Investor Lawyers Blog

Lawmakers & Industry Folk Address the DOL Amending the Definition of Fiduciary, Reg A Plus Offerings, Oversight, Rogue Brokers, and Expungement Rules

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

US House Passes A Bill Prohibiting the US Labor Department DOL From Amending Its Definition of “Fiduciary” Until SEC’s Uniform Conduct Standard is Established

A bill that would not allow the Department of Labor to amend its rules regarding the definition of the term “fiduciary” until after Securities and Exchange Commission adopts its own rule that places broker-dealers and investment advisers under a uniform standard of conduct has passed in the US House of Representatives. The DOL has been trying to revise its definition of “fiduciary” in the Employee Retirement Income Security Act (ERISA). Those who voted to prohibit revising the definition have been worried about possibly ending up with two rulemakings that were inconsistent with one another.

Reg A Plus Offerings and Their Oversight Get Capitol Hill Debate

Why did UBS Financial Advisors Recommend Puerto Rico Muni Bonds to Elderly and Retired Investors?

Published on: November 6, 2013 | by Shepherd Smith Edwards & Kantas, LLP

In the wake of the Puerto Rico Bond Crisis, our securities fraud lawyers cannot help but wonder why advisors of UBS Financial Services of Puerto Rico, Inc. (UBS) recommended that retiree and conservative investors get involved with municipal bonds that had close to junk ratings. Now, many of these investors are coming forward to pursue securities claims against the firm.

According to Forbes, merely assessing Puerto Rico muni bonds via Fitch, Moody’s and Standard & Poor’s should have caused any good financial adviser to make sure that the junk bonds were only recommended to sophisticated clients that could afford the risks. Also, signs that Puerto Rico’s debt was only growing worse have been around for years.

Still, during the last decade, UBS managed to package $10 billion of closed-end bond funds full of risky Puerto Rican bonds that were highly leveraged and sold them to many retired and conservative investors. Now, customers want to know, how could UBS have overlooked the US territory’s unfunded liabilities, serious budget deficits, strict cash flow limitations, and slowed economic growth?

Judge Dismisses Shareholder Lawsuit Suing Bank of America For Allegedly Concealing AIG Fraud Case

Published on: November 6, 2013 | by Shepherd Smith Edwards & Kantas, LLP

A judge has thrown out a securities lawsuit by shareholders accusing Bank of America Corp. (BAC) of concealing that insurer AIG (AIG) intended to file a $10 billion fraud case against it. U.S. District Judge John Koeltl in Manhattan said that BofA and four of its officers were not obligated to reveal in advance that the lawsuit was pending or that it was a large one.

AIG filed its securities fraud lawsuit against Bank of America in 2011. The insurer claimed that the bank misrepresented the quality of over $28 billion of mortgage-backed securities it purchased not just from the bank but also from its Merrill Lynch (MER) and Countrywide units. On the day that the complaint was filed, shares of Bank of America dropped 20.3% and Standard & Poor’s revoked the tripe-A credit rating it had issued.

The shareholder plaintiffs claim that the bank’s officers, including Chief Executive Brian Moynihan, knew about the MBS fraud case six months before the lawsuit was submitted and they should have given them advance warning.

Two Investment Advisers Sue Twitter for Secondary Market Fraud

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

Precedo Capital Group and Continental Advisors SA are suing Twitter for secondary market fraud. The securities lawsuit comes right before the social networking company’s IPO, which is slated for this week. The investment advisor plaintiffs claim that Twitter promised them up to $289 million in shares through another financial firm to try and raise its secondary market valuation and test the market. The third firm, GSV Capital, is not a defendant.

Precedo and Continental claim that GSV’s co-founder and CIO Matthew Hanson reached out to them last year about an arrangement involving his firm giving them shares to market to other accredited investors. The plaintiffs say that Twitter and its legal representation, Wilson Sonsini Goodrich & Rosati, approved the deal. Wanting the healthy commission they expected they’d receive, the investment advisers marketed private Twitter shares to investors abroad and in the US.

Continental and Precedo say they took hundreds of millions of investor orders and collected over $4 million that was placed in an escrow account. The customers wanted exposure to pre-IPO twitter stock.

However, contend the two firms, before payments were accepted Twitter told GSV to cancel the offering, which caused Precedo and Continental to have to pay millions of dollars in lost fees while their reputation suffered. Even though GSV is the one that shut down the offering, the plaintiffs believe that Twitter was the one making the calls and that GSV didn’t have the authority to offer the shares for repurchase. They also claim that Twitter never planned to sell the shares but actually just wanted to get a sense of the demand for the stock so it could set itself up with a high secondary market valuation. Now, Continental and Precedo want $24.2 million in expenses and lost fees.

Twitter says that the lawsuit is without merit and that it never had a relationship with the two investment advisors.

Two Financial Advisers Accuse Twitter of Secondary Market Fraud, NY Times, October 30, 2013

Two Investment Firms Almost Sure They Remember Being Hired to Sell Twitter Stock, Bloomberg, October 30, 2013

More Blog Posts:
Radio Host Dave Ramsey and Financial Advisers Get Into Twitter Fight, Stockbroker Fraud Blog, June 14, 2013

Texas Securities Roundup: $10M Ponzi Scheme, Foreign Note Sale Fraud, Promissory Note Scam, and Money Laundering Lead to Indictments, Criminal Sentences, Stockbroker Fraud Blog, May 21, 2013
Two Oppenheimer Investment Advisers Settle for Over $2.8M SEC Fraud Charges Over Private Equity Fund, Institutional Investor Securities Blog, March 14, 2013 Continue Reading ›

SAC Capital Advisors to Pay $1.2B Penalty, Pleads Guilty to Insider Trading Violations

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

SAC Capital Advisors is the first large Wall Street firm in a very long time to plead guilty to criminal behavior. The insider trading violations come with a $1.2 billion penalty. SAC is owned by billionaire Steve Cohen.

In addition to the fine and guilty plea, federal prosecutors in Manhattan will place the fund on probation for five years and it will no longer be allowed to manage outside investors’ money. Issuing its own statement, SAC said it is taking responsibility for the “handful” of individuals in the firm that pled guilty to insider trading and whose misconduct resulted in the fund’s liability. However, it pointed out, these men made up a “tiny fraction” of the firm and are not reflective of the 3,000 people that have worked there over the last two decades.

Cohen has not been criminally charged. However, the plea agreement is a stain on his reputation and what was once considered a stellar investment track record. The fund has posted average yearly returns of close to 30% since 1992. Now, SAC’s admission that a number of its employees traded stocks because of their access to secret information will always call his success into question.

It was just three months ago that a grand jury indicted SAC for allowing a “systematic” insider trading scam to take place for over a decade-from 1999 through 2010. Eight ex-SAC traders were charged with securities fraud. Six of them pleaded guilty and are cooperating with prosecutors. The other two are about to go on trial.

Earlier this year, SAC agreed to pay federal regulators $616 million in fines over two insider trading cases. The $602 million fine was imposed upon SAC unit Intrinsic Investors because over more than $275 million in profits and losses related to insider information about an Alzheimer’s drug trial. Stocks in pharmaceutical companies Wyeth Pharmaceuticals and Elan Corp. were traded. SAC unit Sigma Capital Management was ordered to pay a $14 million fine for insider trading involving Nvidia Corp. and Dell Inc. stocks. The two portfolio managers involved in these cases allegedly made profits and avoided losing trades in the tens of millions of dollars.

Still yet to be resolved is the civil action filed by the Securities and Exchange Commission against Cohen for this latest insider trading debacle. The regulator is accusing him of ignoring the misconduct that was taking place at SAC. The New York Times says that according to sources the SEC wants to bar Cohen from ever managing money again. (Right now, all of the fund’s investors have taken their money out of SAC-leaving about $9 billion under its management. The money primarily belongs to Cohen and his employees.)

Also, criminal authorities are continuing to investigate the billionaire and other SAC employees, and FBI agents are still looking at the hedge fund’s trading records and seeking more informants. The government has been looking into widescale insider trading allegations within the industry for some time now. Already, there have been over 70 convictions.

SAC Capital Pleads Guilty to Insider Trading, NY Times, March 15, 2013

SAC Hit With Record Insider Penalty, The Wall Street Journal, March 15, 2013

More Blog Posts:
SEC Charges SAC Capital Hedge Fund Adviser Stephen Cohen Faces With Failure to Stop Insider Trading, Institutional Investor Securities Blog, July 20, 2013
New Stream Capital LLC Hedge Fund Executives Face Criminal Securities Fraud Charges, Stockbroker Fraud Blog, February 28, 2013
Hedge Fund Manager Philip Falcone Consents to $18M Securities Fraud Settlement, Institutional Investor Securities Blog, May 16, 2013 Continue Reading ›

JPMorgan’s Admission to CFTC of “Reckless” Trading Could Lead to More Securities Fraud Cases

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

According to one brokerage executive who spoke with Advisen, JPMorgan Chase & CO.’s (JPM) admission to the Commodities Futures Trading Commission when settling securities allegations over its London Whale debacle that it engaged in “reckless” trading could get the financial firm into more legal trouble with investors.

The CFTC implied that because of certain “manipulative” actions, JPMorgan managed to sell $7B in derivatives in one day, including $4.6 billion in three hours. That the term “manipulate” was used could prove useful to plaintiffs (The regulator also accused the firm of using manipulative device related to credit default swaps trading, which violated a Dodd-Frank provision prohibiting such behavior). JPMorgan will pay $100 million to settle the securities fraud cause with the agency.

With the Securities and Exchange Commission also now seeking to obtain admission of wrongdoing from defendants in certain instances, such acknowledgments to regulators could impact firm’s insurance coverage terms. Right now, standard directors and officers coverage policies exclude personal profiting, fraud, and other illegal conduct. Admissions of fraud, however, could nullify such policies.

Texas Jury Clears Billionaire Mark Cuban of Insider Trading Charges

Published on: October 31, 2013 | by Shepherd Smith Edwards & Kantas, LLP

A jury in Texas cleared Mark Cuban of insider trading charges. The Securities and Exchange Commission accused him of using a private tip to avoid losing money when selling his shares of Internet company Mamma.com. Following the court victory, the owner of the Dallas Mavericks, an NBA basketball team, spoke out against US government over the case.

The U.S. Securities and Exchange Commission said Cuba traded on non-public information when selling 600,000 shares-a $7.9 million value-so he wouldn’t lose $750,000. A judge dismissed the insider trading case in 2009 but the Texas securities lawsuit was revived by an appeals court in 2012. The billionaire chose not to settle and the case went to trial.

Prosecutors claimed that Cuban sold his stake after discovering that Guy Faure, the head of Mamma.com, intended for a private placement that would dilute his company holdings. When Mama.com’s shares fell 9.3% the morning after the announcement of the offering, Cuban’s shares were already sold.

SAC Capital Advisors LP Expected to Plead Guilty to Insider Trading Criminal Charges

Published on: October 31, 2013 | by Shepherd Smith Edwards & Kantas, LLP

According to The Wall Street Journal, hedge fund SAC Capital Advisors is expected to plead guilty to criminal charges involving securities fraud allegations as early as next week. The multibillion-dollar hedge fund is owned by billionaire Stephen Cohen.

Sources told the WSJ that SAC will plead guilty as part of a settlement to resolve insider trading allegations made by federal prosecutors. Also, Cohen is expected to agree to stop managing money outside the fund and pay about $1.2 billion in government penalties—the largest penalty ever for insider trading.

Meantime, SAC and Cohen are still in the middle of hashing out the securities case filed by the Securities and Exchange Commission. That civil lawsuit also seeks a ban against Cohen from managing outside funds because he allegedly disregarded signs that insider trading was taking place at his firm. They say he inadequately supervised employees, allowing the fraud to happen.

Are Alternative Investments Good for Investors?

Published on: October 30, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Even as alternative mutual funds have become very popular among financial advisers and investors These investments employee a variety of complex investment strategies and opportunities to create portfolio diversification that are supposed to protect clients from steep market drops. Already, billions of dollars have gone into these funds in recent years. Their total assets, at around $234 billion right now, are a 33% increase from last year. However, just because so many people are interested in alternative mutual funds doesn’t mean they are good for the average investor.

According to The New York Times, there are some financial advisers who are cautioning customers to exercise great care for the same reason that a lot of investors decide not to go with traditional mutual funds that are actively managed-because it is tough to identify which alternative investment managers are talented/skilled enough to do the job right and which ones could end up getting lucky.

Also, it can be hard enough comprehending any fund prospectus. Multi-alternative funds have hedge-fund-like strategies and managed futures. Then, there are the nontraditional bond funds, which trade on anticipating what bonds will do next and hedging risks linked to rates. Seeing as it is important for investors to be able to comprehend what they are getting into, alternative mutual funds might not be the best choice for the average investor.

SEC Sanctions Three Investment Advisory Firms for Custody Rule Violations

Published on: October 30, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The SEC has sanctioned registered investment advisory firms Further Lane Asset Management, Knelman Asset Management Group, and GW & Wade with violating the rules that obligate them to fulfill certain standards while keeping custody of the securities or funds of clients. The regulator says that all three firms either did not keep up client assets with the help of a qualified custodian or failed to work with an independent public accountant to perform surprise exams. They also allegedly committed additional federal securities law violations. All three firms have consented to settle the charges against them.

Per the SEC order, although Further Lane Management, which is based in New York, and its CEO Jose Miguel Araiz did keep up custody of hedge fund assets that it managed along with Osprey Group Inc., they did not set up a yearly surprise exam to verify these assets. They also allegedly committed fraud involving fund-of-funds they controlled and other violations.

Araiz, Further Lane Management, and Osprey Group Inc. have consented to pay disgorgement and prejudgment interest of $347,122. Araiz also has to pay a $150,000 penalty and he is suspended from the industry for a year.