Investor Lawyers Blog

Louisiana-Based Hedge Fund Manager Charged by SEC with Securities Fraud Related for Allegedly Concealing RMBS Losses

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

The Securities and Exchange Commission has filed charges against hedge fund manager Walter A. Morales and his Baton Rouge-based firm Commonwealth Advisors with allegedly defrauding investors by concealing the millions of dollars in losses sustained from investments linked to residential mortgage-backed securities during the economic crisis. The SEC wants a jury trial and it is seeking permanent enjoinment, penalties, disgorgement, and prejudgment interest.

According to the Commission’s RMBS lawsuit, Morales and his financial firm caused the hedge funds that they oversaw to purchase Collybus, which were the most risky and lowest tranches of a collateralized debt obligation. They then sold MBS into the CDO at prices they had received four months prior while being fully aware that during this time the RMBS market had declined. As the CDO investments continued to not do well, Morales allegedly told firm employees to engage in cross-trades by conducting manipulative trades with the hedge funds they advised so that a $32 million loss sustained by one of the funds in the Collybus investment could be hidden. Morales and his firm then allegedly lied to investors, which included individuals and pension funds, about the worth and quantity of the mortgage-backed assets in the funds and created bogus internal documents so that their false valuations could be justified.

Also, even though Morales and Commonwealth likely knew that the losses would continue for some time, the SEC contends that the two of them conducted over 150 cross-trades between two hedge funds they provided advice to and another one of their hedge funds at prices under Commonwealth’s valuation for those securities in June 2008. After the trades were made, Morales is said to have instructed an employee to designate the securities as having fair market value, creating a $19 million gain for the acquiring hedge fund that was fraudulent and at cost to the funds that were sold. The cross-trades were conducted even though Morales had represented that it would not make such trades.

The SEC also claims Morales deceived a prime brokers by representing the transactions as legitimate and at current market prices, as well as its largest investor by misrepresenting the latter’s exposure to the CDO. Although he had promised that the investor’s exposure to Collybus would be limited, by the middle of 2008 its exposure was almost double. Morales also allegedly made up false minutes after the investor found out that Commonwealth was not going along with its valuation procedures that it had stated.

SEC Charges Baton Rouge-Based Investment Adviser with Hiding Losses From Mortgage-Backed Securities Investments, SEC, November 8, 2012

Read the SEC Complaint (PDF)

More Blog Posts:
Wells Fargo Securities Settles for Over $6.5M SEC Charges Over Allegedly Improper Sale of ABCP Investments with Risky MBS and CDOs, Institutional Investor Securities Blog, August 14, 2012

Harbinger Capital Partners LLC and Hedge Fund Adviser Philip A. Falcone Face SEC Securities Charges Over Client Asset Misappropriation and Market Manipulation Allegations, Institutional Investor Securities Blog, June 29, 2012

Securities Lawsuit Against Options Clearing Corporation and Chicago Board Options Exchange Can Proceed Says Illinois Appellate Court, Stockbroker Fraud Blog, August 24, 2012 Continue Reading ›

Standard & Poor’s Misled Investors By Giving Synthetic Derivatives Its Highest Ratings, Rules Australian Federal Court

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

A ruling by the Australian Federal Court against Standard & Poor’s could give 13 NSW councils about A$30M in compensation for their about A$16M in synthetic derivative losses. According to the court, the ratings firm misled investors by giving its highest ratings to complex investment instruments that ended up failing during the worldwide economic crisis. The councils can now claim compensation from S & P and co-defendants Royal Bank of Scotland (RBS)- owned ABN Amro Bank and the Local Government Financial Services, Ltd. The three had sold the councils constant proportion debt obligation notes, promoted as Rembrandt notes, six years ago.

Specifically to this case, Australian Federal Court Justice Jayne Jagot said that Standard & Poor’s took part in conduct that was “deceptive” when it gave AAA ratings to constant proportion debt obligations that were created by ABN Amro Bank NV. The Australian townships were among those that invested what amounted to trillions of dollars in the CPDOs, as well as in collateralized debt obligations.

The projected A$30M in compensation includes not just councils’ losses, but also interest and costs. The councils are also entitled to receive compensation for breach of fiduciary duty from LGFS, which succeeded in its own claim against Standard and Poor’s and ABN Amro for Rembrandt notes that it sold to its parent company after the notes were downgraded from their triple-A rating to triple-B+.

Citigroup to Pay $2M Massachusetts Over Allegedly Improper Disclosure About Facebook Before IPO & SEC Wants Additional Comments on Nasdaq’s Proposed $62M Fund For Those that Experienced Technical Glitches After Trading Began

Published on: November 7, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Citigroup Global markets Inc. (C) has consented to pay $2M to settle claims by the state of Massachusetts that a research analyst improperly disclosed information about Facebook (FB) before the company’s initial public offering. According to Secretary of the Commonwealth William F. Galvin, the financial firm neglected to supervise this person, who allegedly gave research information to a media technology site. Galvin says that this disclosure violated state securities laws, a nondisclosure arrangement between Facebook and Citigroup, and FINRA and NASD rules. While Citigroup has admitted to the statement of facts, it has not denied or admitted violating SRO rules and securities laws.

Per the allegations In re Citigroup Global Markets Inc., Mass. Sec. Div., the junior analyst emailed the information to AOL Inc.-owned media site TechCrunch. The data contained projections by a senior analyst about the IPO. Citigroup is accused of not detecting or preventing the disclosure until responded to a subpoena issued by Massachusetts. Also implicated in the order was a senior Citigroup analyst accused of giving data about YouTube Inc. revenue estimates to a French magazine without getting the communication approved first.

The Facebook IPO in May has attracted a lot of attention from regulators and lawmakers. One reason for this is allegations that analysts gave certain investors select data about the offering. There was also the problem of technical glitches that arose when trading began. Securities lawsuits and congressional and regulatory probes ensued.

To compensate investors that suffered losses from the technical snafus, Nasdaq Stock Market LLC is proposing a $62 million reimbursement fund. Now, the Securities and Exchange Commission is asking for more comment about this proposed fund. As of October 26, most of the 11 letters it had received had voiced objections. For example, some took issue with the $40.527 benchmark price that was used to figure out how much members are owed, while others didn’t like how only a limited number/kinds of orders are eligible for compensation: sells that were priced at $42 or under that failed to execute, sales in this price range that were executed at a lower price, purchases priced at $42 that went through but weren’t confirmed right away, and purchases at the same price that not only went through and weren’t confirmed but also efforts were made to cancel them. Qualified market participants wanting to take part in the compensation program would have to relinquish other related claims that might also be valid.

Citi fined $2 million over Facebook IPO, fires two analysts, Reuters, October 26, 2012

Read the Consent Order resolving the proceedings between Massachusetts and Citigroup(PDF)

More Blog Posts:
Citigroup Inc. CEO Vikram Pandit Resigns, Institutional Investor Securities Blog, October 16, 2012

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

Massachusetts Commonwealth Secretary William Galvin Sues UBS for Fraud, Stockbroker Fraud Blog, June 30, 2012 Continue Reading ›

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.