Investor Lawyers Blog

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.

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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Remaining Defendants in $50M Amerifirst Securities Fraud are Sentenced in Texas, Stockbroker Fraud Blog, August 3, 2012

Even With Securities Lawsuits Over MF Global’s $1.6 Billion Customer Funds Loss, Don’t Expect Criminal Charges, Institutional Investor Securities Blog, August 16, 2012 Continue Reading ›

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.