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J.P. Morgan Securities LLC (JPM) has consented to pay $153.6 million to settle Securities and Exchange Commission charges that it misled investors in 2007 when it marketed a synthetic collateralized debt obligation that was linked to the US housing market. The financial firm also agreed to a permanent bar from future violations of the 1933 Securities Act and to bettering its business practices related to mortgage securities transactions. By agreeing to settle, JP Morgan is not denying or admitting to the allegations. The settlement, however, should allow investors to get a “full return” on their losses.

The SEC says that the brokerage firm mainly used credit default swaps that referenced other CDO securities tied to the housing market to structure the Squared CDO 2007-1. While the CDO’s marketing collateral said that GSCP, GSC Capital Corp.’s investment advisory arm, chose the deal’s investment portfolio, investors were not notified that hedge fund Magnetar Capital LLC played a key part in choosing the portfolio’s CDOs and or that it would benefit if the CDO assets defaulted.

The Commission also claims that when JP Morgan discovered in early 2007 that it could sustain huge losses because the housing market was in peril, it started marketing the deal to investors outside its regular client base. Less than a year later, the securities had lost the majority, if not all, of their value.

The SEC’s complaint accuses the investment bank of selling approximately $150 million of “mezzanine notes” of the Squared deal to over a dozen institutional investors who consequently lost their investments. Also, when the Squared deal was shut in May 2007, Magnetar’s short position was $600 million while its long position was $8.9 million.

J.P. Morgan to Pay $153.6 Million to Settle SEC Charges of Misleading Investors in CDO Tied to U.S. Housing Market, SEC, June 21, 2011

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

National Credit Union Administration Board Files $800M Mortgage-Backed Securities Fraud Lawsuits Against JP Morgan Securities, RBS Securities, and Other Financial Institutions, Institutional Investor Securities Blog, June 23, 2011

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

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In a 5-4 ruling, the US Supreme Court placed specific limits on securities fraud lawsuits this week when it ruled in Janus Capital Group v. First Derivative Traders, No. 09-525 that the mutual funds investment adviser could not be sued over misstatements in fund prospectuses. Justice Clarence Thomas, who wrote for the majority, said that only the fund could be held liable for violating an SEC rule that makes it unlawful for a person to make a directly or indirectly untrue statement of material fact related to the selling or buying of securities.

The fund and its adviser were closely connected. Janus Capital Group, which is a public company, created Janus Investment Fund, which then retained Janus Capital Management to deal with management, investment, and administrative services. However, in its appeal to the nation’s highest court, Janus argued that the funds are separate legal entities. He said that the parent company and subsidiary are not responsible for the prospectuses, and they therefore cannot be held liable. The investors filed their securities fraud lawsuit after the New York attorney general sued the adviser in 2003.

The plaintiffs claimed that the funds disclosure documents falsely indicated that the adviser would implement policies to curb strategies based on fund valuation delays. At issue was whether it could be said that the adviser issued misleading statements that the SEC rule addressed. Justice Thomas said no. He noted although the adviser wrote the words under dispute, the fund was the one that issued them. Meantime, Justice Stephen G. Breyer, who wrote the dissent, said that there is nothing in the English language stopping someone from saying that if several different parties that each played a part in producing a statement then they all played a role in making it.

The owner of “Alpha One” has been convicted of Texas securities fraud for defrauding investors of millions of dollars. Robert David Watson, 50, pleaded guilty to the charge yesterday.

Watson admits that between 2003 and 2009, he employed deceptive and manipulative devices and contrivances related to the sale and purchase of investments in a series of trading enterprises that he formed. He also acknowledges that he raised tens of millions of dollars from investors and maintained custody and control of the money under the guise that he was using the funds to trade, sell, and buy foreign currencies.

Watson convinced people to put money in his ventures by making representations that he was looking to make money with the “Alpha One” model, which he developed and maintained. He claimed that the model has made high historical returns since 2000 and between June 2006 and February 2009 made an annualized return of 23.04%.

Now, however, Watson says that contrary to what he represented, he did not trade. Instead, he made minimal trades and made little-if any-profits. He also caused bogus account statements to be sent to investors through wire communication, US mail, or electronically and put together sham statements of bank accounts and trading activity to make the account statements appear legitimate. When investors took out these “returns” or their principal investments, he paid them with money from other investors rather than foreign currency trade profits. Despite not doing much trading, he paid himself hundreds of thousands of dollars yearly during the securities scam.

Alpha One: Foreign Currency Trader Convicted of Securities Fraud, LoanSafe, June 13, 2011

“Alpha One” Foreign Currency Trader Convicted of Securities Fraud, FBI, June 10, 2011

More Blog Posts:

Houston Securities Arbitration: FINRA Panel Orders Penson Financial Services, Inc. to Pay Boushy North Investments, Ltd. $500,000, Stockbroker Fraud Blog, June 11, 2011
District Court in Texas Decides that Credit Suisse Securities Doesn’t Have to pay Additional $186,000 Arbitration Award to Luby’s Restaurant Over ARS, Stockbroker Fraud Blog, June 2, 2011
Texas Securities Commissioner’s Emergency Cease and Decease Order Accuses Insignia Energy Group Inc. of Misleading Teachers, Stockbroker Fraud Blog, May 23, 2011 Continue Reading ›

In STMicroelectronics N.V. v. Credit Suisse Securities (USA) LLC, 2d Cir., No. 10-3847-cv, 6/2/11, the US U.S. Court of Appeals for the Second Circuit upheld an arbitration panel’s award against Credit Suisse Securities (USA) LLC for $405 million. The financial firm was accused of improperly investing STMicroelectronics N.V. (STM)’s money in high-risk auction-rate securities.

The court says that Credit Suisse offered ST the opportunity to invest in ARS in April 2006 even though the business needed to have cash or its equivalents easily at hand due to the cyclical nature of what it does. Prior to that, ST had invested its funds in safe, liquid securities, including money market deposits.

The court says that the financial firm “explicitly proposed” ARS investments and ST “explicitly accepted” investing only in these securities, which were supported by student loans that were federally guaranteed. Yet within a few days, the court says that Credit Suisse started buying higher yield, higher risk ARS for ST.

By January 2007, none of the ARS were backed by student loans anymore. Yet the financial firm sent an email to ST that concealed the investments “true nature.” All of ST’s ARS failed after the market collapsed and two of the Credit Suisse brokers in charge of the ST account would go on to be convicted of conspiracy and securities fraud charges.

ST later Financial Industry Regulatory Authority arbitration claim against Credit Suisse. The U.S. District Court for Southern District of New York later confirmed the panel’s $406 million.

In its appeal, Credit Suisse attacked the award, claiming that arbitrator John J. Duval Sr. gave inaccurate and incomplete disclosures and was misleading because he suggested that he “worked for ‘both sides,’” when he actually was an expert witness for the claimants. The court rejected that contention. Credit Suisse also accused the arbitrators of “manifestly disregarding” the law when it reached its finding. The court rejected this contention too. The appeals court did, however, find that the district court should have credited the amount of the award funds that ST got from the sale of certain Deutsche Bank securities and, as a result, lowered the amount of interest due.


More Blog Posts:

Credit Suisse Broker Previously Convicted for Selling High Risk ARS is Barred from Future Securities Law Violations, Institutional Investors Securities Blog, February 12, 2011

District Court in Texas Decides that Credit Suisse Securities Doesn’t Have to pay Additional $186,000 Arbitration Award to Luby’s Restaurant Over ARS, Stockbroker Fraud Blog, June 2, 2011

Judge Gives Lower Sentence to Former Credit Suisse Broker Convicted of Auction-Rate Securities Fraud, Stockbroker Fraud Blog, January 30, 2010

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In MBIA Insurance Corp. v. Morgan Stanley, N.Y. Sup.Ct., No. 29951-10, the New York Supreme Court says that insurance company MBIA can sue Morgan Stanley and affiliates Saxon Mortgage Services Inc. and Morgan Stanley Mortgage Capital Holdings LLC for alleged misrepresentations about the risks involved in insuring residential mortgages that were sold to investors as mortgage-backed securities. While Judge Gerald Loehr allowed MBIA to bring a cause of auction for fraud against the broker-dealer and its affiliates, he did dismiss an unjust enrichment claim against Saxon.

MBIA claims that the defendants made their representations in their talks leading up to the agreement that had the insurer saying it would insure over $223 million in residential MBS that investors bought in the transaction. The alleged misstatements were over the characteristics of the mortgage loans (both pooled and individual), the quality of the collateral for the loans, and borrowers’ credit ratings. The action dealt with the securitization of a transaction involving about 5,000 subordinate-lien residential mortgages that were bought, structured, and sold by the defendants. Morgan Stanley is also accused of representing to MBIA that the mortgage loans weren’t subprime loans but were instead alternative documentation loans.

MSMCH had acquired the mortgage loans and then transferred and pooled them to Morgan Stanley Capital Inc., which then transferred them to a trust that had LaSalle Bank National Association serve as a trustee. The trust put out certificates secured by groups of those mortgages, which were sold, and paid a yield to certificate holders connecting the cash flow to the loans.


More Blog Posts:

Goldman Sachs Group Made Money From Financial Crisis When it Bet Against the Subprime Mortgage Market, Says US Senate Panel, Institutional Investor Securities Blog, April 15, 2011

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Larry Feinblum, an ex-Morgan Stanley & Co. Inc. (MS) trader, has consented to settle for $150,000 SEC allegations that he hid from risk managers the true extent of risk involved in certain proprietary trading. This move caused the financial firm to suffer about $24.47 million in losses when it unwound the unauthorized positions.

The SEC claims that over a 3-month period in 2009, Feinblum, who was a supervisor on Morgan Stanley’s Equity Financing Products Swaps Desk, and trader Jennifer Kim executed a number of transactions that set up net risk positions that were significantly over limits that “could be exceeded only with supervisory approval.” The two are also accused of submitting swap orders into the firm’s risk management system that they never planned on executing and which they then promptly canceled.

The SEC says that not only did Feinblum and Kim set up their arbitrage trading strategy at positions that exceeded Morgan Stanley’s risk limits, but they also submitted the orders for the purpose of artificially and temporarily lowering the net risk positions in the securities as recorded in the firm’s risk management systems. They also went after a trading strategy that was supposed to create a profit from price discrepancies between foreign markets and US markets.

On December 17, 2009, Feinblum, who had just lost $7 million the day before, admitted that he and Kim had gone beyond the risk limits on repeated occasions and that they hid their misconduct. Morgan Stanley then proceeded to unwind the positions but by then they had already taken the financial hit.


Related Web Resources:

Former Morgan Stanley Trader Barred for Bogus Swaps, Securities Technology Monitor, June 2, 2011
SEC: Morgan Stanley trader’s trick caused millions in losses, The Washington Post, June 2, 2011
SEC Administrative Proceeding


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China-Based Hackers Broke into Morgan Stanley Network, Reports Bloomberg, Stockbroker Fraud Blog, February 28, 2011
Morgan Stanley Failed to Disclose Financial Adviser’s Felony Charge to FINRA, Claims Car Accident Victim’s Attorney, Stockbroker Fraud Blog, January 10, 2011
Morgan Stanley & Co. and TD Ameritrade Inc. to Repurchase Over $338M in Auction Rate Securities from New Jersey Investors, Institutional Investor Securities Blog, May 4, 2011 Continue Reading ›

In Houston, a FINRA arbitration panel has awarded Boushy North Investments, Ltd. $500,000 in its securities arbitration case against Penson Financial Services, Inc. Boushy North Investments had initially sought $4M in punitive damages and more than $3.8M in compensatory damages for negligence, unauthorized trading, breach of fiduciary duty, and gross negligence. At the Texas securities arbitration hearing, however, the Claimant amended and reduced its compensatory damages and withdrew punitive damages and legal fees.

Boushy North Investments accused Penson of failing to prevent an unsuitable and unauthorized day-trading strategy for its family limited-partnership account. Meantime, Penson denied the allegations, asserted specific defenses, and submitted a Third-Party Complaint against Thomas Cooper and Second Mile Wealth Management, Inc., which asserted causes of action over crack of contract, indemnification, and rascal linked to the Third-Party Respondents’ purported element representations about the trade and the direction of the trading in Claimant’s account. Penson eventually discharged its Third-Party Claim’s result of action for fraud.

The claim for unauthorized trading hadn’t been included in the Original Statement of Claim submitted in September 2009. The first effort to amend that was February. However, FINRA denied it because different or new pleadings cannot be turned in after a panel has been chosen and if a leave to amend hasn’t been granted. Last month, however, after the proper motions were submitted, the panel granted the unauthorized trading count.

Penson Faced Multi-Million Dollar Day-Trading Claim in FINRA Arbitration, Broke and Broker, June 1, 2011
Multi-Million Dollar Day-Trading Claim Hits Penson in FINRA Arbitration, Forbes, May 31, 2011

More Blog Posts:

District Court in Texas Decides that Credit Suisse Securities Doesn’t Have to pay Additional $186,000 Arbitration Award to Luby’s Restaurant Over ARS, Stockbroker Fraud Blog, June 2, 2011
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Texas-Based AIG’s Largest Private Shareholder Says US Will Likely Sell Its Shares in the Insurer At Lower Price than Expected, Stockbroker Fraud Blog, May 13, 2011 Continue Reading ›

The nation’s highest court has decided not to review three federal appeals court rulings that brought up the securities law issues of disclosure obligations and antifraud liability. The cases are Amorosa v. Ernst & Young LLP, Pacific Investment Management Co. v. Mayer Brown LLP, and Full Value Advisors LLC v. SEC.

In the liability case against Ernst & Young, the U.S. Court of Appeals for the Second Circuit held that the district court was correct in turning down the investor’s lawsuit, which alleged fraudulent accounting practices at America Online and later at AOLTime Warner. The court had found that the plaintiff failed to adequately allege loss causation.

The appeals court also affirmed the dismissal of the second liability-related securities fraud case, this one against Mayer Brown LLP, over the latter’s alleged involvement in the fraud at Refco Inc. The court concluded that secondary actors can only be held liable for false statements that they made at the time it issued them (this finding rejected the SEC’s broader view of liability for secondary actors in securities fraud cases) and that without attribution the plaintiffs cannot demonstrate that they depended on the defendants’ false statements. The court also said that “participation in the creation of those statements amounts, at most, to aiding and abetting securities fraud.”

In Full Value Advisors LLC v. SEC, the U.S. Court of Appeals for the District of Columbia Circuit had found that the hedge fund adviser’s constitutional challenge to the SEC’s disclosure requirements for large investment advisers was not ripe for judicial review. This ruling prevented the plaintiff from receiving a ruling on the merits of its claims unless the SEC puts together a report that is accessible to the public and includes the allegedly proprietary information.

Pacific Investment Management Co. v. Mayer Brown LLP

Full Value Advisors LLC v. SEC (PDF)


More Blog Posts:

SEC Securities Settlements Often Don’t Come with Admission of Wrongdoing, Institutional Investors Securities Blog, March 29, 2011

CalPERS Files Securities Fraud Lawsuit Against Lehman Brothers, Institutional Investors Securities Blog, February 10, 2011

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

 

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According to the Wall Street Journal, the SEC is trying to figure out whether Goldman Sachs Group Inc. and a number of other financial firms were in violation of bribery laws because of the way they handled Libya’s sovereign-wealth fund. SEC enforcement lawyers are now looking at documents detailing these relationships. Several other companies have had significant interactions with the Libyan Investment Authority, including Och-Ziff Capital Management Group, JP Morgan Chase, and Carlyle Group.

The Journal says that Goldman invested over $1.33 billion from Libya’s fund in a number of trades in 2008. The investment lost over 98% of its value.

US regulators want to know about a $50M and transaction fees that Goldman Sachs said it would pay the fund in exchange for a release of liability and winding down the trades. Although the money reportedly was never handed over before violence flared up last year in Libya, this doesn’t mean that the financial firm is exempt from the federal Foreign Corrupt Practices Act, which does not let US companies offer (or pay) bribes to state-owned company employees or foreign government officials. The money would have gone to an outside advisory firm that was at the time run by the son-in-law of the Libyan national company.

Goldman spokesman Lucas van Praag has said that the financial firm is “confident” that it didn’t do anything that violated any regulation or rule. He noted that the company worked with outside counsel to make sure that it was in compliance with all rules.


Related Web Resources:

SEC Examining If Goldman-Libya Connection Violated Bribery Laws, Huffington Post, June 9, 2010

SEC Looks At Goldman, Others’ Dealing With Libyan Sovereign Fund, The Wall Street Journal, June 9, 2011

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Goldman Sachs Ordered by FINRA to Pay $650K Fine For Not Disclosing that Broker Responsible for CDO ABACUS 2007-ACI Was Target of SEC Investigation, Stockbroker Fraud Blog, November 12, 2010

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The Securities and Exchange Commission has approved the Financial Industry Regulatory Authority’s proposed rule change subjecting certain back office personnel of broker-dealers to registration and qualification examination requirements. The changes would be made to FINRA Rule 1230(b)(6).

The SEC says it is approving the proposed change on an expedited basis because it is in line with the 1934 Securities Exchange Act requirement that FINRA rules should protect investors while preventing securities fraud and manipulation. As part of the rule change, registration category and a qualification exam category would be set up for certain operations personnel, who would also be subject to continuing education requirements. The Commission believes that this rule change will take care of certain regulatory gaps that still exist in the industry.

Those subject to the rule change would be three categories of persons:
• Senior management in charge of covered functions (these include customer account data; document maintenance, collection, maintenance and reinvestment of funds; stock loan/securities lending; and delivery and receipt of fund and securities)
• Personnel accountable for authorizing work that advances the covered functions • Persons authorized to commit a member’s capital to directly advance the covered functions
FINRA is recommending that the new requirements be phased in. The SEC is currently soliciting comments.

Related Web Resources:

US SEC Approves Registration of Brokerage Back-Office Employees, Wall Street Journal, June 17, 2011
FINRA to Share Details on New Back-Office Staff Rules, AdvisorOne, June 20, 2011
1934 Securities Exchange Act

More Blog Posts:
SEC Approves FINRA’s Proposal to Give Investors an All-Public Arbitration Panel Option, Stockbroker Fraud Blog, February 12, 2011
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Fiduciary Standard in Securities Industry Doesn’t Need New Definition, Stockbroker Fraud Blog, November 26, 2010 Continue Reading ›

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