Investor Lawyers Blog

Plaintiff Says Morgan Stanley Fired Him for Calling out Investment Adviser Who Was Churning Accounts and Bilking Investors

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

Clifford Jagodzinski has filed a lawsuit against Morgan Stanley & Co. (MS), Morgan Stanley Smith Barney, and Citigroup (C). He claims that he was fired from his job at Morgan Stanley as a complex risk officer because he reported that an investment adviser was churning accounts and earning tens of thousands of dollars while defrauding clients. Jagodzinski filed his case in federal court.

He contends that even though he always received excellent job evaluations during the six years he worked for Morgan Stanley, he was terminated as an employee 10 days after he told supervisors that unless the financial firm started reporting unauthorized trades it would be violating SEC regulations. Jagodzinski said that the financial firm told him to sign a confidentiality agreement with a non-disparagement clause and then proceeded to hurt his career by claiming that he was let go because of poor performance. He wants reinstatement and punitive and compensatory damages of over $1 million for whistleblower violations.

Jagodzinski believes that his trouble started after he told his supervisors, Ben Firestein and David Turetzky, that Harvey Kadden, one of the firm’s new wealth managers, was allegedly flipping preferred securities so that he could make tens of thousands of dollars in commissions, while causing his clients to sustain financial losses or make little gains as he exposed them to risks that could have been avoided. Jagodzinski said that while he was initially praised for identifying the alleged misconduct, his supervisors told him not to look into the matter further. He believes this is because Morgan Stanley had given Kadden a $25 million guarantee, and due to their high expectations of him, they didn’t want to hurt his book of business.

Jagodzinski said that he encountered similar resistance when he notified the financial firm of other violations, including those involving Bill Siegel, another financial adviser that he accused of making unauthorized trades. Once again, he says he was told not to investigate or report the alleged violations further-even though (he says) Siegel admitted to making 80 unauthorized trades for one client and other ones for other clients. Although Turetsky allegedly told him that this was because he didn’t want Siegel fired, Jagodzinski suspects that his supervisor was more concerned that the defendants would have to pay penalties and fines. He also said that when he reported his concerns that yet another financial adviser was not just engaging in improper treasury trades but also abusing drugs, his worries were again brushed aside.

An employee who gets fired for blowing the whistle on a company or a coworker can have grounds for filing a wrongful termination lawsuit. If the wronged employee is a whistleblower, he is entitled to certain protections, which include being shielded from retaliation on the job for stepping forward and doing what is right.

Worker Says He Caught Morgan Stanley in the Act, Courthouse News Service, August 3, 2012

Ex-Morgan Stanley Risk Officer Sues Bank Over Firing, Bloomberg, August 1, 2012

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UBS, Citigroup FINRA Arbitration with Nonprofit Over ARS Cannot Be Halted, Said District Court

Published on: August 6, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Eastern District of Virginia said that Citigroup (C) and UBS (UBS)cannot preliminarily enjoin Financial Industry Regulatory Authority arbitration over an auction-rate securities offering that did not succeed. The case is UBS Financial Services Inc. v. Carilion Clinic. Carilion is a nonprofit health care and the two financial services firms had provided it with services, including underwriting, for an issuance of auction rate securities that ended up failing.

Per Judge John Gibney, Jr., in 2005, the nonprofit had looked to Citigroup and UBS for help in raising raise $308.465 million to renovate and grow its medical facilities. The two financial firms allegedly recommended that Carilion issue $72.24 million of bonds as variable demand rate obligations. The nonprofit then issued the rest of the funds—$234 million—as ARS, which are at the center of the case.

After the ARS market failed in 2008, the interest rates on Carillion’s ARS went up, forcing the nonprofit to refinance its debt so it wouldn’t have to contend with even higher rates. The auctions then started failing.

Carilion contends that it didn’t know that UBS and Citigroup had been helping to hold up the ARS market prior to its collapse (which they then stopped doing) and said it wouldn’t have issued the securities if they had known that this was the case. The nonprofit filed FINRA arbitration proceedings against the two financial firms and said it could submit the dispute as a “customer” of both even though arbitration isn’t a provision of their written agreements.

Citigroup and UBS sought to bar the arbitration with their motion for a preliminary injunction. The district court, however, rejected their contention that the nonprofit is not a customer of theirs (if this had been determined to be true, then Carilion would not be able to arbitrate against them in front of FINRA). It said that the nonprofit was a “customer,” to both UBS and Citigroup, seeing as both firms provided it with numerous financial services and were paid accordingly.

The court also turned down the financial firms’ argument that Carilion had waived its right to arbitration when it consented to a mandatory forum selection clause that requires for disputes to go through the litigation in front of the U.S. District Court for the Southern District of New York. It pointed out that the “forum selection clause” could only be found in the agreements with one of the parties and that language used, as it relates to arbitration, is ambiguous and would not be interpreted as a waiver of Carillion’s arbitration rights.

Carilion can therefore go ahead and have FINRA preside over its arbitration dispute.

UBS Financial Services Inc. v. Carilion Clinic, Reuters, July 30, 2012

More Blog Posts:
Texas Securities Fraud: BNY Mellon Capital Markets LLC Settles Allegations of Rigged Bond Bidding for $1.3M, Stockbroker Fraud Blog, January 24, 2012

Securities Claims Accusing Merrill Lynch of Concealing Its Auction-Rate Securities Practices Are Dismissed by Appeals Court, Stockbroker Fraud Blog, November 20, 2012

The 11th Circuit Revives SEC Fraud Lawsuit Against Morgan Keegan Over Auction-Rate Securities, Institutional Investor Securities Blog, May 8, 2012

Remaining Defendants in $50M Amerifirst Securities Fraud are Sentenced in Texas

Published on: August 3, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Five years after the US Securities and Exchange Commission issued an emergency action to stop the Amerifirst securities fraud, all of the defendants accused of defrauding more than 500 investors-many of them senior citizens-of over $50 million in Texas and Florida have now been sentenced for their crimes. The last defendant, Jason Porter Priest, was sentenced to one year in federal prison last week.

The 43-year-old Ocala man had pleaded guilty in 2010 to involvement in the Secured Capital Trust Scam in 2010. He has to pay $4.7 million in restitution. Also recently sentenced was Dennis Woods Bowden, who was previously chief operating officer of COO of Amerifirst Acceptance Corp. and Amerifirst Funding Corp. He used to manage American Eagle Acceptance Corp., a company located in Dallas that sold and bought used cars, bought and serviced used car notes, and financed the purchase of used vehicles. His sentence is 192 months in prison and $23 million in restitution after a jury convicted him on several counts of securities fraud and mail fraud.

The other defendants:
Jeffrey Charles Bruteyn: Amerifirst’s former managing director was convicted by a jury on nine counts of securities fraud in 2010. He is serving a 25-year prison term. According to the evidence, Burteyn and Bowden were the ones behind the secured debt obligation offerings that were at the center of the Amerifirst securities fraud.

Vincent John Bazemore: The former Texas broker is serving 60-months behind bars after pleading guilty to the securities case against him. The broker, who previously sold the secured debt obligations, has to pay nearly $16 million in restitution.

Gerald Kingston: He was sentenced to two years probation and fined $50,000 last year after he pleaded guilty in 2007 to conspiracy to commit securities fraud. He helped Bruteyn manipulate Interfinancial Holdings Corporation’s (IFCH) stock price, bought and sold hundreds of thousands of theses shares, and affected matching trades to make it falsely appear that there was a lot of interest in the stock. He made over $1.6 million in fraudulent sale proceeds.

Eric Hall: His securities fraud guilty plea in 2008 stemmed from his involvement in defrauding investors in Secured Capital Trust. He was sentenced this April to two years in probation and told to pay restitution of about $4.7M.

Fred Howard: Last month, he was sentenced to five years in prison and also ordered to pay approximately $4.7 million in restitution for his involvement in the Securities Capital Trust scam.

Elder financial fraud is a serious problem, and it is depriving many seniors of the ability to retire in peace. Unfortunately, retirees who have worked a lifetime to save their money are among securities fraudsters’ favorite targets.

It was in 2009 that Financial Fraud Enforcement Task Force was created to aggressively investigate and prosecute financial fraud crimes. Over 20 federal agencies, state and local partners, and 94 US attorneys’ offices are working together as a coalition. In the last three fiscal years, the Justice Department has submitted over 10,000 financial fraud cases against close to 15,000 defendants.

Last of Seven Defendants Sentenced in AmeriFirst Securities Fraud Case, FBI, July 27, 2012

Financial Fraud Enforcement Task Force

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AmeriFirst Funding Corp. Owner Convicted of Texas Securities Fraud, Stockbroker Fraud Blog, February 3, 2012

Ex-Stanford Group Compliance Officer, Now MGL Consulting CEO, Says SEC’s Delay Over Whether to Charge Him in Ponzi Scam is Denying Him Right to Due Process, Stockbroker Fraud Blog, July 24, 2012
Reform the Municipal Bond Market, Says the SEC, Institutional Investor Securities Blog, July 31, 2012 Continue Reading ›

Securities Roundup: Court Says Investors’ American Funds Securities Litigation Claims Were Timely, Nasdaq Proposes $62M Fund to Repay Facebook IPO Participants, Indictment Made in Alleged Muni Bond Rigging Plot, & Investment Advisers Could Pay User Fees

Published on: July 31, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to the US Court of Appeals for the 9th Circuit, a lower court was in error when it dismissed on the grounds of timeliness investors’ putative securities fraud class action lawsuit accusing the American Funds mutual fund family of charging marketing and management fees that were too high and giving brokers improper kickbacks. Now, the plaintiffs have the opportunity to amend their case to remedy scienter pleading-related deficiencies.

The district court had found the investors’ securities claims untimely because it said that the defendants provided evidence establishing that the media and regulatory agencies had already looked at the alleged financial scam in question at least three years before the plaintiffs filed their securities complaint. The appeals court, however, said none of the sources (from 2003 and 2004) that had implied that the defendants acted with the intent to deceive could have caused a plaintiff that was “reasonably diligent” to discover this intention (if it even existed). Because of this, the 9th circuit said that the two-year statute of limitations didn’t start running more than two years before the complaint was filed, which means that the lower court made a mistake when it said the case was time-barred.

In an unrelated securities fraud case, this one involving criminal charges, federal officials indicted ex-financial services executive Phillip Murphy over an alleged conspiracy to manipulate the bidding process for multiple finance contracts, including those involving municipal bonds. He is charged with one count of wire fraud, two counts of conspiracy, and one can of conspiring to falsify bank records.

Reform the Municipal Bond Market, Says the SEC

Published on: July 31, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission is calling for broad reforms to the $3.7 trillion municipal bond market. Today, it published a 165-page report that included its recommendations. One of its main concerns is that individual investors have the lower hand when they sell and buy purchase bonds that are issued by the states and cities. The SEC wants Congress to mandate that municipal bond issuers give investors the same information that they would get in other financial markets because right now, the market is not just “illiquid” but also “opaque.”

Whether through exchange-traded funds, mutual funds, or directly, investors currently hold 75% of the over 1 million bonds that are outstanding. One reason municipal bonds are so popular is that the income from these instruments are usually tax-exempt. However, problems with the market have recently surfaced that have caused the Commission concern.

A number of municipalities have tried to escape their bondholder commitments by filing for bankruptcy. Meantime, bankers have had to go to trial for alleged bid rigging while taking advantage of states and cities. Also, the general lack of information for investors about the municipal bonds that they are purchasing makes it difficult for them to assess prices (Because the majority of bonds are not traded daily, brokerages and banks are the ones that primarily get to determine how the bonds are priced) and financial firms are having an easier time charging municipalities too much when assisting them in issuing bonds.

FINRA, SEC Need to Employ Better Oversight Over Investor Education Funds, Says District Court

Published on: July 30, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Southern District of New York says that the Securities and Exchange Commission is not a doing a good enough job in providing oversight of $55 million in investor education funds and the way that the money is being disbursed. The funds come from the $1.4 Global Research Analyst Settlement that was reached with top investment banks, including Citigroup (C), JPMorgan Chase & Co. (JPM), Goldman Sachs Group Inc. (GS), and others, in 2003, over securities research that had been allegedly flawed and biased. The case is SEC v. Bear Stearns & Co.

Now, Judge William H. Pauley III, who is tasked with supervising how the settlement is implemented, is contending that the SEC should have been raising red flags about the FINRA Investor Education Foundation’s “opaque” project spending and operational expenses. The court is asking the foundation and the SEC to turn in certain information, including detailed accounting of receipts and spending for 2011 and 2010, by the end of August. The foundation also has provided additional details about its operating costs.

The court has said that disbursing the funds has been a challenging process. After the Investor Education Entity, which was created to use the funds, failed to take off, in 2005 the court let the SEC move the $55 million to the foundation under the premise that the regulator would provide oversight while turning in quarterly reports.( As of December 31, 2011 the foundation had given out approximately $44.7 million of the funds through education and grant programs.)

However, in an opinion that issued in 2009, the court questioned why the foundation paid $800,000 in administrative expenses while giving just $6.5 million to grantees. And in this most recent decision, the court is once again asking why, considering the type of projects involved, the foundation seems to spend a “disproportionately high” amount. Pauley pointed to several examples, including a daylong seminar involving 130 attendees in West Virginia that cost $58,000 and a financial fraud conference last November that the foundation co-sponsored in DC that took place at a posh hotel.

The court also said that the quarterly reports that it has received are “bereft” of the details that they should provide, and it is wondering why the eight “primary” states that have been the target of the foundation’s educational activities don’t necessarily appear to be the ones with the “greatest investor education needs.”

FINRA Investor Education Foundation spokesperson George Smaragdis has said that the foundation will give over the information that the court is asking for but that it doesn’t agree with the majority of the court’s statements.

SEC v. Bear Stearns

FINRA Investor Education Foundation

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The SEC Penalties Act of 2012 Would Create Tough Financial Punishments for Securities Fraud, Stockbroker Fraud Blog, July 29, 2012

SEC’s Delay in Adopting Conflict Minerals Disclosure Rule is Impeding the Development of Initiatives for Issuer Compliance, Says GAO, Stockbroker Fraud Blog, July 27, 2012
Stanford Ponzi Scam Investors File Class Action Lawsuit Suing The Securities and Exchange Commission, Stockbroker Fraud Blog, July 25, 2012 Continue Reading ›

Govt. Not Prepared for Next Inevitable Financial Crisis, Says Ex-SEC Chair

Published on: July 30, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to ex-Securities and Exchange Commission chairman Harvey Pitt, another financial crisis could happen before the end of the year and still the government isn’t more ready to deal with it than the last one. He shared his views at a US Chamber of Commerce-organized panel on July 25.

Pitt said that rather than the regulations in the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, “three things” are required to keep future crises from happening.

1) A “steady flow” of pertinent information about anyone who takes funds from investors and may be able affect capital markets.

The SEC Penalties Act of 2012 Would Create Tough Financial Punishments for Securities Fraud

Published on: July 29, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Stronger Enforcement of Civil Penalties Act of 2012, is bipartisan legislation that seeks to enhance the Commission’s power to clamp down on violations of securities law while raising the statutory ceilings on civil monetary penalties by tying a penalty’s size to the degree of harm wrought and amount of investor losses sustained. This bill is S. 3416 and is also known as the SEC Penalties Act. It was introduced by Senators Chuck Grassley (R-Iowa) and Jack Reed (D-RI).

Currently, the SEC is only allowed to fine individuals that violate securities laws no more than $150,000/offense. Institutions can be penalized up to $725,000 maximum. If a case goes to federal court, the Commission has sometimes been able to determine a penalty according to the gross amount of gains that were ill-gotten.

The bill raises the cap per securities law violation offense to $10 million for entities and $1 million for individuals. If how much was made because of the misconduct and the penalty are linked, the Commission could up the penalty times three. Penalties could also be tripled for a recidivist that has had a securities fraud conviction or was the target of administrative relief by the SEC in the last 5 years. The Commission could assess in-house penalties for even cases not heard in federal court.

Institutional Investment Fraud Roundup: STEC Inc. CEO Sued for Insider Trading, Hedge Fund Adviser Indicted for Allegedly Misleading Investors, Two Brothers Settle Naked Short Selling Lawsuit for $14.5M, & Underwriters Get New Disclosure Obligations

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

In SEC v. Moshayedi, the Securities and Commission is suing the Chairman and CEO of computer device storage company STEC Inc. (STEC) for insider trading. Manouchehr Moshayedi allegedly traded in his company stock’s secondary offering because he had insider knowledge that there was a decline in the demand for an important product.

The SEC contends that Moshayedi was attempting avail of a sharp upward trend in the price of the company stock when he sold a significant amount of his shares, as well as shares belonging to his brother, who had co-founded the company with him. As a result of his actions, the Commission says that the siblings made gross proceeds of approximately $134 million each. Moshayedi has denied the allegations and intends to combat the case.

In another SEC case, two other brothers that were sued by the Commission for their alleged involvement in naked short selling have agreed to settle the administrative case against them by paying $14.5 million. Robert A. Wolfson and Jeffrey Wolfson are accused of not locating and delivering shares in short sales to brokerage firms. These naked-short selling transactions allegedly earned them about $9.5 million in illegal profits.

Golden Anchor Trading II LLC was also sued over this matter and has settled as well. While the Wolfsons are paying $13.4 million, the brokerage firm has agreed to pay $1.1 million. By settling, none of them are admitting to or denying the allegations.

Meantime, hedge fund adviser Chetan Kapur, who last year settled SEC administrative and civil charges over alleged misconduct related to allegations that he misled investors, has been indicted on the charges of investment adviser fraud, securities fraud, and wire fraud. Kapur was ThinkStrategy Capital Management LLC’s sole managing principal. The financial firm managed the hedge funds ThinkStrategy Capital Management LLC and ThinkStrategy Capital Fund.

According to the criminal charges, made in the U.S. District Court for the Southern District of New York, Kapur allegedly misled clients about the financial state of the two funds through material misstatements and omissions. He also is accused of giving false information about the funds’ performance, assets, longevity, due diligence, and personnel. If convicted, he faces up to 125 years in prison.

In other securities news, beginning August 2, underwriters will have to fulfill new disclosure obligations to local and state governments. This includes disclosing any actual or possible material conflicts of interest, any third party compensation, and any risks involving complex financial transactions that are recommended to clients. Earlier this month the Municipal Securities Rulemaking Board published guidance to assist underwriters in fulfilling these new duties.

SEC v. Moshayedi (PDF)

Short Selling Brothers Agree to Pay $14.5 Million to Settle SEC Charges, SEC, July 17, 2012

SEC v. Kapur (PDF)

MSRB Rule G-17 (PDF)

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SEC’s Delay in Adopting Conflict Minerals Disclosure Rule is Impeding the Development of Initiatives for Issuer Compliance, Says GAO

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

According to the Government Accountability Office, because the Securities and Exchange Commission has not yet adopted a final conflict minerals disclosure rule, the process of developing initiatives to assist the companies that would be affected by this has been delayed. The GAO said that, as a result, there is now uncertainty about the SEC’s due diligence and reporting requirements, which is making it hard for multilateral organizations, industry associations, and other stakeholders to “expand and harmonize” their in-region and global sourcing initiatives. The agency has recommended that SEC Chairman Mary Schapiro identify what steps need to be completed (and when) so that the Commission can finally put out a final rule.

Per the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 1502, the SEC has to start holding the issuers of conflict minerals from the Democratic Republic and nearby countries accountable to enhanced disclosure requirements. (The Commission was supposed to make sure that this provision was implemented by April of last year.) This month, the SEC said it would consider whether to adopt a final conflict material during its open meeting in August.

The GAO has said the delay by the SEC to finalize a rule is a result of the Commission’s already heavy workload for rulemaking, the volume of stakeholder input, a high learning curve on a subject that staff wasn’t well-versed in, cost concerns by industry members, and the Commission’s concentration on cost-benefit analysis. Among the global initiatives that this delay has hampered, said the GAO, are the Conflict-Free Smelter Program and The Tin Supply Chain Initiative. The first looks to confirm that the sources of smelters processed-conflict minerals are conflict free, while the latter supports the responsible sourcing of materials from central Africa. Both provide assistance to downstream companies seeking to obtain minerals from conflict-free suppliers.

The regulator had put out a proposal about the requirements in December 2010. Back then, it estimated that out of 13,000 public companies, approximately 5,500 issuers would likely be affected. Industry opposition to the proposal was swift, with some contending that the Commission had underestimated the impact of the rule and the inevitable financial costs. Earlier this month, the U.S. Chamber of Commerce requested that the SEC issue a re-proposal of the requirements because previous cost estimates were “fundamentally deficient.”

“Events over the past few years should emphasize the need for reforms at the SEC. Most agree that the ‘securities police were not doing their job during the Madoff debacle and other widespread fraud,” said Securities Lawyer William Shepherd. “Current SEC Chairperson Shapiro was then in charge of the securities industry’s own self-regulatory organization, which had the primary duty to oversee the Madoff securities firm. Yet, she was subsequently promoted to head of the SEC. That agency is now bowing to pressure by the securities firms she was hired to police during this and other matters. Having the ‘fox in charge of the henhouse’ seems to apply here.”

Read the GAO’s report (PDF)

GAO: SEC Failure to Act on Conflict Minerals Hampers Initiatives to Aid Issuer Compliance, Bloomberg/BNA, July 17, 2012

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