Investor Lawyers Blog

McGraw Hills, Moody’s, & Standard & Poor’s Can’t Be Held Liable by Ohio Pension Funds for Allegedly Flawed MBS Ratings, Affirms Sixth Circuit

Published on: December 20, 2012 | by Shepherd Smith Edwards & Kantas, LLP

This month, the U.S. Court of Appeals for the Sixth Circuit refused to revive statutory and common law MBS claims made by five Ohio pension funds: The Ohio Police & Fire Pension Fund, the State Teachers Retirement System of Ohio, the Ohio Public Employees Retirement System, the Ohio Public Employees Deferred Compensation Program, and the School Employees Retirement Systems of Ohio. All of them are run by the state for public employees.

Per the court’s opinion, between 2005 and 2008, the funds had invested hundreds of million of dollars in 308 mortgage-backed securities that all were given AAA or the equivalent from one of the three credit rating agencies. When MBS value dropped during this time, the Funds lost about $457 million.

The plaintiffs believe that the reason that they lost their money is because the ratings that were given to the MBS were false and misleading. They filed their Ohio securities lawsuit under the state’s “blue sky ” laws, as well as the common law theory of negligent misrepresentation.

SEC’s Investment Management Division Considers Applying 1940 Advisers Act to Private Fund Advisors

Published on: December 19, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to Securities and Exchange Commission Division of Investment Management Director Norm Champ, consideration is being given toward how the 1940 Investment Advisers Act might be applicable to private fund advisors. Champ spoke at an American Law Institute-Continuing Legal Education Group in New York earlier this month.

One reason for this closer scrutiny is that because of the Dodd-Frank Act, advisers to certain private funds that previously didn’t have to must now register with the SEC. Currently, about 40% of SEC-registered advisors work with private funds. Hence, noted Champ, the need to view our regulatory framework from a wider perspective and “how that fits” with these advisors.

It was just recently that the division began taking a more risk-based approach toward how it determines which regulator initiatives are priority. This means that before starting a project, the way it might impact capital formation, investors, regulated entities, and the needed resources are taken into consideration. Champ said that the issue of whether/not to apply the Investment Advisers Act to private fund advisers is up for consideration as a priority. (He made clear that the remarks he made at the event are his own and don’t necessarily reflect that of his employer.)

Champ also discussed exchange-traded funds and how his division will no longer delay considering exemptive relief for ETF funds that invest a lot in derivatives. (Such requests had been placed on hold by the SEC in 2010 while it reviewed how these funds used the derivatives.)

Exchange traded funds (ETFS) are investment companies that can be legally classified as Unit Investment Trusts and open-end companies but are different from these two in that ETFs don’t sell individual shares straight to investors and instead issue shares in “Creation Units,” which are big blocks. Typically, it is institutions that buy these blocks.

That said, any relief request for ETF funds has to come with “two specific representations,” noted Champ: A) An ETF has to attest that the board will review and approve not just the derivatives investment of the funds but the way that the ETF’s investment manager handles risk related to derivatives and B) AN ETF has to represent that its derivative investments-related disclosures in periodic reports and offering documents are in line with staff and commission guidance. Champ acknowledged that there were still some concerns about leveraged ETFs and that the commission would not “support new exemptive relief” for the funds.

Leveraged ETFs, also called ultra short funds, try to deliver multiples of the performance of the benchmark or index they are tracking. They look to reach a return that is a multiple of the inverse performance of the index that is underlying.

Exchange-Traded Funds (ETFs), SEC

Investment Advisers Act of 1940 (PDF)

More Blog Posts:
Holding Brokers to Investment Adviser Accountability Standards is a Bad Idea, Say Some Wall Street Executives, Stockbroker Fraud Blog, July 16, 2011

Morgan Keegan Founder Faces SEC Charges Over Mortgage-Backed Securities Asset Pricing in Mutual Funds, Institutional Investor Securities Blog, December 17, 2012

Alleged Cherry-Picking Scam Leads to SEC Charges Against California Hedge Fund Manager

Published on: December 18, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Investment advisory firm Aletheia Research and Management, Inc. and its owner hedge fund manager Peter J. Eichler, Jr. are facing Securities and Exchange Commission charges over their alleged involvement in a cherry-picking scam. They are accused of directing winning trades to their trading acocunts, giving preferences to some clients at cost to certain investors, and not revealing in a timely fashion that the firm was in a precarious financial state.

Per the SEC charges, Aletheia and Eichler did a disproportionate job of allocating losing trades to accounts in two of the hedge funds that they managed. This led to investors losing money. Meantime, winning trades were allegedly sent to accounts belonging to company employees, Eichler, and preferred clients.

It was Eichler that allegedly used Aletheia’s discretionary authority over Trading Options accounts to make about “4,891 options trades for an aggregate investment of $238.9M” for these accounts between at least the middle of August 2009 through November 2011. Because most of these trades didn’t happen until over one hour after a trade was made or after the closing of the options positions, Eichler could cherry-pick the losers and winners. Favored accounts then got a disproportionate amount of profitable trades that had been allocated while the disfavored clients received a disproportionate amount of the unprofitable trades.

By participating in this alleged securities scam, contends the Commission, Eichler and his investment advisory firm did not fulfill their fiduciary obligations to certain advisory clients. Aletheia also allegedly failed to put in place procedures, policies or an ethics code that could have stopped the cherry-picking scam from happening and breached federal law and its fiduciary duties when it waited until right before filing for bankruptcy to let its clients know that it was in financial trouble.

Even though Aletheia already was allegedly in financial trouble as early as July of this year, when the state of California filed an over $2M tax lien against it for taxes it hadn’t paid and then on October 1 suspended the company’s corporate status for failing to pay (at this point the investment advisory firm was not legally allowed to be in business), it wasn’t until two days before seeking Chapter 11 protection on November 9that clients were notifies about the firm’s financial woes.

The SEC is accusing Aletheia of violating the Securities Exchange Act of 1934, Section 10(b) and Rules 10b-5(a) and (c) thereunder, as well as numerous sections of the Investment Advisers Act of 1940 and numerous rules thereunder. The regulator wants disgorgement of ill-gotten gains, permanent injunctions, penalties, and prejudgment interest.

Under federal securities laws, an investment advisor has to immediately and completely reveal any financial conditions that might reasonably likely hurt its ability to fulfill its contractual obligations to clients. Unfortunately, this is not always what happens.

SEC CHARGES SANTA MONICA-BASED HEDGE FUND MANAGER IN CHERRY-PICKING SCHEME, SEC, December 14, 2012

S.E.C. Says Asset Firm Manipulated Trades to Enrich Some Clients, NY Times, December 16, 2012

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K.W. Brown & Company, K.W. Brown Investments, & 21st Century Advisors Are Held Liable in $4.5 Million Cherry-Picking Scam, Stockbroker Fraud Blog, January 21, 2008 Continue Reading ›

Morgan Keegan Founder Faces SEC Charges Over Mortgage-Backed Securities Asset Pricing in Mutual Funds

Published on: December 17, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Securities and Exchange Commission has filed civil charges against Morgan Keegan founder Allen Morgan Jr. and several other former mutual fund board members for allegedly failing to supervise the managers accused of inaccurately pricing toxic mortgage-backed assets prior to the financial crisis. According to Reuters, this is a rare attempt by the regulator to hold a mutual fund’s board accountable for manager wrongdoing and it is significant. (Fund manager James Kelsoe hasconsented to pay a $500,000 penalty related to this matter and he is barred from the securities industry in perpetuity. Comptroller Joseph Thompson Weller consented to pay a $50,000 penalty.)

Last year, Morgan Keegan and Morgan Asset Management consented to pay $200 million to settle SEC subprime mortgage-backed securities fraud charges accusing them of causing the false valuations of the securities in five funds and failing to use reasonable pricing methods. (This allegedly led to “net asset values” being calculated for the funds.) The inaccurate daily NAVS would then be published and investors would buy shares at inflated prices. The funds’ value eventually declined significantly.

According to the Commission, the eight ex-board members violated laws mandating that fund directors help decide what a security’s fair value is when market quotations don’t exist. Instead of trying to figure out how fair valuation determinations work, the directors allegedly gave this task to a valuation committee but without providing “meaningful substantive guidance.”

Allen Morgan Jr., who is a Morgan Keegan cofounder, was CEO and Chairman until 2003.The seven other board members facing SEC charges include Kenneth Alderman, Mary S. Stone, W. Randall Pittman, Albert C. Johnson, James Stillman R. McFadden, Jack R. Blair, and Archie W. Willis III.

Already, Morgan Keegan is contending with over 1,000 arbitration lawsuits involving its bond funds that had invested in high risk MBS but were marketed as safe. When the subprime market collapsed, the funds lost up to 80% of their value.

Recently, Morgan Keegan and over 10,000 investors in a closed-end fund reached a $62 class million settlement. Lion Fund LP, the lead plaintiff and a Texas hedge fund, claimed that it had made a $2.1 million investment.

Morgan Keegan is owned by Raymond James (RJF), which bought the firm from Regions Financial Corporation. Other securities lawsuits still pending against it also involve conventional and open-ended funds.

Unfortunately, too many people and entities sustained huge losses because the risks of a number of types of securities leading up to the global crisis and the housing bubble’s implosion were downplayed by financial firms and their representatives. At Shepherd Smith Edwards and Kantars, our subprime mortgage-backed securities lawyers represent investors throughout the US. Contact our securities law firm today.

SEC Charges Eight Mutual Fund Directors for Failure to Properly Oversee Asset Valuation, SEC, December 10, 2012

SEC Order (PDF)

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Morgan Keegan Ordered by FINRA to Pay RMK Fund Investors $881,000, Stockbroker Fraud Blog, April 24, 2011

District Court in Texas Dismisses Securities Fraud Case Against Sports Franchisor

Published on: December 15, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Judge Sam A. Lindsay of the U.S. District Court for the Northern District of Texas has thrown out a securities fraud lawsuit accusing sports franchisor Brent L. Coralli of inducing investor Lee Purser to put $400K into an “emerging lottery” game operation in Peru. Other defendants in the case: Jet Text, LLC, Sting Group Holdings, Coralli Inc. Texas Titans Futbol LLC, and Royal Nations, LLC.

Per the plaintiff’s Texas securities case, Coralli approached Purser about a Peruvian mobile lottery. The supposed opportunity would allow investors to buy into the “emerging” operation that would be licensed there and have no competition. This type of lottery lets participants use cell phones and texting instead of scratch-off cards and paper tickets to purchase chances. Coralli allegedly promised that there would millions of dollars in gaming profits from Corporacion Galena, which is the Peruvian affiliate of British interactive gaming and mobile company Managed Gaming Solutions, and he boasted of having close ties with then-Peruvian President Alan Garcia Perez.

Purser claims that he and Corralli made an agreement that for a $400,000 investment, Purser and his affiliates would own 10% of Silverstrings Investments, a strategic partner of Management gaming Solutions and an industry expert, and that the investment would be protected by Jet Text. However, he is now claiming that Jet Text never gave him proof of his investment, which he made in two installments.

The lottery license was, indeed, awarded to Galena, with 20 year rights. However, Purser says that afterwards he did not hear from those involved and that the money he paid never went to Silverstrings or Galena. He believes that the Peruvian venture was executed to launder money, commit crimes, corruption, and fraud, violate state and federal laws, and harm Purser and his interests. He wants damages for securities fraud and breach of contract.

The defendants, including Coralli, had moved to have the case dismissed, under Rule 12(b)(6) of the Federal Rule of Civil Procedure, the Federal Rules of Civil Procedure, and the Private Securities Litigation Reform Act. Purser, however, filed an “Opposition” to their motions while noting that the original complaint needed to be amended to provide more specificity about what statements were misleading and why.

Now, Judge Lindsay is dismissing the case. He found that the plaintiff’s allegations are not enough to back a federal securities law claim. In particular, he noted the “conclusory” allegations reached about the behavior and motives of defendants and determined that while Purser may have brought up the possibility that Coralli had taken part in wrongdoing this is not enough to demonstrate that the plaintiff is entitled to relief. Lindsay also said that Purser did not identify the misleading statements or name those that made them. The Judge declined to exercise supplemental jurisdiction over the plaintiff’s state law claims involving breach of duty, contract breach, and fraud.

‘About That $200,000 …’, Courthouse News, December 1, 2011
Read the Opinion (PDF)

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Some Private Fund Advisers are Exercising Inadequate Controls, Says SEC Commissioner Elisse Walter

Published on: December 15, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to Securities and Exchange Commissioner Elise Walter, examinations of newly registered private fund advisers has already revealed numerous instances of poor controls by a number of members, especially when expenses and fees are involved. Some of these instances, she reports, are on the border of misconduct. Walter, who President Obama named to take the place of current SEC Chairman Schapiro when she steps down this week, expressed her own views (which may not be the same as the regulator’s) at the Commission’s enforcement panel at the National Law Journal’s Regulatory Summit in DC earlier this month.

Over 1,500 advisers to hedge funds and private funds are now also SEC registered in the wake of rules adopted per the Dodd-Frank Wall Street Reform and Consumer Protection Act. This raises the total number of those that have completed Commission registration to 4,061 private fund advisers and 11,002 investment advisers, with 37% offering advise to hedge funds and other private funds.

The Commission’s Office of Compliance Inspections and Examinations will perform adviser “presence” exams looking at certain risk areas for the next two years. This is a new process for advisers, which is why the SEC has been engaged in outreach to make sure expectations and procedures are clear.

CFTC Securities Headlines: Goldman Sachs Fined For Inadequate Broker Supervision in $118M Fraud, Firms Named in Precious Metal Scam, & Defendants to Pay $1.8M Over Off-Exchange Foreign Currency Scheme

Published on: December 14, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Goldman Sachs Fined$1.5 Inadequate Supervision in $118M Fraud
The Commodity Futures Trading Commission says that Goldman Sachs (GS) must pay $1.5M because it did not properly supervise trader Matthew Marshall Taylor, who allegedly got around internal systems to manually make fabricated trades that went straight to the financial firms’ records and books and not the exchange. Taylor is accused of defrauding the bank, which lost about $118.4M.

The agency says that Goldman failed to make sure that its risk management, supervision, and compliance programs were in alignment with its duties to diligently oversee its business as a registrant of the Commission. However, CFTC commissioner Bart Chilton has criticized the $1.5M fine, describing it as a wrist slap.

CFTC Names Firms and Individuals in Precious Metal Scam The Commission has filed a civil injunctive enforcement action against a number of firms, including Hunter Wise Credit, LLC, Lloyds Commodities Credit Company, Hard Asset Lending Group, Blackstone Metals Group, LLC, CD Hopkins Financial, Newbridge Alliance Inc., Harold Edward Martin Jr., United States Capital Trust, LLC, as well as related entities, and Fred Jager, Frank Gaudino, James Burbage, Chadewick Hopkins, Baris Keser, David A. Moore, and John King. They are accused of fraudulently marketing off-exchange commodity contracts that were illegal. Also, Hunter Wise Commodities, which allegedly orchestrated the fraud, is accused of having gotten least $46M in client funds since July of last year.

The defendants allegedly claimed that they were selling physical metals to retail clients in retail commodity transactions and that they would arrange loans for the balance of the purchase price. Customers were supposed to make down payments at 25% of the complete buying price for certain quantities of metal, which were to be placed in a safe depository. The CFTC contends, however, says that not only were certain statements found in the investment contract untrue, but also the transactions were merely paper transactions with no actual metals involved.

Defendants to Pay $1.8M in Off-Exchange Foreign Currency Scheme
Following a CFTC anti-fraud enforcement action, a permanent injunction order and default judgment has been issued against Forex Capital Trading Partners, Inc., Forex Capital Trading Group Inc., and Highland Stone Capital Management, LLC requiring that they pay a penalty of over $1.3M and disgorge $450,764 to benefit clients who were defrauded. The Commission says that the three firms made fraudulent solicitations to 106 clients that invested over $2.8M in forex trading.

These solicitations were allegedly made with false claims that they were engaging in this type of trading had been profitable for several years, including a falsely reported 51.94% customer gain in 2010, which was a year when the investors actually lost over 1.2M. In fact, says the Commission, customers actually lost over 93% of total invested principal via the defendants’ customer trading.

CFTC Press Room

More Blog Posts:
CFTC Commissioner Proposes Plan to Give Futures Customers SIPC-Like Protections, Stockbroker Fraud Blog, August 14, 2012

CFTC Files Texas Securities Fraud Against TC Credit Services and its Houston Owner Over $1.4M Commodity Pool Scam, Stockbroker Fraud Blog, July 17, 2012
SEC and CFTC Say They Found Out About JPMorgan’s $2B Trading Loss Through Media, Stockbroker Fraud Blog, May 31, 2012 Continue Reading ›

Securities Headlines: Credit Suisse & J.P. Morgan to Pay $400M Over RMBS Misstatements, Fox Network’s FOIA Request for AIG Emails Granted, Expedited Discovery Approved in Real Estate ‘Flipper’ Case, & NY Brokerage Owner is Linked to Affinity Scam

Published on: December 13, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Credit Suisse & J.P. Morgan to Pay $400M Over RMBS Misstatements

In SEC v. J.P. Morgan, the financial firm is accused of allegedly misstating information related to approximately 620 subprime mortgage loans’ delinquency status. The loans gave collateral for a $1.8M residential mortgage-backed securities offering that J.P. Morgan (JPM) underwrote six years ago and from which it was paid over $2.7 million in fees while investors lost at least $37 million. Now, the firm has agreed to pay nearly $297M to settle the allegations (without denying or admitting to them). The Commission is also accusing J.P. Morgan-owned Bear Stearns Cos. LLC of failing to disclose from 2005 to 2007 that it kept financial settlements from mortgage loan originators on problem loans that it sold into RMBS trusts.

Also settling RMBS Misstatement allegations with the regulator is Credit Suisse Securities (USA) LLC. In an administrative order, the SEC claims that between 2005 and 2010 the financial firm did not accurately disclose that it would keep cash from claims it settled against mortgage loan originators for issues involving loans that it had sold into RMBS trusts. Credit Suisse also allegedly misled investors about when it intended to buy back loans from trusts if those that borrowed did not make the initial payment. The firm has agreed to settle for $120M and is also not denying or admitting to the allegedly negligent conduct.

Insider Trading Headlines: Hedge Fund Manager Named in “Most Lucrative Tip” Ever, Ex-Real Estate Director & Friend Accused of Sharing Tips in Merger Targets Must Face SEC Charges, & Matter of Criminal Liability of Secondary Tippees is Clarified Again

Published on: December 13, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Hedge Fund Manager Named in “Most Lucrative Tip” Ever
Prosecutors have unsealed a criminal complaint in what is being called an insider trading scam that lacks historical precedent involving the “most lucrative inside tip of all time.” Ex-hedge fund manager Mathew Martoma allegedly made or avoided losses of $276M when trading securities in pharmaceutical companies Wyeth and Elan Corp. plc.

The insider information related to the potential ineffectiveness of an Alzheimer drug clinical that both companies were working on, which consultant Sidney Gilman allegedly provided to Martoma, is purportedly the reason that the former hedge fund manager liquidated his funds’ long position (about $700M) in the two companies and took short positions instead. Martoma, advisory firm CR Intrinsic Investors LLC, and an affiliated adviser allegedly avoided $194M in losses and $82M in profits when the drug trial results were made public and the companies’ stock dropped. The SEC has filed a parallel civil case against Martoma, CR Intrinsic Investors, and Gilman.

Ex-Real Estate Director & Tippee Friend in Merger Targets Must Face SEC Charges
Ex-Royal Philips real estate director Ralph J. Pirtle Ralph J. Pirtle and his friend Berco Realty President Morando Berrettini do, indeed, have to face Securities and Exchange Commission insider trading charges. The SEC had filed charges against them in 2008 because Pirtle allegedly provided Berrettini with insider information that came from the due diligence he was conducting for Royal Philips about possible merger targets. Berrettini then allegedly used the tips to trade in the stocks of three of the companies under consideration and he made “substantial profit” when two of them were acquired.

The defendants’ countered that in filing its case the SEC did not provide evidence that would cause a jury to find that Berrettini benefited from the insider information. However, Judge Robert M. Dow Jr. of the U.S. District Court for the Northern District of Illinois says that the SEC did adequately allege its claims elements and the insider trading charges will stand.

Criminal Liability of Secondary Tippees Gets Court Clarification Again
When is a secondary tippee criminally liable for insider trading? Holding the conclusion made earlier this year by Federal Judge Jed Rakoff, the U.S. District Court for the Southern District of New York said that it is when that tippee had a “general understanding” that the information received came from an insider who breached a confidentiality duty for personal benefit.

The court rulings involved jury instructions in the criminal case against hedge fund manager Doug Whitman, who was convicted on securities fraud and conspiracy charges related to tips he received from tippees that got their information from the employees of three public companies. The court found that in addition to having this “general understanding,” a secondary tippee such as Whitman does not have to know the specifics of the breach or the benefits that the insider obtained to be held criminally liable. He/she, however, must have had a “specific intent” to defraud the company that the information is related to of that data’s confidentiality.

SEC Charges Former Corporate Director of Real Estate and Real Estate Broker For Insider Trading, SEC, April 1, 2010

More Blog Posts:
Texas Securities Case: Mark Cuban Asks District Court To Reconsider Compelling the SEC to Produce Documents Related to Insider Trading Allegations Over Mamma.com Stock Offering, Stockbroker Fraud Blog, June 19, 2012

Insider Trading Roundup: SEC Settlement Reached Over Alleged Tips In Insurers’ Merger, Court Won’t Throw Out Criminal Charges Related to Info From AA Member, & Asset Freeze Approved Against Broker In Burger King Acquisition, Stockbroker Fraud Blog, September 28, 2012

LIBOR Investigation Leads to Three Arrests

Published on: December 11, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Anti-fraud and police in Britain have made three arrests related to the global interest rate rigging scandal involving the London Interbank Offered Rate (LIBOR). The three men are Thomas Hayes, an ex-Citigroup Inc. (C) and UBS AG (UBSN.VX) trader, and James Gilmour and Terry Farr, who both worked at RP Martin, an interdealer broker. All of them are British nationals.

The Canadian Competition Bureau regulator claims that Hayes and others tried to manipulate yen Libor, which is the average interbank interest rates that banks are willing to lend in unsecured funds that are in Japanese yen denominations to each other. The regulator is also accusing Hayes of reaching out to traders at other banks in London and trying to persuade them to manipulate yen rates.

Regulators and prosecutors in Europe, Canada, the US, and Japan have been probing how traders have been able to rig interbank lending rates, including LIBOR, and whether banks may have changed submissions that are supposed to set benchmarks so they could make money off interest-rate derivatives-related bets or make lenders appear more financially healthy.