Investor Lawyers Blog

SEC Roundup: Number of Securities Cases Brought Against Attorneys Rises, Permission Granted to Announce Material Information Via Social Media, & Clearing Agency Rulemaking Process Gets Streamlined

Published on: April 16, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Under Rule of Practice 102(e), SEC to File More Securities Cases Against Lawyers

According to the Commission, it intends to bring even more cases against lawyers under its Rule of Practice 102(e). The amount cases had already gone up in the wake of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act and the 2002 Sarbanes-Oxley Act. Now, the regulator’s Office of the General Counsel is getting referrals from its Enforcement Division about possible lawyer misconduct.

The cases being brought generally involve alleged securities violations, such as active involvement in financial fraud and the obstruction of probes, with judgment errors and close calls not included. Per rule 102(e), the SEC can bar or censure individuals from practicing or appearing before it for different reasons. Some attorneys, however, are worried about the way the regulator interprets the rule, such as what ‘active participation’ in fraud actually entails. There are also concerns that the rule could be used as a “tactical tool” against attorneys.

CtW Investment Group Wants JPMorgan Chase Shareholders To Vote Against Re-Electing Four Board of Directors

Published on: April 15, 2013 | by Shepherd Smith Edwards & Kantas, LLP

CtW Investment Group has announced plans to file a document with the Securities and Exchange Commission that would press shareholders to vote against reelecting four JPMorgan Chase & Co. (JPM) board of directors: James Crown, Ellen Futter, Laban Jackson, and David Cote. The group, which represents pension funds that together hold approximately 6 million of the financial firm’s shares and is labor organization Change to Win’s advisory arm, also intends to make its request in writing to the shareholders.

CtW believes that these directors can no longer be depended on to deal with oversight failures and blames most of them for poor risk management oversight that they say allowed the trading fiasco to happen. Meantime, JPMorgan is seeking support among its biggest shareholders. It claims that the board isn’t to be blamed for the “London Whale,” which involved its operation in England making risky bets and losing nearly $6 billion in losses.

Meantime, in a report on the global investment banking industry, JPMorgan’s analysts pointed to Goldman Sachs (GS) and Deutsche Bank (DB) as examples of Tier 1 investment banks to stay away from. It described this tier of banks as “un-investable, with their viability in doubt.

AIG Wants to Stop Former CEO Greenberg From Naming It as a Defendant in Derivatives Lawsuit Against the US

Published on: April 13, 2013 | by Shepherd Smith Edwards & Kantas, LLP

American International Group is asking a federal judge to prevent Maurice Greenberg, its former chief executive, from suing the federal government on its behalf. The insurer had already decided it wasn’t going to file a lawsuit against the federal government over its bailout that took place during the economic crisis.

Greenberg, who has filed a $25 billion securities lawsuit against the US, is pursuing derivative claims for the company. He claims that the bailout’s “onerous” terms cost the insurer’s investors billions.

While AIG isn’t trying to stop Greenberg from suing on his behalf or for other shareholders, the insurance giant has made it clear that suing the government over the rescue isn’t where it wants to focus its energy and resources. In its filing, AIG notes that according to Delaware Law, Greenberg, through Starr Investment, cannot take over the right of the AIG board to make the call on whether/not to sue.

Fifth Circuit To Hear Appeal Over Whether Dodd Frank’s Whistleblower Statute Covers Informants that Report FCPA Violations

Published on: April 12, 2013 | by Shepherd Smith Edwards & Kantas, LLP

In June, The U.S. Court of Appeals for the Fifth Circuit will hear oral argument in Asadi v. G.E. Energy (USA) LLC, a novel appeal over whether the Dodd-Frank Wall Street Reform and Consumer Protection Act’s whistleblower statute give protections to informants who report that there have been possible Foreign Corrupt Practices Act abroad. The lawsuit had been dismissed by the U.S. District Court for the Southern District of Texas on the grounds that the Supreme Court’s decision in Morrison v. National Australia Bank Ltd. precluded applying the anti-retaliation provisions to behavior that occurred outside this country.

The plaintiff, Khaled Asadi, is a citizen of both Iraq and the United States. He had sued GE Energy (USA) LLC, his former employer, last year claiming that the company had violated these provisions when they fired him because he allegedly told his superiors that about a possible hiring situation that could violate the Foreign Corrupt Practices Act. He says that he spotted the alleged wrongdoing while working temporarily with Iraqi authorities in Jordan to obtain business for GE Energy.

After the district court in Texas threw out his case, Asadi filed his appeal, arguing that the Anti-Retaliation provisions specifically protect employees who make disclosures of any rule, law, or regulation under the Securities and Exchange Commission’s jurisdiction. He also maintains that American citizens working abroad who provide information about securities violations should be protected when those violations possess “extraterritorial applicability.”

LPL Financial Continues to Stay On Regulators’ Radar

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

According to a number of state and federal regulators, they are continuing to keep their eyes on LPL Financial (LPLA), the fourth biggest brokerage firm in the US after Wells Fargo (WFC), Morgan Stanley (MS)and Merrill Lynch (MER). With 13,300 brokers, 4.3 million customers, and 6,500 offices, it is the biggest broker-dealer in rural America.

Yet even as LPL has grown, so has the number of censures it, and its brokers have been faced with numerous allegations, including securities fraud, selling unsuitable investments to unsophisticated investors, and speculative trading in client accounts. Just in the last 18 months, regulators in Massachusetts, Illinois, Oregon, Montana, and Pennsylvania have imposed penalties on LPL for inadequate broker supervision.

LPL’s recent fast growth can in part be attributed to the 2008 economic crisis, which caused many investors to flee from more prominent brokerage firms and into the arms of independent broker-dealers. Brokers at firms such as LPL are not employees but contractors that are able to earn a huge percentage of the fees and commissions. The supposed advantage for investors is that independent broker-dealers don’t have their own investment products that they are trying to foist onto customers.

However, some analysts believe that the bigger commissions that LPL has to pay its brokers means that the firm has less cash for compliance and is more prone to draw in brokers wanting to get around the rules. Evidence of possible problems from this independent broker system can be found in Montana, where 31 LPL brokers were named in eight securities complaints in the past five years. According to the state, almost half of the LPL brokers there are registered there as their own supervisors. In Washington State, authorities filed a case against LPL last year because a broker allegedly sold nontraded real estate investment trusts to dozens of older investors.

Fast-Growing Brokerage Firm Often Tangles With Regulators, New York Times, March 21, 2013

More Blog Posts:
As Brokers Peddle Junk-Loan Funds, Franklin Square Raises Billions of Dollars, Stockbroker Fraud Blog, April 9, 2013

Federal Workers’ Privacy Rights if STOCK Act Provision Mandating Online Disclosure of Financial Data Goes Into Effect, Says District Court Judge, Institutional Investor Securities Blog, April 8, 2013 Continue Reading ›

Medical Capital Fraud Lawsuit Against Wells Fargo Must Proceed

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

U.S. District Judge David Carter has turned down Wells Fargo & Co.’s (WFC) bid to throw out a securities lawsuit filed by investors accusing the investment bank of not fulfilling its role as trustee for debt issued by Medical Capital Holdings, which failed in an approximately billion dollar fraud in 2009. His ruling removes any obstacles to a possible trial. Claims could hit the hundreds of millions of dollars.

The investors in this securities case are among those that purchased notes put out by three Medical Capital special purpose companies that named the investment bank as their trustee. They are accusing Wells Fargo of 63 breaches. Meantime, the financial firm maintains that it didn’t act in bad faith and it wasn’t negligent in the way it fulfilled its contractual duties.

Per court documents, the holding company had raised $1.7 billion from over 20,000 investors between 2003 and July 2009, which was when the SEC filed a securities fraud lawsuit against it and two of its executives. The company soon shut its doors. Later, a receiver discovered that investors had lost $839 million to $1.08 billion in a Ponzi-like scam that involved the payment of extra fees.

As Brokers Peddle Junk-Loan Funds, Franklin Square Raises Billions of Dollars

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

According to MTS Research Advisors, non-traded business-development companies, which are junk-rated debt funds, doubled their sales to a $2.8 billion high in 2012, making $134 million in revenue. Among these was Franklin Square’s FS Investment Corp., an initial $2.5 billion fund to which investors have already paid $323.5 million in commissions and fees-25% more than the $258 million that they have received, reports Wells Fargo & Co. analyst Jonathan Bock and Bloomberg. $5,000 is the minimum investment.

While Franklin Square touts its fund as having a structure that lets investors who don’t have sufficient money buy into hedge or private-equity funds to diversify into loans to smaller companies, Bloomberg notes that Morningstar Inc. analyst Sarah Bush recently observed that about 50% of the securities held by the fund overlaps with holdings found in bank-loan mutual funds, which means that Franklin Square isn’t giving investors access to anything they wouldn’t be able to obtain via other avenues.

Non-traded business-development companies lend investors’ money to companies. They can charge high interest rates on the loans because lenders are usually rated junk or aren’t rated at all. The debt usually pays a floating rate, which means investors will make more if benchmark interest rates go up.

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