Investor Lawyers Blog

SEC to Investigate Seesawing Credit Suisse TVIX Note

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

The US Securities and Exchange Commission is reviewing the VelocityShares 2x Daily VIX Short Term Exchange Traded Note (TVIX) that collapsed last week, right after it climbing nearly 90% beyond its asset value. The drop came not long after Credit Suisse stopped issuing shares last month. Now, the Switzerland-based investment bank says it will start creating more shares.

Also known as TVIX, the VelocityShares 2x Daily VIX Short Term Exchange Traded Note is an exchanged-traded note that seeks to provide two times the daily return of the VIX volatility index. With the note’s value hitting nearly $700 million up from where it was at approximately $163 million in 2011 and now crashing down, The TVIX has taken investors for quite the ride.

Investor advocates are saying that more should be done to protect retail investors. There is growing concern that with the rising popularity of ETNs, investors and financial advisers are getting into these products without fully understanding them or the risks involved. Financial Industry Regulatory Authority has said that it too will look into the “events and trading activity” that led to the collapse of the TVIX note.

Five Morgan Stanley Smith Barney Managed Future Funds Report $79.1M in Losses in 2011

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

Morgan Stanley (MS) Smith Barney is reporting that five of its managed future funds sustained 9.5% in average losses—that’s $79.1 million—in the wake of client withdrawals last year. Only one of the funds was profitable. The largest fund by assets, Morgan Stanley Smith Barney Spectrum Select LP, faced $55.2 million in redemptions and lost $67.9 million.

Subsidiary Ceres Managed Futures LLC, the funds’ manager, had placed assets with outside trading advisers. In the wake of these losses, Ceres let go two underlying managers: John W. Henry & Co. and Sunrise Capital Partners. Spectrum Currency, which is the fund that they both managed, sustained losses of 9.8% in 2011. That fund is now called Spectrum Currency and Commodity.

Managed-future funds use futures or forwards contracts when betting on the declines or advance in securities, including bonds, commodities, stocks, and currencies. Some funds also invest in securities connected to certain events, such as changes in interest rates or the weather.

It’s been a tough time recently for Morgan Stanley. Last year, the financial firm had to give back approximately $700 million to investors in its flagship global real-estate fund. It also was forced to cut fees (both the fee charged on investments and management fees) to get them to stay. The fund’s size was also cut by $4 billion, resulting in investors getting some of their money back.

Over two-thirds of investors have consented to give Msref VII until June 2013 to invest rather than having billions of dollars returned to them sooner. Morgan Stanley’s earlier fund, which closed in 2007, suffered losses of 62% through March despite a 23% net return during that period’s last 12 months.

Also last December, media sources reported that Zynga stock purchased by Morgan Stanley’s mutual funds for $75 million in the late-stage round dropped in price from $14/share to $9/share, even as the financial firm cashed in two times: on private placement fees (if there were fees) and on fees for the IPO underwriting.

There was also the huge loss sustained by Morgan Stanley in the settlement it reached with bond insurance company MBIA. The two entities had sued one another over insurance sold on mortgage-backed securities. For a $1.1 billion payment by MBIA, Morgan Stanley agreed to give up insurance claims over guarantees on mortgage bonds. However, as a result, the financial firm took a pretax $1.8 billion charge in the fourth quarter of 2011. Morgan Stanley had purchased the insurance against bond defaults.

Meantime, MBIA dismissed its complaint against Morgan Stanley over the quality of the mortgage bonds. The insurer had accused the financial firm of misrepresenting these, which was what the insurance company was supposed to guarantee. (As MBIA’s credit-default swap bets started to falter at the start of the financial crisis, regulators were forced to divide the insurance company into a structured finance unit and a municipal guarantee business.)

Morgan Stanley Settles MBIA Suits, Will Take $1.8B Hit, Forbes, December 13, 2011

Morgan Stanley Brokerage Managed-Futures Funds Lose 9.5%, Bloomberg/Businessweek, March 28, 2012

MBIA and Morgan Stanley Settle Bond Fight, The Wall Street Journal, December 14, 2011

More Blog Posts:
Morgan Stanley Faces $1M FINRA Fine for Excessive Markups and Markdowns on Corporate and Municipal Bond Transactions, Institutional Investor Securities Fraud, September 17, 2011

Morgan Stanley Smith Barney Employee Fined and Suspended by FINRA Over Unauthorized Signatures, Stockbroker Fraud Blog, September 19, 2011

Ameriprise Financial Sued by Employees Over Allegedly Excessive 401(K) Costs

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

In a civil case that is still underway, a number of Ameriprise Financial Inc. workers are suing their employer for what they claim was $20 million in excessive costs that resulted because the company put their 401(k) contribution in proprietary funds. The complaint, filed in September in the U.S. District Court in Minnesota last September, has been seeking class action status.

The 401k plan under dispute was launched in 2005 and the class action securities lawsuit is looking to represent everyone that the plan has employed since then. Over 10,000 members may qualify to become part of the class. The group is led by several former and current Ameriprise plan participants.

Also named as defendants in this civil suit are Ameriprise’s 401(k) investment committees and employee benefits administration. According to the plaintiffs, the defendants violated their fiduciary obligation to the retirement plan, which included investments involving mutual funds and target date funds from RiverSource Investment LLC (an Ameriprise subsidiary that is now called Columbia Management Investment Advisers LLC). The plaintiffs say that about $500 million in plan assets went into Ameriprise Trust Co. and RiverSource yearly.

The plaintiffs claim that the investment that their money went into resulted in fees generated for Ameriprise Trust, RiverSource, and its affiliates. The Ameriprise workers say that the plan suffered over $10 million in losses due to excessive fees and expenses. They also believe that RiverSource was behind in their benchmarks, suffered outflows in the billions of dollars in 2006 and 2005, and was given poor ratings by Morningstar Inc.

The plaintiffs believe that defendants selected the more costly funds with the poorer performance stories to create revenue for ATC and RiverSource and that this also benefited Ameriprise. They say that Ameriprise violated its fiduciary duty, under the Employee Retirement Income Security Act of 1974, to the retirement fund.

The plaintiffs are seeking disgorgement of all revenues, restitution, and all the money that was lost. They want the court to make sure the plan’s losses are paid back and participants are placed in the position they would have been in if only the plan had been administered correctly.

401K Plan Lawsuits
There are fiduciaries and owners of businesses that could find themselves in legal hot waters in the wake of the Department of Labor regulations that now require that the hidden, excessive fees in 401(k) plans be disclosed. Unbeknownst to participants, these fees have been reducing retirement plan balances. Also, the government is now pushing for full disclosure of all fees and wants retirement plan offerings to be provided to employees at the lowest costs possible.

There have ben other employees of other companies that have also filed their 401(k) fees class action lawsuits. For example, just last December, Walmart settled a $13.5 million class action complaint with its employees. The lawsuit blamed the company and Bank of America‘s Merrill Lynch unit for passing along expenses and high fees that were unreasonable to some two million workers.

Ameriprise workers sue over company’s own 401(k) funds, Investment News, September 29, 2011

Ameriprise workers seek class-action suit on 401(k), Star Tribune, September 29, 2011

More Blog Posts:
Ameriprise to Sell Securities America Even as it Finalizes Securities Settlement with Investors of Medical Capital Holdings and Provident Royalties Private Placements, Stockbroker Fraud Blog, April 26, 2011

Ameriprise Broker Arrested for Defrauding Investors – Clients Say He Cashed Checks Made Out to Ameriprise, Stockbroker Fraud Blog, July 7, 2007
Bank of America to Pay $335M to Countrywide Financial Corp. Borrowers Over Allegedly Discriminating Lending Practices, Stockbroker Fraud Blog, December 21, 2011 Continue Reading ›

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

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

The Securities and Exchange Commission is seeking district court approval of its proposed securities fraud settlement with two ex-Bear Stearns & Co. portfolio managers. The SEC presented its second plea to the U.S. District Court for the Eastern District of New York earlier this month.

In a letter to the court, the SEC cited the Second Circuit Appeals Court’s decision earlier this month to stay a district court judge’s ruling turning down the Commission’s proposed $285M settlement with Citigroup Global Markets Inc. It said that the order in that matter “supports approval and entry” of this pending consent judgment.

If the settlement is approved, former Bear Stearns portfolio managers Matthew and Tannin and Ralph Cioffi would settle SEC charges accusing them of misleading bank counterparties and investors about the financial condition of two hedge funds that failed because of subprime mortgage-backed securities in 2007. Per the terms of the proposed settlement, Tannin would pay $200,000 in disgorgement plus a $50,000 fine and Cioffi would pay $700,000 in disgorgement and a $100,000 fine.

This is the second attempt by the SEC and the defendants to the court for settlement approval after District Court Judge Frederic Block cited concerns made by Judge Rakoff, who is the one who threw out the proposed $285M settlement in the SEC-Citigroup case and ordered both parties to trial. The Second Circuit has since stayed those proceedings. (In the securities case between the SEC and Citigroup, the regulator had accused the financial firm of misrepresenting its involvement in a $1 billion collateralized debt obligation that the latter and structured and marketed five years ago.)

In other SEC news, the Commission has honored its commitment to providing greater transparency when it comes to cooperation credit by notifying the public that it credited an ex-AXA Rosenberg senior executive for his substantial help in an enforcement action against the quantitative investment firm. AXA Rosenberg is accused of concealing a material error in the computer code of the model it used to manage client assets.

The SEC said it would not take action against the former executive not just because of the help he provided, but also because the alleged misconduct in question was one that mattered so much. Fortunately, the SEC was able to give clients back the $217 million they lost, as well is impose penalties of $27.5 million. This was the Commissions first case over mistakes in a quantitative investment model.

Meantime, the International Organization of Securities Commissions’ Technical Committee says it has updated the data categories for information it plans to collect in a global survey of hedge funds that will take place later this year. Modified reporting categories include general information about firms, funds, and advisors, geographical focus, market and product exposure for strategy assets, leverage and risk, trading and clearing.

According to IOSCO, responses to the survey will bring together an array of hedge fund information that regulators can look at to determine systemic risk. The committee believes that having securities regulators regularly monitor hedge funds for systemic risk indicators/measures will be beneficial and provide necessary insight into possible issues hedge funds might create for the global financial system. This will be IOSCO’s second survey on hedge funds.

SEC Credits Former Axa Rosenberg Executive for Substantial Cooperation during Investigation, SEC, March 19, 2012

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

Janus Avoids Responsibility to Mutual Fund Shareholders for Alleged Role in Widespread Market Timing Scandal, Stockbroker Fraud Blog, June 11, 2007

Texas Securities Fraud: State Law Class Action in R. Allen Stanford’s Ponzi Scam Not Barred by SLUSA

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

In a reversal of a district court’s decision, the U.S. Court of Appeals for the Fifth Circuit ruled that the Securities Litigation Uniform Standards Act does not bar the investor state law class action lawsuit that was filed by victims of R. Allen Stanford’s Ponzi scheme. The case is Roland v. Green.

The appeals court said that the state court securities lawsuits, which are claiming common law and statutory violations, could go forward because the alleged fraud is only tangentially related to the buying and selling of covered securities under SLUSA. Four complaints are on appeal. In each case, investors submitted state court actions that charged a number of defendants with misleading them into using their individual retirement accounts to invest in Stanford International Bank-issued certificate of deposits that have since proved worthless. Investors have lost $7 billion in Stanford’s Ponzi scam.

The defendants had the lawsuits moved to the U.S. District Court for the Northern District of Texas, which found that SLUSA precluded the claims because of their connection to a covered security. Under SLUSA, state class actions claiming fraud related to the sale or purchase of a covered security are barred. The district court judge in Dallas had dismissed the cases because Stanford marketed the CDs as regulated and securities-backed and because certain investors had sold securities to finance their purchase of the CDs, this, placed the CD-related suits under SLUSA.

Citigroup Ordered by FINRA to Pay $1.2M Over Bond Markups and Markdowns

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

FINRA says that Citigroup Inc. subsidiary Citi International Financial Services LLC must pay over $1.2M in restitution, fines, and interest over alleged excessive markdowns and markups on agency and corporate bond transactions and supervisory violations. The financial firm must also pay $648,000 in restitution and interest to over 3,600 clients for the alleged violations. By settling, Citi International is not denying or admitting to the allegations.

According to FINRA, considering the state of the markets at the time, the expense of making the transactions happen, and the value of services that were provided, from July ’07 through September ’10 Citi International made clients pay too much (up to over 10%) on agency/corporate bond markups and markdowns. (Brokerages usually make clients that buy a bond pay a premium above the price that they themselves paid to obtain the bond. This is called a “markup.”) Also, from April ’09 until June ’10, the SRO contends that Citi International did not put into practice reasonable due diligence in the sale or purchase of corporate bonds so that customers could pay the most favorable price possible.

The SRO says that during the time periods noted, the financial firm’s supervisory system for fixed income transactions had certain deficiencies related to a number of factors, including the evaluation of markups/markdowns under 5% and a pricing grid formulated on the bonds’ par value rather than their actual value. Citi International will now also have to modify its supervisory procedures over these matters.

In the wake of its order against Citi International, FINRA Market Regulation Executive Vice-President Thomas Gira noted that the SRO is determined to make sure that clients who sell and buy securities are given fair prices. He said that the prices that Citi International charged were not within the standards that were appropriate for fair pricing in debt transactions.

If you believe that you were the victim of securities misconduct or fraud, please contact our stockbroker fraud law firm right away. We represent both institutional and individual investors that have sustained losses because of inadequate supervision, misrepresentations and omissions, overconcentration, unsuitability, failure to execute trades, churning, breach of contract, breach of promise, negligence, breach of fiduciary duty, margin account abuse, unauthorized trading, registration violations and other types of adviser/broker misconduct.

Before deciding to work with a brokerage firm that is registered with FINRA, you can always check to see if they have a disciplinary record by using FINRA’s BrokerCheck. Last year, 14.2 million reviews of the records of financial firms and brokers were conducted on BrokerCheck.

FINRA BrokerCheck®

More Blog Posts:
Securities Claims Accusing Merrill Lynch of Concealing Its Auction-Rate Securities Practices Are Dismissed by Appeals Court, Stockbroker Fraud Blog, November 30, 2011

Merrill Lynch Faces $1M FINRA Fine Over Texas Ponzi Scam by Former Registered Representative, Stockbroker Fraud Blog, October 10, 2011

Bank of America’s Merrill Lynch Settles for $315 million Class Action Lawsuit Over Mortgage-Backed Securities, Institutional Investor Securities Blog, December 6, 2011

JP Morgan Chase To Pay $150M to Settle Securities Lawsuit Over Lending Program Losses of Union Pension Funds

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

To settle a securities lending lawsuit filed by the AFTRA Retirement Fund, the Investment Committee of the Manhattan and Bronx Surface Transit Operating System, and the Imperial County Employees’ Retirement System, JPMorgan Chase & Co. will pay $150 million. The union pension funds are blaming the financial firm for losses that they sustained through its securities lending program. A district court will have to approve the settlement.

JPMorgan had invested their money in Sigma Finance Corp. medium term notes, which is a financial instrument that has since failed. However, billions of dollars of repurchase financing was extended to Sigma in the process.

The securities claims accused JPMorgan of violating the Employee Retirement Income Security Act and its state-imposed fiduciary obligations when it invested in Sigma. The plaintiffs contend that financial firm should have known that the investment was a poor one.

Per the union pension funds’ contracts with JPMorgan, the investment bank is only supposed to put their money in investment vehicles that are low-risk and conservative. They believe that the Sigma vehicle did not meet that standard.

The consolidated class action alleges that JPMorgan foresaw Sigma’s impending failure, took part in predatory repo arrangements with significant discounts in order to pick the best of Sigma’s assets in its portfolio, and reduced the quality and quantity of these assets by taking title to assets in an amount that was nearly a billion dollars more than the financing it gave.

The Board of Trustees of the American Federation of Television and Radio Artists (AFTRA) Retirement Fund, which initially brought the class action case, contended that JPMorgan made close to $2 billion profit, even as the notes were left with almost no value. Last year, a year after the court certified the class action case, a judge gave partial summary judgment to the financial firm.

The plaintiffs believe that the securities lawsuit brought up a number of key factual and legal matters under New York common law and ERISA and that this made the case very hard to litigate. They say the $150 million proposed settlement is a representation of 30 – 100% of the potential provable losses if liability were to be set up for a certain breach date. Therefore, seeing as a trial could have led to a wide range of potential damage results, the settlement figure represents an appropriate range of recovery

JPMorgan Agrees to Pay $150M To Settle Securities Lending Lawsuit, Bomberg, March 20, 2012

JPMorgan to pay $150 million over failed Sigma SIV, Reuters, March 20, 2012

More Blog Posts:
JPMorgan Chase to Pay $211M to Settle Charges It Rigged Municipal Bond Transaction Bidding Competitions, Stockbroker Fraud Blog, July 9, 2011

JP Morgan Chase Agrees to Pay $861M to Lehman Brothers Trustee, Stockbroker Fraud Blog, June 28, 2011

Investors Want JP Morgan Chase & Co. To Explain Over $95B of Mortgage-Backed Securities, Institutional Investor Securities Blog, December 17, 2011 Continue Reading ›

Some Former Pro-Athletes Regain the Spotlight But This Time For Financial Fraud

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

A number of former professional athletes have been accused of parlaying their hero/celebrity status and the credibility built on their names to commit securities fraud. According to USA Today, the adulation of celebrities, including sports heroes, in our culture makes high-profile athletes “naturals” for investment fraud.

“Success in too many occupations is more about who you know than what you know. The best talent for selling investments involves getting clients through the front door. Sports stars have a greater opportunity than most to do that,” said Shepherd Smith Edwards and Kantas, LTD, LLP Founder and Stockbroker Fraud Lawyer William Shepherd.

Among the famous ex-athletes to be targeted by the US Securities and Exchange Commission over financial fraud allegations is Willie Gault, the former National Football League member of the Chicago Bears. Known as one of the fastest wide receiver ever and for playing a key part in his team’s victory over the New England Patriots during the 1986 Super bowl, Gault was also a former member of the US Olympic team.

Institutional Investor Fraud Roundup: Decline in Securities Class Action Settlements, ESMA Recognizes US Credit Rating Agency Framework, and Court Dismisses Securities Lawsuit Against Mecox Lane

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

According to a report published by Cornerstone Research, there has been a decline not just in the number of securities class action settlements that the courts have approved, but also in the value of the settlements. There were 65 approved class action settlements for $1.4 billion in 2011, which, per the report, is the lowest number of settlements (and corresponding dollars) reached. That’s 25% less than in 2010 and over 35% under the average for the 10 years prior. The report analyzed agreed-upon settlement amounts, as well as disclosed the values of noncash components. (Attorneys’ fees, additional related derivative payments, SEC/other regulatory settlements, and contingency settlements were not part of this examination.)

The average reported settlement went down from $36.3 million in 2010 to $21 million last year. The declines are being attributed to a decrease in “mega” settlements of $100 million or greater. There was also a reported 40% drop in media “estimated damages,” which is the leading factor in figuring out settlement amounts. Also, according to the report, over 20% of the cases that were settled last year did not involve claims made under the 1934 Securities Exchange Act Rule 10b-5, which tends to settle for higher figures than securities claims made under Sections 11 or 12(a)(2).

Our securities fraud law firm represents institutional investors with individual claims against broker-dealers, investment advisors, and others. Filing your own securities arbitration claim/lawsuit and working with an experienced stockbroker fraud lawyer gives you, the claimant, a better chance of recovering more than if you had filed with a class.

SEC’s Office of the Whistleblower In Early Phase of Evaluating Reward Claims

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

Securities and Exchange Commission’s Office of the Whistleblower Chief Sean McKessy says that the preliminary stage for processing claims stemming from whistleblower cases that resulted in over $1 million in sanctions is underway. McKessy spoke before an Investment Adviser Association-hosted panel earlier this month. He said that the share that an eligible whistleblower can receive would depend on the amount that is actually collected, which might be different from how much a party has been ordered to pay. McKessy made sure to say that the views expressed were his alone and did not reflect those of the SEC or other staff members.

The first reward under the SEC’s whistleblower program, implemented under the

2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, has yet to be issued. Per the program, whistleblowers that provide “original information” of their own accord that leads to the government recovering over $1 million in monetary penalties are entitled to 10-30% of what is paid. SEC staff can also investigate and prosecute employers that retaliate against an employee who stepped forward, regardless of whether or not the federal regulator decided to bring a case based on the information that this person provided.