Investor Lawyers Blog

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.

Barclays Capital, Interactive Brokers, Lebenthal & Co., and Advisors Asset Management Pay $105,000 in FINRA Fines Related to Municipal Securities Rulemaking Board Violations

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

The Financial Industry Regulatory Authority is ordering four financial firms to pay $105,000 in fines for Municipal Securities Rulemaking Board violations related to political contribution, pricing, supervision, and other rules. The SRO noted the fines in its monthly disciplinary report.

One firm, Interactive Brokers LLC, must pay $7,500 for trade reporting violations related to Rule G-14’s requirements. The financial firm is accused of not reporting 60 sale and purchase transactions to the Real Time Transaction Reporting System within 15 minutes of their execution during 2010’s third quarter.

A second firm, Barclays Capital Inc, has to pay $15,000 for violating rules G-14, G-8, and G-27. The firm purportedly did not report 40 transactions to the RTRS, also within 15 minutes of their execution during 2011’s second quarter. It is accused of not reporting the correct trade time of 66 transactions.

SEC Reaches $600M Insider Trading Settlement with SAC Capital Advisors-Affiliated Hedge Fund Advisory Firm

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

Calling it its largest insider trading settlement to date, the Securities and Exchange Commission has settled its securities case with CR Intrinsic Investors LLC, an SAC Capital Advisors-affiliated hedge fund advisory firm, for $600 million. The regulator had sued the CR Intrinsic Investors and portfolio manager Matthew Martoma last year, accusing the latter of gaining access to inside information about an Alzheimer’s drug trial that was being developed by pharmaceutical companies Wyeth and Elan Corp. plc. before the results were released to the public.

The advanced information noted that the drug might be ineffective. This allegedly prompted Martoma to liquidate the position of his funds in both companies’ stocks and take on short positions. Martoma and his funds are said to have yielded $276 million in avoided losses (or profits) from the scam. He is now facing related criminal charges.

Earlier this month, the SEC amended its securities lawsuit, adding SAC and four affiliated hedge funds as relief defendants for allegedly receiving ill-gotten games from the insider trading scheme. According to the regulator’s acting director of enforcement George Canellos, the evidence in this case came from “the earth,” meaning that they were obtained from phone records, trading records, business records, and other information (as opposed to wiretaps).

The defendants resolved the securities case without denying or admitting to the claims. They agreed to pay about $275 million in disgorgement, a $275 million penalty, and $52 million in prejudgment interest. A court, however, must approve the settlement.

US v. Martoma (PDF)

SEC v. CR Intrinsic Investors (PDF)

More Blog Posts:
Investors are Not Raymond James Financial Customers for FINRA Arbitration Purposes, Rules 4th Circuit, Stockbroker Fraud Blog, March 28, 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 Continue Reading ›

Investors are Not Raymond James Financial Customers for FINRA Arbitration Purposes, Rules 4th Circuit

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

The U.S. Court of Appeals for the Fourth Circuit affirmed that, for purposes of Financial Industry Regulatory Authority arbitration, investors who lost the investment they made on stock they purchased from a lawyer connected to a Raymond James Financial Services (RJF) Inc. broker are not the brokerage firm’s client. The appeals court said that the investors dealings with the broker-dealer were “too remote.”

Tax lawyer David Affeldt had been recruited by an Inofin Inc. executive to recommend to investors that they buy securities from the company. That employee happened to be the college roommate of then-Morgan Stanley (MS) representative Kevin Keough, who also informally acted in a sales capacity for Inofin.

Because of his employment with the financial firm at the time, Keough had Inofin pay his compensation for the referrals to his wife instead of to him. He and Affeldt, however, agreed to equally share these referral fees-an agreement that continued even after Keough went to work with Raymond James.

2nd Circuit Eases MBS Lawsuits by Reinstating Pension Fund’s Case Against Wells Fargo, Royal Bank of Scotland, Wachovia, & Others

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

The U.S. Court of Appeals for the Second Circuit has reinstated New Jersey Carpenters Health Fund v. Royal Bank of Scotland Group PLC (RBS), which also includes defendants Wells Fargo Advisors (WFC), McGraw-Hill (MHP), and a number of others. The decision will ease class action mortgage-backed securities lawsuits by investors.

Holding that the plaintiff did not satisfy pleading requirements under the Securities Act of 1933 for lawsuits, a district court had thrown out the case, which was filed by the New Jersey pension fund. The 2nd circuit, however, reversed the ruling, finding that the allegations made (that an unusually high number of mortgages involving a security had defaulted, credit rater agencies downgraded the ratings of the security after modifying how they account for inadequate underwriting, and ex-employees of the relevant underwriter vouched that underwriting standards were being systematically ignored) make a plausible claim that the security’s offering documents incorrectly stated the applicable writing standards. This would be a Securities Act of 1933 violation.

Expected to benefit from the ruling are federal credit union regulators, including the National Credit Union Administration, which has submitted a number of MBS lawsuits against financial firms and banks. Last year, NCUA filed a $3.6 billion action against JP Morgan Chase (JPM) accusing the latter’s Bear Stearns & Co. unit of employing misleading documents to sell mortgage-backed securities to four corporate credit unions that went on to fail. The credit union agency contends that the mortgage in the pools collateralizing the RMBS (residential mortgage-backed securities) did not primarily adhere to underwriting standards noted in the offering statements and the securities were much riskier than what they were represented to be. NCUA has also sued a few of the defendants that the New Jersey Carpenters Health Fund is suing, as well as Goldman Sachs Group (GS) and Barclays.

Institutional Investment Fraud and The Courts: District Court Won’t Stay Derivatives Case Alleging FCPA Violations, Control Person Claims Against Over Revenue Bond Purchases Can Proceed, Ex-Hedge Fund Manager Gets Enhanced Securities Fraud Sentence

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

District Court Won’t Stay Derivatives Case Alleging FCPA Violations

The U.S. District Court for the Eastern District of Louisiana decided not to stay a shareholder derivative lawsuit accusing Tidewater Inc. of violating the Foreign Corrupt Practices Act. Judge Jane Triche Milazzo believes that a stay would burden not just the court but also the defendants. The court threw out the case last year, concluding that shareholder plaintiff Jonathan Strong, who did not make a presuit demand on the Tidewater board, failed to plead with particularity why such a demand was futile.

Per Strong, the offshore energy services provider violated the act when it ignored payments of about $1.76M that a subsidiary made to government officials in Nigeria, allegedly to get around custom regulation to be able to import vessels into that nation’s waters, and Azerbaijan, allegedly as bribes over tax audits. The derivatives lawsuit was filed after the Tidewater and the subsidiary agreed to pay about $15.5 million in a related settlement with the US Department of Justice and the Securities and Exchange Commission.

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

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

SEC Division Reviews Investment Advisers Act As It Applies to Private Fund Advisers

Currently examining the way applies the 1940 Investment Advisers Act to private fund advisers, the Securities and Exchange Commission is reportedly concentrating specifically on the areas of Form ADV and advertising. SEC Division of Investment Manager Director Norm Champ, who recently spoke at an Investment Adviser Association compliance conference, said that rules related to both areas might have to be modified in the wake of changes brought about due to the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The Advisers Act’s Rule 206(4)-1 doesn’t let adviser use advertising that includes misleading or false statements or refers to testimonials. Champ, however, noted that because of the advent of new forms of communications, including social media, as well as the birth of new business models since the rule was promulgated decades ago, there might be a need to revise the rule. As to Form ADV, which new registrants to the SEC must fill out, Champ pointed out that the way it is designed may not be take into consideration the sometimes complex nature of private funds.

SEC Actions Roundup: Bridge Premium Finance Settles Over Alleged $6M Ponzi Scam, Ex-Lancer Group Hedge Fund Manager’s Lawyer Sues Over FOIA Request, & Private Equity Firm Ranieri Partners Settles Securities Allegations

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

SEC Settles with Bridge Premium Finance Over Alleged $6M Ponzi

The U.S. District Court for the District of Colorado has approved a proposed settlement between the SEC and Premium Finance LLC, William Sullivan, and Michael Turnock. The three of them are accused of selling financing so that small businesses could cover their insurance premiums. The alleged Ponzi scam purportedly cost investors $6 million, even as they were promised up to 12% in returns.

Judge John Kane had initially rejected the proposed settlement, which came with SEC’s standard language allowing defendants to resolve cases without denying or admitting to the allegations. Pointing to strong federal policy that favors consent judgments and the “limited and deferential” review the courts have over such agreements, last month the Commission asked the court to reconsider. It also noted that such admissions could hurt the regulator’s enforcement program, potentially causing harm to the public. Turnock and Sullivan also filed a response to the complaint and admitted to some of the allegations.

Demand Notes Used to Help Pay For Ailing Real Estate Business Were Securities, Says District Court

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

In the U.S. District Court for the Eastern District of Michigan, a judge refused to throw out an SEC enforcement action against two men accused o f securities fraud. James Mulholland Jr. and Thomas Mulholland allegedly sold fake demand notes connected to a failing real estate venture. Contending lack of subject matter jurisdiction, and also that, per the law, the notes were not securities, the defendants had sought to have the Michigan securities case dismissed, the court, however, disagreed, pointing out that each note is presumed to be a security unless rebutted by fitting under or sufficiently resembling one of a number of note categories that the US Supreme Court has determined to not be a security.

The two men ran Mulholland Financial Services Inc., which they financed by putting out demand notes that they sold through “word-of-mouth referrals,” as well as to relatives, friends, and clients. When the financial firm started to collapse and it had to be dissolved, James and Thomas allegedly kept using the company to raise investor money, including $2 million in 2009, and selling demand notes to over six dozen investors while promising a 7% return. They also are accused of telling prospective investors that MFSI would make the profits that would lead to the returns, with principal and the interest made to be given within 30 days of any written demand request.

Many of these investors were reportedly retirees who were unseasoned investors. When the Mulhollands filed for bankruptcy protection, these investors lost everything they had placed in the notes.

The court said that it is obvious that the defendants’ main motivation for issuing the notes was to make money, they appeared to have a plan for how they were to distribute the notes, the 7% return that was promised constituted a “reasonable expectation” by the public, the notes were uninsured and uncollateralized, and no regulatory scheme was identified by the defendants that would apply if securities laws weren’t applicable. The court said that all these factors meet the criteria of the Reves test, from the US Supreme Court’s Reves v. Ernst & Young, therefore supporting that the demand notes are securities.

COURT CONCLUDES DEMAND NOTES WERE SECURITIES UNDER FEDERAL ACTS, Bloomberg Law, March 13, 2013

Reves v. Ernst & Young (PDF)

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FINRA CEO Says Now is Time to Make Investment Advisers and Brokers Adhere to a Fiduciary Standard, Stockbroker Fraud Blog, March 22, 2013

Bulk of American Securitization Forum’s Board Resigns, Institutional Investor Securities Blog, March 21, 2013

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FINRA CEO Says Now is Time to Make Investment Advisers and Brokers Adhere to a Fiduciary Standard

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

According to Financial Industry Regulatory Authority Chairman and Chief Executive Officer Richard Ketchum, now is the right time to make brokerage firms and investment advisers that provide personalized retail financial advice adhere to a uniform fiduciary standard. However, he warned that such a standard, whether by itself or combined with other regulatory harmonization, does not guarantee misconduct will not happen.

Establishing a uniform fiduciary duty for investment advisers and setting up new oversight for them were both recommended in Securities and Exchange Commission studies that were conducted over two years ago under the order of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Earlier this month, the SEC requested quantitative and economic information to help it decide what that standard of care should be. It also engaged in the conversation of whether investors would benefit more if rules were harmonized in other sectors of investment adviser and broker-dealer regulation, including supervision, firm licensing, advertising, individual qualification, books and records, and others.

Addressing the Consumer Federation of America earlier this month,