Investor Lawyers Blog

JPMorgan Chase Shareholders File Securities Lawsuits Over $2B Trading Loss

Published on: May 17, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Two securities lawsuits have been filed on behalf of shareholders and investors of JPMorgan Chase & Co. (JPM) over the financial firm’s $2 billion trading loss from synthetic credit products. According to CEO Jamie Dimon, the massive loss is a result of “egregious” failures made by the financial firm’s chief investment officer and a hedging strategy that failed. Both complaints were filed on Tuesday in federal court.

One securities case was brought by Saratoga Advantage Trust — Financial Services Portfolio. The Arizona trust is seeking to represent everyone who suffered losses on the stock that it contends were a result of alleged misstatements the investment bank had made. Affected investors would have bought the stock on April 13 (or later), which is the day that Dimon had minimized any concerns about the financial firm’s trading risk during a conference call.

Per Saratoga Advantage Trust v JPMorgan Chase & Co., the week after the call, losses from the trades went up to about $200 million a day. The Arizona Trust is accusing Dimon and CFO Douglas Braunstein of issuing statements during that conversation that were misleading and “materially false,” as well as misrepresenting not just the losses but also the risks from major bets placed on “derivative contracts involving credit indexes reflecting corporate bonds interest rates.”

Charles Schwab Corp.’s Lawsuit Against FINRA to Stop Enforcement Case is Dismissed by Federal Judge

Published on: May 16, 2012 | by Shepherd Smith Edwards & Kantas, LLP

A federal judge has thrown out a lawsuit filed by Charles Schwab Corp. (SCHW) against the Financial Industry Regulatory Authority Inc. The financial firm had sought to stop the SRO’s enforcement case against it over an allegedly illegal arbitration agreement.

Schwab had added a new provision to over 6.8 million customer account agreement that would prevent clients from beginning or joining a class action lawsuit against the broker-dealer. Customers would also have to agree that industry arbitrators wouldn’t be able to consolidate securities claims from different investors. (Both kinds of cases typically involve investors with smaller claims that are usually less than $10,000. Lawyers who oppose Schwab’s arbitration provision have said that it leaves many of these investors without a legal process to be able to recover any financial losses.) By February, more than 50,000 clients had opened accounts with Schwab since it had implemented its new arbitration provision.

However, FINRA does not let class actions go through its arbitration system and it prevents broker-dealers from limiting the ways in which customers can file claims in court that are not allowed in arbitration. In its enforcement case against Schwab, the SRO accused the brokerage firm of violating its rules by making clients waive their right to file a class action complaint against it. Schwab immediately responded with a lawsuit against FINRA.

JPMorgan Chase $2B Trading Loss Leads to Probes by the SEC, Federal Reserve, and FBI

Published on: May 15, 2012 | by Shepherd Smith Edwards & Kantas, LLP

In the wake of JPMorgan Chase’s (JPM) announcement that it lost $2 billion in a trading portfolio that is supposed to hedge against the risks that it takes against its own money, the Securities and Exchange Commission, the Federal Bureau of Investigation, the Federal Reserve and other regulators are launching their respective investigations to find out exactly what happened. JPMorgan is the largest bank in the US.

As the financial firm’s stock plummeted nearly 7% in after-hours trading after the announcement, its CEO, Jamie Dimon, attributed the losses to “many errors, sloppiness and bad judgment.” He also said that the portfolio, which consisted of derivatives, ended up being “riskier” and not as effective as an economic hedge as the financial firm had previously thought.

Also seeing drops in their stocks following JPMorgan’s announcement of its massive trading loss were other banks, including Bank of America (BAC), Morgan Stanley (MS), Citigroup (C) and Goldman Sachs (GS).

Now, the SEC and other regulators are looking into whether possible civil violations were involved in JPMorgan’s massive loss. The Commission had recently opened a preliminary probe into the financial firm’s public disclosures about its trades and accounting practices.

According to The New York Times, questions regarding JP Morgan’s chief investment office, which is in charge of its hedging activities, were raised in April following reports that a trader in London was taking large bets that were “distorting the market.” Dimon, at the time, dismissed worries about the bank’s trading activities.

The FBI is also looking into potential wrongdoing related to the $2 trading loss.

Known for its excellence in trading until now and earning up to $5.4 billion of securities gains last year, JPMorgan’s chief investment officer has now seen a reversal of fortune. Per The New York Times, the financial firm’s problems may have begun with its bond portfolio, which was valued at $379 billion in March.

Just 30% of the portfolio had been invested in securities that the federal government had guaranteed—a change from 2010 when government guaranteed bonds made up 42% of the portfolio.

Signs of trouble with JPMorgan’s trading strategy started to brew at the end of March when the market went against corporate bonds. Yet during its first-quarter earnings call in mid-April, Dimon did not give any indication that there were problems with the bank’s trading.

Last week, however, Dimon told a different story by announcing the $2 billion trading loss. He said the investment bank’s problems were caused in part by its value-at-risk measure, which underestimated the losses on hedge funds that depended on credit derivatives. Yet were the trades even actual hedges? Banks have been known to perform elaborate trades that at first seemed to be a hedge but eventually become a bad bet.

SEC Opens Review of JP Morgan, The Wall Street Journal, May 11, 2012

F.B.I. Begins Preliminary Inquiry Into JPMorgan, The New York Times, May 15, 2012

More Blog Posts:

Washington Mutual Bank Bondholders’ Securities Fraud Lawsuit Against J.P. Morgan Chase & Co. is Revived by Appeals Court, Institutional Investor Securities Blog, June 29, 2011

Trading in Securities of 379 Microcap Companies Suspended in SEC’s Fraud Crackdown

Published on: May 14, 2012 | by Shepherd Smith Edwards & Kantas, LLP

In an effort to crack down on fraud via pump-and-dump scams and reverse mergers, the Securities and Exchange Commission is suspending trading in the securities of 379 Microcap companies that are dormant. This is the most number of companies to have trading in them suspended in one day.

As part of its heightened efforts to combat microcap shell company-related fraud, The SEC’s Microcap Fraud Working Group employed Operation Shell-Expel, which employed different agency resources to pinpoint shell companies in 6 other countries and 32 US states that were dormant and vulnerable to scams. SEC Division Director Robert Khuzami said that “empty shell companies” are to certain financial scammers “what guns are to bank robbers.”

According to the SEC, stock manipulators are willing to pay up to $750,000 to get control of a company so they can pump and dump the stock to make illegal gains while investors suffer. Now, however, because the trading suspension mandates that current financial formation must be provided, these shell companies can no longer be used by fraudsters to perpetuate their scams.

Securities laws let the SEC suspend trading in any stock for 10 days maximum. Barring exemptions and exceptions, a company whose trading privileges have been suspended can’t be quoted again unless it issues update information, including financial statements that are accurate.

The SEC chooses to suspend trading in a stock when it feels that to do so will protect investors. In an Investor Alert, the Commission listed some of the reasons for suspending trading, including:

• Insufficient or not the most up-to-date or accurate information about a company, including no current periodic report filings.

• Existing questions about whether information made available to the public is accurate, including the most current details about a company’s operational status, business transactions, or financial state.

• Potential issues over the trading in the stock, such as possible market manipulation and insider trading.

Because the SEC knows that suspending trading in a stock can cause the security’s price to dramatically go down, it is very discriminating about issuing suspensions.

Microcap companies usually have low-priced stock, which trades in low volumes, and limited assets. A pump-and-dump scam is one of the most common types of securities fraud involving these firms. Scammers will issue misleading and false statements to promote a microcap stock that is lightly traded. After buying low and then inflating the stock price by making it appear as if there is a lot of market activity, fraudsters will dump the stock by selling it into the market at the higher rate and make huge profits in the process.

Investor Bulletins: Trading Suspension, SEC (PDF)

SEC Microcap Fraud-Fighting Initiative Expels 379 Dormant Shell Companies to Protect Investors From Potential Scams, SEC, May 14, 2012

More Blog Posts:
Daniel “Rudy” Ruettiger Faces SEC Charges Over Pump-and-Dump Scam Involving Sports Drink Company, Stockbroker Fraud Blog, December 19, 2011
Business Man Pleads Guilty Plea in Florida Microcap Market Fraud Case, Stockbroker Fraud Blog, November 17, 2010
Pump & Dump Scam Alleged in $600 Million Lawsuit Against Law Firm Baker & McKenzie, Institutional Investor Securities Blog, April 13, 2011 Continue Reading ›

Dire Predictions For Wall Street Reforms: Not Complete Until 2013, Even Longer to Implement, Half May Not Survive

Published on: May 12, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Speaking at the Council on Foreign Relations on May 2, Federal Reserve Governor Daniel K. Tarullo said he did not think that federal agencies would complete their rulemaking duties that are mandated under the Dodd-Frank Wall Street Reform and Consumer Protection Act until next year. He also said that full implementation of these rules would take even more time. Tarullo is in charge of overseeing efforts by the Fed to draft and execute these regulatory reforms.

He said that the process of completing the rules is a complicated one and challenges have inevitably arisen. To finish rulemaking duties sooner would likely have resulted in “inconsistencies and open questions” that would have inevitably led to “another round of changes.” Tarullo also spoke about how the complexities of certain US regulations have posed added challenges. For example, regulatory reforms must conform to the Basel Committee on Banking Supervision’s Basel III framework.

Tarullo also said that “instability” from the shadow banking system warrants a need for more regulatory reforms. He warned of new forms of shadow banking that could be lurking on the horizon especially if greater regulation of the large financial firms leads to elements of the shadow banking system going into “largely unregulated markets.”

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

Published on: May 11, 2012 | by Shepherd Smith Edwards & Kantas, LLP

UBS Financial Services Inc. of Puerto Rico (UBS) has agreed to pay $26.6 million to settle the Securities and Exchange Commission administrative action accusing the financial firm of misleading investors about its control and liquidity over the secondary market for nearly two dozen proprietary closed-end mutual funds. By settling, UBS Puerto Rico is not denying or admitting to the allegations.

Per the SEC, not only did UBS Puerto Rico fail to disclose to clients that it was in control of the secondary market, but also when investor demand became less in 2008, the financial firm bought millions of dollars of the fund shares from shareholders that were exiting to make it appear as if the funds’ market was stable and liquid. The Commission also contends that when UBS Puerto Rico’s parent firm told it to lower the risks by reducing its closed-end fund inventory, the Latin America-based financial firm carried through with a strategy to liquidate its inventory at prices that undercut a number of customer sell orders that were pending. As a result, closed-end fund clients were allegedly denied the liquidity information and price that they are entitled to under the law. UBS Puerto Rico must now pay a $14 million penalty, $11.5 million in disgorgement, and $1.1 million in prejudgment interest.

The SEC has also filed an administrative action against Miguel A. Ferrer, the company’s ex-CEO and vice chairman, and Carlos Ortiz, the firm’s capital markets head. Ferrer allegedly made misrepresentations, did not disclose certain facts about the closed-end funds, and falsely represented the funds’ market price and trading premiums. The Commission is accusing Ortiz of falsely representing the basis of the fund share prices.

In other stockbroker fraud news, the U.S. District Court for the District of Colorado has denied Morgan Keegan & Co. Inc.’s bid to vacate the over $40,000 arbitration award it has been ordered to pay over the way it marketed its RMK Advantage Income Fund (RMA). Judge Richard Matsch instead granted the investors’ motion to have the award confirmed, noting that there were “many factual allegations” in the statement of claim supporting the contention that the firm was liable.

Per the court, Morgan Keegan had argued that the arbitration panel wasn’t authorized to issue a ruling on the claimants’ bid for damages related to the marketing of the fund, which they had invested in through Fidelity Investment. Morgan Keegan contended that seeing as it had no business relationship with the claimants, it couldn’t be held liable for their losses, and therefore, the FINRA arbitration panel had disregarded applicable law and went outside its authority. The district court, however, disagreed with the financial firm.

In other stockbroker fraud news, the SEC has reached a settlement with a Florida attorney accused of being involved in a financial scam run by a viaticals company that defrauded investors of over $1 billion. The securities action, which restrains Michael McNerney from future securities violations, is SEC v. McNerney. He is the ex-outside counsel for now defunct Mutual Benefits Corp.

The MBC sales agent and the company’s marketing materials allegedly falsely claimed that viatical settlements were “secure” and “safe” investments as part of the strategy to get clients to invest. The viaticals company also is accused of improperly obtaining polices that couldn’t be sold or bought, improperly managing escrow premium funds in a Ponzi scam, and pressuring doctors to approve bogus false life expectancy figures.

McNerney, who was sentenced to time in prison for conspiracy to commit securities fraud, must pay $826 million in restitution (jointly and severally with other defendants convicted over the MBC offering fraud).

UBS Puerto Rico unit to pay $26.6 mln in SEC pact, Reuters, May 1, 2012

Morgan Keegan & Co. Inc. v. Pessel (PDF)

SEC Files Charges Against Former Attorney for Mutual Benefits, SEC, April 30, 2012

More Blog Posts:
Stockbroker Fraud Roundup: 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

Commodities/Futures Round Up: CFTC Cracks Down on Perpetrators of Securities Violations and Considers New Swap Market Definitions and Rules, Stockbroker Fraud Blog, April 20, 2012

Institutional Investor Fraud Roundup: 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 Securities Blog, March 29, 2012 Continue Reading ›

Court Rules that Victims of Fraudulent Sales of Derivative Securities Must File Separate Claims – No Class Action Allowed

Published on: May 11, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Court of Appeals for the Second Circuit has affirmed a lower court’s decision to not grant the petition of two pension funds asking to certify a class action of investors that allegedly suffered financial losses in mortgage-backed securities. The Second Circuit said that the Lower Court did not abuse its discretion by denying the motion for class certification.

The institutional investment fraud cases were argued together at both the district court and appeals court levels but have never been officially consolidated. In both mortgage-backed securities lawsuits, the lead plaintiffs—both pension funds—are accusing their respective defendants of making misleading and false statements in the different MBS prospectuses. They are seeking to recover their losses.

Although the MBS that the plaintiffs had purchased were given AAA credit ratings for the majority of the tranches, the delinquency and default rates in the underlying mortgages would go on to dramatically go up. The ratings agencies then went on to downgrade most of these tranches.

The plaintiffs are claiming that the defaults are an indicator that the subcontractors and issuers failed to follow underwriting guidelines. If this is true, then there were false statements in the registration statements at the time the MBS were bought.

While the plaintiffs had made their claims under the 1933 Securities Act’s Sections 11, 12, and 15, the appeals court said that only claims under Section 11 needed to be discussed, as the claims under the other two sections were derivatives of the Section 11 claims. Under Section 11, a prima facie case has to have proof that a registration statement included material misstatements or omissions. However, since it isn’t a fraud provision, a culpable mental state on the issuer’s part is not required.

Section 11 claims are subject to an affirmative defense in that the issuer can show that when the acquisition took place the buyer had knowledge about a specific omission or untruth. The district court held that to determine whether each buyer had knowledge of specific untruths or omissions at the time of purchase, individual inquiries overriding the common issues would be needed. This holding was affirmed by the appeals court. The second circuit also said that the district court only looked at the facts “on the limited record available on this case.” It noted that district court judge, Harold Baer Jr. has since this decision not to certify the plaintiffs in these two cases granted class certification in similar litigation. (Public Employees’ Retirement System of Mississippi v. Goldman Sachs Group)

The appeals court said that its review was limited to the class definition rejected by the lower court judge and to the record the way it was when the motion to certify was made. It said the appeals determination was “without prejudice to further motion practice in the district court on the matter.”

Boilermaker Blacksmith National Pension Trust v. Harborview Mortgage Loan Trust 2006-4 (PDF)

More Blog Posts:

H & R Block Subsidiary Option One Mortgage Corporation to Pay $28.2M to Residential Mortgage-Backed Securities Investors, Institutional Investor Securities Blog, April 25, 2012

FDIC Objects to Bank of America’s Proposed $8.5B Settlement Over Mortgage-Backed Securities, Stockbroker Fraud Blog, August 30, 2011

Private Fund Advisers Have Fiduciary Duty to Client Funds, Says SEC’s Di Florio

Published on: May 10, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Speaking before the Private Equity International Private Fund Compliance Forum, Securities and Exchange Commission Office of Compliance Inspections and Examinations Director Carlo di Florio reminded the audience that investment advisers are fiduciaries to advisory clients, including client funds. He made his comments just as the SEC is preparing to start overseeing large private equity firm advisors. Di Florio was careful to emphasize that the views he was sharing were his own.

Per the Dodd Frank Wall Street Reform and Consumer Protection Act, private equity fund advisors must now register with the SEC. In the wake of this requirement, there are now nearly 4,000 investment advisers registered with the SEC. These private fund advisers offer advise on nearly 31,000 private funds with $8 trillion in assets.

Di Florio talked about how it was the responsibility of advisors of private equity firms to fairly allocate their expenses and fees. He said must pinpoint any conflicts related to the structure and kinds of investments that their funds usually make and ensure that these conflicts are correctly “mitigated and disclosed.” Regarding the need for pooled investment vehicle advisors to make sure that material facts are disclosed to current and potential investors, he said that to do otherwise could constitute securities fraud.

Dallas Man Involved in $485M Ponzi Scams, Including the Fraud Involving Provident Royalties in Texas, Gets Twenty Year Prison Term

Published on: May 8, 2012 | by Shepherd Smith Edwards & Kantas, LLP

A judge has sentenced Joseph Blimline to 20 years in prison over his involvement in two complex, oil and gas Ponzi scams that took place in Texas and Michigan. The Dallas man, who was sentenced to two counts of conspiracy, was actually sentenced to 240 months behind bars for each count, but U.S. District Judge Marcia A. Crone said the sentences could run concurrently. He also has to pay restitution to his Ponzi scheme victims.

Blimline is accused of working with others to run a Michigan Ponzi scam between November 2003 and December 2005. That financial fraud made more than $28 million before it fell part. The government says that fraudsters promised investors inflated return rates. Blimline would then use payments from newer investors to pay previous investors, while also diverting investor payments for his personal gain.

The scammers then moved the Ponzi scheme to Texas in 2006 where they started running Provident Royalties in Dallas. That fraud eventually made more than $400 million from about 7,700 investors. Blimline was accused of also making materially false representations to Texas and failing to disclose material facts to investors to get them to invest in Provident. Once again, investor money was used to pay other investors. Also, Blimline got millions of dollars in unsecured loans from the investors’ money and directed Provident’s purchase of worthless assets belonging to the Michigan venture.

The 11th Circuit Revives SEC Fraud Lawsuit Against Morgan Keegan Over Auction-Rate Securities

Published on: May 8, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The 11th U.S. Circuit Court of Appeals has revived the US Securities and Exchange Commission’s fraud lawsuit against Morgan Keegan & Co. accusing the financial firm of allegedly misleading investors about auction-rate securities. The federal appeals court said that a district judge was in error when he found that alleged misrepresentations made by the financial firm’s brokers were immaterial. The case will now go back to district court. Morgan Keegan is a Raymond James Financial Inc. (RJF) unit.

The SEC had sued Morgan Keegan in 2009. In its complaint, the Commission accused the financial firm of leaving investors with $2.2M of illiquid ARS. The agency said that Morgan Keegan failed to tell clients about the risks involved and that it instead promoted the securities as having “zero risk” or being “fully liquid” or “just like a money market.” The SEC demanded that Morgan Keegan buy back the debt sold to these clients.

In 2011, U.S. District Judge William Duffey ruled on the securities fraud lawsuit and found that Morgan Keegan did adequately disclose the risks involved. He said that even if some brokers did make misrepresentations, the SEC had failed to present any evidence demonstrating that the financial firm had put into place a policy encouraging its brokers-dealers to mislead investors about ARS liquidity. Duffey pointed to Morgan Keegan’s Web site, which disclosed the ARS risks. He said this demonstrated that there was no institutional intent to fool investors. He also noted that a “failure to predict the market” did not constitute securities fraud and that the Commission would need to show examples of alleged broker misconduct before Morgan Keegan could be held liable.