Investor Lawyers Blog

Texas Appeals Court Says Letter of Intent for Sale of Fiduciary Financial Services of Southwest Stock to Corilant Financial is Not an Enforceable Contract

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

Reversing a trial jury’s ruling, the Texas Court of Appeals has said that a letter of intent to sell Fiduciary Financial Services of the Southwest, Inc.’s outstanding stock to Corilant Financial, L.P. and Corilant Financial Management, LLC is not an enforceable contract. The appeal’s court ruling also reverses the lower court’s decision to award Corilant more than $1.8 million in would-be purchaser damages, interest, and legal fees.

Corilant filed a breach of contract lawsuit against Fiduciary Financial Services of the Southwest after the latter, a Dallas-based registered investment advisory firm, changed its mind and decided not to sell the company stock to it. Corilant and FFSS Paul Welch had met in April 2006 regarding a potential acquisition.

In May 2007, they signed a letter of intent that included provisions stating that Corilant would pay for legal fees related to the drafting of definitive agreements, the “Definitive Agreements” would be signed as soon as was “practicable,” and the letter of intent was an agreement that was “legally binding and enforceable.” Also, per the letter, there would be earn-out payments for the next five years after closing and Corilant would issue payments equivalent to gross revenues minus 19.1% of gross revenues minus FFSS-borne expenses, “including salaries.”

After Corilant sent drafts of a stock purchase agreement, an employment agreement, and a proxy and voting rights agreement to FFSS, the latter said it wouldn’t sign the agreement and notified Corilant that discussions between both parties were over. Corilant then filed its breach of contract lawsuit against the Texas-based RIA and 10 of its stockholders/employees. A first trial concluded with a hung jury. The lawsuit was retried and that jury ruled in favor of Corilant.

To the Texas appeals court, FFSS brought up 11 issues, including its assertion that the trial court made a mistake when it found that the contract with Corilant to sell 98.5% of FFSS’s outstanding stock was enforceable. FFSS contended that the LOI terms were not definite enough to be enforced.

The appeals court found no evidence that there was a “mutual understanding” on how earn-out payments between the two parties would be structured. The court said the letter lacked specific terms about how the 19.1% earn-out payments would be characterized. While FFFS held the belief that the 19.1% payments were to be considered a management fee and would minimize tax liability, Corilant thought that the 19.1% was a dividend and that FFSS would not be able to deduct it as a management fee.

The appeals court said that seeing as at least one essential term was lacking, per the law it not enforceable. It also said that the management agreement provision, which allows material matters to stay open for future negotiations and modifications for “indefiniteness” cannot be enforced.

In Fiduciary Financial Services of Southwest Inc. v. Corilant Financial LP

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Securities and Exchange Commission Charges Former UGA Football Coach Jim Donnan Over Alleged $80M Ponzi Scam

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

The SEC is charging ex-University of Georgia football coach Jim Donnan over his alleged involvement in an $80M Ponzi scam that defrauded nearly 100 investors. Donnan is a College Football Hall of Famer who also coached at Marshall University and has worked as a sports commentator. He, along with Gregory Crabtree, is charged with violations related to the federal securities laws’ antifraud and registration provisions.

According to the SEC, business partners Donnan and Crabtree used GLC Limited to operate the scam. Investors were promised return rates of 50-380%. They were told that the company was into wholesale liquidation and made money by purchasing leftover merchandise from large retailers and reselling what was damaged, discontinued, or had been returned to discount retailers. In truth, contends the Commission, just $12 million of the $80 million from investors was used to buy the merchandise and a lot of what GLC bought ended up dumped in warehouses in Ohio and West Virginia. The rest of the money went toward either paying bogus returns to earlier investors or were used by the two men for other purposes. By the time the Ponzi scam collapsed, the SEC says that Donnan had taken over $7 million from GLC, while Crabtree allegedly misappropriated about $1.08 million of investors’ money.

The SEC’s charges come just a few months after Donnan agreed to a proposed bankruptcy settlement with GLC and investors. He owes the retail liquidation company over $13 million and these investors contended that he owes them approximately $27 million. The ex-college coach has consented to pay back 80% of the losses these clients sustained. Meantime, GLC’s owners are blaming Donnan and his Ponzi scam for the company having to file for bankruptcy. Donnan, too, has sought bankruptcy protection.

The two men are accused of offering and selling short-term investments (ranging from 2 months to 12 months) with a purported high-yield. Investors were to get returns either monthly, quarterly, or as a one-time payment.

The regulator says that the Ponzi scam ran from August 2007 until its demise in October 2010. Donnan allegedly approached contacts he knew through his work as a commentator and coach to recruit investors. In a release announcing the charges, the SE, quotes him as telling one former player that he was doing this for him, his “son.” The player went on to invest $800,000. Donnan is also accused of telling investors that he too was investing in the merchandise deals and that other well-known football coaches had profited from doing the same.

Securities Fraud
Unfortunately, there are people who will not hesitate to use their personal or business or social relationship with you to get you to invest in a financial scam. It can be devastating to discover that someone that you personally know violated your trust to defraud you.

Read the SEC Complaint (PDF)

SEC Charges College Football Hall of Fame Coach in $80 Million Ponzi Scheme, SEC, August 16, 2012

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Even With Securities Lawsuits Over MF Global’s $1.6 Billion Customer Funds Loss, Don’t Expect Criminal Charges

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

The criminal probe into brokerage firm MF Global’s collapse and its inability to account for approximately $1.6 billion in customer funds will likely end with no criminal charges filed against anyone. Sources involved in the case are reportedly saying that investors are finding that not fraud, but “porous risk controls” and “chaos” caused the money to go missing.

At the time of MF Global’s bankruptcy filing almost 10 months ago, then-MF Global CEO Jon S. Corzine apologized to everyone saying that he also didn’t know what happen to the money. Meantime, thousands of customers saw their assets frozen.

According to a report by bankruptcy trustee James Giddens’, the brokerage company improperly used customer money that they are forbidden to tap so that it could stay in business and meet margin calls. Yet, still, is no one likely to be charged with wrongdoing?

CFTC Commissioner Proposes Plan to Give Futures Customers SIPC-Like Protections

Published on: August 14, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Last week, CFTC Commissioner Bart Chilton unveiled a plan to give futures intermediaries’ clients Securities Investor Protection Corporation-like protections via the creation of a Futures Investor and Customer Protection Fund. Similar to the SIPC Fund, this fund would be called the Futures Investor and Customer Protection Fund, and it would be funded by fees assessed to futures commission merchants.

The idea of setting up an insurance type fund for futures clients arose following the Commission’s recent allegations against Peregrine Financial Group Inc.-the SEC is accusing the futures commission merchants of misappropriating about $215 million in customer funds of about $220 million that was on deposit-and after MF Global Inc.’s bankruptcy filing last year revealed that several hundred million dollars in client funds had been misallocated and could not be withdrawn.

Unlike the securities industry, the futures industry has never provided financial protection coverage to customers who lose money because of illegal actions or bankruptcy. Instead, the protection has come from mandating that client funds and the intermediaries should always be kept separate, which was a structure that seemed to work until the incidents involving Peregrine Financial and MF Global occurred.

Wells Fargo Securities Settles for Over $6.5M SEC Charges Over Allegedly Improper Sale of ABCP Investments with Risky MBS and CDOs

Published on: August 14, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The SEC is charging Wells Fargo Securities, formerly known as Wells Fargo Brokerage Services, and former VP Shawn McMurtry for selling complex investments to institutional investors without fully comprehending the investments’ level of sophistication or disclosing all of the risks involved to these clients. To settle the securities charges, Wells Fargo will pay a penalty of over 6.5 million, $16,571.96 in prejudgment interest, and $65,000 in disgorgement.

According to the Commission, Wells Fargo engaged in the improper sale of asset-backed commercial paper that had been structured with risky collateralized debt obligations and mortgage-backed securities to non-profits, municipalities, and other clients. The SEC contends that the financial firm did not secure enough information about the instruments, even failing to go through the investment private placement memoranda (and the risk disclosures in them), and instead relied on credit ratings. With this alleged lack of comprehension of the actual nature of these investment vehicles and the risks and volatility involved, as well as having no basis for making such recommendations, Wells Fargo’s Institutional Brokerage and Sales Division representatives went ahead and recommended the instruments to certain investors who had generally conservative investment objectives.

These allegedly improper sales happened between January and August 2007 when representatives recommended to certain institutional investors that they buy ABCP that were structured investment vehicles that were primarily CDO and MBS-backed (SIVs and SIV-Lites). Unfortunately, a number of the investors that did buy the SIV-issued ABCP, per Wells Fargo’s recommendation, lost money when 3 of these programs defaulted that same year.

Stockbroker Securities Roundup: Criminal Convictions Vacated Against Six Charged in Front Running Scam and Citigroup Broker Cleared in $1B CDO Deal SEC Case

Published on: August 11, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Court of Appeals for the Second has vacated the convictions of six brokers who were criminally charged in a front-running scam to give day traders privileged information via brokerage firms’ squawk boxes. The case is United States v. Mahaffy.

Judge Barrington Parker said that confidence in the jury’s verdict was undermined because the government did not disclose a number of SEC deposition transcripts “pursuant to Brady v. Maryland, 373 U.S. 83 (1963).” Also, noting that there were flaws in the instructions that the jury was given, the second circuit vacated the honest-services fraud convictions that they had issued against the defendant.

The brokers, who were employed by different brokerage firms, had been charged for conspiring to provide A.B. Watley day traders confidential data about securities transactions. This entailed putting phone receivers close to the broker-dealers internal speaker systems so that the traders could make trades in the securities that were squawked before the customer orders were executed.

Lawsuit Challenging BP Cancellation of 2010 First Quarter Dividend After Deepwater Debacle is Dismissed in Texas Court

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

The U.S. District Court for the Southern District of Texas has tossed out a would-be class action securities lawsuit challenging BP plc’s (BP) cancellation of a 2010 first quarter dividend announcement after the Deepwater Horizon disaster. Per the court, the plaintiff did not demonstrate that BP or subsidiary BP American had minimum contact with the state of Oregon and failed to succeed in making out a prima facie case for specific jurisdiction over BP. Oregon rules were applied to this case, said the court, because the claim was originally submitted to the U.S. District for the District of Oregon.

The Deepwater Horizon rig was involved in a blast on April 20, 2010. Seven days later, BP said its Board of Directors announced that $0.84/ADS was the quarterly dividend for the year’s quarter and that this would be paid to “shareholders of record as of May 7, 2010” on June 2, 2010. The plaintiff contends that even though BP gave shareholders assurances that the dividend would be paid, due to pressure from the Obama Administration and the US Congress, on June 16 it announced that first quarter dividend was now canceled.

The plaintiff’s lawsuit makes various claims in an attempt to make BP pay the dividend. The court, however, has thrown out the case due to lack of jurisdiction. The district court said that the plaintiff failed to plead any facts suggesting what actions (if any) BP America executed in Oregon for BP or “at its behest.” The plaintiff therefore did not succeed in satisfying its burden of producing enough evidence to establish that BP is the corporate parent of a subsidiary with “continuous and systematic business contacts” that would approximate a “physical presence in Oregon.” The court also said that if even if the plaintiff were able to demonstrate that BP America had minimum contact with Oregon, the plaintiff did not plead an agency relationship between BP America and BP to let the court “impute to defendant” any theoretical contacts of BP America. Also, per the court, no facts exist to imply that BP had direct contacts with the state that resulted in this cause of action.

Suit Over BP’s Dividend Cancellation After Deepwater Disaster Is Dismissed, Bloomberg/BNA, July 9, 2012

Glenn v. BP plc, Justia, August 10, 2011

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As BP Oil Spill Reaches Crisis Mode, A Number of Wall Street Analysts Placed “Buy” Rating On the Company’s Plunging Shares, Stockbroker Fraud Blog, June 22, 2010
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SEC Reviewing LIBOR-Related Disclosures by Issuers

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

According to SEC Division of Corporation Finance director Meredith Cross, Corp Fin is now looking at issuers’ closers related to the LIBOR scandal. Cross said that right now we are in the ‘early stages” for these types of disclosures, which could be more material for financial institutions. She also spoke about how companies that issue payments according to the London InterBank Offered Rate would have to consider their own circumstances when determining whether they should/shouldn’t make disclosures to shareholders about how exposed they were to the controversy. Cross, who addressed a Federal Regulation of Securities Committee panel at this year’s American Bar Association meeting in Chicago on August 3, made it clear that the views she is expressing are her own and not that of the SEC or any other staffers.

European and US regulators have been looking into whether a number of financial institutions rigged LIBOR, which is considered the global benchmark interest rate for banks to borrow from other banks in the London interbank market. A couple of months ago, Barclays Bank PLC (BCS) consented to pay $360 million to settle charges made by the Commodity Futures Trading Commission and the US Justice Department that it engaged in the manipulation of its LIBOR submissions.

Cross said that the SEC division would likely look at the disclosures belonging to companies that, per media reports, experienced computer breaches. If any of these companies that were reportedly hacked only reports in its disclosure that it may have been “infiltrated,” Cross said that this would be a potential red flag. Also, while Cross spoke about how issuers need to make sure their disclosures are accurate, she emphasized that Corp Fin isn’t looking for disclosures to reveal too much that they show hackers how to get in. (It was nearly a year ago that Corp Fin put out guidance on how companies should disclose incidents involving data breaches, cyber security, and related expenses.)

Last month, US News said the LIBOR controversy may very well be the “mother of all scandals” and the one that could cause major banks’ insolvency, as well as criminal charges to finally be filed. Meantime, regulators are also being accused of contributing to the rigging of LIBOR when they allegedly disregarded clear indicators that the rates were being fixed. Rather than bringing in law enforcement agencies, regulators were busy looking at how to improve ongoing practices.

SEC Division of Corporation Finance

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Morgan Stanley May Have To Shut Down Brokerage Offices, Say Sources

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

Reuters is reporting that sources aware of internal talks taking place at Morgan Stanley (MS) are saying that the financial firm is thinking about shutting down brokerage offices as part of its efforts to increase profit margins in its retail brokerage arm. It also is reportedly considering laying off support employees and making branch managers work as revenues to bring in more money.

Already, Morgan Stanley has consolidated regional manager ranks down from 19, and last week, it narrowed its regions from 16 to 12. More measures to reduce expenses are likely.

Also, last month, the financial firm announced more layoffs when it said that its payroll would likely shrink by another 1,000 employees in 2012 so that it could employ staff levels that were 7% lower than what they were in December 2011. The news came after its second–quarter earnings showed a step decline, while revenue in its asset management, wealth management, and investment banking business saw a large drop, with overall revenue declining 24% to $6.95 billion
The financial firm appears determined to cut spending in its brokerage division now that its close to 17,000 brokers were moved to a common technology platform. Offices from the Morgan Stanley and Smith Barney networks that are considered redundant will likely be the ones shut down, which could affect up to 100 offices. (As of the end of June 2012, Morgan Stanley Smith Barney had 740 offices. Consider that in the middle of 2009, it had over 950 branches in the US alone.) Its bond trading business performed the worst, dropping in revenue by 60% to $770 million-a significantly larger descent than other big banks on Wall Street.

The financial firm is trying, by December 2014, to reduce its risk weighted assets by 30% from the $346.79 billion levels where they were last September. As of June 30, Morgan Stanley had $319.19 billion in risk-weighted assets. It also is contending with its bond trading business declining because there had been the threat of a severe debt rating downgrade, as well as criticism over the way it handled the Facebook (FB) IPO. Fortunately for the financial firm, Moody’s Investors Service only downgraded the bank to “Baa1,” which is three steps over junk.

Morgan Stanley is not the only big bank to have to cut costs after quarterly results were reported. Goldman Sachs Group. Inc. (GS) (now with a $500 million cost-saving target), Deutsche Bank AG (DBK), and Bank of America Corp. (BAC) also made staff cuts in their underwriting and trading businesses. 2011 was the first time that banks didn’t give some employees bonuses.

With so much uncertainty, now, more than ever financial representatives must make sure that they invest their clients’ money wisely and refrain from any type of misconduct or poor decisions that could cause huge losses. At Shepherd Smith Edwards and Kantas, LTD, LLP, we are here to fight for our clients’ recovery from losses stemming from securities fraud.

Morgan Stanley Considers Shutting Offices, Cutting Staff: Sources, CNBC/Reuters, August 8, 2012

Morgan Stanley plans further staff cuts on weak outlook, Reuters, July 19, 2012

Deutsche Bank Said To Consider Staff Cuts At Investment Bank, Bloomberg, July 19, 2012

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Institutional Investor Securities Roundup: Biremis, Corp. Settles Securities Violation Charges with Industry Bar, FINRA Contacts Broker-Dealers About Conflicts of Interest Via Sweeps Letters, & Regulators Examine Financial Market Infrastructures

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

Broker-dealer Biremis Corp. and its CEO and president Peter Beck agreed to be barred from the securities industry to settle Financial Industry Regulatory Authority allegations that they committed supervisory violations related to the prevention of manipulative trading, securities law violations, and money laundering. The SRO says that even though the financial firm’s specialty was executing trades for day traders, it had only obtained order flow from two clients outside the US from June 2007 through June 2010 and that both had connections to Beck.

FINRA contends that the broker-dealer and Beck did not set up a supervisory system that could be expected to comply with the regulations and laws that prohibit trading activity that is manipulative, such as “layering,” which involves making non-bona-fide orders on one side of the market to create a reaction that will lead to an order being executed on the other side. The SRO also says that Beck and Biremis did not set up an anti-money laundering system that was adequate, which caused the brokerage firm to miss warning signs of certain suspect activity so that it could report them in a timely manner.

Meanwhile, FINRA has also been attempting to deal with the issue of conflicts of interests via sweep letters, which it sent to a number of broker-dealers. The SRO is seeking information about how the financial firms manage and identify conflicts of interest. In addition to requesting meetings with each of them, FINRA wants the brokerage firms to provide, by September 14, the department and employee names of those in charge of conflict reviews, information about the kinds of documents that are prepared after such evaluations, and the names of who gets the final documents and reports after the conflict reviews.

Another area where regulators have been taking a hard look is the financial market infrastructures. The International Organization of Securities Commissions and the
Committee on Payment and Settlement Systems put out a joint report last month providing guidance about resolution and recovery regimes that apply to financial market infrastructures. The “Recovery and resolution of financial market infrastructures” is a follow-up report to the “Key Attributes of Effective Resolution Regimes for Financial Institutions” by the Financial Stability Board.

The board had said that financial market infrastructures needed to be subject to resolution regimes in a manner that was appropriate to them. This report tackles these matters as they apply to financial market infrastructures, including important payment systems, central counterparties, central securities depositories, trade repositories, and securities settlement systems.

FINRA Expels Biremis, Corp. and Bars President and CEO Peter Beck, FINRA, July 31, 2012

Recovery and resolution of financial market infrastructures (PDF)

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$1.2 Billion of MF Global Inc.’s Clients Money Still Missing, Stockbroker Fraud Blog, December 10, 2011