allegations without denying or admitting the allegations. As part of their agreements, Perlmutter will pay a $40,000 fine and serve an eight-month suspension. Slater is suspended for five months and will pay $30,000.

Standard Poors Wants DOJ’s Mortgage Debt Lawsuit Against It Tossed

Published on: April 24, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Standard Poors is asking a judge to dismiss the US Justice Department’s securities lawsuit against it. The government claims that the largest ratings agency defrauded investors when it put out excellent ratings for some poor quality complex mortgage packages, including collateralized debt obligations, residential mortgage-backed securities, and subprime mortgage-backed securities, between 2004 and 2007. The ratings agency, however, claims that the DOJ has no case.

Per the government’s securities complaint, financial institutions lost over $5 billion on 33 CDOs because they trusted S & P’s ratings and invested in the complex debt instruments. The DOJ believes that the credit rater issued its inaccurate ratings on purpose, raising investor demand and prices until the latter crashed, triggering the global economic crisis. It argues that certain ratings were inflated based on conflicts of interest that involved making the banks that packaged the mortgage securities happy as opposed to issuing independent, objective ratings that investors could rely on.

Now, S & P is claiming that the government’s lawsuit overreaches in targeting it and fails to show that the credit rater knew what the more accurate ratings should have been, which it contends would be necessary for there to be grounds for this CDO lawsuit. In a brief submitted to the United States District Court for the Central District of California, in Los Angeles, S & P’s lawyers argue that there is no way that their client, the Treasury, the Federal Reserve, or other market participants could have predicted how severe the financial meltdown would be.

New Hampshire Regulators Accuse Edward Jones of “Questionable Marketing” to Recruit Customers

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

The New Hampshire Bureau of Securities Regulation says Edward Jones & Co. employed “questionable marketing” to bring in customers. Seeking up to $3 million, the brokerage firm is accused of making 20,000 calls to residents that were on NH’s National Do Not Call Registry.

According to regulators, no other broker-dealer has been named in as many complaints about unsolicited phone calls. A spokesperson for Edward Jones, however, disputes this contention.

With over 12,000 financial advisers and approximately 11,400 offices throughout the US-mostly there is just one broker per locale-the brokerage firm tries to work around telemarketing rules by getting brokers to go door-to-door. Training materials talk about how when a potential customer asks to be added to the do-not call list, the broker is supposed to respond by saying he/she respects the former’s decision but that another visit may be likely if something that could be of possible interest to the prospective client arises.

Lehman Brothers Australia Wants Federal Court to Approve $248M Settlement Payment Plan to Creditors

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

The liquidators of Lehman Brothers Australia want the Federal Court there to approve their plan that would allow the bank to pay $248M in securities losses that were sustained by 72 local charities, councils, private investors, and churches. Although the court held Lehman liable, no compensation has been issued because the financial firm went bankrupt.

Per that ruling, the Federal Court found that Lehman’s Australian arm misled customers during the sale of synthetic collateralized debt obligations. The court also said that Lehman Brothers subsidiary Grange Securities was in breach of its fiduciary duty and took part in deceptive and misleading behavior when it put the very complex CDOs in the councils’ portfolio. (Lehman had acquired Grange Securities and Grange Asset Management in early 2007, thereby also taking charge of managing current and past relationships, including the asset management and transactional services for the councils.) The court determined that the council clients’ “commercial naivety” in getting into these complex transactions were to Grange’s advantage.

Via the liquidators’ plan, creditors would get a portion of a $211 million payout. This is much more than the $43 million that Lehman had offered to pay. The payout would include $45 million from American professional indemnity insurers to Lehman, which would then disburse the funds to those it owes.