Investor Lawyers Blog

Top Financial Regulators Speak Out Against Bill They Claim Gives the White House Authority Over Rulemaking

Published on: November 6, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The heads of the Office of the Comptroller of the Currency, the Federal Reserve, the Securities and Exchange Commission, the Consumer Financial Protection Bureau, the National Credit Union Administration, and the Federal Deposit Insurance Corporation have sent a letter to Senators Susan Collins (R-Maine) and Joseph Lieberman (I-Conn) about bill S. 3468: Independent Agency Regulatory Analysis Act of 2012. Lieberman is the chair of the Senate Committee on Homeland Security and Governmental Affairs, the committee to which S. 3467 has been referred.

The regulators believe that, if approved, the legislation would give the White House “unprecedented authority” over independent agencies’ rulemaking and policy functions. For example, would let the president of the United States mandate that independent agencies turn in proposed rules to the Office of Management and Budget for approval. It also would require the agencies to analyze the benefits and costs of new regulations, which is a process that they have up to now been exempt from.

The letter reminds Lieberman and Collins, who is a ranking committee member and a cosponsor of the proposal, that Congress set up the independent regulatory agencies to exercise policymaking functions separate from any administration’s control. By requiring that the agencies give their rulemakings to OMB’s Office of Information and Regulatory Affairs, say the regulators, the president would gain power to affect the rulemaking and policy functions of these agencies, taking away that independence. They also believe that the bill gets in the way of their ability to make needed rules in a timely way, which would likely lead to litigation.

Securities Roundup: Study Recommends Against Additional Money Fund Reforms, Lawmakers Disagree on Whether Dodd-Frank Wiped Out “Too Big to Fail” & An SEC Committee Approves Recommendations to Proposed General Solicitation Ban

Published on: October 31, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Per a study released by the U.S. Chamber of Commerce, it is “ill-advised” to regulate money market mutual funds further due to the effective reforms that the SEC already implemented two yeas ago, including revisions that made the funds more transparent and liquid and not as high risk. The study comes in the wake of debate between lawmakers, market participants, and regulators about more regulations to the industry. For example, SEC Chairman Mary Schapiro has been pushing for the additional reforms because she believes the money market mutual fund industry continues to be a threat to the financial system.

The authors of the study derived their findings from money fund investment data that had been filed with the Commission, as well as from information on commercial paper from the Federal Reserve. Among its conclusions is that the reforms in 2010 made the funds more liquid and better equipped to deal with significant redemption changes. Also, in the last two years, the funds have begun to shift “more dynamically” through geographies and asset classes in reaction to “evolving risks.”

Another area that has been up for debate is whether the Dodd-Frank Wall Street Reform and Consumer Protection Act has, in fact, ended “too big to fail” and outlawed bailouts. Rep. Barney Frank (D-Mass) issued an analysis earlier this month that said that the law does. However, another report, by House Financial Services Committee Chairman Rep. Spencer Bachus (R-Ala), disagrees.

Criminal Sentences Issued in Municipal Bond Conspiracies Involving Three Ex-Financial Services Execs Accused of Contract Bidding & FINRA Looks at Whether Financial Firms Made Bond Ballot Campaign Contributions For Municipal Underwriting Business

Published on: October 31, 2012 | by Shepherd Smith Edwards & Kantas, LLP

In the U.S. District Court for the Southern District of New York, three ex-former financial services executives have received their respective sentences for taking part in conspiracies involving contract bidding for municipal finance contracts and the municipal bond proceed investments. The defendants, Peter S. Grimm, Steven E. Goldberg, and Dominick P. Carollo, are former General Electric (GE) affiliate executives. They were convicted earlier this year.

Per evidence at the criminal trial, between 1999 and 2006, while working for the GE affiliates, the three defendants took part in different conspiracies involving different insurance companies and financial institutions. These “providers” offered an investment agreement contract to governments and agencies throughout the country. These public entities wanted to invest money from different sources, mainly proceeds from municipal bonds proceeds they had issued to raise money, for public projects.

The three men and their co-conspirators are accused of corrupting the bidding process for many of these investment agreements to raise the profitability and amount of the agreements that were awarded to the provider companies where they worked. This led to municipalities not being able to avail of competitive interest rates for investing tax-exempt bond proceeds that they were going to use for different public works projects, which cost them millions of dollars.

Carollo, who was convicted on two counts of conspiracy to commit wire fraud and defraud the US, was sentenced to 36 months behind bars and he has to pay a $50,000 criminal fine. Goldberg, who was found guilty of four counts of the same charge, got a prison term of 48 months and he must pay a $90,000 fine. Grimm, whose conviction involves 3 counts of the same crime, also received a 36-month prison term. He has to pay a $50,000 fine.

Meantime, the Financial Industry Regulatory Authority is trying to determine whether brokerage firms made bond ballot campaign contributions that resulted in them receiving campaign-related municipal underwriting business. This closer examination by the SRO comes following media reports in these allegations.

Although municipal dealers contributing to campaigns usually is not a violation of rule G-37 of the Municipal Securities Rulemaking Board, the SRO wants to look into the perception that some contributions may have been influential and if, indeed, some broker-dealers have been assisting a “municipal issuer do what it is prohibited itself from doing,” said Robert Ketchum, FINRA CEO and chairman. Ketchum made his statements at the Bond Dealers Association’s annual conference earlier this month.

FINRA has been looking closely at bond markets (which in the last year have experienced a rise in retail investors), including municipal dealer firms with business activities dealing significantly with retail-sized transactions. The SRO wants to make sure that members reveal all material facts about a transaction to customers, check that products are suitable for investors, assess the credit risks involved with a municipal bond, and refrain from pay-to-play violations to influence issuer officials.

Ex-GE Bankers Convicted of Municipal Bond Bid-Rig Scheme, Bloomberg Businessweek, October 18, 2012

Remarks by Richard G. Ketchum Chairman and Chief Executive Officer, Bond Dealers Association Annual Conference, October 11, 2012

More Blog Posts:
Reform the Municipal Bond Market, Says the SEC, Institutional Investor Securities Blog,
July 31, 2012
JPMorgan Chase to Pay $211M to Settle Charges It Rigged Municipal Bond Transaction Bidding Competitions, Stockbroker Fraud Blog, July 9, 2011

Muni Debt Reform: SEC to Proceed with Field Hearing in Alabama, Stockbroker Fraud Blog, May 29, 2011

Court Upholds Ex-NBA Star Horace Grant’s $1.46M FINRA Arbitration Award from Morgan Keegan & Co. Over Mortgage-Backed Bond Losses

Published on: October 30, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Three years after the Financial Industry Regulatory Authority awarded former Chicago Bulls forward Horace Grant a $1.46 million arbitration award in his securities claim against Morgan Keegan & Co., the U.S. Court of Appeals for the Ninth Circuit has upheld that ruling. Grant, who had suffered mortgage-backed bond losses, accused the brokerage firm of not disclosing to him that his investments were not suitable for him, withholding information about the actual risks involved, and failing to supervise the fund manager. Morgan Keegan is now part of Raymond James Financial Inc. (RJF).

Grant bought the majority of the funds through his account with Morgan Keegan in 2004 when the brokerage firm owned the sports agency that represented him. The mortgage-backed bond funds were among a group of investment products that took huge losses in value in 2007 and 2008 when the subprime market failed.

Hundreds of investors proceeded to file similar mortgage-backed bond losses claims against Morgan Keegan, which finally agreed to settle with regulators for $200 million the allegations that it had inflated the value of the high-risk subprime securities that the funds held. James Kelsoe, a fund manager who is accused of purposely inflating the subprime securities’ value, would later to agree to an industry bar by the SEC and consent to pay a $500,000 penalty.

Plaintiff Must Arbitrate Faulty Investment Advice Claim With TD Ameritrade But Can Proceed With Litigation Against Oakwood Capital Management

Published on: October 29, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The California Court of Appeals says that while investor Irene Mastick can proceed with her securities litigation against Oakwood Capital Management LLC, she has to arbitrate her securities claim against TD Ameritrade Inc. Mastick had sued representatives of the two financial firms, along with M.E. Safris & Co. and her accountant Michael Safris alleging that she had been provided with poor investment counsel.

Mastick claims that after meeting the defendants in 2008, she was advised to take the proceeds from her life insurance policies and invest them. Contending that she was given bad advice regarding this strategy’s tax consequences, she filed her fraud lawsuit.

Safris, who is a New Jersey resident, had the securities case removed to federal court and Mastick amended her complaint to include the firm representatives. Oakwood and TD Ameritrade then sought to compel arbitration but the federal court then denied their petitions and remanded the lawsuit due to lack of diversity. TD Ameritrade and again sought to compel arbitration.

Institutional Investor Securities Blog: Putnam Advisory Accused of Massachusetts Securities Fraud in $3B CDO Offerings, SEC Claims Yorkville Advisors Fixed Books To Attract Investors, and FINRA Seeks Comments on Revised Proposal Over Bond Market Research

Published on: October 29, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Massachusetts Securities Division is claiming that Putnam Advisory Co. deceived investors about its actual involvement in Pyxis 2006 and Pyxis 2007, two $1.5 billion collateralized debt obligations comprised of midprime and subprime mortgage-backed securities. In its administrative complaint, the state contends that Putnam represented to investors that it would act as an independent advisor when to the Pyxis CDOs when, in fact, Magnetar Capital, a hedge fund, was also involved creating in and structuring key aspects of both and even recommended that certain collateral to be included in them while then proceeding to take a substantial short position on that collateral. Putnam denies the allegations.

The state says that Magnetar proceeded to benefit from the downgrades of subprime assets in the two CDOs while making a net gain of about $67 million on aggressive positions and equity investments linked to the two of them. Meantime, Putnam earned $8.81 million in collateral management fees for the Pyxis CDOs. Massachusetts Secretary of Commonwealth William F. Galvin says that his office will continue to look at how banks misled the buyers of subprime mortgage-backed securitized debt instruments.

In other securities news, the SEC is accusing Yorkville Advisors LLC, its president and founder Mark Angelo, and CFO Edward Schinik of revising certain books to appeal to potential investors and succeeded in getting pension funds and funds of funds to invest $280 million into two Yorkville hedge funds. This allegedly let Yorkville charge at least $10 million in excessive fees. All three three defendants are denying the allegations.

If SEC JOBS Act Rule 506 Proposal is Made Final, Legal Challenges Are Likely

Published on: October 27, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Officials representing consumers, union, and state groups are threatening legal proceedings should the Securities and Exchange Commission’s proposed Rule 506 of the Jumpstart Our Business Startups Act becomes final. They strongly opposed the proposed rule, which is supposed to implement the JOBS Act’s Section 201, which takes away the bars on general solicitations and general advertising for securities offerings that are exempt from registration, per Regulation D’s Rule 506, as long as certain provisions are satisfied. The group officials say that they considered the proposal so flawed that they want the SEC to withdraw the rule, amend it, and propose it again.

Proposed rule 506 gives a safe harbor for Section 4(2) of the Securities Act of 1933’s private offering exemption. Companies that avail of the exemption can raise an unlimited sum of investor funds as long as they are in compliance with certain provisions. However, the groups’ officials don’t believe that the proposed rule gets specific enough about the reasonable steps that issuers must execute to make sure that only accredited investors are the ones that buy the issued securities. They also don’t think that it protect investors enough from the greater fraud risk related to the implementation of the law. (For example, they want private funds to be subject to more restrictions when it comes to seeking capital and advertising to the public.) The group leaders also said that the term “accredited investors” is not defined in a manner that protects the investing public.

Recently, both the SEC and the Commodity Futures Trading Commission had the experience of having the rulemakings they implemented, per the Dodd-Frank Wall Street Reform and Consumer Protection Act, vacated by federal court judges. Questions that were raised included those involving the thoroughness of one rule’s cost benefit analysis and whether an appropriate enough job of comprehending Congressional intent was done when developing regulation. Even the North American Securities Administrators, which considers the SEC to be its partner, would consider a lawsuit against the Commission if proposed Rule 506 were to go through.

Morgan Stanley Must Pay CFTC $200K for Supervisory Violations, Sued for Bias by Detroit Owners Over New Century Loans

Published on: October 26, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The CFTC is ordering Morgan Stanley Smith Barney LLC (MS) to pay a civil monetary penalty of $200,000 for alleged supervisory failures related to customer account handling by employees, which is a violation of CFTC regulation 166.3. Its Order maintains that Morgan Stanley did not have adequate supervisory and internal controls in place that would have allowed it to successfully discourage and detect CFTC and CEA regulation violations.

Per the CFTC, the financial firm had a customer that acted as a futures commission merchant even though it wasn’t registered as one. (This is a Commodity Exchange Act violation.) The agency contends that by failing to look into suspect transactions that indicated this client was engaging in unlawful behavior, Morgan Stanley was committing a CFTC regulation 166.3 violation.

The CFTC says that even after Morgan Stanley discovered in January 2010that the client had been improperly carrying its proprietary futures trading account since 2006, it let the customer keep on in the role as a futures commission merchant through May 2010.

In other Morgan Stanley related news, five Detroit, Michigan homeowners are suing the financial firm for what they are claiming is racial bias over the way the firm finances and funds mortgage loans. They believe that this statistically increased African Americans’ exposure to foreclosure. The case, which is being presented as a class action lawsuit, could involve up to 6,000 plaintiffs.

The lead plaintiffs are alleging Michigan civil rights statute and federal anti-bias law violations in Morgan Stanley’s securitizing of mortgage loans that it was aware would expose borrowers to a higher foreclosure risk. Per their lawsuit, the investment bank’s sale and packaging of New Century loans to investors was closely linked to how it funded and financed New Century even before the loans were made.

Between 2004 and 2007, Morgan Stanley gave New Century billions of dollars in credit lines and issued procedures and policies that resulted in loans with high debt-to-income ratios, teaser rates that were low, hardly, if any, income verification, and other features. The plaintiffs believe that the financial firm dictated the kinds of loans that New Century issued, even requiring, as a condition of their profitable business relationship, that a huge percentage of the loans come with “dangerous” traits. Such obligations, they contend, negatively impacted African-American borrowers in the Detroit area who got their loans from New Century. In 2007, New Century sought bankruptcy protection.

According to the attorneys that filed the complaint, this is the first lawsuit to claim a connection between racial discrimination and securitization, as well as the first one involving homeowners accusing an investment bank, rather than the lender, of causing borrowers harm.

CFTC Orders Morgan Stanley Smith Barney LLC to Pay $200,000 for Supervision Violations, CFTC, October 22, 2012

Adkins, et al. vs. Morgan Stanley, ACLU, October 15, 2012

More Blog Posts:
Texas Securities Roundup: Morgan Stanley Smith Barney Sued Over Financial Adviser’s Ponzi Scam, Judge Dismisses Ex-GE Executive Whistleblower’s Lawsuit Over His Firing, & Ex-Stanford Financial Group CIO Pleads Guilty to Obstructing the SEC’s Probe, Stockbroker Fraud Blog, July 3, 2012

Why Were Two Former Morgan Stanley Smith Barney Brokers Not Named As Defendants in Securities Lawsuit by State Regulators Over $6M Now Missing From Wisconsin Funeral Trust?, Stockbroker Fraud Blog, September 27, 2012

Ex-Morgan Stanley Smith Barney Broker Settles with FINRA for Allegedly Failing to Notify Firm of Previous Arrest, Stockbroker Fraud Blog, June 16, 2012 Continue Reading ›

Texas Securities Fraud: Investors Bilked $68M Dallas Ponzi Scam Hoping To Recover Funds Via Rare Guitar Auction

Published on: October 25, 2012 | by Shepherd Smith Edwards & Kantas, LLP

One year after The Rand Family pled guilty to bilking over 200 investors in $68M Dallas Ponzi scam, a number of their expensive instruments are going up for auction. The money from the sales will go towards paying back their victims.

The Rand Family, who owned oil and gas owned Aspen Exploration, scammed investors into financing the operation and drilling of a number of Texas oil wells. At least a 40% return was promised. However, not all of the investors’ monies went to drilling oil. Instead, US Postal investigators discovered that the family was using some of the funds to pay for their expensive lifestyle, which included private jets, yachts, country club membership, and the purchase of real estate, jewelry, musical instruments, and an original Picasso.

Their company, Aspen, sold net revenue interests and working interests in a number of wells in the Rancho Blanco Corporation State Gas Unit in Texas. Prosecutors accused the Rands of making false representations, such as telling them that their money, which would only be commingled when necessary, would go toward testing, drilling, and completion of a well and that they would managerial rights. Instead, the money was moved out of Aspen’s bank accounts as the defendants spent it on personal expenses and to drill and pay for the operation of other wells.

Bank of America Corp. Sued for Over $1B By US Government For Mortgage Fraud Against Freddie Mac and Fannie Mae

Published on: October 24, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The United States is suing Bank of America Corporation (BAC) for more than $1 billion over alleged mortgage fraud involving the sale of defective loans to Freddie Mac and Fannie Mae. The federal government contends that Countrywide, and then later Bank of America, following its acquisition of the former, executed the “Hustle,” a loan origination process intended to swiftly process loans without the use of quality checkpoints.

This allegedly resulted in thousands of defective and fraudulent residential mortgage loans, which were sold to Fannie Mae and Freddie Mac, that later defaulted, leading to innumerable foreclosures and over $1 billion in losses.

The US claims that between 2007 and 2009, mortgage company Countrywide Financial Corp. got rid of checks and quality control on loans, including opting not to use underwriters, giving unqualified personnel incentives to cut corners, and hiding defects, and then proceeded to falsely keep claiming that these loans were qualified to be insured by Freddie Mac and Fannie Mae. The result, says U.S. Attorney for the Southern District of New York Preet Bharara, was that taxpayers were left to foot the bill from these “disastrously bad loans.”