Investor Lawyers Blog

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

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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.

Investment Advisor Securities Roundup: Two Firms Settle SEC Claims That They Impeded with Examinations, FINRA Defends SRO Model, IA Allegedly Duped Private Equity Investors, & CDO Misrepresentation Accusations Against GSCP Executive Are Dismissed

Published on: December 10, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Investment advisory firms EM Capital Management and Barthelemy Group have settled SEC administrative charges that they got in the way of Commission staff examinations. Both cases were settled without the parties involved denying or admitting to the allegations.

According to the SEC, Barthelemy Group and Evens Barthelemy allegedly misled examiners by inflating claimed assets under management to make it appear as if the firm qualified for SEC legislation. To settle the claims, Barthelemy has consented to a securities industry bar. He can reapply for admission again in two years. His firm consented to a censure.

As for the proceedings against Em Capital Management and Freeman, they allegedly waited a year and a half to produce the records and books for the firm’s mutual fund advisory business. Both have consented to pay a $20,000 penalty and be censured.

FHFA Lawsuits Against Barclays Bank, Morgan Stanley, & Deutsche Bank Over RMBS to Proceed to Trial

Published on: December 8, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Southern District of New York is allowing the Federal Housing Finance Agency’s residential mortgage-backed securities lawsuits against Deutsche Bank AG, Morgan Stanley (MS), Barclays Bank PLC (BCS), and RBS Securities to go to trial even while granting the dismissal of some of the motions having to do with alleged misstatements about owner-occupancy information and loan-to-value ratio. FHFA is the conservator for Freddie Mac and Fannie Mae against numerous financial institutions for alleged securities law violations related to the sale and offer of RMBS.

According to the complaints, which are part of 17 FHFA lawsuits that were brought in September 2011, from 2005 to 2007 the offering documents used to sell RMBS to the government sponsored enterprises included material misstatements or omissions about LTV, owner-occupancy status, and mortgage-underwriting standards. (Based on these allegations, the SEC made claims under the Virginia Securities Act, the 1933 Securities Act, and the District of Columbia Securities Act) In the FHFA’s complaints against Morgan Stanley, Deutsche Bank, and in four of the other cases, the agency is making New York common law claims of aiding and abetting fraud and fraud on the basis of three categories of alleged misstatements that the securities law claims were based upon.

Per the Federal Housing Finance Agency v. Deutsche Bank AG, the financial firm, a number of its corporate affiliates, and associated individuals were named defendants for acting as lead underwriter for 40 securitizations, as well as a depositor and sponsor for 35 of them. The defendants submitted motions to dismiss the fraud claims and claims, pointing to DC law and Virginia law as basis.

SEC Working to Create $50M Reg A Offering Cap to Commissioners ASAP

Published on: December 8, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to the SEC Division of Corporation Finance’s Office of Small Business Policy chief Gerald LaPorte, Commission staff are working hard to create under Reg A a new $50 million offering cap as soon as possible, even without a hard deadline. LaPorte, who expressed his own views at a Jumpstart Our Business Startups Act rulemaking panel at the American Bar Association Business Law Section, said that a lot of people had “high expectations for this exemption.”

Right now, public offerings of up to $5 million get registration exemption under the regulation. Under the JOBS Act’s Title IV, the SEC has to allow for exempt offerings as high as $50 million under Reg A.

Per LaPorte, the Commission will have plenty of discretion regarding how to put Title IV into effect. He said that SEC staff is looking into questions that commenters have sent in via pre-rulemaking letters, including whether reporting companies should be able to apply the new exemption, there should be a periodic reporting regime for the new cap, who should trigger reporting duties, and how similar Reg A reporting should be to crowdfunding reporting. LaPorte said that too many similarities could cause confusion for market participants.

Decreased Ability to Process Risk and Danger Make the Elderly Easy Fraud Targets, Says Study

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

According to a study conducted by UCLA psychologist Shelley Taylor, one reason that older adults may be more easily prone to being deceived is that there appears to be less activity in the part of their brains that processes subtle danger and risk. She wanted to find out how well older people recognize visual clues indicating that someone may be scamming them.

Taylor brought in 119 seniors over the age of 55 and 24 people in their twenties. The two groups looked at 30 photographs that showed one of three faces: a neutral looking face, an untrustworthy one, or a trustworthy one. Taylor found that while the seniors and younger adults rated the neutral and trustworthy faces about the same, the elder adults had a more difficult time identifying the untrustworthy cues, rating them as more trustworthy than did their younger counterparts.

A follow-up study she then conducted using brain imaging showed the seniors exhibiting less activity in the risk processing area of the brain. She also said determined that people’s propensity to focus more on the positive as they grow older might too be causing them to miss deception cues (such as a smile that doesn’t include the eyes or someone who leans backward and/or looks away.)

Houston-Based Receiver Files $1.8B Class Action Filed Against Law Firms Accused of Helping R. Allen Stanford Carry Out His $7B Ponzi Scam

Published on: December 5, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Ralph Janvey, the Stanford receiver based in Houston, has filed a putative class action lawsuit against Hunton & Williams LLP and Greenberg Traurig LLP, two law firms accused of playing roles that allowed R. Allen Stanford to execute his $7B Ponzi scam. The securities complaint, which was filed in the U.S. District Court for the Northern District of Texas, is seeking $1.8 billion in damages and $10 million that it claims Stanford gave to the law firms during their years of working together. The plaintiffs are contending Texas Securities Act violations, aiding and abetting participation in a fraud scam, aiding and abetting breach of fiduciary duty, and conspiracy.

Also named as a defendant is Yolanda Suarez, who was not only a former Greenberg Traurig associate but also she served as Stanford Financial Group’s general counsel and later as chief of staff. Janvey says that Stanford could not have kept his scam going for over 20 years without these parties’ help.

Per the Texas securities case, Carlos Loumiet, an ex-Greenberg Traurig partner who later went to work for Hunton & Williams (he is now a DLA Piper partner and is not a defendant in this lawsuit), had a “very close personal relationship” with Stanford and played a part in helping the now convicted fraudster run his global scam. This included helping him establish sales and marketing offices in the US. Loumiet and Greenberg Traurig also allegedly helped Stanford set up the transactions that would allow the Ponzi mastermind to use the money he took from Stanford International Bank Ltd. in Antigua and invest them in “speculative venture capital” deals and property in the Caribbean. The law firm is also accused of giving Stanford securities law counsel and advice on a regularly basis.

Insider Trading Roundup: Ex-MLB Player Indicted on Fraud Charges, Former Brokers Indicted in Scam Involving IBM Acquisition, & Health Care Company Execs. Charged Over Alleged Tippee Ring

Published on: December 5, 2012 | by Shepherd Smith Edwards & Kantas, LLP

MLB player Douglas DeCinces has been indicted by a federal grand jury
In California with 42 counts of securities fraud (including insider trading and tender offering fraud charges) related to the 2009 acquisition by Abbott Laboratories (ABT) of Advanced Medical Optics Inc. His friends Fred Scott Jackson, David Parker, and Roger Wittenbach have also been charged.

DeCinces is accused of made about $1.3 million from a tip that Advanced Medical Optics Inc. was thinking about letting Abbott Laboratories acquire it. Prosecutors say that the tip came from an Advanced Medical executive and DeCinces purchased nearly 100 shares of that company and sold it after the tender was announced. He also allegedly told his three friends, who traded the stock and made about $690,000 combined.

In another alleged insider trading scam, a grand jury in New York has indicted two ex-stockbrokers on securities fraud and conspiracy charges involving tips related to the acquisition of software manufacturer SPSS Inc. by IBM Corp. (IBM). The brokers are David Weishaus and Thomas Conradt.

The inside information is said to have come from a lawyer on IBM’s legal team during the deal, which took place in 2009. The attorney allegedly told a friend, who then told Conradt. Both that friend and Conradt then allegedly bought SPSS shares, as did Weishaus after Conradt told him about it. The two of them also allegedly tipped other colleagues.

Communication about the scam is said to have occurred via instant messaging. After the acquisition was announced, the participants allegedly made over $1 million.

Criminal charges against Conradt and Weishaus include conspiracy to commit securities fraud and securities fraud. They also face SEC civil charges.

In two other securities cases, one civil and one criminal, charges have been filed against three health-care company officials and their colleagues and friends that are accused of making over $1.7 million in kickbacks and illegal profits by trading on insider information related to technology and drug companies. The defendants in the Justice Department case are Celegene Corp. (CELG) financial official John Lazorchak, Sanofi (SNY) finance officer Mark Cupo, Stryker Corp. (SYK) marketing official Mark Foldy, Cuop friend Michael Castelli, Michael Pendolino, and Lawrence Grum. All six of them and James Deprado are named in the SEC fraud lawsuit.

According to the commission, Lazorchak, Cupo, and Foldy gave the others tips about their companies so that they could engage in insider trading. The defendants allegedly tried to avoid detection by making sure there was no direct contact between the traders and the insiders. One person would be designated to act as the non-trading middle person, who would get the tip from the insider and notify the others. Cash payments would then be made to the insiders as compensation. Grum and Castelli, who were allegedly the main traders, are also accused of by putting together binders of research activity as a “false basis” for trades that they made in an effort to hide their illegal conduct.

SEC CHARGES RING OF HIGH SCHOOL BUDDIES WITH INSIDER TRADING IN HEALTH CARE STOCKS, SEC, November 19, 2012

Ex-Orioles Player DeCinces Charged With Insider Trading, Bloomberg, November 29, 2012

SEC v. Conradt & Weishaus (PDF)

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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

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: Former FrontPoint Partners Hedge Fund Manager Pleads Guilty to Criminal Charges, Institutional Investor Securities Blog, August 20, 2012

Goldman Sachs Ordered to Arbitrate Underwriting Dispute Involving $210M in Auction-Rate Securities

Published on: December 4, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the District of Nevada has rejected Goldman Sachs & Co.’s (GS) bid to arbitrate its dispute with the city of Reno, Nevada. The financial firm had sought to stop a Financial Industry Regulatory Authority proceeding over its underwriting of $210 million in ARS. Per Judge Robert Jones, even though there was no arbitration agreement, that the city paid Goldman to facilitate the securities’ auctions makes Reno a customer of a FINRA firm member for the purposes of arbitration. The case is Goldman Sachs & Co. v. City of Reno.

Recounts the court, Reno had issued about $210 million in auction-rate securities to fund a number of projects in 2005 and 2006. Pursuant to their underwriter and broker-dealer agreements together, Goldman was to underwrite and broker the ARS. While the broker-dealer arrangement included a forum selection clause allowing for any lawsuits stemming from the agreement to be heard in Nevada district court, it did not (nor did the underwriter agreement), come with an arbitration provision.

Reno began FINRA arbitration proceedings against the brokerage firm in early 2012 claiming that Goldman had committed wrongdoing under the terms of the agreements. Goldman countered with this case, requesting that the court find that the FINRA forum was inappropriate for resolving this dispute, per the forum selection clause, and because there was no arbitration clause between the two parties. Goldman also sought preliminary injunction against the proceedings.

The district court said no to the request for relief, observing that a party that wants injunctive relief has to show that success on the merits was likely, which it said Goldman did not do. It also said that, according to FINRA arbitration code, parties have to arbitrate any dispute between a member and its customer that involves the member’s business activities. As for the forum selection clauses found in the broker-dealer agreement, the court said that although these don’t directly address the matter of arbitration, they also don’t disallow for arbitration if that is what is needed.

The court disagreed with Goldman’s contention that FINRA rules don’t apply because the ARS are municipal securities and therefore influenced by Municipal Securities Rulemaking Board rules, which don’t include muni issuers under the customer definition. It pointed out that, according to the SEC, MSRB members are also subject to FINRA arbitration just like FINRA members. Also, Goldman is both an MSRB member and a FINRA member.

Judge Jones noted that even if FINRA finds that Reno’s claims have more to do with the brokerage firm’s underwriting than its auction facilitation services, the issue of arbitrability is for the arbitrator and not the court.

Goldman Sachs & Co. v. City of Reno, D. Nev, Dockets, Justia

Goldman Must Arbitrate Dispute With City of Reno Over ARS Underwriting, Bloomberg BNA, November 30, 2012

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Class Action MBS Securities Lawsuit Against Goldman Sachs is Reinstated by 2nd Circuit, Institutional Investor Securities Blog, September 14, 2012

Amerigroup Shareholders Claim Goldman Sachs Advisers’ Had Conflicts of Interest That Influenced $4.5B Sale of Company to WellPoint, Institutional Investor Securities Blog, August 21, 2012

Texas Securities Fraud: BNY Mellon Capital Markets LLC Settles Allegations of Rigged Bond Bidding for $1.3M, Stockbroker Fraud Blog, January 24, 2012 Continue Reading ›