Investor Lawyers Blog

Citigroup to Pay $590M to Settle Shareholder Class Action CDO Lawsuit Over Subprime Mortgage Debt

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

Citigroup (C) has agreed to pay $590 million settle a shareholder class action collateralized debt obligation lawsuit filed by plaintiffs claiming it misled them about the bank’s subprime mortgage debt exposure right before the 2008 economic collapse By settling, Citigroup is not admitting to denying any wrongdoing. A federal judge has approved the proposed agreement.

Plaintiffs of this CDO lawsuit include pension funds in Illinois, Ohio, and Colorado led by ex-employees and directors of Automated Trading Desk. They obtained Citigroup shares when the bank bought the electronic trading firm in July 2007. The shareholders are accusing bank and some of its former senior executives of not disclosing that Citigroup’s CDOs were linked to mortgage securities until the bank took a million dollar write down on them that year. Citigroup would later go on to write down the CDOs by another tens of billions of dollars.

The plaintiffs claim that Citigroup used improper accounting practices so no one would find out that its holdings were losing their value, and instead, used “unsupportable marks” that were inflated so its “scheme” could continue. They say that the bank told them it had sold billions of dollars in collateralized debt obligations but did not tell them it guaranteed the securities against losses. The shareholders claim that to conceal the risks, Citi placed the guarantees in separate accounts.

Prior to the economic collapse of 2008, Citi had underwritten about $70 billion in CDOs. It, along with other Wall Street firms, had been busy participating in the profitable, growing business of packaging loans into complex securities. When the financial crisis happened, the US government had to bail Citigroup out with $45 billion, which the financial firm has since paid back.

This is not the first case Citigroup has settled related to subprime mortgages and the financial crisis. In 2010, Citi paid $75 million to settle SEC charges that it had issued misleading statements to the public about the extent of its subprime exposure, even acknowledging that it had misrepresented the exposure to be at $13 billion or under between July and the middle of October 2007 when it was actually over $50 billion. Citigroup also consented to pay the SEC $285 million to settle allegations that it misled investors when it didn’t reveal that it was assisting in choosing the mortgage securities underpinning a CDO while betting against it.

This week, Citi agreed to pay a different group of investors a $25 million MBS settlement to a securities lawsuit accusing it of underplaying the risks and telling lies about appraisal and underwriting standards on residential loans of two MBS trusts. The plaintiffs, Greater Kansas City Laborers Pension Fund and the ‪City of Ann Arbor Employees’ Retirement System,‬ had sued Citi’s Institutional Clients Group. ‬

This $590 million settlement of Citigroup’s is the largest one reached over CDOs to date and one of the largest related to the economic crisis. According to The Wall Street Journal, the two that outsize this was the $627 million that Wachovia Corp. (WB) agreed to pay over allegations that investors were misled about its mortgage loan portfolio’s quality and the $624 million by Countrywide Financial (CFC) in 2010 to settle claims that it misled investors about its high risk mortgage practices.

Citigroup in $590 million settlement of subprime lawsuit, The New York Times, August 29, 2012

Citi’s $590 million settlement: Where it ranks, August 29, 2012

Citigroup Said To Pay $75 Million To Settle SEC Subprime Case, Bloomberg, July 29, 2010

More Blog Posts:

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

SEC Securities Law Roundup: First Whistleblower Award Under New Program is Announced, Internet-Based Investment Adviser Seeks Regulator’s Recognition, & the Commission Stops Alleged $600M Online Ponzi Scheme

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

The Securities and Exchange Commission has made its first award to a whistleblower under its new program created under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Informants who give the commission “original information” leading to action resulting in $1 million or greater in penalties are entitled to receive 10-30% of whatever sanctions the regulator collects.

The SEC announced that it would pay $50,000 to this particular tipster for assistance provided in stopping a “multi-million dollar fraud.” This person gave “significant information” and documents, which helped speed up the agency’s probe. Now, the defendants in the securities case must pay about $1 million in penalties, of which the Commission has collected about $150,000. The $50,000 is about 30% of that amount. If a final judgment is issued against other defendants, the whistleblower could receive a larger amount.

In other SEC-related news, Larry Eiben the co-founder of Moxy Vote, an investment web site, wants the Commission to put into effect rules that recognize a new investment adviser category. He wants investors to be able to use a “neutral Internet voting platform” to get information about investments, as well as be able to not just vote shares during corporate meetings, but also “designate as the recipient of proxy materials” for transmission by companies with SEC-registered stock.

Eiben believes the rule changes is necessary because under existing regulations, retail investors cannot use the Internet to vote their shares or collect and get information through means that they might find most helpful when determining how to vote. He says the change will tackle what he considers an ongoing issue: “low participation by retail investors in voting shares of their portfolio companies.”

Unfortunately, the Internet continues to prove an effective tool for perpetuating financial fraud. Earlier this month, the SEC obtained an emergency asset freeze order stopping an alleged $600 million Ponzi scam that was about to collapse. The defendants are Rex Venture Group and its owner Paul Burkes, who is an online marketer.

Per the Commission, the two of them raised money from over one million clients on the Internet using ZeekRewards.com. They allegedly gave customers several options for earning money through a rewards program. Two of them involved the purchase of investment contracts. However, none of these securities were SEC registered, which they are required to be under federal securities laws. Meantime, investors were promised up to half of the company’s daily net profits via a profit sharing system. Also, despite the defendants’ allegedly giving them the impression that the company was profitable, investors received payouts that were unrelated to such profits, and instead, in typical Ponzi scam fashion, the money paid to them came from the newer investors.

The SEC said its order to freeze assets will allow the Ponzi scam victims to recoup more of their money so whatever is left of what they invested with ZeekRewards can be used as payouts to them. Burkes has agreed to settle the Commission’s allegations without denying or admitting to wrongdoing. He will, however, pay a $4 million penalty.

Whistleblower Program, SEC

S.E.C. Pays Out First Whistle-Blower Reward, The New York Times, August 21, 2012

Read Eiben’s Petition to the SEC (PDF)

MoxyVote (PDF)

Read the SEC complaint in its case against Rex Venture Group (PDF)

More Blog Posts:
Merrill Lynch Agrees to Pay $40M Proposed Deferred Compensation Class Action Settlement to Ex-Brokers, Stockbroker Fraud Blog, August 27, 2012

Majority of Non-Traded REITs Underperform Compared to Benchmarks, Reports New Study, Stockbroker Fraud Blog, August 25, 2012

Ex-Fannie Mae Executives Have to Defend Against SEC Lawsuit Over Their Alleged Involvement in Understating Mortgage Company’s Exposure Risk, Institutional Investor Securities Blog, August 25, 2012 Continue Reading ›

Institutional Investment Roundup: Madoff Ponzi Victims to Get 2nd Payout, Insurer’s MBS Lawsuit Against UBS Can Proceed, SEC Charges 2 in $10M Penny Stock Scam, & Hedge Fund Manager Found Guilty in $900K Insider Trading Scheme

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

The U.S. Bankruptcy Court for the Southern District has issued an order giving Irving Picard, the Bernard L. Madoff Investment Securities LLC liquidation trustee, permission to issue a second interim distribution to the victims of the Madoff Ponzi scam. Picard had asked to add $5.5 billion to the customer fund and issue a second payout of $1.5 billion to $2.4 billion to the investors that were harmed.

According to Bloomberg Businessweek, a $2.4 billion payout would be seven times more than what the bilked investors have been able to get back since Madoff, who is serving a 150-year prison term for his crimes, defrauded them. A huge part of the customer fund is on reserve because there are investors who have filed securities lawsuits contending they should be getting more.

Meantime, the U.S. District Court for the Southern District of New York has decided that the mortgage-backed securities lawsuit filed by insurance company Assured Guaranty Municipal Corp. against UBS Real Estate Securities Inc. can proceed. The plaintiff contends that UBS misrepresented the quality of the loans that were underlying the MBS it insured in 2006 and 2007.

Merrill Lynch Agrees to Pay $40M Proposed Deferred Compensation Class Action Settlement to Ex-Brokers

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

Merrill Lynch (MER) has arrived at an “agreement in principle” to resolve the class action lawsuit filed by John Burnette and Scott Chambers over deferred compensation that they contend that the brokerage firm refused to pay them after it merged with Bank of America (BAC) in 2008 and they left its employ. About 1,400 brokers are part of this class. However, some 3,300 ex-Merrill brokers have submitted deferred compensation claims against the brokerage firm for the same reason.

Merrill had refused to give these employees their deferred compensation, which is what a broker usually gets paid for staying with a financial firm for a specific number of years, when they resigned after the merger. These brokers, however, cited “good reason” for their departure, which is another cause they can claim to receive this.

The class action settlement was presented to U.S. District Judge Alison Nathan at Manhattan federal court on Friday. She will decide whether to approve it, as well as certify the class according to the parties’ definition. However, it is not known at this time how many brokers will go for this settlement if it is approved.

It is not unusual for many to opt not to be part of a class action settlement and instead seek to obtain more money via an individual arbitration claim. Having an arbitration lawyer personally representing your case generally leads to bigger results. Already, over a thousand ex-Merrill brokers have filed their FINRA claims. Also, for an ex-Merrill broker whose deferred compensation was above six figures, they are likely to get much less by going the class action route. Meantime, ex-Merrill brokers with revenues that exceeded $500,000 during a certain timeframe before they left the financial firm cannot participate in a class action settlement. Neither can those that accepted bonuses and waived certain rights related to deferred compensation claims from Merrill after the deal with Bank of America.

That said, even the ex-Merrill brokers that decide to opt out of the class are likely to benefit from this settlement because it establishes a floor for payouts while serving as Merrill’s public acknowledgement that it had a financial duty to pay the former brokers upon their departure.

Under the class action settlement, the majority of advisers would get 40-60% of the value of their account. According to OnWallStreet.com, for a broker to receive 60%, advisors must have already made a request for reimbursement, whether via lawsuit, arbitration, or some other way and left the financial firm prior to January 30, 2010. To be eligible to receive 50%, these advisers too will have had to have made some type of legal action and resigned by June 30, 2010. If no action was taken, and the former broker still wants to opt in, they would turn in a form and seek 40% of compensation–dependent upon when they exited the firm. Other ex-advisors might also be able to receive 40 to 60% of payment depending on when they left Merrill, whether they had filed a deferred compensation claim, and in what compensation plans they were participants. Ex-dvisers that had an agreement with the Advisor Transition Program, however, would not be able to participate.)

Merrill to Make Good on Former Brokers’ Deferred Comp, On Wall Street, August 24, 2012
Merrill to pay $40 mln in deferred compensation suit, Reuters, August 25, 2012

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Merrill Lynch to Pay Brokers Over $10M for Alleged Fraud Over Deferred Compensation Plans, Institutional Investor Securities Blog, April 5, 2012

Advanced Equities Ordered by FINRA Arbitration Panel to Pay $4.5M to Ex-Broker, Stockbroker Fraud Blog, June 12, 2012

Claims Continue over MasterShare – Prudential Securities’ Deferred Compensation Plan, Stockbroker Fraud Blog, August 13, 2008 Continue Reading ›

Majority of Non-Traded REITs Underperform Compared to Benchmarks, Reports New Study

Published on: August 25, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to a study by The University of Texas at Austin McCombs School of Business and Blue Vault Partners LLC, most non-traded real estate investment trusts underperform compared to benchmarks. The study was released on June 1 and compared 17 “full-cycle” non-traded REITS that experienced liquidity events between 1990 and May 15, 2012 with two customized benchmarks. The benchmarks involved a portfolio of properties from the National Council of Real Estate Investment Fiduciaries and broad indexes of REITs that were publicly traded.

Per the study, only five of the REITs examined- Cornerstone Realty Income Trust Inc., Apple Suites Inc., Corporate Property Associates 10 Inc., Carey Institutional Properties Inc., and American Realty Capital Trust Inc.-outperformed the market indexes, meaning 71% of the REITs that were part of the study underperformed the customized benchmark. Only Apple Suites outperformed both. While the nontraded REITS made “respectable total returns”-10.3% was the average internal return rate-this was still 140 basis points below the two customized benchmarks, which both had returns of 11.7%. The study said that the main reason for this was fees. (With a standard 12% sales load or fee, the annualized return rate for the nontraded REIT goes up from 10.3% to 12.5%. That said, nontraded REIT fees could go as high as 15%.)

Even though the full cycle REIT sample on average underperformed their benchmarks, each REIT showed a positive total return to investors. A few of the other findings, according to the study:

• Non-traded REITs that had shorter time periods from inception to a full cycle event did better than ones that had longer holding periods.

• In looking at distribution yields to capital gains as a portion of total return, distributions made up 75% or greater of returns.

• When looking at “early Stage Investment Period” performances, about 1/3rd of nontraded REITs outperformed benchmarks based on NAREIT and NCREIF.

Nontraded REITS have been promoted to retail investors as investment vehicles that will allow them to purchase real estate that is institutional quality while having low volatility and greater than average current yields. That said, a maturation process caused by a number of big events has recently occurred, creating certain changes. Valuations of nontraded REITs have even gone down by 50%.

Unfortunately, many investors are not given a clear picture of the risks involved in non-traded REIT investments. This can lead to suspension of dividends, illiquidity, and huge REIT losses. Many investors of non-traded REITs were told they would be getting steady dividend income, as well as stock prices that wouldn’t fluctuate too much. That non-traded REITs are accompanied by commissions, larger broker fees, suspended buyback programs, and dividend cuts may come as a surprise.

Blue Vault Partners and The University of Texas at Austin McCombs School of Business Release Results from Performance Study of Nontraded REITs, PRWeb, August 28, 2012

Most nontraded REITs underperform market, Investment News, June 10, 2012

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

Ex-Fannie Mae Executives Have to Defend Against SEC Lawsuit Over Their Alleged Involvement in Understating Mortgage Company’s Exposure Risk

Published on: August 25, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Southern District of New York has decided that ex-Federal National Mortgage Association executives do have to contend with a Securities Exchange Commission enforcement lawsuit over their alleged role in underplaying just how exposed the company was to high risk loans. Ex-Fannie Mae (FNM) CEO Daniel Mudd, former single family mortgage business EVP Thomas Lund, and ex-chief risk officer Enrico Dallavecchia had sought to have the lawsuit dismissed because they said that the Commission failed to make its case against them. Judge Paul Crotty has denied their motion.

The SEC claims that former Fannie Mae executives misled investors about the actual degree to which the company was exposed to “Alt-A” loans and subprime loans when they failed to reveal this information in the mortgage firm’s public disclosures. As a result, Fannie Mae understated its mortgage exposure risk by hundreds of billions of dollars.

The defendants had countered that because Fannie Mae is an independent establishment of this country, per the 1934 Securities Exchange Act’s Section 3(c), government agencies are protected from liability. Crotty, however, did not agree Fannie Mae did not fall under the “independent establishment” category seeing that it is a private corporation, run by a board, did not get federal funding, and traded stock in public.

Securities Lawsuit Against Options Clearing Corporation and Chicago Board Options Exchange Can Proceed Says Illinois Appellate Court

Published on: August 24, 2012 | by Shepherd Smith Edwards & Kantas, LLP

In a divided 2-1 ruling, the Illinois Appellate Court has decided that Platinum Partners Value Arbitrage Fund LP can sue the Chicago Board Options Exchange and the Options Clearing Corporation for allegedly telling certain traders about a downward adjustment made to the price of certain mutual fund options. The ruling reverses a lawyer court’s decision and concludes that the two SROs did not act in a regulatory capacity when they privately revealed this information to certain John Doe defendants before the news was made public.

Platinum Partners Value Arbitrage Fund, which is a hedge fund, contends that in late 2010, it bought 50,000 India Fund Inc. (IFN) options from the John Does. Soon after, Options Clearing Corporation and Chicago Board Options Exchange decided to downgrade the India Fund’s series option contracts strike price by $3.78. An employee at one of the SRO’s allegedly told certain market participants about this adjustment before the public was notified.

The hedge fund then proceeded to file a securities fraud lawsuit against Chicago Board Options Exchange and Options Clearing Corp. accusing them of Illinois statutory and common law violations, while contending that they caused it to suffer harm because it bought the IFN options right before the price adjustment was publicly disclosed. The two organizations countered that as SROs, they were immune from such lawsuits. The lower court agreed with their claim of immunity.

The appellate court, however, disagrees. In his majority opinion, Circuit Judge Robert E. Gordon stressed that SROs are not completely immune from lawsuits and that absolute immunity only stands when the alleged conduct in question is one that is a disciplinary, regulatory, or quasi-governmental prosecutorial function. The court noted that while the plaintiff acknowledged that the decision to change IFN’s strike price was a regulatory one, how the change was disclosed-early and in in private to the John Doe defendants-wasn’t and didn’t serve a purpose that was governmental or regulatory. Seeing as SROs, in addition to fulfilling quasi-governmental duties also have a for-profit business that is private, the court found that when the private disclosure was made to the John Doe defendants, Chicago Board Options Exchange and Options Clearing Corp. were behaving in a “private capacity and for their own corporate benefit.” As a result, the non-public notification to the John Doe defendants cannot be considered conduct under the 1934 Securities Exchange Act’s delegated authority and therefore “cannot be protected by the doctrine of regulatory immunity.”

Judge Gordon also determined that Platinum Partners did a sufficient job of stating a claim, under the Illinois Consumer Fraud Act, that disclosing the price adjustment in private was a “material omission and a deceptive act” by the two SROs. The hedge fund claimed that the two organizations meant for the rest of the market to depend on the fact that the information hadn’t been already privately disclosed to anyone. The judge said that the deception occurred during commerce and trade and was the proximate cause of damage to the plaintiff.

Platinum Partners Value Arbitrage Fund LP v. Chicago Board Options Exchange, Ill. App (PDF)

Chicago Board Options Exchange

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Montford Associates to Pay $650,000 in Securities and Exchange Commission Penalties Over Failure to Disclose Payments from Hedge Fund, Institutional Investor Securities Blog, May 1, 2008 Continue Reading ›

FINRA Seeking to Create a Bigger, More Diverse Arbitrator Roster

Published on: August 23, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to the Financial Industry Regulatory Authority ‘s lead arbitrator recruiter, the self-regulatory organization is taking active steps to create a roster of arbitrators that is not only larger than its current one, but also more professionally and culturally diverse. Barbara Brady spoke at a Practicing Law Institute seminar this month.

Arbitrators are who that preside over FINRA arbitration cases on numerous matters, including financial fraud claims by investors and broker-brokerage firm disputes. Last year, arbitrators made more than 1,270 securities arbitration decisions that led to over $19 million in repayment to investors, over $63 million in fines, and 475 broker suspensions. Only a court can overturn an arbitrator’s securities ruling and this would have to be due to extenuating circumstances.

“Outcomes in arbitration vary greatly based on the quality of the arbitrators,” said William Shepherd, a Houston-based attorney, whose firm has represented investors in more than 1,000 arbitration claims over the past twenty years. “If securities arbitration is to have any integrity at all FINRA must make certain that the arbitrator decides cases fairly.”

Choosing who should be named an arbitrator can lead to disagreement over how much securities industry/brokerage firm experience or ties a candidate should have. For example, while an arbitrator who used to be a broker or a securities attorney may have certain technical expertise and experience that could prove helpful in deciding a case, he/she may also be biased.

“Having savvy arbitrators may streamline the process a bit with less reliance on expert testimony,” said Shepherd, “but it is difficult for such arbitrators to understand the lack of understanding of investments by the ordinary investor. I often point to my client’s own experiences to demonstrate this to arbitrators. For example, my client’s understanding of machinery at his workplace keeps him from getting hurt, but if you walked into that factory you might be killed the first day. It’s not that you’re stupid, just that you lack experience in that environment. The dangers of investing were foreign to my client. That is why he or she hired an expert. ”

Securities panels with three arbitrators usually handle arbitration disputes when over $100,000 is involved. Customers are allowed to opt for two of the three arbitrators or all three of them to not have a securities industry background. That said, just because someone is a non-industry arbitrator doesn’t mean he/she lacks biases.

While FINRA chooses not to reveal the demographics of its arbitrator pool, Brady claims that the SRO does try to select a diverse range of arbitrators from different backgrounds. She said FINRA is making an effort to make sure that women, minorities, and professors of economics, law, and real estate are represented.

Who makes a good arbitrator?, Reuters, August 20, 2012

Arbitrator Appointment Frequently Asked Questions, FINRA

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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