Investor Lawyers Blog

Wells Fargo and Wachovia Sued by LBBW Luxemburg Over Alleged $1.5B Securities Fraud

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

LBBW Luxemburg SA has filed a securities fraud lawsuit against Wells Fargo & Co. (WFC) and its unit Wachovia Corp. over an alleged $1.5 billion securities fraud scam. The case involves transaction in 2006 involving Wells Fargo selling what they allegedly touted as securities with high ratings to LBBW and other customers. LBBW, a Landesbank Baden-Wurttemberg subsidiary, bought $40 million of these residential mortgage-backed securities.

Now, the European bank is contending that the underlying mortgages were riskier than represented and not worth their buying price. Within a year, the securities had defaulted. LBBW is alleging common law fraud, breach of contract, constructive fraud, negligent misrepresentation, and breach of fiduciary duty.

Per the plaintiff’s attorneys, the alleged financial fraud was discovered after the SEC investigated a $5.5 million investment that the Zuni Indian Tribe’s employee pension fund made. The Securities and Exchange Commission had accused Wachovia of selling overpriced equity in Grant Avenue II, a collateralized debt obligation, to the tribe and another investor. The Commission contended that after marking down some of the equity to 52.7 cents on the dollar, Wachovia charged 90 cents and 95 cents on the dollar. The bank was also accused of misleading investors in Longshore 3, another CDO, by saying that assets had been acquired from affiliates at prices that were fair market when, actually, claims the regulator, 40 securities had been moved at prices that were above market and Wachovia moved assets at prices that were stale so it wouldn’t have to report the losses.

The SEC said that while it did not consider Wachovia to have acted improperly in the way it structured the CDOs, the bank violated investment protection rules by using stale prices, even as buyers were being told the prices were fair market value, and charging excessive markups in secret. The Commission found that the Zuni Indians and other investors suffered financial losses as a result. Last year, Wachovia agreed to pay $11 million to settle charges accusing it of violating federal securities laws in its sale of MBS leading up to the collapse of the housing market.

European Bank LBBW Sues Wells Fargo Over Alleged $1.5 Billion Securities Fraud, The Sacramento Bee, October 1, 2012

German bank sues Wells Fargo alleging $1.5 billion securities fraud, San Francisco Business Times, October 2, 2012

Wells Fargo Settles Case Originating At Wachovia, The New York Times, April 5, 2012

More Blog Posts:
Lehman Brothers Australia Found Liable in CDO Losses of 72 Councils, Charities, and Churches, Institutional Investor Securities Blog, September 25, 2012

REIT Retail Properties of America’s $8 Public Offering Results in Major Losses for Fund Investors, Institutional Investor Securities Blog, April 17, 2012

Texas Securities Fraud: Investor Sues Behringer Harvard REIT I, Stockbroker Fraud Blog, September 26, 2012

New York’s Attorney General Sues JP Morgan Chase & Co. Over Alleged MBS Financial Fraud by Its Bear Stearns Unit

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

NY Attorney General Eric Schneiderman is suing J.P. Morgan Chase & Co. (JPM) over MBS fraud that was allegedly committed by its Bear Stearns unit. This is the first securities lawsuit to be brought under the sponsorship of the Residential Mortgage-Backed Securities Working Group, which is made up of prosecutors and regulators and was formed by President Barack Obama. The action is seeking damages that were either a direct or an indirect result of “fraudulent and deceptive acts.”

The group is contending that investors sustained $22.5 billion in losses involving Bear Stearns Cos.-issued securities before the investment bank almost failed in 2008 and JP Morgan ended up taking it over. Mortgage securitizations involving subprime and Alt A mortgages from between 2005 and 2007 are at the center of the case.

According to the MBS fraud lawsuit, Bear Stearns committed financial fraud against investors when it packaged and sold mortgages that it knew (or should have known) had a good chance of defaulting. The lawsuit even quotes messages and emails supposedly sent internally at Bear Stearns showing that bank employees knew the investments they were selling were of poor quality. Schneiderman is alleging that the mortgage unit “systematically failed” when assessing loans, disregarded defects that were found, and failed to inform investors about review procedures or problems involving the loans.

Rather than focusing on a single transaction, the New York securities fraud lawsuit is claiming financial fraud across the firm. It also is applying New York State’s Martin Act, which doesn’t mandate that in order to win the case prosecutors must prove that a financial firm meant to commit the alleged fraud. The task force intends to use this case to bring other claims on a firm-wide basis. Schneiderman said that the group is “looking at tens of billions of dollars” in damages and not just by one financial firm.

Federal and state regulators have been working hard since 2008 to find out whether banks just made poor decisions or actually broke securities laws related to the mortgage securities that failed in the economic crisis. Recent victories against large firms include Bank of America Corp. (BAC) consenting to pay $2.43 billion to settle class action securities allegations accusing it of misleading investors about the Merrill Lynch & Co. (MER) acquisition. However, the bank settled without admitting or denying wrongdoing.

Regarding this New York MBS case against JP Morgan Chase, a spokesperson for the financial firm said it was “disappointed” with the civil action while making it clear that the alleged activities in question occurred before it bought Bear Stearns.

JP Morgan Sued on Mortgage Bonds, The Wall Street Journal, October 1, 2012

NY Attorney General Says More Suits Will Follow JPMorgan, Bloomberg, October 2, 2012

Residential Mortgage-Backed Securities Working Group Members Announce First Legal Action, Justice.gov, October 2, 2012

Residential Mortgage Backed Securities Fraud Working Group

Martin Act (PDF)

More Blog Posts:
Morgan Keegan Settles Subprime Mortgage-Backed Securities Charges for $200M, Stockbroker Fraud Blog, June 29, 2011

Morgan Keegan to Pay $9.2M to Investors in Texas Securities Fraud Case Involving Risky Bond Funds, Stockbroker Fraud Blog, October 6, 2010
Class Action MBS Securities Lawsuit Against Goldman Sachs is Reinstated by 2nd Circuit, Institutional Investor Securities Blog, September 14, 2012 Continue Reading ›

US Supreme Court Considers Hearing Stanford Ponzi Lawsuits

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

The Supreme Court’s justices are looking to the Obama administration for advice about an appeal made to a ruling allowing the victims of R. Allen Stanford’s $7 billion Ponzi fraud can pursue law firms, insurance brokers, and outside parties for damages. The defendants, third party firms, want the court to stop the securities lawsuits, which are based on Texas and Louisiana law. If the court were to hear the appeals, it would put to test the Securities Litigation Uniform Standards Act, which was enacted so that if a class action lawsuit comes from a misrepresentation issued “in connection” with a covered security’s sale or purchase, investors cannot go to state courts to get around federal limits placed on such claims. The appeals is asking how close that connection has to be for a state lawsuit to be barred.

Investors have been trying to get back the money they lost in Stanford’s Ponzi fraud, which involved the sale of CDs from his Antigua bank. Numerous securities lawsuits have been filed, and at Shepherd Smith Edwards and Kantas, LTD, LLP, our Texas securities fraud lawyers represent victims of the Stanford Ponzi scam and other financial schemes.

Our Texas securities fraud law firm also continues to provide updates on the different Stanford-related securities litigation on our blog sites:

Securities Lawsuit Over Excessive AXA Mutual Fund Management Fees in Variable Annuity Program Can Proceed, Says NJ District Court

Published on: October 2, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to the U.S. District Court for the District of New Jersey, plaintiff Mary Ann Sovolella can sue AXA Equitable Life Insurance Co. on behalf of eight mutual funds that belong to a variable annuity program for excessive management fees. Per Judge Peter Sheridan, the economic realities and a broad interpretation the 1940 Investment Company Act Section 36(b) gives her standing. The defendants are AXA Equitable Funds Management Group LLC (collectively AXA) and AXA Equitable Life Insurance Company (AXA Equitable).

Sovolella is suing on behalf of the AXA Funds, EQ Advisors Trust and those that paid investment management fees. She alleges that charging the funds management fees that were excessive violates ICA’s Section 36(b). The defendants’ sought to have the securities lawsuit dismissed on the grounds of lack of statutory standing.

The plaintiff joined the EQUI-VEST Deferred Variable Annuity Program after the opportunity was offered to her by her employer, Newark School System (due to a group annuity contract involving AXA Equitable). The eight AXA Funds in the EQ Trust are part of the portfolios that were made available to Sovolella through the program. AXA charges the funds an investment management fee that is taken out of the fund balance, which lowers the “value of the Plaintiff’s investment.”

While ICA’s Section 36(b) includes the provision that investment advisers have a fiduciary obligation regarding the “receipt of compensation for services” that they give to mutual funds, there are limits as to who can pursue a claim. An action can only be brought by the Securities and Exchange Commission or a security holder for a mutual fund that is allegedly charging fees that are excessive. However, per the court, ICA doesn’t provide a definition for the term “security holder.” While the defendants argued that Sovolella is not a “security holder” the plaintiff, maintains that she is one as this pertains to the funds.

Denying the defendants’ motion to dismiss, the court said that while it doesn’t make “sense to limit standing” in in order to enforce Section 36(b) to AXA or any entity that didn’t pay the fees that were allegedly excessive, Sovolella and other investors that are similarly situated are accountable for and did pay all challenged fees while bearing the complete risk of “poor investment performance,” entitled to direct AXA on how to vote their shares, and when the plaintiff opts to take out her investment in the fund it will be her responsibility to pay the investment taxes. Plaintiff, therefore, possesses an “economic stake” in these transactions.

Sivolella v. AXA Equitable Life Insurance Co., Justia (PDF)

1940 Investment Company Act (PDF)

More Blog Posts:
Stockbroker Fraud News Roundup: UBS Puerto Rico Settles SEC Action for $26M, Morgan Keegan’s Bid to Get $40K Award Over Marketing of RMK Advantage Income Fund Vacated is Denied, and SEC Settles with Attorney Involved in $1B Viaticals Scam, Stockbroker Fraud Blog, May 11, 2012

Securities Fraud: Mutual Funds Investment Adviser Cannot Be Sued Over Misstatement in Prospectuses, Says US Supreme Court, Stockbroker Fraud Blog, June 16, 2011

Why Were Two Former Morgan Stanley Smith Barney Brokers Not Named As Defendants in Securities Lawsuit by State Regulators Over $6M Now Missing From Wisconsin Funeral Trust?, Stockbroker Fraud Blog, September 27, 2012 Continue Reading ›

LIBOR Oversight-Related Changes Announced by FSA Chief

Published on: October 2, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Britain’s Financial Services Authority managing director Martin Wheatley says that oversight of Libor should become the UK regulator’s job. He made his statements on Friday, proposing that over 100 Libor rates tied to maturities and currencies that lack enough trading information to be set properly should be eliminated right away. He also said that submissions by banks should be grounded in “hard data.”

Questions were raised about the London Inter-Bank Offer Rate’s accuracy a few months ago following allegations that Barclays (BCS) and other large banks had been rigging it by turning in borrowing estimates that were artificially low. Considering that LIBOR is the average borrowing cost for banks in Britain for when they are lending each other money, as well as a benchmark interest rate that impacts financial contracts and corporate loans globally, such manipulation cannot happen. Barclays later admitted that it had tried to rig rates to boost its own derivative trading, hide actual lending costs, and create the impression of better financial health during the economic crisis. The bank would go on to settle over these securities allegations: $453 million to the FSA, $200 million to the Commodity Futures Trading Commission, and $160 million to the US Department of Justice. However, several other banks are still under investigation related to the LIBOR scandal.

“Many regional banks and other financial institutions are seeking to recover losses based on fraudulently manipulated Libor rates,” said Securities Fraud Attorney William Shepherd. “Most lenders have abandoned the ‘prime’ rate formula and now base their rates on the widely accepted (and trusted) Libor rate. Our law firm represents financial institutions in claims for damages.”

Acknowledging that Libor governance has been a complete failure, Wheatley, who is expected to become the Financial Conduct Authority’s chief executive when the FSA breaks up into two agencies, acknowledged that inadequate regulation and a “comprehensive mechanism” to retaliate against those that attempt to “manipulate the system” has made resulting problems worse. He wants FSA to be given additional authorities, including vetting power over rate-submitters and the ability to prosecute rate manipulation efforts.

According to Advisen.com, with regulatory actions and securities litigation over the LIBOR manipulation scandal growing every day, through the first week of September it had counted 88 actions against 20 banks—that’s 20 regulatory probes and 68 complaints. Among the defendants, besides Barclays, are JP Morgan Chase Bank (JPM), Citibank (C), Royal Bank of Scotland Group (RBS), Bank of America (BAC), Credit Suisse Group AG (CS), UBS (UBS), HSBC, Deutsche Bank AG (DB), Bank of Tokyo Mitsubishi, Royal Bank of Canada (RY), and others. More actions over pension fund losses are likely.

FSA to Oversee Libor in Streamlining of Tarnished Interest Rate, SF Gate, September 28, 2012

More Blog Posts:

Insider Trading Roundup: SEC Settlement Reached Over Alleged Tips In Insurers’ Merger, Court Won’t Throw Out Criminal Charges Related to Info From AA Member, & Asset Freeze Approved Against Broker In Burger King Acquisition, Stockbroker Fraud Blog, September 28, 2012

Burger King Structure Could Activate Certain 1934 Securities Exchange Act Prohibitions, Says SEC’s Special Counsel

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

According to Attorney Daniel Duchovny, who is the special counsel to the Securities and Exchange Commission Corporation Finance Division’s Office of Mergers and Acquisitions, a two-track merger and acquisition structure known as the Burger King structure could cause certain 1934 Securities Exchange Act provisions to be triggered. Named after the burger chain’s private acquisition equity that took place in 2010, the Burger King structure allows companies to go after a traditional one-step merger and a tender offer at the same time. Firms involved in such deals have to agree that if the company that is doing the acquiring is unable to arrive at the majority of shares (usually 90%) through the tender offer, midway through the process they can choose to do a one-step merger instead. Duchovny, who spoke during the Practising Law Institute webcast on September 6, made clear to emphasize that these views are his own.

At issue, says Duchovny, is that this dual structure may conflict with the 1934 Act’s Rule 14e-5, which, reports BNA, “prohibits buying or offering to buy the target company’s securities outside a tender offer.” The one-step merger path could activate this prohibition because the acquiring company has to submit a preliminary proxy statement with the Commission. Duchovny noted that this filing could be viewed as a deal to buy securities “outside the tender offer.”

The SEC is currently trying to see whether the transaction structure does actually violate rule 14e-5. Meantime, Commission staff intend to get in touch with acquiring firms that exhibit plans to submit a preliminary proxy statement related to a Burger King-style transaction, warn about the possible “application of the rule,” and ask for a hold off on the submission of a definitive proxy statement before the expiration of the tender offer period. However, bidders looking for no-action relief from the Commission to submit a definitive proxy statement should be ready to tackle the agency’s concerns, said Duchovny, including that this type of solicitation is only speculative, the filer may not have to complete it, there may be a possible exception that the deal is one that not many shareholders support, there may be potential shareholder confusion, and that, seeing as there are other deal tools, there may not be a compelling enough need for the exception. Duchovny said that although the SEC has granted no-action relief before under Rule 14e-5, he emphasized that companies shouldn’t assume that this relief exists for general reliance.

Insider Trading Roundup: SEC Settlement Reached Over Alleged Tips In Insurers’ Merger, Court Won’t Throw Out Criminal Charges Related to Info From AA Member, & Asset Freeze Approved Against Broker In Burger King Acquisition

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

The Securities and Exchange Commission has reached a settlement with three men accused of trading on insider information about the acquisition between Mercer Insurance Group Inc. and United Fire & Casualty Co. (UFCS), with the latter to obtain the former. Per the SEC, in or around June 2010, Mercer Insurance director H. Thomas Davis Jr. found out about the talks between the two insurance companies and then allegedly tipped business associate/friend Mark W. Baggett, who then allegedly tipped golfing partner Kenneth Wrangell. Baggett and Wrangell then bought Mercer stock that they sold when the merger became public in November of that year. The Commission says they made over $83,000 in illegal profits.

Wrangell, who reportedly went into a cooperation deal with SEC investigators right away when they approached him about the insider trading, saw his penalty reduced to $11,380.39. His disgorgement remains at is $42,521.55. This agreement led to the quick gathering of evidence and settlements against the other two men. In addition to a bar from working for a public company as a director or officer, Davis has consented to be severally and jointly liable for the disgorgement of $41,584.45, which were Baggett’s profits, in addition to a $41,584.45 penalty and prejudgment interest.) Baggett will also pay disgorgement and a penalty.

In a Pennsylvania insider trading case, a district court has decided not to dismiss criminal securities fraud charges against Timothy McGee, who allegedly traded securities in a merger target using information that he obtained from a fellow Alcoholics Anonymous member. Judge Tim Savage found that the prosecution alleged enough facts to support that there was a relationship of confidence/trust between the defendant and his tipster.

Why Were Two Former Morgan Stanley Smith Barney Brokers Not Named As Defendants in Securities Lawsuit by State Regulators Over $6M Now Missing From Wisconsin Funeral Trust?

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

Wisconsin regulators are suing Wisconsin Funeral Directors Association Inc. and Fiduciary Partners Inc. for allegedly improperly investing the money from a $48 million Wisconsin Funeral Trust. With a possible long-term deficit of $21 million, close to $6 million in investor money has already been lost. However, our stockbroker fraud law firm wants to know why two former Morgan Stanley Smith Barney brokers-brothers Michael Hull and Patrick Hull-are not defendants in this case. The two brothers managed the trust until earlier this month, when a circuit court judge assigned a receiver to take charge of liquidating the fund. They now run bluepoint Investment Council, LLC.

The trust is funded by about 10,500 prepaid contracts. According to state Department of Justice officials, customers who bought prepaid funeral policy plans because they were under the impression that their money would be placed in CDs, government bonds, and low risk investments and that they would get a guaranteed, modest return rate. Instead, the trust ended up losing millions in risky investments. (The Department of Financial Institutions is now ordering a securities enforcement action after it concluded that the funds, which were in the trust, were invested in a manner that violated state law.) Fiduciary Partners Trust, the trust’s trustee, has said that it was never involved in how the trust’s investments were managed or marketed and that this was the job of the Wisconsin Funeral Directors Association and the investment management firms.

“The information which has been reported leaves us with more questions than answers as to Morgan Stanley and its former brokers,” said stockbroker fraud lawyer William Shepherd. “In any event, any claims against the firm and/or brokers would likely be excluded from court action by the trust because of a mandatory FINRA arbitration agreement.”

Texas Securities Fraud: Investor Sues Behringer Harvard REIT I

Published on: September 26, 2012 | by Shepherd Smith Edwards & Kantas, LLP

In her Texas securities lawsuit, investor Lillian Hohenstein is suing Behringer Harvard REIT I, one of the biggest nontraded real estate investment trusts. Hohenstein, who purchased 1,275 shares from the trust between 2004 and 2008, claims that the REIT, Behringer Harvard Holdings LLC, President and Chief Executive Robert Aisner, other company executives, and its board members of breach of fiduciary duty and negligence. Aisner and board members also are accused of making allegedly misleading and false statements when they recommended that investors turn down outside fund offers from those wanting to pay the REIT’s shares for as low as $180/share.

According to Hohenstein ‘s Texas REIT lawsuit, the REIT attempted to conceal its poor performance by using investors’ own money to pay them, while simultaneously depleting the company of millions of dollars even as top executives benefited. Behringer Harvard REIT I is among the nontraded REITs that have seen their value drop significantly following the collapse of the real estate market.

The REIT complaint contends that for a certain period of time, HPT Management Services LP and Behringer Advisors respectively collected fees of $77 million and $104 million, which, per the securities lawsuit, over the life of the trust is about 4% of the REITs existing assets. Behringer Harvard COO Jason Mattox, who says Hohenstein ‘s case is meritless, says the company has since lowered his fees, even waiving asset management fees of over $30 million.

Institutional Investment Fraud Roundup: Ex-Hedge Fund Managers’ Guilty Plea Over Bilking Investors of Almost $1M Get 3-Year Prison Term, SEC Sues Investment Adviser Over Alleged $37M Ponzi, and SEC Files Lawsuit Over Purported “Fund of Funds” Scam

Published on: September 26, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Ex-hedge fund managers Christopher Fardella and Michael Katz have been sentenced to three years in prison after they pleaded securities fraud and conspiracy charges for defrauding investors of nearly $1 million. Per court documents, between April 2005 and November 2006, the two men, along with two co-conspirators, were partners in KMFG International LLC, which is a hedge fund.

They cold called investors throughout the US and provided them with misleading information about the fund, its principals, and financial performance even though KMFG actually lacked a track record and never generated any profit for investors. The defendants and co-conspirators lost and spent $981,000 of the $1,031,086 that was given to them by investors.

Meantime, another hedge fund manager, Oregon-based investment advisor Yusaf Jawad, is being sued by the Securities and Exchange Commission over an alleged $37 million Ponzi scam. The securities lawsuit against him and attorney Robert Custis was filed in the U.S. District Court for the District of Oregon.