Investor Lawyers Blog

Merrill Lynch Agrees to Pay $40M Proposed Deferred Compensation Class Action Settlement to Ex-Brokers

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

Merrill Lynch (MER) has arrived at an “agreement in principle” to resolve the class action lawsuit filed by John Burnette and Scott Chambers over deferred compensation that they contend that the brokerage firm refused to pay them after it merged with Bank of America (BAC) in 2008 and they left its employ. About 1,400 brokers are part of this class. However, some 3,300 ex-Merrill brokers have submitted deferred compensation claims against the brokerage firm for the same reason.

Merrill had refused to give these employees their deferred compensation, which is what a broker usually gets paid for staying with a financial firm for a specific number of years, when they resigned after the merger. These brokers, however, cited “good reason” for their departure, which is another cause they can claim to receive this.

The class action settlement was presented to U.S. District Judge Alison Nathan at Manhattan federal court on Friday. She will decide whether to approve it, as well as certify the class according to the parties’ definition. However, it is not known at this time how many brokers will go for this settlement if it is approved.

It is not unusual for many to opt not to be part of a class action settlement and instead seek to obtain more money via an individual arbitration claim. Having an arbitration lawyer personally representing your case generally leads to bigger results. Already, over a thousand ex-Merrill brokers have filed their FINRA claims. Also, for an ex-Merrill broker whose deferred compensation was above six figures, they are likely to get much less by going the class action route. Meantime, ex-Merrill brokers with revenues that exceeded $500,000 during a certain timeframe before they left the financial firm cannot participate in a class action settlement. Neither can those that accepted bonuses and waived certain rights related to deferred compensation claims from Merrill after the deal with Bank of America.

That said, even the ex-Merrill brokers that decide to opt out of the class are likely to benefit from this settlement because it establishes a floor for payouts while serving as Merrill’s public acknowledgement that it had a financial duty to pay the former brokers upon their departure.

Under the class action settlement, the majority of advisers would get 40-60% of the value of their account. According to OnWallStreet.com, for a broker to receive 60%, advisors must have already made a request for reimbursement, whether via lawsuit, arbitration, or some other way and left the financial firm prior to January 30, 2010. To be eligible to receive 50%, these advisers too will have had to have made some type of legal action and resigned by June 30, 2010. If no action was taken, and the former broker still wants to opt in, they would turn in a form and seek 40% of compensation–dependent upon when they exited the firm. Other ex-advisors might also be able to receive 40 to 60% of payment depending on when they left Merrill, whether they had filed a deferred compensation claim, and in what compensation plans they were participants. Ex-dvisers that had an agreement with the Advisor Transition Program, however, would not be able to participate.)

Merrill to Make Good on Former Brokers’ Deferred Comp, On Wall Street, August 24, 2012
Merrill to pay $40 mln in deferred compensation suit, Reuters, August 25, 2012

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Merrill Lynch to Pay Brokers Over $10M for Alleged Fraud Over Deferred Compensation Plans, Institutional Investor Securities Blog, April 5, 2012

Advanced Equities Ordered by FINRA Arbitration Panel to Pay $4.5M to Ex-Broker, Stockbroker Fraud Blog, June 12, 2012

Claims Continue over MasterShare – Prudential Securities’ Deferred Compensation Plan, Stockbroker Fraud Blog, August 13, 2008 Continue Reading ›

Majority of Non-Traded REITs Underperform Compared to Benchmarks, Reports New Study

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

According to a study by The University of Texas at Austin McCombs School of Business and Blue Vault Partners LLC, most non-traded real estate investment trusts underperform compared to benchmarks. The study was released on June 1 and compared 17 “full-cycle” non-traded REITS that experienced liquidity events between 1990 and May 15, 2012 with two customized benchmarks. The benchmarks involved a portfolio of properties from the National Council of Real Estate Investment Fiduciaries and broad indexes of REITs that were publicly traded.

Per the study, only five of the REITs examined- Cornerstone Realty Income Trust Inc., Apple Suites Inc., Corporate Property Associates 10 Inc., Carey Institutional Properties Inc., and American Realty Capital Trust Inc.-outperformed the market indexes, meaning 71% of the REITs that were part of the study underperformed the customized benchmark. Only Apple Suites outperformed both. While the nontraded REITS made “respectable total returns”-10.3% was the average internal return rate-this was still 140 basis points below the two customized benchmarks, which both had returns of 11.7%. The study said that the main reason for this was fees. (With a standard 12% sales load or fee, the annualized return rate for the nontraded REIT goes up from 10.3% to 12.5%. That said, nontraded REIT fees could go as high as 15%.)

Even though the full cycle REIT sample on average underperformed their benchmarks, each REIT showed a positive total return to investors. A few of the other findings, according to the study:

• Non-traded REITs that had shorter time periods from inception to a full cycle event did better than ones that had longer holding periods.

• In looking at distribution yields to capital gains as a portion of total return, distributions made up 75% or greater of returns.

• When looking at “early Stage Investment Period” performances, about 1/3rd of nontraded REITs outperformed benchmarks based on NAREIT and NCREIF.

Nontraded REITS have been promoted to retail investors as investment vehicles that will allow them to purchase real estate that is institutional quality while having low volatility and greater than average current yields. That said, a maturation process caused by a number of big events has recently occurred, creating certain changes. Valuations of nontraded REITs have even gone down by 50%.

Unfortunately, many investors are not given a clear picture of the risks involved in non-traded REIT investments. This can lead to suspension of dividends, illiquidity, and huge REIT losses. Many investors of non-traded REITs were told they would be getting steady dividend income, as well as stock prices that wouldn’t fluctuate too much. That non-traded REITs are accompanied by commissions, larger broker fees, suspended buyback programs, and dividend cuts may come as a surprise.

Blue Vault Partners and The University of Texas at Austin McCombs School of Business Release Results from Performance Study of Nontraded REITs, PRWeb, August 28, 2012

Most nontraded REITs underperform market, Investment News, June 10, 2012

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REIT Retail Properties of America’s $8 Public Offering Results in Major Losses for Fund Investors, Institutional Investor Securities Blog, April 17, 2012 Continue Reading ›

Ex-Fannie Mae Executives Have to Defend Against SEC Lawsuit Over Their Alleged Involvement in Understating Mortgage Company’s Exposure Risk

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

The U.S. District Court for the Southern District of New York has decided that ex-Federal National Mortgage Association executives do have to contend with a Securities Exchange Commission enforcement lawsuit over their alleged role in underplaying just how exposed the company was to high risk loans. Ex-Fannie Mae (FNM) CEO Daniel Mudd, former single family mortgage business EVP Thomas Lund, and ex-chief risk officer Enrico Dallavecchia had sought to have the lawsuit dismissed because they said that the Commission failed to make its case against them. Judge Paul Crotty has denied their motion.

The SEC claims that former Fannie Mae executives misled investors about the actual degree to which the company was exposed to “Alt-A” loans and subprime loans when they failed to reveal this information in the mortgage firm’s public disclosures. As a result, Fannie Mae understated its mortgage exposure risk by hundreds of billions of dollars.

The defendants had countered that because Fannie Mae is an independent establishment of this country, per the 1934 Securities Exchange Act’s Section 3(c), government agencies are protected from liability. Crotty, however, did not agree Fannie Mae did not fall under the “independent establishment” category seeing that it is a private corporation, run by a board, did not get federal funding, and traded stock in public.

Securities Lawsuit Against Options Clearing Corporation and Chicago Board Options Exchange Can Proceed Says Illinois Appellate Court

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

In a divided 2-1 ruling, the Illinois Appellate Court has decided that Platinum Partners Value Arbitrage Fund LP can sue the Chicago Board Options Exchange and the Options Clearing Corporation for allegedly telling certain traders about a downward adjustment made to the price of certain mutual fund options. The ruling reverses a lawyer court’s decision and concludes that the two SROs did not act in a regulatory capacity when they privately revealed this information to certain John Doe defendants before the news was made public.

Platinum Partners Value Arbitrage Fund, which is a hedge fund, contends that in late 2010, it bought 50,000 India Fund Inc. (IFN) options from the John Does. Soon after, Options Clearing Corporation and Chicago Board Options Exchange decided to downgrade the India Fund’s series option contracts strike price by $3.78. An employee at one of the SRO’s allegedly told certain market participants about this adjustment before the public was notified.

The hedge fund then proceeded to file a securities fraud lawsuit against Chicago Board Options Exchange and Options Clearing Corp. accusing them of Illinois statutory and common law violations, while contending that they caused it to suffer harm because it bought the IFN options right before the price adjustment was publicly disclosed. The two organizations countered that as SROs, they were immune from such lawsuits. The lower court agreed with their claim of immunity.

The appellate court, however, disagrees. In his majority opinion, Circuit Judge Robert E. Gordon stressed that SROs are not completely immune from lawsuits and that absolute immunity only stands when the alleged conduct in question is one that is a disciplinary, regulatory, or quasi-governmental prosecutorial function. The court noted that while the plaintiff acknowledged that the decision to change IFN’s strike price was a regulatory one, how the change was disclosed-early and in in private to the John Doe defendants-wasn’t and didn’t serve a purpose that was governmental or regulatory. Seeing as SROs, in addition to fulfilling quasi-governmental duties also have a for-profit business that is private, the court found that when the private disclosure was made to the John Doe defendants, Chicago Board Options Exchange and Options Clearing Corp. were behaving in a “private capacity and for their own corporate benefit.” As a result, the non-public notification to the John Doe defendants cannot be considered conduct under the 1934 Securities Exchange Act’s delegated authority and therefore “cannot be protected by the doctrine of regulatory immunity.”

Judge Gordon also determined that Platinum Partners did a sufficient job of stating a claim, under the Illinois Consumer Fraud Act, that disclosing the price adjustment in private was a “material omission and a deceptive act” by the two SROs. The hedge fund claimed that the two organizations meant for the rest of the market to depend on the fact that the information hadn’t been already privately disclosed to anyone. The judge said that the deception occurred during commerce and trade and was the proximate cause of damage to the plaintiff.

Platinum Partners Value Arbitrage Fund LP v. Chicago Board Options Exchange, Ill. App (PDF)

Chicago Board Options Exchange

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FINRA Seeking to Create a Bigger, More Diverse Arbitrator Roster

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

According to the Financial Industry Regulatory Authority ‘s lead arbitrator recruiter, the self-regulatory organization is taking active steps to create a roster of arbitrators that is not only larger than its current one, but also more professionally and culturally diverse. Barbara Brady spoke at a Practicing Law Institute seminar this month.

Arbitrators are who that preside over FINRA arbitration cases on numerous matters, including financial fraud claims by investors and broker-brokerage firm disputes. Last year, arbitrators made more than 1,270 securities arbitration decisions that led to over $19 million in repayment to investors, over $63 million in fines, and 475 broker suspensions. Only a court can overturn an arbitrator’s securities ruling and this would have to be due to extenuating circumstances.

“Outcomes in arbitration vary greatly based on the quality of the arbitrators,” said William Shepherd, a Houston-based attorney, whose firm has represented investors in more than 1,000 arbitration claims over the past twenty years. “If securities arbitration is to have any integrity at all FINRA must make certain that the arbitrator decides cases fairly.”

Choosing who should be named an arbitrator can lead to disagreement over how much securities industry/brokerage firm experience or ties a candidate should have. For example, while an arbitrator who used to be a broker or a securities attorney may have certain technical expertise and experience that could prove helpful in deciding a case, he/she may also be biased.

“Having savvy arbitrators may streamline the process a bit with less reliance on expert testimony,” said Shepherd, “but it is difficult for such arbitrators to understand the lack of understanding of investments by the ordinary investor. I often point to my client’s own experiences to demonstrate this to arbitrators. For example, my client’s understanding of machinery at his workplace keeps him from getting hurt, but if you walked into that factory you might be killed the first day. It’s not that you’re stupid, just that you lack experience in that environment. The dangers of investing were foreign to my client. That is why he or she hired an expert. ”

Securities panels with three arbitrators usually handle arbitration disputes when over $100,000 is involved. Customers are allowed to opt for two of the three arbitrators or all three of them to not have a securities industry background. That said, just because someone is a non-industry arbitrator doesn’t mean he/she lacks biases.

While FINRA chooses not to reveal the demographics of its arbitrator pool, Brady claims that the SRO does try to select a diverse range of arbitrators from different backgrounds. She said FINRA is making an effort to make sure that women, minorities, and professors of economics, law, and real estate are represented.

Who makes a good arbitrator?, Reuters, August 20, 2012

Arbitrator Appointment Frequently Asked Questions, FINRA

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2nd Circuit Affirms Dismissal of $18.5M Auction-Rate Securities Lawsuit Against Merrill Lynch Filed by Anschutz Corp.

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

The U.S. Court of Appeals for the Second Circuit has affirmed a lower court’s ruling to dismiss the ARS lawsuit filed against Merrill Lynch (MER), Merrill Lynch, Pierce, Fenner, and Smith Inc. ( MLPF&S), Moody’s Investor Services (MCO), and the McGraw-Hill Companies, Inc. (MHP). Pursuant to state and federal law, plaintiff Anschutz Corp., which was left with $18.95 million of illiquid auction-rate securities when the market failed, had brought claims alleging market manipulation, negligent misrepresentation, and control person liability. The case is Anschutz Corp. v. Merrill Lynch & Co. Inc.

According to the court, Merrill Lynch underwrote a number of the Anchorage Finance ARS and Dutch Harbor ARS offerings in which Anschutz Corp. invested. To keep auction failures from happening, Merrill was also involved as a seller and buyer in the ARS auctions and had its own account. Placing these support bids in both ARS auctions allowed Merrill to make sure that they would clear regardless of the orders placed by others. The financial firm is said to have been aware that the ARS demand was not enough to “feed the auctions” unless it too made bids and that its clients did not know of the full extent of these practices.

Per its securities complaint, Anschutz contends that the description of Merrill’s ARS practices, which were published on the financial firm’s website beginning in 2006, were misleading, untrue, and “inadequate.” The plaintiff accused the credit rating agency defendants of giving the ARS offerings ratings that also were misleading and false and should have been lowered (at the latest) in early 2007 when Merrill knew or should have known that the ratings they did receive were unwarranted.

NASAA Warns Against Crowdfunding, Investment-for-Visa Scams And Other Investment Fraud

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

The North American Securities Administrators Association has issued its yearly list of financial products and practices that it believes pose among the greatest investment danger to investors. The 10 on this year’s list, which was put together by securities regulators in the association’s Enforcement Section are:

1) Gold and precious metals 2) Promissory notes 3) Reg D/Rule 506 private offerings 4) High risk gas and oil drilling programs 5) Real estate investment schemes (REITS)

6) Salesmen without licenses who make recommendations related to liquidation 7) Internet offers involving crowdfunding 8) EB-5 Investment-for-Visa scams 9) Investment advisers engaging in practices and giving advice that is not appropriate for an investor 10) Scammers attempting to hide their fraud schemes using self-directed IRAs

Amerigroup Shareholders Claim Goldman Sachs Advisers’ Had Conflicts of Interest That Influenced $4.5B Sale of Company to WellPoint

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

Amerigroup Corp (AGP) shareholders are suing its board and Goldman Sachs Group (GS) because they say that the defendants’ conflicts of interest got in the way of other bids being considered before they agreed to let WellPoint Inc. (WLP) buy the managed care company for $4.9B.

The shareholders’ securities lawsuit was filed by the Louisiana Municipal Police Employees Retirement System and the City of Monroe Employees Retirement System in Michigan in the Delaware Court of Chancery, which has seen an increase in cases over whether certain deals shouldn’t go through because of questions surrounding whether the advisors involved had conflicts of interest.

According to the plaintiffs, a complex derivative transaction with Amerigroup created a financial incentive for Goldman to execute a deal quickly even if was not in the best interests of shareholders. The financial firm is accused of pushing for the WellPoint purchase instead of one with another company that was willing to pay more albeit bringing more regulatory issues with it that would take time to resolve.

The WellPoint deal, contend the pension funds, allowed for the possibility that Goldman would get a windfall profit on the derivative deal that would obligate Amerigroup to pay the financial firm $233.7M if an agreement on the sale was reached by August 13, as well as another “substantial” financial figure if by October 22 it was closed.

Now, Amerigroup’s shareholders want to block the sale of the company until the board improves the deal’s terms. They believe that the process that led to the deal, which could nearly double WellPoint’s Medicaid business, prevented the highest price possible from being considered and was “flawed.” They said that the derivative transaction was a conflict for Goldman because Amerigroup would be it much more than the $18.7M it was supposed to get from the WellPoint deal.

Although not defendants in this shareholder complaint, the firm’s management and Barclays (BCS) also had conflicts when arranging the company’s sale, claim the plaintiffs. They said that one could argue that WellPoint bought Amerigroup executives’ loyalty by indicating that they could stay in their positions after the acquisition and that following the merger they would be given $12M worth of WellPoint stock.

Under President Barack Obama’s health-care law, up to 17 million patients would be added under Medicaid. The sale would make WellPoint the largest provider of Medicaid coverage for the impoverished. UnitedHealth Group Inc. (UNH) would be the second largest. More healthcare company acquisitions are expected as competition for the growing Medicaid market continues.

Goldman ‘conflicted’ in Amerigroup/WellPoint deal-lawsuit, Reuters, August 17, 2012

WellPoint dragged into Goldman Sachs suit, IBJ.com, August 20, 2012

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Appeal of Stockbroker Found Liable in Unauthorized Trades of Cyberonics Stock is Rejected by 7th Circuit

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

The U.S. Court of Appeals for the Seventh Circuit is rejecting the appeal filed by stockbroker Kevin Wells, who was found liable for making unauthorized trades of Cyberonics Inc. (CYBX) in a customer’s account. In an initial default judgment, the customer, plaintiff William Wehrs, was awarded approximately $49,861 in damages.

Per the court, Wehrs sued Wells after the alleged unauthorized trades occurred and cost him “significant losses.” When Wells did not appear in court or respond to the securities fraud lawsuit, a default judgment was entered in Wehrs’s favor. Meantime, Wells’ supervisor and his financial firm chose to settle with Wehrs.

Following the default judgment, Wells filed an appeal, challenging the decision by the district court to deny his motion to vacate the default judgment as it pertains to liability. He also contended that the district court abused its discretion when it did not consider evidence that he believes demonstrates he not the proximate cause of a large amount of the losses that Wehrs suffered.

Shareholder Lawsuit Against Goldman Sachs CEO and Other Financial Firm Executives is Dismissed

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

In the US District Court for the Southern District of New York, the shareholder complaint against a number of Goldman Sachs Group (GS) executives, including CEO Lloyd Blankfein, COO Gary Cohn, CFO David Viniar, and ex-director Rajat Gupta, has been dismissed. The lead plaintiffs of this derivatives lawsuit are the pension fund Retirement Relief System of the City of Birmingham, Alabama and Goldman shareholder Michael Brautigam. They believe that the investment bank sponsored $162 billion of residential mortgage-backed securities while knowing that the loans backing them were in trouble. They say that Goldman then proceeded to sell $1.1 billion of the securities to Freddie Mac and Fannie May. Their securities complaint also accuses the defendants of getting out of the Troubled Asset Relief Program early so they could get paid more.

According to Judge William Pauley, the plaintiffs did not demonstrate that “red flags” had existed for bank directors to have been able to detect that there were problems with the “controls” of mortgage servicing business or that problematic loans were being packaged with RMBS. He also said that the shareholders did not prove that firm directors conducted themselves in bad faith when they allowed Goldman to pay back the $10 billion it had received from TARP early in 2009, which then got rid of the limits that had been placed on executive compensation.

Even with this shareholder complaint against Goldman tossed out, however, the investment bank is still dealing with other shareholder lawsuits. For example, they can file securities lawsuits claiming that they suffered financial losses after Goldman hid that there were conflicts of interest in the way several CDO transactions were put together.