Investor Lawyers Blog

SEC to Push for Money Market Mutual Fund Reform Provisions Despite Opposition

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

According to Securities and Exchange Commission Division of Investment Management deputy director Robert Plaze, the division is ready to recommend new reforms for mutual market funds as soon as Chairman Mary Schapiro gives the go ahead. Plaze spoke to reporters following at panel at the Mutual Fund Directors Forum’s yearly policy conference in DC on June 19. He was clear to note that the opinions he expressed are his own. On June 21, Schapiro said that she plans to wait until later in July to decide whether to push the division’s recommendations to a commission vote.

While lawmakers and industry members disagree, Schapiro has stayed firm in her belief that money market funds are risky and require more reforms beyond the changes to MMF requirements that the Commission signed off on in 2010. Among the options to increase money market fund resiliency that staff has been considering are mandating capital buffers accompanied by redemption limits or fees or transferring the funds from their fixed $1 net value asset to a floating one.

However these reform measures, even without their formal proposal, are already being heavily criticized. Some are worried that the potential measures might cause investors to abandon the products and sponsors to leave the industry. These critics generally believe that the changes that were made to SEC regulations in 2010 have been sufficient to strengthen the funds’ framework. For example, the Commission amendment to the 1940 Investment Company Act’s Rule 2a-7 improved fund disclosures while limiting fund risks.

Will the JOBS ACT Will Expand Private Offerings But Hurt Public Markets?

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

Participants at the D.C. Bar panel on June 21 talked about whether the Jumpstart Our Business Startups Act is going to increase private placements but at a cost to public markets. The JOBS Act, which was enacted in April, facilitates the IPO process for emerging growth companies, ups the threshold for activating registration requirements, creates, under Regulation A, new exempt securities of up to $50 million, and gets rid of the general advertising and solicitation restrictions for Regulation D Rule 505 offerings.

Meantime, Attorney Tyler Gellasch, who is Sen. Carl Levin’s (D-Mich.) counsel (he was clear to articulate that his views are his own and don’t necessarily reflect the opinions of the senator), also said that he doesn’t expect there to be a lot of IPOs with this easing of rules for private offerings. He noted that while changes to Reg D Rule 506’s offerings would broaden the world of private securities, the greater threshold now provided for issuer registrations under the 1934 Securities Exchange Act has “significantly” reduced the impetus for going public.

Gellasch believes that many investors have become mistrusting of IPOs in the wake of so many of them lately not performing well upon completion of their first year. The controversies this year involving the IPOs of Facebook (FB) and BATS Global Markets Inc. haven’t helped.

He also talked about how Congress failed to perform its own cost-benefit analysis when it enacted the statute and that no extensive hearings took place about the new requirements. Among the unforeseen circumstances that have already developed are the efforts that have been made reverse merger companies to employ the on-ramp provisions to obtain a foothold in US markets.

Gellasch said that JOBS Act brings up questions that it fails to answer, such as whether the benefits that the act creates for some entities should also be given to other entities that are similar and involved in analogous circumstances. (For example, while mutual fund advertising continues to be very regulated, hedge funds are getting to avail of fewer restrictions imposed on their advertising.) He also wondered about who is now responsible for supervising Rule 506 offerings, determining whether advertisements and solicitations are accurate, and ensuring that offerings don’t turn into boiler rooms as they relate to the act’s crowdfunding provisions.

Gellasch wants to know who will now be liable for investor losses.

The JOBS Act (PDF)

More Blog Posts:

Should Retail Investors Be Given Greater Access to IPO Information?, Stockbroker Fraud Blog, June 29, 2012

JPMorgan Chase Brokers Say the Financial Firm Prioritized Sales Over Investors’ Needs

Published on: July 5, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to a number of its current and former brokers, as JPMorgan Chase (JPM) was growing into one of the largest mutual fund managers in the country, it was placing a greater emphasis on sales than it was on the needs of its clients. These financial advisors say that JPMorgan encouraged them on occasion to promote its products over competitors even when what the others were offering was less expensive or had been performing better.

The New York Times, which wrote a news report about the brokers’ claims, says that if these allegations are true then the benefit to JPMorgan is obvious. The more money investors put into the investment bank’s funds the greater the fees it collects for managing the funds. One ex-JPMorgan employee, Geoffrey Tomas said he frequently would sell JPMorgan funds with poor performance records for the sole purpose of making the financial firm more money. Thomas now works with Urso Investment Management.

JPMorgan is one of a number of investment banks that turned to retail investors in the wake of the economic crisis. UBS (UBS) and Morgan Stanley (MS) have also attempted to target mom and pop investors. The Times says that JPMorgan’s approach is to concentrate on selling funds of its own creation. This is a practice that many companies, who don’t want to be thought of as having conflicts of interest, have decided to abandon.

NYSE Euronext Head Wants SEC to Revive Rule Proposal Enhancing Dark Pool Transparency

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

NYSE Euronext (NYX) CEO Duncan Niederauer wants the Securities and Exchange Commission to act on a rulemaking proposal from 2009 that seeks to improve transparency in “dark pools.” Testifying in front of a House Financial Services Committee panel, Niederauer talked about how the dramatic increase in off-exchange trading has resulted in a U.S. equity market structure that continues to become more bifurcated. During the June 20 hearing, held by the committee’s Capital Markets Subcommittee, participants looked at the U.S. equity market structure and how it affects competition and innovation.

Dark pools, which are off-exchange private trading venues that don’t show quotes to the public, are involved in about 15% of off-exchange trading. It was in 2009, even before the flash crash of May 6, 2010 that the SEC issued a proposal that would expose dark pools by making certain actionable order information subject to SEC quoting requirements. (The proposal also would substantially reduce the threshold volume that activates public display obligations for ATSs from 5% to .25%.)

At the hearing, Niederauer pressed regulators and policy makers to even matters out between alternative trading systems and exchanges, while recommending the fair distribution across all trading pools of regulatory costs. He also suggested that national exchanges be given permission to avail of lighter disclosure requirements under Regulation ATS (Alternative Trading System), which regulates non-exchange trading venues.

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

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

In Dallas County Court, 11 investors are suing Morgan Stanley Smith Barney and its financial adviser Delsa Thomas for bilking them in an alleged Texas Ponzi scam. They say that Thomas “took advantage of their trust in her when she suggested that they invest in Tejas Eagle Financial LLC. (She gave them the choice of investing $250,000 or $125,000.) They invested hundreds of thousand dollars of their retirement money and savings.

The plaintiffs contend that the financial firm breached its duty of care to them by allowing Thomas to give them unsuitable financial advice that “would destroy their investments.” They are seeking damages for negligent misrepresentation, fraud, negligent supervision, and vicarious liability.

In other Texas securities news, ex-Stanford Financial group chief investment officer Laura Pendergest Holt has pled guilty to charges that she obstructed the SEC’s probe into Stanford International Bank, which was owned by Ponzi scammer Robert Allen Stanford. Holt, who testified before the Commission about SIB’s investment portfolio, now admits that she did so as a “stall tactic” to impede the agencies efforts to get key information. Stanford is behind bars for running a $7 billion Ponzi scam.

Ex-Money Concepts Registered Representative Faces SEC Charges For Running Astrology-Influenced Ponzi Scam

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

The Securities and Exchange Commission is charging Gurudeo “Buddy” Persaud,” an ex-Money Concepts registered representative, with financial fraud. The SEC alleges that while running a Ponzi scam involving transactions influenced by his astrological beliefs, Persaud lost $400,000 of investor money in trades while diverting at least $415,000 to cover his personal spending. The Commission is seeking Persaud’s alleged ill-gotten gains and wants injunctive relief and financial penalties imposed against him. (A spokesperson for Money Concepts, which is based in Florida, says that none of the investors that were bilked in the scam were its clients at the time.)

According to the SEC, Persaud believes that the gravitational forces of the earth can influence stock prices, while the moon can make people feel like selling their securities. When he made trading decisions between 6/07 and 1/10, he is accused of mainly depended on an online service that offers directional market forecasts according to the earth’s gravitational pull and the moon’s cycles. Clients were not aware that he was using astrology to make trades.

Persaud raised about $1 million from 14 investors, while drawing in investments through White Elephant Trading Co., his now defunct company that sold and offered securities in investment contract form for its supposed private equity fund. The Commission says that to hide his involvement with White Elephant, Persaud appointed two of his sons as its only managing members even though he was the one who ran the company, made all trading decisions, controlled is bank and brokerage accounts, and had contact with its clients.

Persaud’s alleged victims included family and friends, who were told that their money would be placed in stock, debt, real estate markets, and futures and bring in 6-18% percent returns. The Commission says that Persaud used investors’ money to pay other investors while he generated bogus account statements to make clients feel secure and conceal trading losses. He promoted the fund as an investment opportunity that was a risk-free/low risk way to make high returns within a short time frame, while presenting White Elephant as employing strict financial management strategies.

One investor who was allegedly told he would get an 18% return at year’s end gave Persaud $50,000. Another prospective client received a marketing document called the White Elephant Trading Co. LLC, Conservative Fixed Income Fund that said White Elephant planned to raise up to $10 million and built Persaud up as an experienced, licensed certified financial planner. The Commission contends that Persaud violated sections of the Securities Act of 1933, the Securities Exchange Act of 1934, Exchange Act Rule 10b-5, the Investment Advisers Act, and Advisers Act Rules (2) and 206(4)-8(a)(1).

SEC Charges Rep for Running Astrology-Based Ponzi Scheme, Financial Planning, June 21, 2012

Read the SEC Complaint (PDF)

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Should Retail Investors Be Given Greater Access to IPO Information?

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

At a Senate Banking Subcommittee hearing last week, the topic of whether retail investors should get more access to IPO information to even out the initial public offering process for both institutional and ordinary investors was discussed. One of the reasons the hearing was called was to look at the issues involving the recent IPO of Facebook (FB), which opened on the Nasdaq a few weeks ago.

There are some who believe that the social networking giant’s underwriters gave favored clients negative material information prior to the offering while leaving other investors out in the cold. Soon after trading began, Facebook shares declined sharply. At the hearing, Securities Subcommittee chairman Sen. Jack Reed (D-RI) spoke about the need to make sure that ordinary investors and sophisticated investors are subject to the same rules, including providing everyone with access to the same disclosures and data (or, at the very least, equivalent versions of both).

Among the witnesses who support giving retail investors more access to information about IPO’s is DePaul University finance professor Ann Sherman. She suggested making issuers publish online at least two Q and A sessions from the IPO road show so that retail investors would be getting the same amount of information as the typical institutional investor that usually attends one such meeting. While she acknowledged that there are reasonable grounds for limiting how much access is given to analyst forecasts that tend to be “speculative,” she said that lawmakers should either make this data available to no one or to everyone.

Harbinger Capital Partners LLC and Hedge Fund Adviser Philip A. Falcone Face SEC Securities Charges Over Client Asset Misappropriation and Market Manipulation Allegations

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

The SEC has filed securities charges against Harbinger Capital Partners LLC and its owner Philip A. Falcone. The SEC is accusing them of a number of charges, including engaging in market manipulation and client asset misappropriation. Also facing SEC charges for allegedly helping them is former Harbinger COO Peter A. Jenson.

The Commission accused Falcone, who is a hedge fund adviser headquartered in New York, of paying his taxes with fund assets, getting involved in a “short squeeze” that was not legal to manipulate the prices of bonds, and secretly favoring some clients to the disadvantage of other clients. The SEC contended that after short selling equity securities during a period that was restricted, Harbinger then illegally purchased the same ones in a public offering.

The Commission claims that rather than use legal means to cover the $113.2M in personal taxes that he owed, Falcone fraudulently used fund assets by borrowing that amount from Harbinger Capital Partners Special Situations Fund, L.P. (investors had been suspended from redeeming from this fund). The regulator says that all of this was done without investors’ permission.

The Commission also contends that Harbinger and Falcone waited about five months to reveal the loan because they were worried that making the hedge fund adviser’s financial state known could negatively impact both investors’ withdrawals and Falcone’s ability to bring in more investments for the other Harbinger funds.

The SEC is accusing Harbinger and Falcone, with Jenson’s help, of making a number of key omissions and misrepresentations in getting legal counsel and when communicating with investors about: the financing options that had been available to Falcone, the reasons why he needed the loan, the fund’s ability to not harm investors while covering the loan, the loan’s conditions and terms, and the part that Harbinger’s legal counsel played. Falcone paid back the loan last year after the SEC started investigating this matter. In connection with this alleged scam, the SEC separately filed and settled cease-and-desist and administrative proceedings against Harbinger.

The Commission also filed another civil case contending that between ‘06 through early ‘08, two Harbinger entities and Falcone engaged in market manipulation of distressed high-yield bonds issued by MAXX Holdings Inc. The three of them allegedly took part in a “short squeeze” that was not legal and, on Falcone’s order, Harbinger bought a huge position in the bonds in 4/06 and 6/06.

When he heard rumors that a financial services firm was shorting the bonds and suggesting that its clients follow suit, Falcone allegedly decided to retaliate by telling the funds that were managed by Harbinger to purchase every bond that was available, which caused the funds’ stakes to go up about 13% more than what was actually available.

The financial services company and its clients were then told that they had to settle their MAAX short sales that were outstanding, which was not really possible given the circumstances. As the financial services company went on to bid for the bonds every day, the bond price doubled. Falcone is accused of then taking part in transactions, at prices that were both inflated and arbitrary, with a number of short sellers.

SEC Complaint: Harbinger Capital Partners LLC; Philip A. Falcone; and Peter A. Jenson (PDF)

SEC Complaint: Philip A. Falcone, Harbinger Capital Partners Offshore Manager, L.L.C., and Harbinger Capital Partners Special Situations GP, L.L.C. (PDF)

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Securities Law Roundup: Merrill Lynch Pays Customers $32M For Allegedly Overcharging Them with Unwarranted Fees, Brookstone Securities is Accused of $1.6M in Fraudulent CMO Sales to Elderly Retirees, and Planner Loses CFP Designation Following After Maine

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

The Financial Industry Regulatory Authority says that it is fining Merrill Lynch, Pierce, Fenner & Smith, Inc. $2.8M in the wake of certain alleged supervisory failures that the SRO says led to the financial firm billing clients unwarranted fees. The financial firm paid back the $32M in remediation to affected clients, in addition to interest.

According to FINRA, from 4/03 to 12/11, Merrill Lynch lacked a satisfactory supervisory system that could ensure that certain investment advisory program clients were billed per the terms of their disclosure documents and contract. As a result, close to 95,000 client account fees were charged.

Also, due to programming mistakes, Merrill Lynch allegedly did not give certain clients timely trade confirmations. These errors caused them to not get confirmations for over 10.6 million trades in more than 230,000 customer accounts from 7/06 to 11/10. Additionally, FINRA contends that Merrill Lynch failed to properly identify when it played the role of principal or agent on account statements and trade confirmations involving at least 7.5 million mutual fund buy transactions. By settling, Merrill Lynch is not denying nor admitting to the charges. It is, however, agreeing to the entry of FINRA’s findings.

Ponzi Scam Receiver Can Go Forward with Securities Claim Against Texas Investor Who Benefited From the Fraud

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

According to the U.S. District Court for the District of Utah, R. Wayne Klein, the receiver of a Ponzi scam involving Winsome Investment Trust and US Ventures can go ahead with his claims to get back money from an investor who received more than she had invested. Judge Dale A. Kimball rejected Houston restaurateur and caterer Nina Abdulbaki’s claims that the fraudulent transfer claims of the receiver were not timely and that she isn’t subject to personal jurisdiction in the district.

Per the court, Winsome sent nearly $25 million to US Ventures, which allegedly bilked investors while claiming to be involved in commodity trading. Robert Andres, who ran Winsome Investment Trust, is accused of soliciting Abdulbaki for money to take part in a commodity futures pool.

She put $65,000 into Winsome and between 6/31/07 and 3/28/08 she received payments of $92,250. However, the court says that during the time that Abdulbaki was paid this amount, Winsome was not solvent because it was being run as a Ponzi scam.

Finding no merit to her claims that she isn’t subject to personal jurisdiction, the court said that federal receiver statutes allow for “nationwide service of process for in personam as well as in rem jurisdiction.” It also found that Abdulbaki’s statute of limitations defense does not succeed on a number of grounds, including that for this case equitable tolling is allowed under the doctrine of adverse domination. Per the doctrine, the statute of limitations for an entity’s claim is tolled when the entity is dominated and controlled by individuals taking part in behavior that harms it. The court found that the doctrine applies to this case because Andres had sole control of Winsome until the receiver’s appointment removed him. Therefore, says the court, the statute of limitations was tolled until the appointment of the receiver and his claims are, as a result, timely. (Before Klein’s appointment, receivership entities would not have been able to avail of their legal rights.)

Commenting on the court’s decision, Texas securities lawyer William Shepherd said, “The claw-backs system used in these cases is grossly unfair and treats fraud victims as if they were perpetrators! Money received years ago has been spent on necessities, invested into homes, businesses, or used to pay taxes or make donations. Un-ringing such bells can be very harsh! Innocent persons often receive benefits from others’ wrongdoing. While others die, many who use drugs with unknown dangers receive benefits. Resort owners profit from lavish events to entertain government employees. Crooks pay top dollar for homes and cars and tip excessively. The list of innocent persons who benefit from crimes is very long. At the very least, those who benefit from Ponzi schemes should be allowed to retain the interest they would have earned or profits they could have made if their funds had been properly invested.”

Klein v. Abdulbaki, D. Utah, No. 2:11-CV-0095

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