Investor Lawyers Blog

Institutional Investment Securities Round-Up: Citigroup Agrees to $3.5M FINRA FIne Related to Subprime RMBS, Ex-Broker Consents to $600K CFTC Fine Over Alleged Options Trading Scam, and Senate Ag Chair Presses Regulators To Fully Implement Dodd-Frank

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

Citigroup Global Markets Inc. (CLQ) has consented to pay the Financial Industry Regulatory Authority a $3.5M fine to settle allegations that he gave out inaccurate information about subprime residential mortgage-backed securities. The SRO is also accusing the financial firm of supervisory failures and inadequate maintenance of records and books.

Per FINRA, beginning January 2006 through October 2007, Citigroup published mortgage performance information that was inaccurate on its Web site, including inaccurate information about three subprime and Alt-A securitizations that may have impacted investors’ assessment of subsequent RMB. Citigroup also allegedly failed to supervise the pricing of MBS because of a lack of procedures to verify pricing and did not properly document the steps that were executed to evaluate the reasonableness of the prices provided by traders. The financial firm is also accused of not maintaining the needed books and records, including original margin call records. By settling, Citigroup is not denying or admitting to the FINRA securities charges.

In other institutional investment securities news, in U.S. District Court for the Southern District of New York, Kent Whitney an ex-registered floor broker at the Chicago Mercantile Exchange, agreed to pay $600K to settle allegations by the Commodity Futures Trading Commission that he made statements that were “false and misleading” to the exchange and others about a scam to trade options without posting margin. The CFTC contends that between May 2008 and April 2010, Whitney engaged in the scam on eight occasions, purposely giving out clearing firms that had invalid account numbers in connection with trades made on the New York Mercantile Exchange CME trading floors. He is said to have gotten out of posting over $96 million in margin.

SEC Charges New York-Based Fund Manager and His Two Financial Firms Over Alleged $11M Ponzi Scheme

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

The Securities and Exchange Commission has filed charges against fund manager Jason J. Konior and his Absolute Fund Management and Absolute Fund Advisors for running a Ponzi-like investment scheme that was supposed to maximize investors’ profits and instead allegedly funneled $2 million of clients’ money to pay for earlier investors’ redemption requests, as well as business and personal expenses. The SEC is charging Konior and his two firms with violating the Securities Exchange Act of 1934’s antifraud provisions. The Commission is seeking financial penalties, permanent injunctive relief, and disgorgement of ill-gotten gains.

According to SEC, beginning at least last November, Konior and the two firms raised about $11 million from investors by selling them Absolute Fund LP limited partnership interests. Konior allegedly touted this investment vehicle as having $220 million in trading capital. He and his two companies also allegedly made false claims that the fund would contribute millions of dollars as a promised match to clients’ investments (Konior had told investors that Absolute would put in up to nine times what they originally contributed), combine new investors’ money with its principal, and put their cash in brokerage accounts that investors could use to trade securities through. This “first loss” trading program investors was supposed to allow investors to significantly up their potential profits.

Per Absolute Fund Advisors’ marketing collateral, Absolute would give seed capital allocations to emerging and new hedge funds, which would then buy limited partnership interests in the fund. Absolute was supposed to match the investments by an up to 9:1 ratio. This means that if a hedge fund invested $1 million in Absolute then the fund would match it with $9 million, which means there would be $10 million in investment capital.

Absolute was to put this mix of funds in a brokerage firm sub-account to be managed by the hedge fund investor. Per the “first loss model” trading losses in the sub-account would be 100% allocated to the hedge fund investor up to the sum of its capital contribution. The hedge fund investor was then supposed to get 50-70% of trading profits.

Unfortunately, this trading program that was promised never went into operation. The investment fund not only neglected to match investors’ funds but also it failed to return their money when they asked to withdraw their investments.

Last week, the SEC secured an asset freeze order against Konior and his two companies. All three parties have consented to this order without denying or admitting to the securities charges. The Commission says that the current assets of Absolute are only a “fraction” of how much investors are still owed.

SEC Shuts Down $11M Ponzi Scam, May 25, 2012

Read the complaint (pdf)

More Blog Posts:
Dallas Man Involved in $485M Ponzi Scams, Including the Fraud Involving Provident Royalties in Texas, Gets Twenty Year Prison Term, Stockbroker Fraud Blog, May 8, 2012
Texas Securities Fraud: State Law Class Action in R. Allen Stanford’s Ponzi Scam Not Barred by SLUSA, Stockbroker Fraud Blog, March 28, 2012
Alleged Ponzi-Like Real Estate Investment Scam that Defrauded Victims of $9M Leads to SEC Charges Against New Jersey Man, Institutional Investor Securities Blog, May 24, 2012 Continue Reading ›

Apple REIT Arbitration: FINRA Rules Against David Lerner Associates in First of Hundreds of Cases

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

Financial Industry Regulatory Authority Inc. arbitrator Alvin Green is ordering David Lerner Associates Inc. to pay claimants Florence Hechtel and Joseph Graziose $24,450 for the Apple REITs that they bought from the firm. They will get the money after returning the Apple REIT 9 shares to the company. The Apple REIT is the 14th largest nontraded real estate investment trust in the US. David Lerner & Associates also will have to reimburse them their $425 FINRA claim filing fee.

According to Graziose and Hechtel, the financial firm misrepresented the Apple REIT 9, as well as breached its fiduciary duty and contract to them. Other Apple REIT investors have made similar claims. However, of the hundreds of arbitration claims (there are also securities lawsuits) that have been pending, this is the first one to go to hearing.

Per FINRA, since 1992 David Lerner & Associates has sold close to $7 billion in Apple REITs, making about $600 million in revenue from the sales (60-70% of the firm’s business since 1996). It is the only distributor of Apple REITs.

Last year, the SRO charged the financial firm with soliciting investors to buy Apple REIT Ten shares (a $2 billion non-traded REIT) without performing a reasonable investigation to make sure the REITs were suitable for these clients. Many of its Apple REIT investors are not only unsophisticated investors but also they are elderly. David Lerner & Associates also allegedly offered misleading information about the distribution online.

Several months ago, FINRA also sued firm owner David Lerner for similar alleged misconduct, including misleading clients about the valuation and risk involved in their Apple REIT Tens. The complaint against Lerner follows statements he is accused of making to investors after FINRA made its charges against the financial firm.

Per the amended complaint, Lerner wrote to over 50,000 clients to “counter negative press.” This letter also talked about a potential opportunity for Apple REIT shareholders to take part in a listing or a sale on a national exchange to get rid of their shares at a reasonable price. Also, at a seminar he hosted Lerner allegedly made statements to investors that were misleading.

For the last nine months, our REIT lawyers at Shepherd Smith Edwards and Kantas, LTD, LPP has been investigating claims on behalf of investors who sustained losses in Apple Real Estate Investment Trusts that they bought from David Lerner Associates. For many investors, these non-traded REITs were unsuitable for them.

First Apple REIT case goes against Lerner, Investment News, May 23, 2012

FINRA Charges David Lerner & Associates With Soliciting Investors to Purchase REITs Without Fully Investigating Suitability; Lerner Marketed REITs on its Website With Misleading Returns, FINRA, May 31, 2011

More Blog Posts:
David Lerner & Associates Ignored Suitability of REITs When Recommending to Investors, Claims FINRA, Stockbroker Fraud Blog, June 8, 2011

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

Shepherd Smith Edwards and Kantas LLP Pursue Securities Fraud Cases Against Merrill Lynch, Pierce, Fenner, & Smith, Purshe Kaplan Sterling Investments, and First Allied Securities, Inc., Stockbroker Fraud Blog, May 10, 2012 Continue Reading ›

SEC Practice of Settling Enforcement Actions Without Requiring Defendants to Deny or Admit to Allegations Gets Support from Federal Judges and Democrats

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

At a House Financial Services Committee hearing on May 17, a number of Democratic lawmakers spoke out against the Securities and Exchange Commission’s practice of settling securities enforcement actions without making defendants deny or admit to the allegations. There is concern that companies might see this solution as a mere business expense.

The hearing was spurred by U.S. District Court for the Southern District of New York Judge Jed Rakoff’s rejection of the SEC’s $285 million securities settlement with Citigroup (C) over its alleged misrepresentation of its role in a collateralized debt obligation that it marketed and structured in 2007. Citigroup had agreed to settle without denying or admitting to the allegations.

Rakoff, however, refused to approve the deal. In addition to calling for more facts before the court could accurately judge whether or not to approve the agreement, he spoke out against the SEC’s policy of letting defendants off the hook in terms of not having to deny or admit to allegations when settling. The U.S. Court of Appeals for the Second Circuit later went on to stay Rakoff’s ruling that SEC v. Citigroup Global Markets, Inc. go to trial.

Securities Law Roundup: Ex-Morgan Stanley’s SEC Settlement Over Alleged FCPA Violations Gets Court Approval, Corruption Probe Into Wal-Mart’s Mexico Activities Continue, and Sentry Global Securities Principal Gets 20-Years for Pump-and-Dump Scam

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

A district court has approved ex-Morgan Stanley (MS) executive Garth Peterson’s civil settlement with the Securities and Exchange Commission over alleged Foreign Corrupt Practices Act violations. In SEC v. Garth Peterson, the plaintiff agreed to pay $241,589 in disgorgement and give up his interest in an apartment building in China. He is to work with an SEC-appointed receiver. Peterson has entered a guilty plea to related criminal charges.

According to the Commission, while working at Morgan Stanley’s real estate investment and fund advisory business, Peterson secretly obtained real estate investments worth millions of dollars from the financial firm’s funds not just for himself but also for others, including the ex-chairman of a Chinese state-owned entity that could influence Morgan Stanley’s real estate business in that country. Peterson, the official, and a Canadian lawyer are accused of acquiring a direct interest in the Jin Lin Tiandi Serviced Apartments. The Commission has said that Peterson violated the FCPA’s anti-bribery and internal control provisions, as well as aided and abetted violations of the 1940 Investment Advisers Act’s antifraud provisions.

In other allegations of Foreign Corrupt Practices Act violations, Wal-Mart (WMT) is accused of not just committing them but also of covering up its alleged misconduct. An investigation into the accusations was opened up in April.

Wal-Mart executives are accused of concealing possible corruption (including bribery) by company executives and officials in Mexico, where the retail chain has been working to build its presence. Now, House Energy and Commerce Committee ranking member Henry Waxman (D-Calif.) and House Oversight Committee ranking member Elijah Cummings (D-Md.) want the store’s CEO Michael Duke to let a former general counsel cooperate with their investigation.

In a letter to Duke, the two lawmakers said that there are several hundred internal documents that seem to confirm early reports of the scandal. At the time of the alleged cover up, then-Wal-Mart general counsel Maritza Munich had tried to get company’s board to expand its probe into the accusations and put into place a tough anticorruption policy. However, when she left Wal-Mart in 2006, Albert Mora, the person who replaced her, chose not to investigate further. Now, Waxman and Cummings want Wal-Mart to allow Munich to get involved in the current probe. They also are once more putting forward an earlier request that the retail giant give them a “substantive briefing” about the specific bribery allegations related to Mexico.

Meantime, Sentry Global Securities and Red Sea Management principal Jonathan Curshen has been sentenced to two decades behind bars for his conviction in a pump and dump stock manipulation scheme. He was found guilty of wire fraud, conspiracy to commit securities fraud, mail fraud, and conspiracy to commit international money laundering. He also has to forfeit about $7.3 million.

Curshen, stock promoter Nathan Montgomery, and their co-conspirators are accused in taking part in coordinated trades while with issuing false statements to the press. According to the US Department of Justice, the alleged misconduct, which is said to have occurred in 2007, was committed to raise the price of C02 Technologies stock. While co-conspirators “pumped,” Curshen and others “dumped” by selling the shares through his two Costa Rica brokerage companies. The shares then virtually lost all their value.

SEC v. Garth Peterson

Foreign Corrupt Practices Act, US DOJ
Read the letter to lawmakers’ Wal-Mart CEO Duke, BNA, (PDF)

CO2 Tech’s Curshen receives 20 years in jail, Stockwatch, May 14, 2012

More Blog Posts:
SEC Issues Alert for Broker-Dealers and Investors Over Municipal Bonds, Man Who Posed As Investment Adviser Pleads Guilty to Securities Fraud, and Citigroup Settles FINRA Claims of Excessive Markups/Markdowns, Stockbroker Fraud Blog, April 10, 2012

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

SEC Seeks Approval of Settlement with Ex-Bear Stearns Portfolio Managers, Credits Ex-AXA Rosenberg Executive for Help in Quantitative Investment Case; IOSCO Gets Ready for Global Hedge Fund Survey, Institutional Investor Fraud, March 29, 2012 Continue Reading ›

Alleged Ponzi-Like Real Estate Investment Scam that Defrauded Victims of $9M Leads to SEC Charges Against New Jersey Man

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

The SEC has charged David M. Connolly with running a Ponzi-like scam involving investment vehicles that bought and managed Pennsylvania and New Jersey apartment rental buildings. According to prosecutors in New Jersey, Connolly’s alleged victims were defrauded of $9 million. He also faces criminal charges.

None of Connolly’s securities offerings were registered with the SEC. (Since 1996, he had raised more $50 million from over 200 clients who invested in over two dozen investment vehicles.)

Per the Commission’s complaint, in 2006 Connolly allegedly started misrepresenting to clients that their funds were to be solely used for the property linked to the vehicle they had in invested in when (unbeknownst to them) he actually was mixing monies in bank accounts and using their funds for other purposes. Although clients were promised monthly dividends from cash-flow profits that were to come from apartment rentals and their principal’s growth from property appreciation, these projected funds did not materialize. Instead, Connolly allegedly ran a Ponzi-like scam that involved earlier investors getting their dividend payments from the money of newer investors.

He also allegedly made materially false and misleading omissions and statements about: investors’ money being placed in escrow until a purported real estate transaction closed, the financial independence and state of each property, the amount of equity victims had in properties, and the condition of each property. (Also containing allegedly false material misrepresentations and omissions was the “offering prospectus,” which provided information about how the investment vehicles would use the investor funds, the projected investment returns, prior vehicles performances, the mortgage financials for the real estate held in the investment vehicles, and the apartment buildings’ vacancy rates.)

Connolly is accused of improperly using proceeds from refinanced properties to keep his scheme running, and he even allegedly took $2 million of investors’ funds for himself. After he stopped giving dividend payments to investors in April 2009 (when money from new investors stopped coming in and the investment vehicles’ properties went into foreclosure), Connolly allegedly kept making sure he was getting dividends and a $250,000 income from the remaining client funds.

Meantime, a federal grand jury has charged him with one count of securities fraud, three counts of wire fraud, five counts of mail fraud, and seven counts of money laundering. A conviction for securities fraud comes with a 20-year maximum prison term and a $5 million fine. The other charges also come with hefty sentences and fines.

Read the SEC Complaint (PDF)

Multimillion-Dollar Real Estate Ponzi Schemer Indicted For Fraud And Money Laundering, Justice.gov, May 17, 2012

More Blog Posts:
Dallas Man Involved in $485M Ponzi Scams, Including the Fraud Involving Provident Royalties in Texas, Gets Twenty Year Prison Term, Stockbroker Fraud Blog, May 8, 2012

JPMorgan Chase $2B Trading Loss Leads to Probes by the SEC, Federal Reserve, and FBI, Institutional Investor Securities Blog, May 15, 2012

Whistleblower Sues SEC and FBI for Documents Into Commission’s Probe of Sempra Energy

Published on: May 22, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Whistleblower Rodolfo Michelon is suing the Federal Bureau of Investigation and the Securities and Exchange Commission in an effort to obtain records connected to the their probe into his employer, Sempra Energy (SRE). He believes that the SEC may have violated federal securities laws through the “outsourcing” of their investigation into Sempra’s alleged illegal activities to two law firms with “close ties” to the company.

Michelon had filed a whistleblower lawsuit with the Commission accusing Sempra of a number of record and books violations related to gas distribution clients in Mexico. Rather than conduct their own probes, he says that the two government agencies instead allowed the two law firms to investigate. After the firms found that Sempra did not violate securities laws, the FBI and the SEC ended their own investigations into the matter.

Michelon submitted Freedom of Information Act requests asking for certain documents and records related to the case last November and this January, and he says both agencies failed to satisfy his request. He is accusing the SEC of making its “Outsourcing Program” available to Fortune 500 companies,” the biggest financial institutions in the country, and their executives. Michelon contends that the program violates both mandates by Congress and public policy expressions “embodied the Securities Act of 1933,” as well as the Investment Company Act of 1940, the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, and the regulations and rules that implement the acts that direct and give the SEC the authority to handle its own probes into those suspected of violating these rules, regulations, and acts. He claims that the SEC “effectively nullified” the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act’s whistleblower provisions with their handling of the Synergy case.

Michelon’s complaint was filed pursuant to the legal theory applied in Aguirre v. SEC. In that FOIA lawsuit, the U.S. District Court for the District of Columbia found that the Commission behaved improperly and public interest in disclosure was greater than the privacy interests of individuals named records related to the SEC’s probe of insider trading that allegedly occurred at Pequot Capital, a hedge fund. The court ordered the Commission to give Gary Aguirre, a former SEC enforcement lawyer, the investigative files sans redactions.

Aguirre had contended that he was let go from the SEC in 2005 as punishment for insisting that a high profile figure in the Pequot investigation be deposed. He later used the records that he obtained to make the SEC reopen its probe into Pequot. In 2010, Pequot, which is now defunct, had to pay $28 million to settle insider trading charges field against it by SEC.

Michelon v. SEC, Justia Docket, April 24, 2012

Whistleblower Sues SEC For ‘Outsourcing’ Bribery Investigation To Sempra Favorite, KPBS, April 30, 2012

Aguirre v. SEC

Freedom of Information Act

More Blog Posts:
SEC Settles Wrongful Termination Lawsuit with Whistleblower Gary Aguirre for $755,000, Stockbroker Fraud Blog, July 15, 2010
ISS Probes Allegations that a Boston Employee Sold Shareholder Information, Stockbroker Fraud Blog, February 21, 2012

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

Senate Democrats Want Volcker Rule’s “JP Morgan Loophole” Allowing Portfolio Hedging Blocked

Published on: May 22, 2012 | by Shepherd Smith Edwards & Kantas, LLP

In a letter to the Federal Reserve Board, the Securities and Exchange Commission, the Commodity Futures Trading Commission the Office of the Comptroller of the Currency Administrator of National Banks, and the Federal Deposit Insurance Commission, Senators Jeff Merkley (D-Ore.) and Carl Levin (D-Mich.) spoke out against what they are calling the current draft of the Volcker rule’s “JPMorgan loophole,” which they say allows for the kinds of trading activities that resulted in the investment bank’s recent massive trading loss. Merkley and Levin want the regulators to make sure that the language in October’s draft version is more stringent so that “clear bright lines” exist between legitimate activities and proprietary trading activities that should be banned (including risk-mitigating hedging and market-making).

According to Levin and Merkley, who are both principal co-sponsors of the Volcker rule and its restrictions on proprietary trading, the regulation’s latest draft disregarded “clear legislative language and clear statement of Congressional intent” and left room for “portfolio hedging.” Under the law, risk-mitigating hedge activities are allowed as long as they aim to lower the “specific risks” to a financial firm’s holdings, including contracts or positions. This is supposed to let banks lower their risks by letting them to take part in actual, specific hedges. However, the senators are contending that because the language that was necessary to enforce wasn’t included in the last draft, hence the “JPMorgan loophole” (among others) that will allow proprietary trading to occur even after the law goes into effect. They blame pressure from Wall Street lobbyists for these gaps.

The senators are pressing the regulators to get rid of such loopholes and put into effect a solid Volcker Rule, with stricter language, and without further delays. They noted that despite getting trillions of dollars in public bailout money, a lot of large financial firms continue to fight against the “most basic… reforms,” which is what they believe that Wall Street has been doing with its resistance to the Volcker rule. (Also in their letter, Levin and Merkley reminded the regulators that it was proprietary trading positions that resulted in billions of dollars lost during the recent economic crisis.)

SSEK Talking to Investors About JPMorgan Trading Losses
JPMorgan Chase‘s (JPM) over $2 billion loss was on a series of complex derivative trades that it claims were made to hedge economic risks. Now, according to a number of people who work at trading desks that specialize in the kind of derivatives that the financial firm used when making its trades, the financial firm’s loss has likely grown to closer than $6 billion to $7 billion.

Volcker Rule Resource Center, SIFMA

More Blog Posts:

JPMorgan Chase Shareholders File Securities Lawsuits Over $2B Trading Loss, Institutional Investor Securities Blog, May 17, 2012

SEC Chairman Mary Schapiro Stands By Agency’s 2011 Enforcement Record https://www.investorlawyers.com/our-staff.html, Stockbroker Fraud Blog, March 15, 2012

Ex- NAPFA Chairman Indicted by Grand Jury and Sued by SEC For Allegedly Diverting $47.7M of Investors’ Funds Into His Own Start-Ups

Published on: May 19, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has filed a civil lawsuit against former National Association of Personal Financial Advisors Mark Spangler for allegedly bilking clients by secretly investing $47.7 million of their money in two start-ups that he co-founded. These were risker investments than if he had kept their money in the mostly publicly traded securities, which is where he told clients their funds were going. The investment strategy that he actually employed allegedly was not in line with their investment goals and they ended up losing millions.

Also going after Spangler is the government. A federal grand jury just Spangler indicted him over these allegations. He now faces 23 criminal counts, which include charges of fraud and money laundering. U.S. Attorney Jenny Durkan said the government was working closely with the SEC to make sure that he was held accountable.

Per the SEC’s complaint, starting around 2003 through 2011, Spangler and his advisory firm The Spangler Group (TSG) started putting most of their clients’ money, which had been in the private investment funds that he managed, into two private technology companies. He did not notify investors of this move.

JPMorgan Chase Had No Treasurer When Chief Investment Office Made Trades Resulting In More than $2B Loss, Reports WSJ

Published on: May 19, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to the Wall Street Journal, during five of the months when JPMorgan Chase’s (JPM) Chief Investment Office made the trades that has led to over $2 billion in losses, the financial firm lacked a treasurer. Also, the executive appointed to head up department’s risk management might not have had the necessary experience to do the job. A few ex- and current employees of the financial firm have alluded to poor decisions in staffing as a reason that bad positions were allowed to go unchecked.

Apparently, until the appointment of Sandie O’Connor as treasurer was announced in March, the last person to hold that position was Joseph Bonocore. He left the financial firm in October 2011, which was before trading losses soared. Prior to leaving, he expressed general worries about risks that were being made by the JPMorgan’s London office, which is where many of the questionable trades originated. (He also had previously served as the investment unit’s chief financial officer for about 11 years.) Now, questions are being raised by those on the outside as to how a bank as big as JPMorgan could go so long without a treasurer.

As for its chief risk officer, Irving Goldman, he is related by marriage to JPMorgan executive Barry Zubrow. Goldman was moved into the post this February, one month after Zubrow was made the bank’s chief of corporate regulatory affairs. Goldman’s background in trading is extensive. He previously worked for Salomon Brothers, Credit Suisse First Boston, and Cantor Fitzgerald (CANTRP), where he also was president of its asset management and debt capital markets divisions. A JPMorgan spokesperson defended Goldman’s professional background, saying it wasn’t uncommon for a risk manager to be heavy on trading experience.