Investor Lawyers Blog

New York Fed Bailed Out Bank of America Over Mortgage-Backed Securities Sold to AIG

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

Recently, a secret deal came to light involving the Federal Reserve Bank of New York bailing out Bank of America (BAC) that released the latter from all legal claims involving mortgage-backed securities losses that the former obtained when the government rescued American International Group (AIG) in 2008. Some believe that the bank was allowed to abscond responsibility even as AIG sought to recover $7 billion that was loss on these same MBSs.

According to The New York Times, as part of its settlement with BofA, the New York Fed obtained $43 million in a securities dispute involving two of the mortgage securities. For no compensation, the bank was released from all other legal claims.

The roots of this settlement can be traced back to 2008 when the government intervened to rescue AIG . Part of that aid involved AIG selling mortgage securities to Maiden Lane II, which the New York Fed oversees. At the time, the insurer was losing money from toxic mortgages, many of which came from BofA. AIG obtained $20.8 billion for securities valued at $39.2 billion.

FINRA Pulls Back on Regulating Registered Investment Advisers

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

According to Financial Industry Regulatory Authority Chief Executive and Chairman Richard Ketchum, the SRO is pulling back from its bid to regulate Regulating Registered Investment Advisers. This move comes after FINRA spent the last couple of years lobbing to become the main regulator for RIAs.

However, according to Ketchum, in the wake of the current political climate and changes in leadership during the 2012 election, he does not expect that the House of Representative Financial Services Committee will try to revamp the way RIAs are currently regulated, which is via the Securities and Exchange Commission. For advisers that did not want FINRA overseeing them, this is good news.

However, not all of those that were against the SRO taking over RIA regulation are convinced that FINRA has completely given up. Some are worried that the regulator intends to return to the issue at a later date.

Securities Roundup: Lawmaker Presses SEC to Tackle High-Frequency Trading, Approval of Nasdaq’s Plan to Payback FB IPO Investors is Delayed, & Less Investors Filed Securities Lawsuits Against Corporate Firms in 2012

Published on: February 18, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Lawmaker Presses SEC to Tackle High-Frequency Trading
Rep. Edward Markey (D-Mass.) is pressing the Securities and Exchange Commission to help stop the allegedly harmful impact of high-frequency trading. Writing to SEC Chairman Elisse Walter and her predecessor Mary Schapiro, Markey talked about how the Market Reform Act of 1990 gives the regulator the power to “crack down on program trading.”

He noted that the law has a provision that lets the agency forbid or limit activities that can cause great volatility. Originally intended to place limits on program trading, Markey said the provision can be applied to ban or place restrictions on high-frequency trading.

Approval of Nasdaq’s Plan to Payback FB IPO Investors is Delayed
The SEC is now giving itself until March 29 to decide whether or not to approve Nasdaq’s proposal to set up a $62 million fund to pay back those that lost money due to technical problems during the initial public offering of Facebook Inc. (FB). The regulator says it needs more time to look at comment letters about the proposal and see to other matters.

Facebook’s May 2012 IPO was beleaguered by technical snafus that led to lawsuits by investors. Regulators and lawmakers have been seeking more information about what went wrong. In July, Nasdaq proposed accommodating members for losses they suffered from the IPO because of the system glitches. It says it would pay back $62 million in cash.

Number of Investors Suing Corporate Firms for Securities Fraud Down in 2012
According to a recent report, the number of federal securities lawsuits seeking for class-action status went down significantly in 2012. Unlike in 2011 when 188 such securities cases were filed, there were only 152 submitted last year, reports Stanford University Law School and Cornerstone Research. This was the second-lowest number of filings in over a decade and a half. The report credits the drop in cases to a decline in federal complaints submitted over acquisition and merger issues and less allegations against financial firms over Chinese reverse-mergers.
13 federal merger and acquisition lawsuits were submitted last year-down significantly from the year before when there were 43. Also, investors with cases did not name US companies found in the S & P 500 as often. Only one in 29 of these large institutions were accused of securities fraud last year. There also didn’t appear to be any trend among the new cases.

House Democrat Urges SEC to Take On High-Frequency Trading With 1990 Law, Bloomberg/BNA, January 23, 2013

Nasdaq’s Facebook IPO proposal ruling delayed by SEC, Silicon Valley Business Journal, October 30, 2012

Fewer U.S. investors sued corporate firms for fraud in 2012, USA Today, January 23, 2013

More Blog Posts:
Texas Courts Show Preference for Arbitration to Resolve Securities Fraud Claims and Other Business Disputes, Stockbroker Fraud Blog, February 15, 2013

Judge that Dismissed Regulators’ Claims Against Morgan Keegan to Rule on ARS Lawsuit Again After His Ruling Was Reversed on Appeal, Institutional Investor Securities Blog, November 27, 2012
Court Upholds Ex-NBA Star Horace Grant $1.46M FINRA Arbitration Award from Morgan Keegan & Co. Over Mortgage-Backed Bond Losses, Stockbroker fraud Blog, October 30, 2012 Continue Reading ›

Investment Fraud Lawsuit Against BlackRock Over Exchange-Traded Funds Could Shed More Light on Securities Lending

Published on: February 18, 2013 | by Shepherd Smith Edwards & Kantas, LLP

In a recent securities case, manager BlackRock is accused of self-dealing and pilfering from iShares exchange-traded funds’ securities lending revenues. The plaintiffs are pension funds Plumbers and Pipefitters Local No. 572 Pension Fund of Nashville and Laborers’ Local 265 Pension Fund of Cincinnati. They contend that a number of the iShares ETFs put money towards compensation that was “grossly excessive” to pay agents, including those with affiliations to the funds. iShares Chairman Michael Latham and BlackRock President Robert Kapito are also defendants.

The plaintiffs contend that BlackRock’s iShares ETFs violated fiduciary duties and created an fee structure was excessive in order to avail of returns from securities lending that should have been paid to investors. They believe that iShares ETFs and officials at Blackrock perpetuated a scam that allowed them to get their hands on at minimum 40% of revenues from securities lending at cost to investors.

However, BlackRock, which is the largest ETF manager, is arguing that the securities case is without merit. The company claims that its program for securities lending has generated returns that exceed the average to ETF shareholders and it believes that its lending policies shouldn’t be compared with others in its field. BlackRock has pointed out that while it has profited from the program, investors do get their high returns “over time.” It intends to fight the ETF lawsuit.

Texas Courts Show Preference for Arbitration to Resolve Securities Fraud Claims and Other Business Disputes

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

Over the years, the Texas courts have followed federal courts in that they are now showing a preference that business disputes be resolved in arbitration rather than with a trial. Many view arbitration as a less costly, faster, and more logical way to solve conflicts between a company’s employees and its clients.

This willingness to have disputes be resolved outside a courtroom took on even more fervor in 2009, when the Texas Supreme Court determined that non-signatories in an arbitration agreement could be made to deal with their problems between each other away from the courtroom. The court held that an arbitration agreement between an employee and employer that was signed prior to the employee’s passing binds that employee’s wrongful death beneficiaries even if they didn’t sign the agreement. The state’s highest court said that in states where wrongful death actions are derivative, these are bound by the agreement of the decedent.

Then, in 2012, the Texas Supreme Court again exhibited its approval for dispute resolution methods not having to require a jury when it found in an employment dispute that a threat by an employer to use its legal right to fire an at-will employee if he didn’t sign a jury waiver is not coercion that would render a jury waiver agreement not valid. Also, a standalone arbitration agreement is still valid even if an employer keeps its right to unilaterally change or take back an employment policy in its employee manual. This includes arbitration policies (and even if the arbitration agreement doesn’t talk about the right to modify its terms or of incorporating the employment manual by reference.) Also, mutual promises to bring employment disputes to arbitration are satisfactory consideration for the agreements.

NH Investment Adviser to Pay $1.8M to Investors in FINRA Securities Arbitration Case Over Leveraged and Inverse Exchange-Traded Funds

Published on: February 14, 2013 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority panel has ruled that Focus Capital Wealth Management Inc. and its owner Nicholas Rowe must pay investors $1.8 million over securities fraud allegations related to the sale of high-risk exchange-traded funds. The investment adviser is accused of civil fraud, negligence, and other misdeeds related to the funds’ sale to nine clients, some of them older investors.

The claimants’ investments had been heavily concentrated in inverse and leveraged ETFs. They contend that Rowe upped their risk by purchasing and holding the ETFs for up to a few months-a strategy that some consider practically guaranteed there would be loss. Focus and Rowe have been named in civil proceedings initiated by the New Hampshire Bureau of Securities Regulation. Meantime, a state court has put out a temporary order barring Rowe and his firm from conducting business.

Exchange-Traded Funds

UBS Fails in Bid to Block $125M ARS Arbitration Case by Allina Health System

Published on: February 14, 2013 | by Shepherd Smith Edwards & Kantas, LLP

A district court judge in Minnesota has ordered a $125 million auction-rate securities arbitration case filed by Allina Health System against UBS (UBS) to proceed.

U.S. District Judge Michael Davis found that claimant Allina is indeed a UBS client even though the financial firm had argued that under Financial Industry Regulatory Authority rules ARS issuers are not underwriter customers. The Minnesota non-profit healthcare system had filed its securities claim over ARS it issued in October 2007 that were part of a $475 million bond issuance to finance renovations and remodeling, as well as refinance debt. UBS was its underwriter.

Allina contends that the market collapsed in 2008 because UBS and other financial firms stopped putting in support bids to keep auctions from failing. The healthcare group says that because of this, it had to pay a great deal of money to refinance the securities and make higher bound payments after losing its bond insurance. Allina claims that UBS did not properly represent the ARS market risks, breached its fiduciary duties, and violated state and federal securities laws.

Securities Fraud Litigation Roundup: Former Hedge Fund Exec Admits to $1M Investment Fraud, SEC Files Penny Stock Scam Case& Class Action Claims Against Contact Lens Maker are Dismissed

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

Ex-Hedge Fund Exec Pleads Guilty to $1M Investment Fraud

In the U.S. District Court for the Southern District of New York, ex-hedge fund principal Berton Hochfeld pleaded guilty to wire fraud and securities charges over his alleged role in an investment scam that bilked investors of over $1M. He had been the organizer of limited liability Hochfield Capital, the general partner of Heppelwhite Fund LLP, which was set up to invest in publicly traded securities.

According to prosecutors, Hochfeld issued false representations to investors about the investments they made while misappropriating their money. He also is accused of taking money from Heppelwhite. Hochfeld will pay restitution and forfeit illegal profits. He will be sentenced this summer.

Morgan Keegan Must Buy Back Auction-Rate Securities and Pay $110,500, Says District Judge

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

A US District judge is ordering Morgan Keegan & Co. to repurchase auction-rate securities and make a payment of $110,500 in an ARS lawsuit filed by the SEC that accuses the financial firm of misleading investors about these investments’ risks. The SEC contends that the $2.2B in securities that the firm sold left clients with frozen funds when the market failed in 2008.

Even after the financial firm started buying back ARS—it has since repurchased $2B in ARS of its own accord—the SEC decided to proceed with its securities case. The Commission contends that even as the ARS market failed, Morgan Keegan told clients that the securities being sold came with “zero risk” and were short-term investments that were liquid.

Now, Judge William Duffey Jr. has found that although Morgan Keegan’s brokers did not act fraudulently, some of them acted negligently when they left out key information and made misrepresentations when selling the securities. This including not apprising investors about the risk of failure, liquidity loss, or that interest rates might vary.

Duffey is the same judge who dismissed this very case in 2011. However, last May, the US Court of Appeals in Atlanta overturned his decision after determining that he wrongly found that verbal comments made to certain customers were not material because of disclosures that could be found on the financial firm’s web site.

Morgan Keegan Trial Judge to Decide SEC Case He Dismissed, Bloomberg.com, November 26, 2012

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

Judge that Dismissed Regulators’ Claims Against Morgan Keegan to Rule on ARS Lawsuit Again After His Ruling Was Reversed on Appeal, Institutional Investor Securities Blog, November 27, 2012

Court Upholds Ex-NBA Star Horace Grant $1.46M FINRA Arbitration Award from Morgan Keegan & Co. Over Mortgage-Backed Bond Losses, Stockbroker fraud Blog, October 30, 2012

Former Jeffries Director Charged with Securities Fraud Crimes and Sued By SEC Over Alleged Residential Mortgage-Backed Securities

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

The US Justice Department has filed criminal charges against ex-Jefferies & Co. Inc. Director Jesse Litvak, who is accused of defrauding investors in residential mortgage-backed securities. The former senior trader allegedly also defrauded a federal bank bailout program and private and public funds when he falsified sellers’ identities and prices to try to make more money for his employer.

Investigators contend that Litvak was able to generate over $2.7 million from his securities scam. He has pleaded not guilty to 16 criminal charges. The case against him is the first under a law that bans major fraud against the US through TARP (the Troubled Asset Relief Program.)

Meantime, the Securities and Exchange Commission has filed a civil case against Litvak over the same alleged RMBS fraud. The SEC says that the former Jefferies director would lie about the buying price of mortgage-backed securities that he would purchase from one client and sell to another. He is accused of making up a fictional seller to make it seem like he was putting together an RMBS trade between customers when he was actually just selling securities from the inventory of the firm at a high price.