Investor Lawyers Blog

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.”

Broadway Musical “Rebecca’s” Producers File $100M New York Fraud Lawsuit Against Broker Accused of Scamming Them

Published on: October 23, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The producers of the Broadway musical “Rebecca” have filed a $100 million fraud lawsuit against former Oppenheimer & Co. broker Mark Hotton because they say he scammed them by pretending to raise $4.5 million from investors for the play while they paid him and his entities $60,000. Hotton was arrested earlier last week and charged with wire fraud not just in this alleged financial scam, but also for his supposed involvement in a separate scheme in which he is accused of using similar deceptive practices to con a real estate company into paying $750,000 to him and the entities.

In the financial fraud involving “Rebecca,” which is based on Daphne Du Maurier’s novel, Hotton allegedly made fake investors and businesses to deceive the producers, who were about $4 million short of making their budget. They signed a deal with his TM Consulting Inc. earlier this year in an agreement that gave Hotton a $7,500 fee and an 8% guarantee on any money he raised above $250,000.

Hotton made it seem as if he had found four investors to put in the $4.5 million-yet these supposed individuals didn’t actually exist. Instead, he allegedly pretended to be them. When the producers asked him for the money, Hotton even claimed that one of the investors, Paul Abrams, had died abruptly from malaria.

David Lerner Associates Must Pay $14M Over Apple REIT Ten Sales and Allegedly Excessive Markups Involving CMOs and Municipal Bonds—$12M to Go to Investors

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

The Financial Industry Regulatory Authority is ordering David Lerner Associates, Inc. to pay $14M for allegedly engaging in unfair sales practices involving its Apple REIT Ten and charging clients excessive markups. $12 million of this will be restitution to the investors that bought shares in the $2 billion non-traded real estate investment trust, as well as to clients that were overcharged. $2.3 million is FINRA’s fine against the brokerage firm for charging unfair prices on collateralized mortgage obligations (CMOs) and municipal bonds.

According to the SRO, David Lerner Associates solicited thousands of clients to get them to buy shares in the Apple REIT TEN, of which it is the sole distributor. Elderly and unsophisticated investors were among its sales targets, even as it failed to do enough due diligence to make sure these investments were appropriate for these clients. Instead, the financial allegedly used marketing collateral that was misleading and showed customers performance results for closed Apple REITs without revealing that their incomes were not enough to support distributions to unit owners.

As part of the settlement, the financial firm has agreed to modify its advertising procedures. For example, for three years it will video record sales seminars involving 50 or more participants. It will also prefile its sales literature and ads with FINRA at least 10 days before they are made available for use. Additionally, per FINRA mandate, the brokerage firm will bring in independent consultants to look at proposed modifications to its supervisory system, as well as the training involving the pricing of municipal bonds and CMOs and the sale of non-traded REITs.

Securities Fraud Roundup: EKN Financial Services Expelled from FINRA, SRO’s CEO Says Complex Products Should Be Subject to Stricter Scrutiny, and Federal Regulators Now Paying Closer Attention to Securities Law Violations that Lead to Victim Hardships

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

The Financial Industry Regulatory Authority has expelled EKN Financial Services for a number of compliance violations and for letting firm CEO Anthony Ottimo act in the capacity of supervisor even after the Securities and Exchange Commission had barred him from doing so in 2008. FINRA has barred Ottimo from the securities industry, in addition to barring ex-EKN President Thomas Giugliano from working in a principal role. The SRO contends that through Ottimo and Giugliano, EKN violated a number of SEC and NASD/FINRA rules and federal securities laws, including those involving net capital deficiencies, anti-money laundering violations, and reporting failures.

According to FINRA, from 2008 to 2011 Ottimo took on a supervisory role despite the SEC bar. He also continued to serve as CEO even though he wasn’t a registered principal. Meantime, Giugliano and the financial firm are accused of misrepresenting to FINRA that Ottimo wasn’t serving in these roles. The SRO also found that EKN made numerous anti-money laundering violations, such as not setting up a satisfactory AML compliance program to identify and report suspect activity, preparing net capital computations that were not accurate, failing to properly report net capital deficiencies, not accurately detailing liabilities and cost in its records and books, and neglecting to tell FINRA that Giugliano and Ottimo had hundreds of thousands of dollars in liens and judgments that hadn’t been satisfied.

Federal regulators have lately been more alert to potential securities law violations because of the devastating effect such misconduct can have on the lives of victims. Other examples include boiler room scams, affinity fraud, accounting fraud, misappropriation, and Ponzi schemes, which are just some of the violations that target individual investors, including the elderly and the sick, draining many of them of their life savings. Many such violations that impact investors directly are ones generally involving more low profile incidents that the public doesn’t usually hear about.

Annuity Assets are Hot Commodities Among Investment Managers Private-Equity Groups, and Hedge Fund-Controlled Entities

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

According to the Wall Street Journal, Guggenheim Partners, Harbinger Capital Partners, and Apollo Global Management are just some of the money managers who have begun to acquire fixed annuities. These investments, which were sold by life insurance companies to conservative savers for decades, are now being seen by these newest buyers as a way to increase money under management. Many of these entities, which are controlled by private-equity groups, hedge funds, and other investment managers, believe that their investment savvy will allow them to discover profits where traditional insurance companies were unable to do so. Such acquisitions could provide a more stable income source.

For example, following its acquisition of a couple of midsize insurers this summer by its affiliates, Guggenheim, the $160 billion money manager. won credit-ratings upgrades. Meantime, Athene Annuity & Life, which said it would pay $415 million for Presidential Life Corp., will add about $3.5 billion in assets if Presidential shareholders approve the deal. As for Apollo Global Management, it is seeking to establish a retirement-savings company that is a market leader.

Some of these new annuity owners are offering products that come with terms that are now more generous for clients, while others want to make money off the business blocks they’ve acquired. The National Organization of Life & Health Insurance Guaranty Associations says that to get US consumers to buy annuities, firms have to set up state-based insurance units that are governed by the same risk-based-capital rules that other insurers have to follow.

Texas Securities Fraud: District Court Says Houston-Based Private Equity Firm Can Proceed with Claim Over $10M Film Financing Investment

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

The U.S. District Court for the Southern District of Texas is allowing Small Ventures USA LP, a private equity firm based in Houston, to move forward with its Delaware fraud claim against the promoters that solicited its $10 million investment in RT Newbridge III LLC, a film financing venture. Judge Ewing Werlein Jr. also decided that the plaintiff could proceed with its Texas securities fraud claim against MLRT Film Holdings LLC, Rizvi Traverse Management LLC, and a number of individual defendants.

Small Ventures contends that the defendants made false representations that most of Newbridge’s investments, including independent movie Tekken (comprising about 30% of its portfolio), were financially healthy, when in fact they were not. Meantime, they also allegedly hid or did not reveal material facts, such as the fact that this particular film’s producer had defaulted on an $11 million loan from Newbridge and the movie wasn’t commercially viable and had received poor reviews at the Cannes Film Festival.

The plaintiff claims that to persuade the private equity firm to invest, in 2008 defendant Suhail Rizvi told Small Ventures founder William O. Perkins III that the loan Newbridge had made to produce the film was low risk because of having been over-collateralized with tax credits or foreign pre-sales. Spreadsheets were also passed on to the Small Ventures to make it appear as if the Newbridge portfolio was doing well. Several months after investment discussions began, Small Ventures decided to invest $10 million in return for a membership interest in Newbridge.

When Newbridge failed and the defendants did not collect on the Tekken loan, Small Ventures lost its investment. The plaintiff contends that if it had known the truth about the state of Tekken, it would have taken action to sell its interest so that damages could be mitigated. Small Ventures also believes that the defendants were negligent in the way that they managed the Tekken loan due to their failure to comply with the terms mandated for collection of the completion guaranty bond.

The plaintiff wants damages for what it claims was tortious conduct related to the sale, solicitation, and management of its $10 million investment. It is also contending fraud, grossly negligent and negligent misrepresentation, fraud by nondisclosure, gross negligence and negligence, breach of fiduciary duty, and claims under the Texas Securities Act.

Per the court, Small Ventures stated a fraud claim under Delaware law, which is applicable to the fraud claim, per a choice of law clause that can be found in the agreement between the parties. The court turned down the defendants’ contention that the fraud claims should be thrown out due to “no other representations” and “no reliance” clauses that could be found in the subscription agreements. It did, however, dismiss Small Ventures’ fiduciary duty claims.

Small Ventures USA, L.P. v. Rizvi Traverse Management, LLC et al, Justia Dockets and Filings

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US Supreme Court Considers Hearing Stanford Ponzi Lawsuits, Stockbroker Fraud Blog, October 3, 2012

Texas Securities Fraud: Investor Sues Behringer Harvard REIT I Stockbroker Fraud Blog, September 26, 2012

Texas Securities Fraud: Ex-Stanford Chief Investment Officer Gets 3-Year Prison Term for Her Part in $7 Billion Ponzi Scam, Stockbroker Fraud Blog, September 18, 2012 Continue Reading ›

Institutional Investment Fraud Roundup: Ex-Analyst Guilty in $61.8M Insider Trading Scheme, SLUSA Precludes Investor Class Action Over Hedge Funds that Failed After Madoff Ponzi, & Dark Pool Operator Settles Subscriber Info. Breach Charges

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

Jon Horvath, an ex-research analyst at a New York hedge fund, has pled guilty to two counts of securities fraud and one count of conspiracy to commit securities fraud related to a $61.8 million insider trading scheme. Several other former hedge fund managers and analysts from different investment firms and hedge funds are also accused of allegedly trading key, nonpublic information about NVIDIA Corporation (NVDA), Dell, Inc. (Dell), and other publicly traded technology companies between 2007 and 2009. The information was obtained indirectly and directly from employees that worked at these companies.

Horvath admitted that when he received the insider information from the other analysts, he knew that they were all breaching their duties of loyalty. He caused certain trades to be executed based on such information. He also provided the other analysts with insider information about publicly traded companies.

In other securities fraud news, the U.S. District Court for the Southern District of New York has ruled that under California securities law, the Securities Litigation Uniform Standards Act bars a class action filed by investors in two hedge funds that failed after the Madoff Ponzi scheme was found out. The plaintiffs are contending that the defendants, investment advisor Tremont Partners and a number of affiliates, made misrepresentations and omissions connected with a covered securities’ sale. The case is Lakeview Investment LP v. Schulman.

FINRA Arbitration Panel Tells Merrill Lynch to Pay $1.34M to Florida Couple Over Allegedly Misrepresenting Fannie Mae Preferred Shares’ Risks

Published on: October 17, 2012 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority panel says that Merrill Lynch (MER) has to pay Michele and Robert Billings $1.34 million for allegedly misrepresenting the risks involved in preferred shares of Fannie Mae. The couple, who used to own a pest control business, placed $2.3 million in the shares in 2008 on the recommendation of their broker, Miles Pure.

The Billings claim that Pure told them them that their investment was “safe,” backed by the government, and came with an attractive yield, when, actually, contends the couple, at the time Fannie Mae’s exposure to the residential real estate market that was failing was causing Fannie Mae to lose billions of dollars. Even as the stock’s price went down, they say that Pure discouraged them from selling. They also claim that he didn’t let them know that the financial firm’s own research showed that Fannie Mae was becoming more beleaguered. Not long after, the Billings’ shares lost their value when Fannie Mae went into government conservatorship.

They filed their FINRA arbitration claim contending civil fraud, negligent supervision, and other alleged wrongdoing. The couple, who are now retired, sought $1 million from Merrill Lynch, in addition to other relief. The $1.34 million award includes punitive damages.

While a spokesman for Merrill says that the brokerage firm doesn’t agree with the panel’s ruling, the Billings’ securities attorney expressed approval of the outcome. Meantime, the FINRA panel has denied Pure’s request to have the disclosure about this arbitration taken out of public record. Although he was not involved in this case, per the securities industry, all securities brokers who are license must have their connection to any arbitration claim noted in their public records regardless of whether/not if he/she was party to it. (The panel, however, did remove the arbitration disclosure from the record of a brokerage manager who didn’t deal directly/daily with the Billings.)

Pure is now a Morgan Keegan broker. Morgan Keegan is a Raymond James Financial Inc. (RJF) unit. Merrill Lynch is a Bank of America (BAC) subsidiary.

This securities case is an example of some of the repercussions that are still happening for investors and brokers in the wake of the economic crisis. The Billings are just two of many investors that have sustained financial losses because a brokerage firm allegedly misrepresented the risks involved in an investment. Meantime, more arbitration claims over such losses are still pending.

Merrill Lynch ordered to pay couple $1.34 million over Fannie Mae Preferred Shares, Reuters/Chicago Tribune, October 16, 2012

Bank of America Merrill Lynch hit with $1.3 million arbitration order, Investment News, October 17, 2012

More Blog Posts:
Ex-Fannie Mae Executives Have to Defend Against SEC Lawsuit Over Their Alleged Involvement in Understating Mortgage Company’s Exposure Risk, Institutional Investor Securities Blog, August 25, 2012

Merrill Lynch Told to Pay $3.6M to Brazilian Heiress for Brother’s Alleged $389M in Unauthorized Trading, Stockbroker Fraud Blog, September 22, 2012

Freddie Mac and Fannie May Drop After They Delist Their Shares from New York Stock Exchange, Stockbroker Fraud Blog, June 25, 2010 Continue Reading ›

Citigroup Inc. CEO Vikram Pandit Resigns

Published on: October 16, 2012 | by Shepherd Smith Edwards & Kantas, LLP

After months of tensions with Citigroup’s (C) board of directors, Chief Executive Officer Vikram Pandit has turned in his resignation. Taking his place as CEO will be Michael Corbat.

According to several sources, Pandit’s decision to leave comes after months of tension with Chairman Michael O’Neill over numerous issues, including the role of Chief Operating Officer John Havens and regarding compensation. Havens stepped down on the same day as Pandit. (Reuters reports that one person familiar with the investment bank says that this means that O’Neill is now in full control.) During a conference call with analysts and investors, O’Neill offered reassurances while noting that outside candidates had been considered before Corbat’s appointment.

With Pandit’s departure, Citigroup shares rose up to 2%, with some investors expressing relief that he is gone. Pandit was at the helm when the financial firm took a loss when it had to sell the stake it had left in its retail brokerage business to Morgan Stanley (MS). He also opposed breaking up the bank in any way, which some believed could have raised shareholder value. Proposals for these changes could come back onto the table now that he is gone.

Pandit’s relationship with the board wasn’t helped after shareholders recently turned down the CEO pay package. While he was awarded over $15 million in compensation last year, 55% of shareholders did not approve it.

According to Reuters, Pandit, who says he is leaving of his own accord, believes he has accomplished his aims since becoming Citigroup CEO in December 2007 and that putting his successor in place now makes sense because plans are in development for 2013 when a new strategy will be executed.

Meantime, Havens’ departure also isn’t a surprise to many, as he and Pandit have close career ties. They worked together at Morgan Stanley and Old Lane Partners LP. Some inside Citigroup considered their relationship to be an obstacle. Pandit moved to Citigroup after Old Lane Partners, which was his private equity firm and hedge fund, was acquired by the bank for $800 million.

Since the mortgage crisis, banks are under pressure regarding their profits, which haven’t been helped by unimpressive investment returns and unspectacular capital market activities. The Wall Street Journal reports that according to private equity firm JC Flowers & Co., the return on equity among financials should “normalize to historic levels” even though the economic crisis has resulted in a “major long-term evolution.”

In the firm’s mid-year report to investors, Chairman J. Christopher Flowers said this normalization would occur because financial service companies are needed if the economy is to work properly. He stressed that with economic growth, financial service companies will periodically need more capital to stimulate this, and, as a result, they won’t be able to attract new capital unless ROEs and valuations adjust accordingly. Flowers said that this would occur via price changes and business mix shifts. Also per the WSJ, his view is in contrast to that of KKR & Co. global macro and asset allocation head Henry McVey, who recently reported that while the financial services industry is experiencing changes, more intense regulation will likely cause the firms’ performance and returns to keep lagging.

Citi’s CEO Pandit exits abruptly after board clash, Reuters, October 16, 2012

Pandit Is Forced Out at Citi, The Wall Street Journal, October 17, 2012

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Citigroup Inc.’s $590M CDO Putative Class Action Settlement Gets Preliminary Approval from District Court, Stockbroker Fraud Blog, September 13, 2012

Institutional Investor Securities Roundup: FHFA Can Start Discovery in MBS Litigation Against Banks, SEC Sues Puerto Rico Man Over Alleged $7M Scam, and Assets of Two Colorado Men are Temporarily Frozen Over Alleged Promissory Note Ponzi Scheme, Institutional Investor Securities Blog, August 31, 2012

JPMorgan Chase Must Pay Oil Heiress’s Trust $18M For Derivatives Investments, Account Mismanagement, and Unsuitable Investment Advice

Published on: October 12, 2012 | by Shepherd Smith Edwards & Kantas, LLP

JPMorgan Chase (JPM) must pay the trust of oil heiress Carolyn S. Burford $18 million for the “grossly negligent and reckless” way that the financial firm handled the account. In Tulsa County District Court in Oklahoma, Judge Linda G. Morrissey said that beneficiary Ann Fletcher was persuaded to invest in derivatives that were unsuitable for the trust, causing it to sustain significant losses. The judge is also ordering punitive damages to be determined at a later date, as well as repayment of the trust’s legal expenses.

Fletcher, now 75, is the daughter of Burford, who passed away in 1996. The trust was set up in 1955 by Burford’s parents. Burford’s dad is the founder of Kelly Oil and her mother had connections to another oil company.

Between 2000 and 2005, the trust and JPMorgan, which gained management over the trust after a number of bank mergers and oversaw it until 2006, got into a number of variable prepaid forward contracts. These derivatives were pitched to the trust as way for it to make more income. However, according to the court, Fletcher was cognitively impaired and experiencing medical problems when the bank recommended that the trust buy the derivatives. A year before, she even expressed in a written letter to the bank that she was scared about getting involved in “puts & calls.” She eventually chose to trust their recommendation that she buy them.

Judge Morrisey believes that the bank failed to properly explain the product to its client while neglecting to reveal that it stood to benefit from the transaction. She also says that when JPMorgan invested the contracts’ proceeds in its own investment products, which she described as “double dipping,” it was in breach of fiduciary duty. JPMorgan also billed the trust transaction investment fees and corporate trustee fees.

Morrisey said that because the bank gives employees incentives to make it revenue, this creates a conflict of interest for those that are advising and managing fiduciary accounts. She said that the financial misconduct that occurred in this securities case exhibits JPMorgan’s disregard of its clients, especially when it knew, or if it didn’t then was reckless in not knowing, that such conduct was occurring.

Investors that purchase variable prepaid contracts generally consent to give a number of the stock shares to the brokerage firm in the future. Such a deal can protect investors from certain losses and can be accompanied by tax benefits. However, they can also lead to additional fees. With Burford’s trust, however, the trustee is not allowed to sell its original stocks. The court said that JPMorgan failed to tell Fletcher that getting involved in the contracts could lead to the sale of that stock.
JPMorgan says it disagrees with the court’s ruling and it may appeal.

JPMorgan Must Pay $18 Million to Heiress Over Derivatives, Bloomberg, October 10, 2012

JP Morgan Ordered to Pay $18 Million to Oil Heiress’s Trust, New York Times, October 10, 2012

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New York’s Attorney General Sues JP Morgan Chase & Co. Over Alleged MBS Financial Fraud by Its Bear Stearns Unit, Stockbroker Fraud Blog, October 4, 2012
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Barclays LIBOR Manipulation Scam Places Citigroup, Credit Suisse, Deutsche Bank, JP Morgan Chase, and UBS Under The Investigation Microscope, Institutional Investor Securities Blog, July 16, 2012 Continue Reading ›