Investor Lawyers Blog

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?

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

Wisconsin regulators are suing Wisconsin Funeral Directors Association Inc. and Fiduciary Partners Inc. for allegedly improperly investing the money from a $48 million Wisconsin Funeral Trust. With a possible long-term deficit of $21 million, close to $6 million in investor money has already been lost. However, our stockbroker fraud law firm wants to know why two former Morgan Stanley Smith Barney brokers-brothers Michael Hull and Patrick Hull-are not defendants in this case. The two brothers managed the trust until earlier this month, when a circuit court judge assigned a receiver to take charge of liquidating the fund. They now run bluepoint Investment Council, LLC.

The trust is funded by about 10,500 prepaid contracts. According to state Department of Justice officials, customers who bought prepaid funeral policy plans because they were under the impression that their money would be placed in CDs, government bonds, and low risk investments and that they would get a guaranteed, modest return rate. Instead, the trust ended up losing millions in risky investments. (The Department of Financial Institutions is now ordering a securities enforcement action after it concluded that the funds, which were in the trust, were invested in a manner that violated state law.) Fiduciary Partners Trust, the trust’s trustee, has said that it was never involved in how the trust’s investments were managed or marketed and that this was the job of the Wisconsin Funeral Directors Association and the investment management firms.

“The information which has been reported leaves us with more questions than answers as to Morgan Stanley and its former brokers,” said stockbroker fraud lawyer William Shepherd. “In any event, any claims against the firm and/or brokers would likely be excluded from court action by the trust because of a mandatory FINRA arbitration agreement.”

Texas Securities Fraud: Investor Sues Behringer Harvard REIT I

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

In her Texas securities lawsuit, investor Lillian Hohenstein is suing Behringer Harvard REIT I, one of the biggest nontraded real estate investment trusts. Hohenstein, who purchased 1,275 shares from the trust between 2004 and 2008, claims that the REIT, Behringer Harvard Holdings LLC, President and Chief Executive Robert Aisner, other company executives, and its board members of breach of fiduciary duty and negligence. Aisner and board members also are accused of making allegedly misleading and false statements when they recommended that investors turn down outside fund offers from those wanting to pay the REIT’s shares for as low as $180/share.

According to Hohenstein ‘s Texas REIT lawsuit, the REIT attempted to conceal its poor performance by using investors’ own money to pay them, while simultaneously depleting the company of millions of dollars even as top executives benefited. Behringer Harvard REIT I is among the nontraded REITs that have seen their value drop significantly following the collapse of the real estate market.

The REIT complaint contends that for a certain period of time, HPT Management Services LP and Behringer Advisors respectively collected fees of $77 million and $104 million, which, per the securities lawsuit, over the life of the trust is about 4% of the REITs existing assets. Behringer Harvard COO Jason Mattox, who says Hohenstein ‘s case is meritless, says the company has since lowered his fees, even waiving asset management fees of over $30 million.

Institutional Investment Fraud Roundup: Ex-Hedge Fund Managers’ Guilty Plea Over Bilking Investors of Almost $1M Get 3-Year Prison Term, SEC Sues Investment Adviser Over Alleged $37M Ponzi, and SEC Files Lawsuit Over Purported “Fund of Funds” Scam

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

Ex-hedge fund managers Christopher Fardella and Michael Katz have been sentenced to three years in prison after they pleaded securities fraud and conspiracy charges for defrauding investors of nearly $1 million. Per court documents, between April 2005 and November 2006, the two men, along with two co-conspirators, were partners in KMFG International LLC, which is a hedge fund.

They cold called investors throughout the US and provided them with misleading information about the fund, its principals, and financial performance even though KMFG actually lacked a track record and never generated any profit for investors. The defendants and co-conspirators lost and spent $981,000 of the $1,031,086 that was given to them by investors.

Meantime, another hedge fund manager, Oregon-based investment advisor Yusaf Jawad, is being sued by the Securities and Exchange Commission over an alleged $37 million Ponzi scam. The securities lawsuit against him and attorney Robert Custis was filed in the U.S. District Court for the District of Oregon.

Lehman Brothers Australia Found Liable in CDO Losses of 72 Councils, Charities, and Churches

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

Lehman Brothers subsidiary Lehman Brothers Australia has been found liable for collateralized debt obligation losses sustained by 72 councils, churches, and charities during the global economic crisis. The class action securities lawsuit was led by three Australian counsels—Wingecarribee, Parkes and Swan City. A fixed settlement amount, however, has not yet been reached. The parties will have to meet to figure out the damages, and their submissions will then be presented to the Federal Court later this year. (Because the defendant, previously known as Grange Securities, is in liquidation, it cannot make any payments right now). The three lead plaintiffs had sought up to $209M (US dollars), which is how much they say was lost from the CDOs.

The majority of the CDOs that caused the investors losses had been purchased from Grange Securities before Lehman Brothers Australia acquired the firm in 2007, which is the year when the bond world started to fall apart as the global economic crisis began to unfold. The plaintiffs are claiming alleged breach of fiduciary duty, misconduct, and negligence for how the defendant marketed the synthetic derivative investments.

Federal Court Justice Steven Rares, who issued the ruling, said the CDOs were presented as if they were liquid like cash and safe investments even though they were, in fact, a risky, “sophisticated bet.” He said the plaintiffs were told that they would get their money back if they held on to the CDO’s until maturity and that high credit ratings placed the securities in the same arena as the AAA-rated Australian government’s debts. They also presented the investments that it recommended or made for the plaintiffs as suitable for investors that had conservative goals.

The judge noted that although that each of the three councils that were the lead plaintiffs had different complaints, in relation to two councils, the defendant was negligent in the advice and recommendation it offered them. Also, as financial advisor to two of the councils, the financial firm breached its fiduciary duty and took part in deceptive and misleading behavior when it pushed the CDOs as suitable for them.

More Blog Posts:
Stockbroker Securities Roundup: Criminal Convictions Vacated Against Six Charged in Front Running Scam and Citigroup Broker Cleared in $1B CDO Deal SEC Case, Stockbroker Fraud Blog, August 11, 2012

Some of the SEC Charges Against Investment Adviser Over Alleged Involvement In J.P. Morgan Securities LLC Collateralized Debt Obligation Are Dismissed, Institutional Investor Securities Blog, September 24, 2011

Lehman Brothers’ “Structured Products” Investigated by Stockbroker Fraud Law Firm Shepherd Smith Edwards & Kantas LTD LLPn, Stockbroker Fraud Blog, September 30, 2008

Securities Roundup: FINRA Heightens Focus on Options Industry & Wants More Investors to Use BrokerCheck, Lawmaker Hopes SEC is Taking Closer Look at National Exchanges, and US Senator Calls For Reform of Money Market Mutual Fund Industry

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

At the Security Traders Association’s yearly market conference in DC, Richard Ketchum, Financial Industry Regulatory Authority’s chief executive officer and chairman, said that due to growing problems the SRO is heightening its surveillance and exam focus on the options industry. He noted that there has been an increase in complaints about the use of algorithmic activities to perform possible manipulations to “move underlying equity” and that this could cause a financial firm to “take advantage” of options positions that were pre-established.

Per BNA, Ketchum said that FINRA has set up surveillance alerts to catch too much messaging traffic from algorithms that update quotes at vicious rates when options are involved. It is also looking at firms to make sure they have adequate controls related to algorithms and it will keep checking for options orders that may have possibly inaccurate coding.

The week before, Ketchum reported that the FINRA Board of Governors had given the SRO’s staff the authority to propose to the SEC rule changes to promote greater investors use of BrokerCheck. This free tool allows investors to look up former and current firms and brokers that are registered with the SRO, and representatives and investment advisers, to decide whether the should work with them. (This information would also have to be available on websites that were maintained by/for an individual associated with these firms.) Per amendments that have been proposed to the FINRA Rule 2267, which covers the education and protection of investors, member firms would have to make sure that their company sites provide a direct link to BrokerCheck. Meantime, a change has also been proposed to FINRA Rule 8312 that would give the public permanent access to information available through BrokerCheck about foreign and state cases against associated persons who were let go after a settlement was reached. It would also per the board’s approval, make downloads of BrokerCheck information available.

Merrill Lynch Told to Pay $3.6M to Brazilian Heiress for Brother’s Alleged $389M in Unauthorized Trading

Published on: September 22, 2012 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority panel is ordering Merrill Lynch (MER), a Bank of America Corp. (BAC) unit, to pay $3.6 million to a Brazilian heiress who contends that she lost millions of dollars because of unauthorized trades that her brother made in her account. The securities arbitration case was submitted on behalf of Sophin Investments SA, which was established to manage Camelia Nasser de Kassin’s inheritance from a relative.

Sophin contended that Merrill allowed Camelia’s brother, Ezequiel Nasser, to make unauthorized trades worth $389 million using her accounts at two Merrill Lynch units. He allegedly invested in high risk securities, including naked puts in Lehman Brothers and Bear Stearns (BSC) that created a deficit of at least $8 million.

The plaintiff claimed inadequate supervision, civil fraud, unauthorized trading, and other alleged wrongdoings, and asked for compensatory damages of $21 million for the $9.5 million that had been placed in the accounts, $9.5 million as an investment return, and the rest for commissions that went to Merrill. The financial firm then submitted a counterclaim alleging that their contract together had been breached. It asked the FINRA panel for almost $2.5 million in damages for the deficit in Sophin’s retail account and close to $3 million for the swap account. Merrill also filed claims against Marc Bonnant, who is the lawyer who set up the accounts on Sophin’s behalf, as well as against Ezequiel.

The FINRA panel found both Sophin and Merrill liable. While it told Merrill to pay $6.1 million in compensatory damages to Sophin, the latter was told to pay the financial firm $2.5 million-hence the $3.6 million that Merrill was ultimately ordered to pay Sophin. Also, while the panel acknowledged that Bonnant paid less than adequate attention to his fiduciary duties to Sophin, it said that Merrill exhibited “lapses” in hits own supervising and record keeping.

The claims made against Ezequiel Nasser by Merrill were denied. The arbitration panel said Bonnant, who has been based in Europe, isn’t under its jurisdiction. (Merrill has accused him of authorizing the trades that it had made for Sophin and misrepresenting the client’s investment experience, financial state, and tolerance for risk.)

This case is just one aspect of the bigger dispute between Merrill Lynch and members of the Nasser banking family over alleged trading losses. For example, in 2008, the financial firm sued the Nassers for huge trading losses that result in a $99 million judgment. A New York appeals court upheld that ruling.

Unauthorized Trades
A broker or advisor has to get an investor’s permission to sell or buy securities for an investor. Otherwise, the trade is not authorized. When “trading authorization” is obtained to sell or buy in that client’s account, trades can be made without getting in touch with the client. However, this is a limited power of attorney.

Unfortunately, many investors suffer losses because of unauthorized trades.

Merrill Lynch must pay $3.6 million to Brazilian banking heiress, Merrill Lynch, Reuters, September 12, 2012

Merrill Lynch Ordered to Pay $3.6 Million to Brazilian Heiress, Wall Street Journal, September 12, 2012

Bonnant V. Merrill Lynch (PDF)

More Blog Posts:
Shepherd Smith Edwards and Kantas LLP Pursue Securities Fraud Cases Against Merrill Lynch, Pierce, Fenner, & Smith, Purshe Kaplan Sterling Investments, and First Allied Securities, Inc., Stockbroker Fraud Blog, May 10, 2012

Merrill Lynch Agrees to Pay $40M Proposed Deferred Compensation Class Action Settlement to Ex-Brokers, Stockbroker Fraud Blog, August 27, 2012

Shepherd Smith Edwards and Kantas LLP Pursue Securities Fraud Cases Against Merrill Lynch, Pierce, Fenner, & Smith, Purshe Kaplan Sterling Investments, and First Allied Securities, Inc., Stockbroker Fraud Blog, May 10, 2012 Continue Reading ›

Municipal Advisor Bill Passes Vote by US House of Representatives

Published on: September 21, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The House of Representatives has passed a bill that narrows the definition of a municipal advisor. HR 2827 also exempts certain market participants from being subject to certain rules and says that under Dodd-Frank Section 975 already regulated entities are not municipal advisors. This bill comes after the SEC proposed its own definition of municipal advisor two years ago that some considered too inclusive and/or not in line with Congress’s intent.

In an effort to get wide bipartisan support, Rep. Robert Dold (R-Ill) and Rep. Gwen Moore (D-Wis.) modified the legislation and put back in the federal fiduciary standard for municipal advisers that ha been taken out. Democrats had expressed worry that getting rid of the uniform federal standard might reduce the strength of oversight on the industry. The bill also no longer has “blanket exemptions” to its definition of a municipal advisor, including the categorical language stating that broker-dealers, banks, and municipal securities dealers are not municipal advisors. However, per the House Financial Services Committee, which unanimously approved the bill earlier this month, if such entities were to only take part in certain activities, they would still not be included in the definition.

The bill passed the committee with an amendment by Rep. Barney Frank (D-Mass.) that would take out the language that defines a municipal advisor as someone “engaged … in writing” to give a municipality advice. He believed the wording might have set up a possible loophole from municipal advisor regulation by letting parties not have a written contract. The municipal adviser definition, however, would still include those that “engaged … for compensation.” Also moving forward to the House with the bill was an amendment by Dold letting persons “associated” with a municipal advisory firm to not have to individually register with the SEC. Dold said that the Commission had requested this.

SEC Charges Advanced Equities with Securities Fraud Related to Private Equity Offerings

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

The Securities and Exchange Commission is charging investment advisory firm and broker dealer Advanced Equities Inc. and its cofounders Keith G. Daubenspeck and Dwight O. Badger with securities fraud related to two private equity offerings that were made for a California alternative energy company. Badger, who spearheaded the sales initiatives for the offering and allegedly made misstatements about the company’s finances, is charged with misleading investors. Daubenspeck is accused of not correcting these misstatements, therefore allegedly inadequately supervising Badger. Daubenspeck is the Advanced Equities’ parent company’s ex-chief executive and board chairman. All three parties have agreed to a cease-and-desist order entry but they are not denying or admitting to the charges.

Per the SEC, for the Silicon Valley company’s 2009 offering, Badger led close at least 49 outside investor presentations and a minimum of five in-house sales calls with Advanced Equities brokers related to this between January and March 2009 alone. He claimed that the energy company had over $2 billion in order backlogs when actually this never went above $42 million. He also said that a national grocery chain had placed a $1 billion order even though that was only worth $2 million, and although a letter of intent for making future buys was signed, it was a non-binding one. Badger also is accused of making a misstatement when he said that a US Department of Energy loan of over $250 million had been granted to the company after it had sought a $96.8 million loan. (He also allegedly again made a misstatement about the loan application in 2010 during the follow-up offering.) His misstatements were then repeated to investors during phone calls and in e-mails by brokers, Advanced Equities’ investment banking team, and the broker-in-charge at the firm’s branch in New York. (The SEC believes that these individuals should have known that the statements that Badger made were untrue.)

Meantime, Daubenspeck allegedly did not say anything after he heard Badger issue the misstatements about the grocery store order, order backlog, and loan application even though he took part in at least two of the internal sales calls attended by Advanced Equities brokers during the 2009 offering. The SEC contends that although these misstatements should have been warning signs that there was the danger that the wrong information would get to investors, Daubenspeck allegedly did not take reasonable steps to fix these misstatements and did not properly supervise Badger.

Proposal Getting Rid of Ban Against General Solicitation and Advertising For Certain Private Placements Ended up with Narrower Scope Because of Short Deadline, Said SEC Deputy Director

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

According to the SEC’s Division of Corporate Finance deputy director Lona Nallengara, a short deadline for rulemaking resulted in its proposal to eliminate the ban on general solicitation and advertising for private placements only tackling the elements ordered by the Jumpstart Our Business Startups Act’s Title II provisions. Nallengara said that the proposal looks at the issues that the Commission considers important to deal with now, and that other issues, such as whether the definition of “accredited investor” needs to be revised and there should be a wider examination of Regulation D offerings and related provisions are likely to be addressed later.

Per the JOBS Act’s Title II, the regulator has put out a proposal that lets issuers generally solicit investors or advertise offerings under Rule 144A and Reg D Rule 506 of the 1933 Securities Act for offerings that are only sold to qualified institutional buyers or accredited investors. However, contrary to what some expected, the Commission didn’t propose a series of steps or a method that Rule 506 issuers can use to verify that purchasers are accredited buyers. Rather, the proposal mandates that issuers take steps that are objectively reasonable to make sure accreditation status is based only on the particular circumstances and facts of the transaction.

Nallengara, who spoke on a CorporateCounsel.net JOBS ACT panel, acknowledged that there are differences of opinion on how strict the verification method for making share that buyers are accredited should be. Issuers don’t want the requirements to be too much of a burden while investors and state regulators want tough safeguards to make sure that only sophisticated investors are buying. He said the SEC is open to comments on the proposed rule’s verification portion. However, he wouldn’t give more concrete details about when the Commission plans to adopt a final rule per Title II (but the comment period, which is 30-days long, places the rulemaking for the proposal on a “faster track.”)

Rodman & Renshaw Exits Brokerage Business

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

Rodman & Renshaw LLC is getting out of the brokerage business. It turned in its Form BDW – the Uniform Request for Withdrawal of Broker Dealer- to the Financial Industry Regulatory Authority on Friday. Just two days before, on September 12, the brokerage firm, which is a Direct Markets Holdings Subsidiary, told the SRO that it isn’t in compliance anymore with the Securities and Exchange Commission’s Net Capital Rule 15c3-1. Because of this, besides liquidating transactions, the once leading investment bank will no longer be involved in the securities business. Rodman & Renshaw may also sell its assets.

Just last month, FINRA fined Rodman & Renshaw $315,000 for alleged supervisory and information barrier violations involving interactions that took place between its investment banking and research functions. FINRA maintains that because of supervisory deficiencies, at least two incidents occurred involving a research analyst taking part in attempts to solicit investment banking business and an incident involving another research analyst trying to organize a payment from a public company happened. Both individuals have been sanctioned and will serve out suspensions.

According to Investment News, failing to meet regulatory-net-capital levels is often a sign that the end is near for a financial firm-unless it manages to recoup and stay in operation. Since the 2008 economic crisis, a number of brokers-dealers have struggled to keep their reserves up. Unfortunately, hundreds of brokerage firms have been unable to do so, and many of them have had to close down. FINRA says that in the last five year, there has been a 13% drop in the number of broker-dealers. Compare the 4,370 brokerage firms in operation last month to the 5,005 that were in business in 2007.