Investor Lawyers Blog

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)

More Blog Posts:
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,

Massachusetts Ponzi Case Leads to Criminal Charges for Couple that Own Viking Financial Group. Inc.

Published on: March 21, 2013 | by Shepherd Smith Edwards & Kantas, LLP

At his arraignment this week, Steven Palladino, 55, pleaded not guilty to multiple criminal counts of larceny over $250, falsifying corporate books, and loan sharking, as well as one count of uttering. He and his wife Lori, 52, are accused of running a Massachusetts Ponzi scam. The victims of their alleged financial fraud are reportedly business associates and friends. Lori’s arraignment is scheduled for April.

Per the authorities, the couple used their firm, Viking Financial Group Inc. to pay investors interest and support their lavish lifestyle. Palladino allegedly told potential investors that the supposed private lending company had $25 million in assets and had never defaulted on a single loan. A closer look at Viking’s books, however, showed close to $2 million in bogus loans and nearly $756,000 in real loans. Also, loans made by the company were often purportedly done at such a high interest rate that the government believes these transactions were illegal.

While Palladino’s defense team claim that none of his clients investors were “out a penny” with everyone having “been paid,” the Suffolk County Prosecutor Benjamin Goldberger said he feared that investors’ losses could be in the millions of dollars. The government claims that between September 2009 and the end of 2012, Viking made $1.6 million in loans while taking in $4.6 million in new investments. Out of the money borrowed, at least $600,000 were allegedly loans made to the couple. (Also, although Palladino did repay one elderly senior, his 94-year-old aunt, whom he previously defrauded of real estate, the prosecution contends that the repayment of $350,000 came from the Ponzi scam.)

Bulk of American Securitization Forum’s Board Resigns

Published on: March 21, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The American Securitization Forum recently experienced an upheaval when most of its board resigned over a dispute with its executive director on the topics of bonuses and governance. The group is the primary trade association for the securitization industry, which generated over $500 billion of new bonds around the world.

Among those that resigned are JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC), Citigroup (C), and Deutsche Bank (DB). Sources that spoke on the grounds of anonymity said that the departures now place the future of the forum in peril. Also no longer on the ASF board are Fitch Ratings Ltd., Amherst Securities Group LP, Natixis SA, and Moody’s Investors Service.

The different board members stepped down after they were unable to remove the ASF board’s executive director Tom Deutsch. Even though they disagreed with the bonuses he received, they couldn’t displace him because of existing documents regarding governance.

Citigroup Will Pay $730M in Bond Lawsuit Alleging It Misled Debt Investors

Published on: March 20, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Pending court approval, Citigroup Inc. (C) will $730 million to resolve claims that it misled debt investors regarding its financial state during the economic crisis. The plaintiffs had purchased Citi preferred stock and bonds from 5/06 through 11/8. They are accusing Citigroup of misleading the buyers of 48 issues of its corporate bonds. Included among the plaintiffs of this bond lawsuit are the City of Philadelphia Board of Pensions and Retirement, the Louisiana Sheriffs’ Pension and Relief Fund, and the Minneapolis Firefighters’ Relief Association.

The bonds’ declined as the US mortgage market collapsed and the losses grew. According to Bloomberg.com, at one point, Citigroup’s $4 billion of 10-year notes declined to 79.7 cents on the dollar. It went on to lose over $29 billion in ‘08 and ’09.

Struggling from losses involving subprime mortgages, Citigroup ended up having to take a $45 million bailout in 2008, which it has since repaid. However, it is one of the Wall Street firms still coping with the aftermath of the financial crisis. Just last year, Citi consented to pay $590 million over a securities case filed by investors of stock contending that they too had been misled.

Securities Law and Congress Roundup: SEC Plans to Look at Corporate Political Spending Has Some Republicans Asking Why, Regulator Wants Lawmakers To Set Up Independent Auditor for Advisory Firms, & DOJ Stands by Its Record on Prosecuting Financial Firms

Published on: March 19, 2013 | by Shepherd Smith Edwards & Kantas, LLP

SEC Plans to Look at Corporate Political Spending Has Some Republicans Asking Why

In a letter to Securities and Exchange Commission Chairman Elisse Walter, a number of House Republicans, including Oversight Committee Chairman Darrell Issa (R-Calif.) and House Financial Services Committee Chairman Jeb Hensarling (R-Texas), asked why the agency plans to consider making corporate political spending disclosures a requirement when this matter seems “unrelated to its mandate” that it protect investors, maintain the markets, and “facilitate capital formation.” The lawmakers expressed concern that such a move by the SEC would be “especially problematic” seeing as it has no experience in this matter and the writing of such a rule would likely require much in terms of resources and staff.

The Congressional lawmakers said that the Commission should concentrate not on a “discretionary rule” but on a rulemaking that is mandatory. They pointed to the agency’s delays in getting the Jumpstart Our Business Startups Act efected in time for the mandated statutory deadline. They are asking why resources should be allocated to non-essential rulemaking that brings up serious concerns.