Investor Lawyers Blog

Stockbroker Fraud Headlines: Wells Fargo Banker Charged Over $11M Insider Trading, Morgan Stanley to Resolve Facebook IPO Action for $5M, & SEC Accuses Canadian Broker of Inadequate Day Trader Supervision

Published on: December 28, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Wells Fargo Banker and 8 Others Accused of Alleged $8M Insider Trading Scam

The U.S. Attorney for the Western District of North Carolina is charging Wells Fargo (WFC) investment banker John Femenia and eight alleged co-conspirators with involvement in an alleged $11 million insider trading scam. Femenia is accused of stealing confidential data from his employer and its clients about acquisitions and mergers that were pending. He then either directly or via others tipped his co-conspirators, receiving kickbacks in return.

According to the N.C. government, the insider trading scam resulted in $11M in profits. While six of the co-conspirators opted to plead guilty to conspiracy to commit insider trading, Femenia and the other two have been indicted on multiple charges of conspiracy and insider trading. The same defendants, and another person, are also named in the SEC lawsuit over the scheme.

SEC Intends to Examine 25% of Investment Advisers That Had To Register, Per Dodd-Frank Act, by End of 2014

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

According to SEC Office of Compliance Inspections and Examinations Director Carlo di Florio, by December 31, 2014, the Commission plans to have examined 25% of the investment advisers that had to register with it after the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 issued its mandate. This will be done via “presence exams” at these investment firms.

The exams will concentrate on the issues of marketing, valuation, conflicts of interest, portfolio management, and asset verification. Also, the agency’s enforcement division will focus on private fiduciary duties.

According to di Florio, based on “preliminary observations” from initial presence exams it appears that even though a lot of longtime private investment firms have done a good job in constructing compliance risk management and control programs that work, OCIE examiners still noticed that there were numerous issues when they conducted initial exams, such as deficiencies related to conflicts of interest mismanagement. One example of this is the inflation of certain fees to conceal losses. Also, examiners found that some expenses, such as property rent and salaries, were inappropriately charged to funds instead of to the fund manager.

CFTC Roundup: Japan Securities Clearing Corp. Gets Relief Despite Not Registering as a Derivatives Clearing Organization & the Final Oral Communications Records Rule is Approved, as is Interim Final Rules for Major Swap Participants and Swap Dealers

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

No Enforcement Action Against Japan Securities Clearing Corp. Despite Failure to Register as a Derivatives Clearing Organization

The Commodity Futures Trading Commission Division of Clearing and Risk has decided not to recommend that an enforcement action be taken against Japan Securities Clearing Corp. for not registering as a derivatives clearing organization. Enforcement action also won’t be recommended against the corporation’s clearing participants for not clearing yen-dominated interested rate swaps through a registered DCO.

The Commission had recently finalized its clearing requirement determination, which mandates that market participants clear certain CDS classes based on European and North American corporate entities and certain interest rate swaps classes. Under the relief, JSCC will be able to clear credit default swaps (“iTraxx Japan index and yen-denominated interest rate swaps that reference the Tokyo Interbank Offered Rate or LIBOR”, said the CFTC), as long as it doesn’t accept (and none of its qualified clearing participants offer) swaps for clearing for a US customer.

Stockbroker Fraud Headlines: Securities Claims Against Lehman Underwriters Are Dismissed, NYSE Euronext Works on Kill-Switches Plan, and SEC Calls for Structured Products Ratings Roundtable

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

Securities Claims Against Lehman Brothers Holdings Inc. Underwriters Are Dismissed

The U.S. District Court for the Southern District of New York has thrown out the California Corporations Code claims made against the underwriters of two offerings of Lehman Brothers Holdings Inc. debt securities per the precluding of the 1998 Securities Litigation Uniform Standards Act. This, despite the fact that the securities case was brought by one plaintiff and lacks class action allegations.

The SLUSA’s enactment had occurred to shut a 1995 Private Securities litigation Reform Act loophole that let plaintiffs filing lawsuits in state courts circumvent the Act’s tougher securities fraud pleading requirements. It generally allows for federal preemption of state law class actions contending misrepresentations related to the buying or selling of a covered security. However, the court granted the motion to dismiss noting that even though the securities case was brought only on the State Compensation Insurance Fund’s behalf, it is still a covered class action within the act’s meaning.

GAO Says Most Financial Regulators Don’t Have the Procedures/Policies to Coordinate Dodd-Frank Rules

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

According to a recent Government Accountability report, the majority of regulators don’t have the formal procedures and policies needed to coordinate with each other on the interagency rules that the Dodd-Frank Wall Street Reform and Consumer Protection Act is requiring. As of earlier this month, regulators had reportedly coordinated on just 19 of the 54 substantive regulations that the GAO had examined. The GAO’s report is the yearly review that is required by Congress of how well Dodd-Frank is being implemented.

Per the Act, interagency consultation and coordination on specific rules has to take place. Coordination is also occurring when at least two regulators work together of their own volition to eliminate regulation overlap or duplication.

Yet, said the GAO, seven of nine agencies don’t even have written procedures and policies to facilitate rulemaking coordination. The two that do are the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. One agency that has made some progress in this matter since last year is the Consumer Financial Protection Bureau.

Dismissal of Double Derivative Delaware Securities Lawsuits Over The Bank of America-Merrill Lynch Merger is Affirmed by the Second Circuit

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

The U.S. Court of Appeals for the Second Circuit has affirmed the dismissal of Lambrecht v. O’Neal and Sollins v. O’Neal, two double derivative actions that were brought under Delaware law for Bank of America Corp. (BAC) and its subsidiary Merrill Lynch & Co. The cases were brought by Merrill shareholders contending wrongdoing. (Because Bank of America acquired Merrill, following the stock-for-stock swap, these shareholders are now BofA shareholders.)

The actions were an attempt to make Bank of America board of directors mandate that Merrill sue some of the subsidiary’s officials over allegedly reckless investments that were made. Finding that the actions were a result of unprecedented losses experienced by Merrill because it had invested aggressively in mortgage-baked securities (including collateralized debt obligations) before it was acquired by Bank of America, the district law court dismissed both actions for different but related reasons under Delaware law. In Sollins, the court said that the plaintiff’s predecessor-in-interest submitted the action without making presuit demand on the board yet did not demand futility. As for the Lambrecht action, while that lawsuit made three demands on the Bank of America board, it did not demonstrate that the bank had wrongfully denied the request that claims be made against ex-Merrill officials.

The Second Circuit, in its unpublished summary order, said that it sees no error in the rulings made by the district court. The appeals court noted that while Sollins suggested that Bank of America was “complicit” in Merrill’s alleged pre-merger wrongdoing involving the subprime market by letting the latter issue bonuses at 2007 levels, consenting to indemnify Merrill directors over pre-merger wrongdoing, approving the merger without figuring out Merrill’s growing losses, sealing the deal despite serious misgivings about the firm’s financial state, and not doing a good enough job of notifying investors about losses, his arguments are not properly placed. The district court was therefore correct in stating that the plaintiff cannot “boostrap” his claims against Merrill related to the subprime market onto the merger-related allegations against Bank of America to get around the demand request.

Reviving Antifraud Lawsuit Over Alleged Market-Timing Practices From Over Five Years Ago is Not the Answer, Say Ex-SEC Officials

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

In their amicus curiae brief, a number of ex-SEC Commissioners and top officials told the U.S. Supreme Court that the decision by the U.S. Court of Appeals for the Second Circuit to revive the agency’s antifraud cases against investment advisory officials Bruce Alpert and Marc Gabelli was a mistake. The men, who are Gabelli Funds LLC’s COO and portfolio manager, respectively, are accused of taking part in allegedly questionable market-timing practices involving the selling and buying of mutual fund shares to take advantage of short-term price swings.

Per the SEC’S 2008 securities case, Alpert and Gabelli committed these alleged violations between September 1999 and August 2002. While the district court threw out most of the lawsuit, finding that the majority of allegations were either untimely or not legally sufficient, the appeals court disagreed and reversed that ruling. It said that the defendants failed to fulfill the burden of demonstrating that a reasonably diligent plaintiff would have identified the alleged fraud more than five years before the SEC submitting its action.

Amicus curiae brief: A brief is a statement of the law and the impact on the law or other persons if a case if decided a certain way. “Amicus curiae,” is Latin for “friend of the court.” This “friend” can be any non-party to the lawsuit that has an opinion about it. Feasibly, there could be 100 such briefs, but the court would only be interested in those from credible groups, persons or lawyers.

McGraw Hills, Moody’s, & Standard & Poor’s Can’t Be Held Liable by Ohio Pension Funds for Allegedly Flawed MBS Ratings, Affirms Sixth Circuit

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

This month, the U.S. Court of Appeals for the Sixth Circuit refused to revive statutory and common law MBS claims made by five Ohio pension funds: The Ohio Police & Fire Pension Fund, the State Teachers Retirement System of Ohio, the Ohio Public Employees Retirement System, the Ohio Public Employees Deferred Compensation Program, and the School Employees Retirement Systems of Ohio. All of them are run by the state for public employees.

Per the court’s opinion, between 2005 and 2008, the funds had invested hundreds of million of dollars in 308 mortgage-backed securities that all were given AAA or the equivalent from one of the three credit rating agencies. When MBS value dropped during this time, the Funds lost about $457 million.

The plaintiffs believe that the reason that they lost their money is because the ratings that were given to the MBS were false and misleading. They filed their Ohio securities lawsuit under the state’s “blue sky ” laws, as well as the common law theory of negligent misrepresentation.

SEC’s Investment Management Division Considers Applying 1940 Advisers Act to Private Fund Advisors

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

According to Securities and Exchange Commission Division of Investment Management Director Norm Champ, consideration is being given toward how the 1940 Investment Advisers Act might be applicable to private fund advisors. Champ spoke at an American Law Institute-Continuing Legal Education Group in New York earlier this month.

One reason for this closer scrutiny is that because of the Dodd-Frank Act, advisers to certain private funds that previously didn’t have to must now register with the SEC. Currently, about 40% of SEC-registered advisors work with private funds. Hence, noted Champ, the need to view our regulatory framework from a wider perspective and “how that fits” with these advisors.

It was just recently that the division began taking a more risk-based approach toward how it determines which regulator initiatives are priority. This means that before starting a project, the way it might impact capital formation, investors, regulated entities, and the needed resources are taken into consideration. Champ said that the issue of whether/not to apply the Investment Advisers Act to private fund advisers is up for consideration as a priority. (He made clear that the remarks he made at the event are his own and don’t necessarily reflect that of his employer.)

Champ also discussed exchange-traded funds and how his division will no longer delay considering exemptive relief for ETF funds that invest a lot in derivatives. (Such requests had been placed on hold by the SEC in 2010 while it reviewed how these funds used the derivatives.)

Exchange traded funds (ETFS) are investment companies that can be legally classified as Unit Investment Trusts and open-end companies but are different from these two in that ETFs don’t sell individual shares straight to investors and instead issue shares in “Creation Units,” which are big blocks. Typically, it is institutions that buy these blocks.

That said, any relief request for ETF funds has to come with “two specific representations,” noted Champ: A) An ETF has to attest that the board will review and approve not just the derivatives investment of the funds but the way that the ETF’s investment manager handles risk related to derivatives and B) AN ETF has to represent that its derivative investments-related disclosures in periodic reports and offering documents are in line with staff and commission guidance. Champ acknowledged that there were still some concerns about leveraged ETFs and that the commission would not “support new exemptive relief” for the funds.

Leveraged ETFs, also called ultra short funds, try to deliver multiples of the performance of the benchmark or index they are tracking. They look to reach a return that is a multiple of the inverse performance of the index that is underlying.

Exchange-Traded Funds (ETFs), SEC

Investment Advisers Act of 1940 (PDF)

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Holding Brokers to Investment Adviser Accountability Standards is a Bad Idea, Say Some Wall Street Executives, Stockbroker Fraud Blog, July 16, 2011

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

Alleged Cherry-Picking Scam Leads to SEC Charges Against California Hedge Fund Manager

Published on: December 18, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Investment advisory firm Aletheia Research and Management, Inc. and its owner hedge fund manager Peter J. Eichler, Jr. are facing Securities and Exchange Commission charges over their alleged involvement in a cherry-picking scam. They are accused of directing winning trades to their trading acocunts, giving preferences to some clients at cost to certain investors, and not revealing in a timely fashion that the firm was in a precarious financial state.

Per the SEC charges, Aletheia and Eichler did a disproportionate job of allocating losing trades to accounts in two of the hedge funds that they managed. This led to investors losing money. Meantime, winning trades were allegedly sent to accounts belonging to company employees, Eichler, and preferred clients.

It was Eichler that allegedly used Aletheia’s discretionary authority over Trading Options accounts to make about “4,891 options trades for an aggregate investment of $238.9M” for these accounts between at least the middle of August 2009 through November 2011. Because most of these trades didn’t happen until over one hour after a trade was made or after the closing of the options positions, Eichler could cherry-pick the losers and winners. Favored accounts then got a disproportionate amount of profitable trades that had been allocated while the disfavored clients received a disproportionate amount of the unprofitable trades.

By participating in this alleged securities scam, contends the Commission, Eichler and his investment advisory firm did not fulfill their fiduciary obligations to certain advisory clients. Aletheia also allegedly failed to put in place procedures, policies or an ethics code that could have stopped the cherry-picking scam from happening and breached federal law and its fiduciary duties when it waited until right before filing for bankruptcy to let its clients know that it was in financial trouble.

Even though Aletheia already was allegedly in financial trouble as early as July of this year, when the state of California filed an over $2M tax lien against it for taxes it hadn’t paid and then on October 1 suspended the company’s corporate status for failing to pay (at this point the investment advisory firm was not legally allowed to be in business), it wasn’t until two days before seeking Chapter 11 protection on November 9that clients were notifies about the firm’s financial woes.

The SEC is accusing Aletheia of violating the Securities Exchange Act of 1934, Section 10(b) and Rules 10b-5(a) and (c) thereunder, as well as numerous sections of the Investment Advisers Act of 1940 and numerous rules thereunder. The regulator wants disgorgement of ill-gotten gains, permanent injunctions, penalties, and prejudgment interest.

Under federal securities laws, an investment advisor has to immediately and completely reveal any financial conditions that might reasonably likely hurt its ability to fulfill its contractual obligations to clients. Unfortunately, this is not always what happens.

SEC CHARGES SANTA MONICA-BASED HEDGE FUND MANAGER IN CHERRY-PICKING SCHEME, SEC, December 14, 2012

S.E.C. Says Asset Firm Manipulated Trades to Enrich Some Clients, NY Times, December 16, 2012

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SEC Gets Initial Victory in Lawsuit Against SIPC Over Payments Owed to Stanford Ponzi Scam Investors, Institutional Investor Securities Fraud Blog, February 10, 2012
K.W. Brown & Company, K.W. Brown Investments, & 21st Century Advisors Are Held Liable in $4.5 Million Cherry-Picking Scam, Stockbroker Fraud Blog, January 21, 2008 Continue Reading ›