Investor Lawyers Blog

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

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

Stanford Ponzi Scam Investors File Class Action Lawsuit Suing The Securities and Exchange Commission, Stockbroker Fraud Blog, July 25, 2012 Continue Reading ›

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

More Blog Posts:

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

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

More Blog Posts:
Plaintiff Says Morgan Stanley Fired Him for Calling out Investment Adviser Who Was Churning Accounts and Bilking Investors, Stockbroker Fraud Blog, August 7, 2012

Morgan Stanley Smith Barney Ordered by FINRA Arbitration Panel to Pay $5M Over Allegedly False Promises Made To Brokers Recruited from UBS AG, Stockbroker Fraud Blog, June 22, 2012

Ex-Morgan Stanley Smith Barney Broker Settles with FINRA for Allegedly Failing to Notify Firm of Previous Arrest, Stockbroker Fraud Blog, June 16, 2012 Continue Reading ›

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)

More Blog Posts:
Texas Securities Roundup: Morgan Stanley Smith Barney Sued Over Financial Adviser’s Ponzi Scam, Judge Dismisses Ex-GE Executive Whistleblower’s Lawsuit Over His Firing, & Ex-Stanford Financial Group CIO Pleads Guilty to Obstructing the SEC’s Probe, Stockbroker Fraud Blog, July 3, 2012

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

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

More Blog Posts:
Dodd-Frank Whistleblower Protection Amendment Must Be Applied Retroactively, Said District Court, Stockbroker Fraud Blog, July 21, 2012

SEC’s Office of the Whistleblower In Early Phase of Evaluating Reward Claims, Institutional Investor Securities Blog, March 23, 2012

District Court Denies UBS Summary Judgment in Sarbanes-Oxley Whistleblower Lawsuit, Stockbroker Fraud Blog, June 27, 2012 Continue Reading ›

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

More Blog Posts:
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.