Investor Lawyers Blog

IRS Pays Whistleblower $104M for Exposing Tax Evasion at UBS AG

Published on: September 13, 2012 | by Shepherd Smith Edwards & Kantas, LLP

In the largest individual federal payout in our nation’s history, the Internal Revenue Service has awarded ex-UBS AG (UBSN) Bradley Birkenfeld $104 million for acting as a whistleblower and exposing wide scale tax evasion involving the Swiss Bank. Birkenfeld, who was released from prison last month after serving 2.5 years in prison for fraud conspiracy related to this matter, is the one who revealed to the IRS how the Swiss bank helped thousands of Americans evade paying their taxes. He reported that in handling $20 billion in undeclared assets annually, UBS made $200 million a year.

The information that he provided led to UBS paying a $780 million fine so that it wouldn’t be prosecuted over the allegations. The Swiss bank also consented to an unprecedented agreement for it to give over the names of thousands of US citizens suspected of tax evasion and admitted that it fostered tax evasion between 2000 and 2007. UBS would eventually hand over information on 4,700 of its accounts.

At least 33,000 Americans have since voluntary disclosed to the IRS that they have offshore accounts. This resulted in over $5 billion.

Securities Roundup: FINRA Fines Rodman & Renshaw $315K, Convictions Reached in $1B High Yield Fraud Scam Involving FBI, SEC Sues Wwebnet over $2.1M Fraud, and Ex-Hedge Fund Manager Settles Unsuitable Investment Recommendation Allegations for Over $421K

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

To settle Financial Industry Regulatory Authority allegations that it committed numerous violations involving dealings between investment banking and research functions, Rodman & Renshaw LLC has agreed to pay a $315,000 fine. According to the SRO, from January 2008 to March 2012, the financial firm did not have an adequate supervisory system in place to properly monitor these interactions. Rodman & Renshaw also allegedly did not keep research analysts from soliciting investment banking business, compensated one analyst for such contributions, and did not stop Rodman’s CEO (he was on its Research Analyst Compensation Committee while taking part investment banking activities) from having control or influence over research analyst evaluations and compensation.

Also fined over this matter are ex-Rodman & Renshaw CCO William A. Iommi Sr., who must pay $15,000, is suspended from serving in a principal capacity for 90 days, and has to requalify as a general securities principal, research analyst Lewis B. Fan, who must pay $10,000 fine and is suspended for 30 business days for allegedly trying to solicit investment banking business from public companies, and research analyst Alka Singh, who must pay $10,000 and is suspended for six months for allegedly trying to set up a concealed fee from a public company that she provided with research coverage. Although all of the parties have consented to an entry of FINRA’s findings, they have not denied or admitted to the securities charges.

In an unrelated securities case, a California jury has found ex-Rodman & Renshaw broker and investment adviser William Ferry and former real estate investment manager Dennis Clinton guilty of conspiracy, wire fraud, and mail fraud in a high-yield investment fraud scam that involved efforts to bilk a rich investor of $1 billion. The investor was actually someone who was working undercover for the Federal Bureau of Investigation.

US Government Sells $18B of AIG Stock and Turns a $12.4B Profit

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

The United States Treasury Department has sold $18 billion of American International Group Inc. (AIG) stock in a public offering. The sale cut the government ‘s stake in the insurance company to approximately 21.5% while making it a $12.4B profit on the bailouts that occurred during the economic crisis. This could be largest secondary offering in our nation’s history. AIG’s shares were sold at $32.50 each.

Meantime, AIG repurchased $5B of its shares with the remaining going to the broader public. In a securities filing, the insurance company said that it intends to use $3B of short-term securities and cash and $2B in proceeds from its sale of its stake in AIA Group to repurchase its stock.

Now, underwriters have 30 days to purchase another $2.7B of AIG shares. The deal’s underwriters include Citigroup Inc. (C), Deutsche Bank, AG (DB), Credit Suisse (CS), Goldman Sachs Group Inc. (GS), Wells Fargo & Co. (WFC), JPMorgan (JPM), Royal Bank of Canada’s (RY) RBC Capital Markets division, Bank of America Corp’s (BAC) Merrill Lynch division (MER), Morgan Stanley (MS), and Barclays PLC (BCS).

This is the government’s largest sell-down of AIG shares since bailing out the insurer. It had even pledged up to $182.3B to bolster AIG in the wake of growing subprime losses at one point. In return, the government acquired a close to 80% stake in AIG.

To date, the government, which used taxpayer funds to keep some companies afloat during the economic crisis, has gotten back $342 billion of the $411 billion that it through Troubled Asset Relief Program. That said, over 300 small banks that were given funding through TARP still need to pay back taxpayers.

In May, the GAO estimated that taxpayers might profit by $15.1 billion on the AIG bailout. Overallotment, if exercised, will allow the government to arrive at that amount. (The government has been reducing its stake in AIG since early last year. With the overallotment option of the stock sale, the government’s stake will go from 53% to 15.9%.)

According to Reuters, with the Treasury’s ownership stake in it dropping under 50%, because AIG is the owner of a small bank the Federal Reserve will begin regulating it as a savings and loan holding company. This means that AIG will have to be in compliance with the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act’s new rules, such as the Volcker law, which places a limit on a large financial firm’s being able to have stakes in hedge funds and private equity firms or trade for their own account.

The government’s bailout of AIG after Lehman Brothers filed for bankruptcy about four years ago had totaled $182 billion. Now, Chief Executive Robert Benmosche is saying that the financial rescues, paid back at a profit, have left the insurer positioned for success. The government has also been paid back in huge part the bailout loans it gave to other large financial institutions. However, it still is owed much from its rescues of Chrysler and General Motors and the billions of dollars it used to keep Fannie Mae and Freddie Mac afloat.

Treasury sells big chunk of AIG stock at a profit, Reuters, September 11, 2012

Treasury Sells More AIG Shares: $20.7B Total Cuts Stake To 15.9%, Forbes, September 11, 2012
U.S. Plans $18 Billion Sale of AIG Stock, The Wall Street Journal, September 10, 2012

Mutual Funds File Suit Against BP for Violating Texas Statute Prohibiting Fraud in the Sale of Stock

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

A number of mutual funds are suing BP (BP) in Texas for common fraud, negligent misrepresentation, and statutory fraud. They are contending that they wouldn’t have paid top price for the company’s shares if they’d known the “truth.” Plaintiffs include Skandia Global Funds, Yorkshire Pensions Authority, and GAM Fund Management.

The institutional investors are claiming that they lost huge amounts of money because of misleading statements that BP made about having a priority ‘safety first’ policy and that the oil giant tried to mislead them about the true extent of the 2010 oil spill while downplaying the likely scope of its responsibility for the disaster, which killed 11 people and is now considered the worst offshore spill in our nation’s history. They believe that statements were made to make it seem as if: the leak wasn’t as widespread, BP didn’t do anything wrong to cause the tragedy, and “consequential damages were limited,” not only minimized the seriousness in the decline of BP’s stock price but also caused Plaintiffs to make the decision to buy more shares. The mutual funds are accusing BP executives of exhibiting a “reckless disregard” of what was actually happening and concealing that the oil spill was a lot bigger.

The disaster began on April 20, 2010 when an explosion rocked the Deepwater Horizon, a drilling rig that was licensed to BP. Not only were lives lost, but also in two days, the rig, which sank, left an oil slick of five miles in its wake, with millions of gallons of crude oil spilling out before the well could be capped. Already, BP has put aside about $38 billion for lawsuits involving US authorities over civil claims related to the oil spill. (Criminal charges could be likely).

St. Louis Rams Quarterback AJ Feeley and US Soccer Player Heather Mitts Are Among Professional Athletes Allegedly Targeted in Ponzi Scam

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

St. Louis Rams Quarterback AJ Feeley, US Soccer Player Heather Mitts, Philadelphia Eagles Tight End Brent Celek, and NFL player Kevin Curtis have filed a securities lawsuit against their former financial advisor William Crafton Jr. for allegedly defrauding them in the Westmoore Capital Ponzi scam and other financial schemes and causing them to lose millions of dollars. Crafton controlled and oversaw over $7.5 million of their funds. The plaintiffs are also suing Martin Kelly Capital Management, Suntrust Bank, and CSI Capital Management (as well as 50 John Does) for their negligent hiring and supervision of Crafton at the relevant times material to this lawsuit.

According to their Ponzi scam complaint, Crafton is the financial representative for at least 20 professional athletes, including members of the NFL, MLB, and NHL. The plaintiffs said that he often referred to these relationships to solicit new pro athlete clients. When he became the plaintiffs’ financial adviser, he managed nearly all of their assets and incomes that they’d obtained through their professional contracts until their relationship with him ended. They say that the three defendant firms also affiliated themselves with having professional athlete clients.

The plaintiffs maintain that from the beginning of their working relationship with Crafton, they each made it clear that they wanted to employ a conservative investment approach involving a portfolio of assets that were liquid and would help preserve their money. They claim that while Crafton assured them that he was a low risk taker and conservative money manager, in 2005 he began putting their money in risky, alternative investment that were either Ponzi scams or other fraudulent investments that were created or run by individuals that Crafton knew. These investments were not liquid and unsuitable for the plaintiffs and Crafton allegedly either had a financial stake or undisclosed relationship with each investment that they did not know about.

The plaintiffs are accusing Crafton of knowingly making false and material misrepresentations to them, providing them with poor quality wealth management services, placing their funds in unsafe investments, misappropriating their money for his personal purposes, and taking inappropriate steps to conceal the fraud scams he was committing against them. They believe that the defendant companies failed in their independent fiduciary duty when they let Crafton invest, in some instances, over 60% of the Plaintiffs’ assets in illiquid, risky, Ponzi scams and alternative investments.

The plaintiffs say they were never required to fill out investment objective statements or client profiles and customized investment programs were never developed for them. They also contend that their financial risks were not defined for them and industry standards allegedly weren’t followed to determine their risk tolerances or set up an appropriate plan for them. They are seeking disgorgement of management fees, compensatory damages, punitive damages, and legal fees.

Snookered in a Ponzi, Pro Athletes Say, Courthouse News, August 15, 2012

Read the Complaint (PDF)

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Securities and Exchange Commission Charges Former UGA Football Coach Jim Donnan Over Alleged $80M Ponzi Scam, Stockbroker Fraud Blog, August 16, 2012 Goldman Sachs Execution and Clearing Must Pay $20.5M Arbitration Award in Bayou Ponzi Scam, Upholds 2nd Circuit, Institutional Investor Securities Blog, July 14, 2012

Madoff Trustee Files Clawback Lawsuits Collectively Seeking Over $1B For BLMIS Feeder Fund Transfers, Institutional Investor Securities Blog, June 12, 2012 Continue Reading ›

SEC Commissioners Paredes and Gallagher ‘Dismayed’ Over Chairman Schapiro’s Announcement Regarding Failed Money Market Mutual Fund Industry Overhaul Proposal

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

In a recent joint statement, Securities and Exchange Commissioners Troy Paredes and Daniel Gallagher expressed dismay over Chairman Mary Schapiro’s announcement regarding a staff proposal to revamp the money market mutual fund industry that she said would no longer move forward because it would have failed to garner the necessary votes. Gallagher and Paredes expressed concern that her announcement made it seem as if they and Commissioner Luis Aguilar are not worried (and may even be dismissive) about “strengthening money market funds.”

Schapiro recently made it known that she would not be able to get three votes needed to move forward the proposal, which includes reforms to the regulations that preside over money market funds. Under the proposal, funds would have had to either lose their $1 fixed net asset value while floating their NAVs or keep up an under 1% capital buffer. Per her statement, Schapiro said the three commissioners told her that they “will not support a staff proposal to reform the structure of money market funds,” which she believes will protect retail investors and decrease need for taxpayer bailouts in the future. She called on policymakers to look at other ways of dealing with the “systemic risks” involving money market funds. A day after her announcement, the Treasury Department and the SEC were already looking at alternative means to reform the money fund industry.

Paredes and Gallagher want to make it clear that even though they rejected the proposal, this does not mean they are abandoning their duty to regulate money market funds, which fall under the SEC’s jurisdiction for regulation, or that they are unsupportive of making improvements to the way the agency performs oversight. The two of them think the proposal lacks the necessary analysis and data as support and that investors and issuers could have been left with “significant costs” while the system would have possibly become burdened with new risks. They also are concerned that the changes put forward by the proposal would not stop a run on funds. Gallagher and Paredes said that they believe that the SEC “can do better.”

SEC Study Reports that Many Retail Investors Are Financially Illiterate

Published on: September 5, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to the Study Regarding Financial Literacy Among Investors, which was recently released by the SEC, many US retail investors are confused or don’t know much about making informed financial choices and can be considered financially illiterate. The study, which was created to fulfill the Dodd Frank Act’s section 917, is a representation of information distilled by SEC staff from retail investors, focus groups, public comments, quantitative research, and FLEC, which is comprised of 22 federal entities and was set up under the Fair and Accurate Credit Transactions Act of 2003’s Title V to better financial literacy in this country. The Commission also looked to the Library of Congress to review other studies on this subject.

Reportedly, regardless of whether the information came from, the general findings were the same: that many investors lacked an understanding of the most basic financial ideas, including the difference between bonds and stocks, did not know a lot about investment costs or their effect on investment returns, and were challenged when it came to knowing much about liquidity or credit risks. Women, elderly seniors, African-Americans, Hispanics, and the uneducated seemed to generally have less knowledge about investment than did members of the general population.

Also, many investors appeared to have a difficult time reading their portfolio account descriptions and trade confirmations. Many of them appeared confused about fees. One focus group participant even zeroed in on how, when given too much information, the “more that is disclosed” the less likely investors were to pay attention.

Also, per the study:
• Investors would rather get investment disclosures first before buying an investment service or product or getting involved with a financial intermediary.

• Investors do factor disciplinary history, fees, strategy for investments, and conflicts of interest when considering financial intermediaries.

• They prefer summaries with key data about their investments in investment product disclosures. They like disclosures that are concise, clear, easy to understand, and employ tables, bullet points, graphs, or charts.

• They also like “layered” disclosure, where they are given key information and can then access more details online or via e-mail or mail.

You can find out about other study findings by clicking on the link below.

From assessing commenter feedback, SEC staff have now identified which private and public investor educations efforts are the most useful to the audience they are targeting. Also, OIEA and other FLEC participants intend to work together to develop programs that zero in on specific groups, such as military members, young investors, investment trustees, lump sum payout recipients, and underserved populations. They will create programs that emphasize how key it is to perform investment professional background checks, market Investor.gov as the main federal government resource for information about investing, and make sure people become aware of the costs and fees associated with investing.

Securities Fraud
When an investor comes to a financial professional without a lot of investment knowledge of experience, it is the representative’s responsibility to make sure that the client knows about and understands the risks and costs involved before they invest and doesn’t get into anything that would be unsuitable or risky for their goals or finances. Unfortunately, there are brokers and investment advisers that take advantage of investor and their lack of knowledge in order to make a profit. When securities fraud happens it is the investor that suffers.

Study Regarding Financial Literacy Among Investors (PDF)

SEC Says Retail Investors Are Clueless About Stocks, Minyanville’s Wall Street, August 31, 2012

More Blog Posts:
SEC Acts to Put into Effect Provision of JOBS Act that Allows General Advertising and Solicitation in Securities Offerings, Stockbroker Fraud Blog, September 4, 2012

District Court in Texas Finds that SEC Improperly Deposed Witness in Lawsuit Over Alleged Life Settlement Scam, Stockbroker Fraud Blog, September 1, 2012

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

Ex-MF Global CEO John Corzine Says Bankruptcy Trustee’s Bid to Join Investors’ Class Action Securities Litigation is Hurting His Defense

Published on: September 5, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to Jon Corzine, the ex-CEO of MF Global Holdings Ltd. (MFGLQ), bankruptcy trustee James Giddens’s efforts to be part of some of the investor class action lawsuits against the firm’s former and current executives are negatively impacting his defense. Corzine, who is also Goldman Sachs Group Inc.’s (GS) (GS) former co-chairman, left his position at MF Global last year, mere days after the brokerage giant failed in the wake of losses it sustained on European sovereign debt and its overwhelming inability to account for about $1.6 billion in customer funds. MF Global would go on to file for bankruptcy protection.

Rather than file his own securities lawsuit, Giddens has decided to work with the lawyers of the firm’s customers. He won’t join them as a plaintiff but he will “assign” his legal claims to their attorneys and fully participate in their cases. Giddens considers it totally “appropriate” for his office to join forces with the plaintiffs’ securities fraud lawsuits, and he believes that this cooperation agreement is the “most efficient, expedited and cost-effective” means of getting back additional assets for MF Global clients and creditors.

Meantime, Corzine and other ex- and current MF Global executives are complaining that this arrangement would give Giddens complete and total authority over the documents and books they would be able to get in their defense and that this unfairly limits them. Per the former executives’ lawyers, restricting the objectors’ rights to obtain discovery deprives them of the chance to a proper defense, violates due process principals, and is not in line with the goals and requirements of the federal rules that preside over civil litigation. (Also opposing Giddens’s cooperation agreement with the plaintiffs and their lawyers is ex-FBI director Louis Freeh, who is tasked with wrapping up MF Global Holdings Ltd.’s affairs. He believes that the deal oversteps Giddens’s authority and that the bankruptcy trustee is moving claims that belong to the holding company’s creditors and not the brokerage’s customers.)

SEC Acts to Put into Effect Provision of JOBS Act that Allows General Advertising and Solicitation in Securities Offerings

Published on: September 4, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Last week, the SEC proposed rules that would get rid of the ban against general advertising and solicitation of certain securities offerings under Rule 144A and Rule 506 of Regulation D of the Securities Act. The rules are mandated under the Jumpstart Our Business Startups Act.

Currently, companies that want to raise money through securities sales have to depend on an exemption from registration or register the offering with the SEC. The majority of the SEC’s exemptions from registration, including Rule 506, don’t allow companies to take part in general solicitation/advertising related to the securities offering.

However, the newly enacted JOBS Act mandates that the Commission take away the general advertising/solicitation prohibitions on securities offerings related to Rule 506. Section 201(a)(1) of the JOBS Act even directs the SEC to amend Rule 506 to allow general solicitation/advertising as long as the buyers of the securities are investors that are accredited. It also says that the rules shall make sure the issuer exercises reasonable steps to confirm that the buyers are accredited investors and that it is up to the Commission to determine what these methods would be.

District Court in Texas Finds that SEC Improperly Deposed Witness in Lawsuit Over Alleged Life Settlement Scam

Published on: September 1, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to the U.S. District Court for the Western District of Texas, the SEC violated the Federal Rules of Civil Procedure when it deposed a third party witness in its enforcement case dealing with an allegedly fraudulent life settlements accounting scam. The case is SEC v. Life Partners Holdings Inc. While the Commission contended that under its regulatory authority to look into possible securities law violations the deposition was properly obtained, the Judge James Nowlin disagreed, backing up the defendants’ claim that the regulator was trying to get ex-parte discovery.

In the Texas securities lawsuit it filed against Life Partners Holdings and three of its senior executives several months ago, the Commission is accusing the defendants of being allegedly involved in an accounting scam over life settlements involving the selling and buying of fractional interests of life insurance policies in the secondary market. The agency also said that they neglected to tell shareholders that the financial firm was materially underestimating the life expectancy estimates it employed to determine transaction prices.

According to the Court, prior to the Rule 26(f) conference between the two parties and after the SEC lawsuit was filed, the Commission deposed Peter Cangany, who was a Life Partner auditor and a third party. Contending that the deposition was obtained without the court’s leave, before the conference, and without them being notified, the defendants filed a motion for sanctions. Meantime, the SEC came back with the defense that the subpoena it sent to Cangany had been an administrative one seeking more information about possible violations that hadn’t been made in the lawsuit.

Per the court’s recap, what is pertinent here is whether the FRCP governs Cangany’s deposition or it was obtained pursuant to the investigatory authority of the FRCP. It noted that although the SEC doesn’t explicitly point to the reason for the deposition, it “implies” that Cangany was deposed to look into possible violations he made as the auditor of Life Partner. Topics that came up during the deposition included the practices of Life Partners as they relate to revenue recognition, life expectancy, and asset impairment-areas that are the basis of the SEC’s lawsuit against Life Partners.

Although per Rule 26(d)(1), a party cannot pursue recovery before parties have spoken pursuant to Rule 26(f) and in instances where the parties have not stipulated, a defendant looking to obtain a deposition before the conference has to first get the court’s permission first, and also, a party looking to depose a witness must give notice to other party, the court noted that the Commission deposed Cangany before the Rule 26(f) conference, without the stipulation of the other parties, and without getting the court’s leave. The court also said that even though the Commission gave the defendants the transcript and contended that, as a result, they were not prejudiced, this is not the end result. By taking an extra-judicial deposition from a non-party witness to get testimony against the defendants, the court said that the SEC did cause the defendants to be prejudiced. Also, not notifying the defendants that Cangany was to be deposed prevented them from being able to cross-examine him and object to testimony that the agency had elicited.

The court says the SEC cannot use this deposition testimony in its lawsuit against Life Partners. It also has to pay the defendants’ legal fees legal fees for filing the motion for sanctions.

Read the Complaint (PDF)

Court Raps SEC for Discovery Violation In Suit Over Alleged Life Settlements Scam, Bloomberg BNA, August 21, 2012

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Texas Securities Fraud: SEC Charges Life Partners Holdings Inc. in Life Settlement Scam, Stockbroker Fraud Blog, January 4, 2012

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Lawsuit Challenging BP Cancellation of 2010 First Quarter Dividend After Deepwater Debacle is Dismissed in Texas Court, Stockbroker Fraud Blog, August 10, 2012

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