Investor Lawyers Blog

ABA Presses for Self-Funding for SEC and CFTC

Published on: May 31, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The American Bar Association is in strong favor of self-funding for both the Commodity Futures Trading Commission and the Securities and Exchange Commission. It is calling on Congress to quickly deal with this need to increase the agencies’ resources.

In a letter to lawmakers on the House Financial Services Committee and the Senate Banking Committee, ABA Task Force on Financial Markets Regulatory Reform co-chairs William Kroener III and Giovanni Prezioso talked about how not having sufficient funding sources for the SEC and the CFTC is going to substantially hurt the regulators’ ability to complete their assigned regulatory missions. The ABA believes that self-funding would effectively deal with this problem.

Both the CFTC and SEC have acknowledged that they are short on funds. The two regulators have partially attributed this to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which doesn’t authorize self-funding despite the fact that SEC Chairman Mary Schapiro, past SEC chairmen, certain senators, and securities lawyers had pressed for it.

FINRA Enforcement Actions in 2012 Likely to Equal The Record Number Brought Last Year

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

According to a senior FINRA enforcement official, the Financial Industry Regulatory Authority appears on schedule this year to bring about 1,500 enforcement actions-that’s about the same amount a last year, when this was then considered a record number. He said that the actions tend to be “isolated cases,” with dishonesty playing a factor.

The FINRA enforcer, who spoke at an enforcement panel during the SRO’s yearly conference in DC on May 23 (panelists were not identified by name), also noted that the self-regulatory organization is concentrating on complex products. He talked about how important it was for firms to fully comprehend the products that they are selling.

Meantime, another FINRA enforcer encouraged brokerage firms to pay attention to recent actions involving four firms that consented to pay $9.1 million to settle allegations that without supervision they sold leveraged and inverse exchange-traded funds valued at billions of dollars. (The SRO had accused the Wall Street broker-dealers of not having “reasonable” grounds for recommending these instruments to retail clients.) The FINRA official said that similar FINRA cases are expected-a clear indicator that it is integral for financial firms to supervise the products that they sell. She also talked about how when examining real estate investment trusts and private placements under regulation D, FINRA is looking at the areas of supervision, advertising, due diligence, suitability, misstatements, training, risk disclosure, and product understanding.

Several Claims in Securities Fraud Lawsuit Against Ex-IndyMac Bancorp Executives Are Dismissed by Federal Judge

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

In U.S. District Court for the Central District of California, federal judge Manuel Real threw out five of the seven securities claims made by the Securities and Exchange Commission in its fraud lawsuit against ex-IndyMac Bancorp chief executive Michael Perry and former finance chief Scott Keys. The Commission is accusing the two men of covering up the now failed California mortgage lender’s deteriorating liquidity position and capital in 2008. Real’s bench ruling dilutes the SEC’s lawsuit against the two men.

The Commission contends that Keys and Perry misled investors while trying to raise capital and preparing to sell $100 million in new stock before July 2008, which is when thrift regulators closed IndyMac Bank, F.S.B and the holding company filed for bankruptcy protection. They are accusing Perry of letting investors receive misleading or false statements about the company’s failing financial state that omitted material information. (S. Blair Abernathy, also a former IndyMac chief financial officer, had also been sued by the SEC. However, rather that fight the lawsuit, he chose to settle without denying or admitting to any wrongdoing.)

Attorneys for Perry and Keys had filed a motion for partial summary judgment, arguing that five of the seven filings that the SEC is targeting cannot support the claims. Real granted that motion last month, finding that IndyMac’s regulatory filings lacked any misleading or false statements to investors and did not leave out key information.

The remaining claims revolve around whether the bank properly disclosed in its 2008 first-quarter earnings report (and companion slideshow presentation) the financial hazards it was in at the time. The judge also ruled that Perry could not be made to pay back allegedly ill-gotten gains.

Real’s decision substantially narrows the Commission’s securities case against Perry and Keys. According to Reuters, the ruling also could potentially end the lawsuit against Keys because he was on a leave of absence during the time that the matters related to the filings that are still at issue would have occurred.

Before its collapse in 2008, Countrywide spinoff IndyMac was the country’s largest issuers of alt-A mortgage, also called “liar loans.” These high-risk home loans are primarily based on simple statements from borrowers of their income instead of tax returns. Unfortunately, loan defaults ended up soaring and a mid-2008 run on deposits at IndyMac contributed to its collapse. The Federal Deposit Insurance Corp, which places its IndyMac losses at $13 billion, went on to sell what was left of the bank to private investors. IndyMac is now OneWest bank.

Judge dismisses parts of IndyMac fraud case, Los Angeles Times, May 23, 2012

Read the SEC Complaint (PDF)

More Blog Posts:

Citigroup’s $75 Million Securities Fraud Settlement with the SEC Over Subprime Mortgage Debt Approved by Judge, Stockbroker Fraud Blog, October 23, 2010

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 ›