Investor Lawyers Blog

Credit Suisse Must Face ARS Lawsuit Over Subsidiary Brokerage’s Alleged Misconduct, Says District Court

Published on: January 11, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Southern District of New York has rejected Credit Suisse Group’s (CS) motion to dismiss Elbit Systems Ltd. v. Credit Suisse Group, the auction-rate securities lawsuit filed by an investor claiming that alleged misconduct took place at a Credit Suisse Group brokerage firm subsidiary Credit Suisse Securities (USA) LLC. The court said that the investor did an adequate job of alleging that the subsidiary acted with actual power of authority as Credit Suisse Group’s agent.

The plaintiff, Elbit Systems Ltd., contends that it invested in ARS because it was told that these were liquid, safe, and backed by the US government-backed. However, the Israeli electronics company claims that even as the market started failing in 2007, cash managers started to replace the government-backed ARS with more risky ARS backed by credit-linked note securities and collateralized debt obligations, and its Corporate Cash Management account began to fail, it was never informed that these problems were happening. Instead, its holdings in these risky investments were allegedly increased.

As of the complaints filing, Elbit’s securities have not been sold while its ARS investments had allegedly lost about $16 million. Also, a Credit Suisse Securities executive is accused of telling the plaintiff that brokers Eric Butler and Julian Tzolov were too busy to handle its account when actually, the two of them were no longer at the firm because they had been accused of securities fraud.

Despite Her Involvement in Dozens of Securities Cases, Brokerage Firms Continue to Clear Trades of Newport Coast Securities Broker Bambi I. Holzer

Published on: January 10, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Three years after Forbes magazine wrote an article exposing broker Bambi Holzer as someone whose investment advice to clients had resulted in more than $12M in securities settlements, brokerage firms continue to clear her trades. Over the years there have been dozens of complaints filed against her for improper broker activities-more than nearly anyone that we here at Shepherd Smith Edwards and Kantas, LTD, LLP have ever seen.

Holzer is currently a Newport Coast Securities broker, but her employment history with different broker-dealers within the industry has involved numerous financial firms. According to the Financial Industry Regulatory Authority, she was previously registered with Wedbush Morgan Securities Inc., Brookstreet Securities Corporation, and Sequoia Equities Securities. Holzer also worked with UBS (UBS), where she and the firm were compelled to pay at least $11.4 million to settle securities claims that she had allegedly misrepresented variable annuities by misrepresenting that they came with guaranteed returns. Following her time there, Holzer went to go work at AG Edwards (AGE), where she was fired in 2003 for engaging in business practices allegedly not in line with the policies of the firm.

Later, while at Brookstreet, Holzer allegedly made misrepresentations during a 2005 presentation in Beverly Hills about how trusts had allowed a fictional couple to defer $732,000 in taxes and make $9 million. She would later say on her website that 500 people watched her that day. However, a court document says that there were actually just 33 people in attendance.

Also while at Brookstreet, NASD, FINRA’s predecessor suspended Holzer for 21 days and ordered her to pay a $100,000 fine for negligent misrepresentations she allegedly made about certain product features related to variable annuities when she worked at PaineWebber. And an example of one complaint still pending against Holzer is the FINRA arbitration claim filed in early 2010 by a Wedbush Morgan Securities customer who is contending that account mishandling, breach of fiduciary duty, and breach of contract allegedly resulting in $824,000 in damages.

Holzer’s record on FINRA’s Central Registration Depository is 105 pages long, and the lawsuits and regulatory disciplinary actions against her span over 90 of these pages. Allegations include:

• Violations of the Illinois Securities Act • Negligent representations related to variable annuities
• Fraud • Misrepresentations of fees • Unsuitable investments
• Private placement-related fraud • Churning • Variable annuity-related fraud • Inadequate supervision • Elder abuse
• Negligent sale/recommendation of Provident Royalties, LLC • Negligent recommendation/sale of unsafe products, including the Behringer Harvard Security Trust

Many of the FINRA claims against Holzer involve private placement and variable annuity instruments. A lot of these arbitration cases have resulted in substantial settlements.

Beware of Your Broker, Forbes, March 25, 2009

FINRA Central Registration Depository

More Blog Posts:
Ernst &Young Auditor Suspended Over Part Played in Botched 2004 Audit of AA Investors Management LLC, Stockbroker Fraud Blog, January 7, 2013

SEC Roundup: Massachusetts Investment Adviser Gets $1.78M Judgment and Allianz to Pay $12.3M to Settle Foreign Corrupt Practices Act Lawsuit, Stockbroker Fraud Blog, January 7, 2013

Clearing House Association Wants Greater Protections for Clearing Members, Institutional Investor Securities Blog, December 31, 2012

FINRA To Take Closer Look at High-Frequency and Algorithmic Trading, Will Continue to Monitor Private Placements, Complex Products, and Other Areas

Published on: January 10, 2013 | by Shepherd Smith Edwards & Kantas, LLP

This month, the Financial Industry Regulatory Authority announced that it would be placing “significant resources” into monitoring high-frequency and algorithmic trading. The SRO said that following a number of market disruptions last year, it is worried about the way firms oversee these two systems.

In its yearly examination and regulatory priorities letter, FINRA spoke about how despite the fact that many high-frequency trading strategies are legitimate, others can be employed for purposes that are volatile, which is why the SRO wants to keep surveillance of this a priority and make sure that abusive trading doesn’t happen.

FINRA also said that it wants to take a closer look at alternative trading systems due to disclosure and operational concerns and high volume trading. It is examining firms that run ATS, as well as their affiliates. The SRO wants to figure out whether firms are accurately and consistently representing and disclosing different parts of their ATS operations to subscribers. Sweep letters were sent by FINRA to broker-dealers inquiring about ATSs in August.

SEC Roundup: Lawmakers Question Structural Reform Costs, Enforcement Director Khuzami to Step Down, & New Commission Chairman Names General Counsel is Named

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

Lawmakers Question the SEC About Costs Related to Structural Reform

Per the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 967, the Securities and Exchange Commission has been tasked with assessing how to restructure its operations to better its use of internal communications and resources. The restructuring plan is being referred to as the Mission Advancement Program. However, lawmakers are concerned that this effort may be too expensive—especially because of the costs associated with retaining independent consultant Booz Allen Hamilton Inc. to help with the restructuring.

Earlier this month, House Oversight Committee Chairman Darrell Issa (R-Calif.) asked the SEC for information about how much the Commission expects to save through the Booz Allen-recommended reforms, its 2012 fiscal year budget for Office of the Chief Operating Officer, CEO Jeffery Heslop’s yearly compensation, the May 2011 contract between the agency and Booz Allen, and the payments that have been made to the latter.

IOSCO Complex Products Report Does Not Get SEC Commissioners’ Approval Votes

Published on: January 7, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has failed to approve the International Organization of Securities Commission’s final report on the suitability requirements for distributing complex financial products. Commissioners Troy Paredes and Daniel Gallagher say they disapprove of its release. They don’t think it accurately portrays relevant law and that the US regulatory regime should not conform to it.

IOSCO believes that the 2008 economic collapse brought up serious concerns about how the increasing complexity of certain financial products has made it harder for clients to see the risks involved.

The report lays out nine principals to make sure there is proper customer protection related to complex financial instruments. Among the principals: intermediaries must implement policies to note the difference between non-retail and retail clients as they relate to financial instruments and execute “reasonable steps” to handle conflicts of interest, while exposing the risks should the client’s interest potentially be compromised; firms have to set up specific internal policies that support suitability requirements; and that intermediaries that recommend certain complex instruments have to take reasonable steps to make sure that their counsel is grounded upon a reasonable assessment that the financial product’s risk-reward profile and structure is aligned with the customer’s knowledge, experience, investment goals, inclination toward risk, and capacity to handle loss.

Ernst &Young Auditor Suspended Over Part Played in Botched 2004 Audit of AA Investors Management LLC

Published on: January 7, 2013 | by Shepherd Smith Edwards & Kantas, LLP

In a divided decision, the SEC has decided that suspending Ernst & Young auditor Wendy McNeeley from Commission practice for half a year for her conduct as manager of the audit of investment adviser AA Investors Management LLC and a related fund is appropriate. According to the agency, McNeeley and her engagement partner Gerard Oprin did not apply due professional care when assessing a $1.92 million related-party “tax loan” from client accounts to alleged fraudster John Orecchio, who co-owns AA Capital. She is also accused of choosing not to investigate further even after she encountered a number of red flags over a material transaction involving a related party.

The SEC filed its administrative proceedings against her and Oprin for not conducting the 2004 audit of AA Capital Equity Fund LLP and AA Capital, per generally accepted auditing standards. This alleged misconduct, contends the Commission, resulted in Ernst & Young putting out audit reports that were not properly qualified yet came with disclosures noting that they conformed to general accounting principles. McNeeley and Oprin are accused of not getting enough “competent evidential matter” or exercising the professional care required to their evaluation and disclosure of the loan to Orecchio. Instead, they allegedly depended on information from AA Capital’s chief financial officer that hadn’t been substantiated. Oprin was also accused of not properly supervising the audit.

While an administrative law judge would go on to dismiss the allegations facing Oprin, McNeeley was barred from appearing as an SEC accountant for a year. She appealed.

SEC Investor Advisory Members to Deal with Crowdfunding, Fiduciary Standard, and Pay Ratio Disclosures

Published on: January 7, 2013 | by Shepherd Smith Edwards & Kantas, LLP

According to the Securities and Exchange Commission Investor Advisory Committee, its subcommittees are try to come up with possible recommendations about crowdfunding, a uniform fiduciary standard, and pay ratio disclosures. Also during the first quarter of this year, the SEC is expected to seek economic data that is supposed to help it decide whether it should establish a uniform fiduciary standard for investment advisers and broker-dealers that gives investment advice to retail investors.

Under Section 911 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the committee has to “advise and consult” with the Commission on its investor protection initiatives and rulemaking priorities. While the SEC is not required to act on the recommendations, it must “promptly” evaluate them and disclose whether it will take related action. The committee’s first set of recommendations, to make the general solicitation ban under the Jumpstart Our Business Startups Act less stringent, was issued last year.

At the SEC Investor Advisory Committee’s January 18 meeting, subcommittee chairpersons talked about current and ongoing efforts. Investor as Purchaser subcommittee chairman Barbara Roper said that her group and the Investor Education subcommittee are working together to figure out where in a possible crowdfunding regime investors may be facing possible risks. Also, the group is trying to figure out where investor education might be most needed.

SEC Roundup: Massachusetts Investment Adviser Gets $1.78M Judgment and Allianz to Pay $12.3M to Settle Foreign Corrupt Practices Act Lawsuit

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

Massachusetts Investment Adviser Gets $1.78M Judgment

In a final judgment, the U.S. District Court for the District of Massachusetts says that EagleEye Asset Management LLC and its principal Jeffrey A. Liskov must pay a $1.78M judgment for using a foreign currency exchange trading scam to defraud clients. The Securities and Exchange Commission contends that Liskov fraudulently got several of his investment advisory clients to liquidate securities investments and place the money in forex trading. While EagleEye and Liskov made about $300,000 in performance fees, their clients allegedly lost $4M.

Liskov is accused of perpetuating the investment adviser fraud by issuing material misrepresentations about forex investments, their risks, and his track record. Also per the SEC’s complaint, Liskov more than once took old forms that advisory clients had signed and changed the dates, asset transfer amounts, and other information, and, without their knowledge, opened forex trading accounts.

Pension Plans’ Shareholder Derivative Claims Against UBS is Reinstated by 1st Circuit Appeals Court

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

The U.S. Court of Appeals for the First Circuit has reinstated the shareholder derivative claims filed by two Puerto Rican pension funds against UBS Financial Services Inc. (UBS) Judge Kermit Lepez said that following de novo review—a district court had dismissed the case on the grounds that a failure to properly plead demand futility was subject to such an examination—it seemed to him that the plaintiffs’ allegations sufficiently show reasonable doubt about six fund directors’ ability to assess the former’s demand to bring this action with the independence and disinterest mandated by Puerto Rican law.

The two pension funds are the owners of shares in closed-end funds that made investments, which were not successful, through UBS entities. Their investment adviser and fund administrator is UBS Trust, which is a UBS Financial affiliate.

According to the court, UBS Financial, which has been Puerto Rico’s Employee Retirement System (ERS) financial adviser for more than five years, underwrote $2.9B of ERS-issued bonds. Meantime, the UBS Trust bought approximately $1.5B of the ERS bonds and then sold them to funds. At issue is about $757M in bonds that the two Puerto Rican funds purchased.

Morgan Stanley Must Pay Ex-Manager $1M

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

A Financial Industry Regulatory Authority arbitration panel says that Morgan Stanley (MS) Smith Barney has to pay Gregory Carl Torretta $1 million. The financial firm’s ex-manager claims that he was forced to unfairly resign.

Torretta had sought $8 million to $9 million for what he claims were wrongful termination and the breach of his employment contract. Torretta contends that Morgan Stanley had accused him of criticizing the performance of a branch manager, whom he was about to fire, and that he was going to take that person with him to another firm. The allegations surfaced after the branch manager, who was unhappy with the oversight, wrote Torretta implying that the latter had talked about leaving the brokerage firm and suggested that he also leave with him. The branch manager cc’ed Torretta’s boss on the email.

Torretta says that the firm then told him he could either resign or be fired, so he resigned. He is now employed with Ameriprise Financial Services Inc. (AMP). The branch manager was letter let go.