Investor Lawyers Blog

Pressure from Regulators and Investors Prompts Carlyle Group to Drop Arbitration Clause from its IPO Filing

Published on: February 9, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Carlyle Group will no longer be including a controversial arbitration clause initial public offering filing. The private equity giant had filed its IPO documents last year but has since been pressed by regulators and investors to drop the clause, which would have prevented company shareholders from submitting class action lawsuits and instead require that they go through a confidential arbitration process.

There had been concern from the Securities and Exchange Commission, lawmakers, and investors that the clause would prevent shareholders from bringing claims against the Carlyle Group in the event of wrongdoing. Earlier this month, the private equity group’s spokesperson Christopher W. Ullman said that after talking with the SEC and its investors, the Carlyle Group was withdrawing the proposed provision. Ullman was also quick to clarify that the original intent of the clause was to make the process for potential claims more cost-effective for everyone involved.

However, there is also the possibility that if the company had chosen not to withdraw the arbitration clause, the SEC may not have allowed the IPO to go forward. Senators Robert Menendez (D-NJ), Al Franken (D-Minn.), and Richard Blumenthal (D-Conn.) had even recently written to SEC chairwoman Mary L. Schapiro asking the SEC to block the IPO offering if the clause, which they believed would take away investors’ rights, wasn’t removed.

In their letter, the senators reminded the SEC that private securities litigation remains an “indispensable tool” that allows defrauded investors to get back their losses without needing to depend on the government. They cited the Exchange Act’s Section 10(b), which establishes an investor’s private right of action to file a lawsuit against an insurer for deceitful/fraudulent statements and actions allegedly committed when selling securities. The senators also said that making individuals only be able to go through the confidential arbitration process for shareholder claims would limit their ability to enforce their rights under the Exchange Act’s Section (10b), which would then violate the Act’s Section 29(a)’s statutory language.

The Senators wrote about how they believed that private arbitration significantly limits or doesn’t allow for pretrial discovery, which can then make complex securities claims impossible to prove. They also said that the private arbitration system generally favors the companies that retained their services as opposed to the individual shareholder with a claim. (Ullman said the Carlyle Group decided to take the arbitration clause out even before the senators had sent their letter to Schapiro.)

The Carlyle Group is shooting for its IPO to happen during the first half of the year. Last year, the firm revealed that about 36% of its assets are in private equity funds. Approximately 21% are in the areas of energy and real estate, while approximately 29% are in funds of funds. Carlyle Group has over 1,400 hundred investors in more than 73 nations. Its executives have gotten up to 60% of their compensation based on how the funds they focus on perform—the remaining amount is based on the performance of the firm. The filing says that once Carlyle becomes a public company, it executives will obtain about 45% of their compensation from their own funds’ returns, which is more in line with the industry average.

Our institutional investment fraud attorneys represent clients throughout the US. We also have clients abroad with securities fraud claims and lawsuits against financial firms in the US.

Carlyle Drops Arbitration Clause From I.P.O. Plans, New York Times, February 3, 2012

Carlyle Drops Forced Arbitration Clause In IPO, The Wall Street Journal, February 3, 2012

Private equity giant Carlyle files for IPO, Reuters, September 6, 2011

More Blog Posts:
Senate Passes Bill Banning Congressional Insider Trading, Institutional Investor Securities Blog, February 8, 2012

With Confirmation of Richard Cordray as Its Director, The Consumer Financial Protection Bureau Can Finally Get to Work, Institutional Investor Securities Blog, January 4, 2012

SEC and SIPC Go to Court to Over Whether SIPA Protects Stanford Ponzi Fraud Investors, Stockbroker Fraud Blog, February 6, 2012

FINRA Says Charles Schwab Corp. is Making Customers Waive Right to Pursue Class Action Lawsuits

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

The Financial Industry Regulatory Authority has filed a complaint against Charles Schwab Corp. The SRO says the online brokerage is in violation of FINRA rules because it makes clients waive their rights to pursue class actions against it.

Per a new provision added to over 6.8 million customer account agreements, Charles Schwab clients are now not allowed to begin or join class-action complaints against the financial firm. Customers must also agree that arbitrators won’t be given authority to consolidate claims from different parties, as this would set up a class-action situation.

Over 50,000 clients have opened accounts with the financial firm since it implemented this new limitation. Now, FINRA wants an expedited hearing. The SRO is concerned that the class action waiver will cause millions of Schwab clients to mistakenly think they cannot bring or take part in an already existing class action complaint against the brokerage firm. Also, FINRA has specific rules about the conditions that financial firms can place on clients, and the SRO says this provision is a definite violation.

Senate Passes Bill Banning Congressional Insider Trading

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

Two days after the US Senate votes 92 to 2 to take up a measure that would ban Congressional members from engaging in insider trading, the legislation has passed by a 96 to 3 vote. The bill, which bars members of Congress from using confidential information obtained as a result of being in public office to trade stock, had temporarily become entangled in the proposals of over two dozen amendments, with some of the amendments seeking to strengthen the bill and others looking to weaken it.

One of the amendments that passed by a 58-41 vote would extend the new rules of the bill to cover members of the executive branch. Per the bill, Congressional members, senior administration officials, and top aides would have 30 days instead of a year to disclose financial transactions.

President Barack Obama is a supporter of the Stop Trading on Congressional Knowledge (STOCK) Act. During his State of the Union address last month, he said that if Congress placed their signatures of approval on the bill he would sign it into law right away. There is currently a companion bill making its way through the House that has over 255 co-sponsors and still must be put to a vote.

Authored by Senators Scott Brown (R-Mass.) and Kirsten Gillibrand (D-N.Y.), the STOCK Act is derived from two bills authored respectively by both of them. It was Senate Homeland Security and Government Reform Committee Chairman Joe Lieberman (I-Ct.) that combined the two bills.

Originally introduced in 2006, the STOCK Act started to generate a lot more interest from lawmakers after the CBS news program 60 minutes reported that members of Congress bought stock in companies while debating on laws that could impact the businesses. These investments were not illegal.

Other provisions of the combined bill include making it illegal for Congress members to tip off others, which would become a crime and a violation of congressional rules. However, the bill does not ban lawmakers from doing political favors for companies that they have stock in as long as they don’t actually sell the stock.

As our securities fraud law firm mentioned in an earlier blog post, the Securities and Exchange Commission grew worried that placing this kind of insider trading ban on lawmakers affect the scope of existing laws. The SEC instead wanted there to be a fiduciary duty barring members of Congress from revealing confidential information and using what they know for personal gain.

The use of confidential insider information to make a trading profit is wrong—even if some consider it a victimless crime.

Lure of a Senate Bill Attracts Amendments, Some of Them Relevant, The New York Times, February 1, 2012

STOCK Act: Insider Trading Bill To Receive Senate Vote Next Week, Huffington Post, January 26, 2012

More Blog Posts:

$78M Insider Trading Scam: “Operation Perfect Hedge” Leads to Criminal Charges for Seven Financial Industry Professionals, Stockbroker Fraud Blog, January 18, 2012

Measure Banning Insider Trading Gains Support of Congress Members, Stockbroker Fraud Blog, September 24, 2011

Two Ex-Credit Suisse Executives Plead Guilty to Mortgage-Backed Securities Fraud

Published on: February 7, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Salmaan Siddiqui and David Higgs have pled guilty to conspiracy to commit wire fraud and conspiracy to falsify books in the mortgage-backed securities fraud case against them. Higgs was former a Credit Suisse managing director while Siddiqui had been vice president.

The US Securities and Exchange Commission and the Justice Department have been conducting coordinated enforcement efforts against Higgs, Siddiqui, and Kareen Serageldin. They are charged with fraudulently inflating asset-backed bonds’ prices during late 2007 and early 2008. The bonds consisted of commercial mortgage-backed securities and subprime residential mortgage-backed securities in Credit Suisse’s trading books. Their alleged manipulation of the bond prices resulted in the financial firm getting a $2.65B write-down of its end of the year financial results for 2007. Meantime, seeing as trading book profitability determines bonuses, the three defendants obtained hefty ones.

In addition to the three men, the SEC is also suing Faisal Siddiqui as a fourth defendant. In its securities fraud complaint, the Commission accused the men of being involved in a scam to fraudulently overstate the prices of over $3B of subprime bonds. Recorded phone calls document their fraudulent actions.

Serageldin, who was Credit Suisse’s Structured Credit Trading global head, reportedly initiated the MBS fraud while Higgs, who was with the financial firm’s Hedge Trading, oversaw the operation. The Siddiquis, who are not related to each other, were brokers that allegedly falsely processed the bonds’ prices.

In August 2007, the defendants reportedly started pricing the bonds in a way that would benefit them, rather than recording the fair value. The MBS scam would continue to accelerate as the credit markets faltered. By the end of the year, they were pricing the bonds at falsely high levels. Higgs would later on get the bond prices raised beyond their year-end levels to gain favorable P & L results at the end of January.

In February, Credit Suisse reported having a 2007 net income of $7.12 billion and fourth quarter earnings of $1.16B. Seeing as these figures incorporated the false gains, the information was materially misleading and false. Their scam fell apart when Credit Suisse senior management realized that specific bonds that the defendants’ controlled had been priced abnormally high.

MBS Pricing by Credit Suisse Traders
Credit Suisse traders must price the securities that they hold at fair value, which is determined by current market price or the current price for a similar liability or asset. When there is no liquid market, the traders have to refer to other indicia to determine their assets’ fair value. Credit Suisse brokers know that the ABX indices are the benchmark for specific securities backed by home loans and that they must refer to it when placing a price on RMBS bonds and related products.

Ex-Credit Suisse bond players plead guilty to MBS fraud, Housing Wire, February 2, 2012

Manhattan U.S. Attorney and FBI Assistant Director in Charge Announce Charges Against Two Former Credit Suisse Managing Directors and Vice President for Fraudulently Inflating Subprime Mortgage-Related Bond Prices in Trading Book, FBI, February 2012

SEC Charges Former Credit Suisse Investment Bankers in Subprime Bond Pricing Scheme, SEC, February 1, 2012

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

Credit Suisse Group AG Must Pay ST Microelectronics NV $431 Million Auction-Rate Securities Arbitration Award, Stockbroker Fraud Blog, April 5, 2012

Citigroup to Pay $285M to Settle SEC Lawsuit Alleging Securities Fraud in $1B Derivatives Deal, Institutional Investor Securities Blog, October 20, 2011

SEC and SIPC Go to Court Over Whether SIPA Protects Stanford Ponzi Fraud Investors

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

The US Securities and Exchange Commission is asking District Judge Robert Wilkins to make the federal Securities Investor Protection Corp. set up a claims process for the Ponzi fraud victims of R. Allen Stanford. These investors had purchased $7.2B in certificates of deposit that allegedly ended up being bogus. The SEC is suing SIPC in an attempt to get it to pay Stanford’s investors for their losses.

SIPC is a nonprofit corporation that gets its funding from the brokerage industry. It is supposed to insure clients against losses resulting from broker theft.

The Commission contends that per the Security Investor Protection Act’s Section 16(b), these investors are protected because the money they deposited at Stanford International Bank Ltd. in Antigua to buy the CD’s was considered to have been deposited with Stanford Group Co., which is a SIPC member. The Commission wants the nonprofit corporation, to begin liquidation proceedings in federal court in Texas.

More than $1B in securities fraud claims from thousands of claimants related to the Stanford Ponzi fraud would likely be filed if the judge were to approve the SEC’s request.

The issue here is whether the clients who were victimized by the Stanford Ponzi scam are eligible to have SIPC cover the losses they sustained. SIPC says no. The group doesn’t believe that the Stanford Investments meets the criteria set up by federal law over who can qualify for payouts from such losses.

Attorneys for SIPC claims that the SEC is trying to set up a liquidation proceeding without there having to be a judicial review regarding whether the law would consider Stanford’s investors “customers.” SIPC wants the judge to order the SEC to refile its complaint, allow for discovery, and then determine this point.

Meantime, Stanford’s criminal trial is underway in Texas. Prosecutors are accusing him of bilking investors by getting them to invest in $7B in fake CDs while he used their funds to support his business and pay for an extravagant lifestyle. Stanford has denied any wrongdoing.

At his trial last week, former Stanford Financial Group Co. CFO James M. Davis testified against Stanford. Davis’s testimony against Stanford is part of the plea deal that he struck. Not only was Stanford Davis’s former boss, but also the two were once roommates at Baylor University.

According to Davis, Stanford told executives to falsify investment returns and that his boss threatened to terminate their employment if they ever reported that he borrowed over $2B from his Antigua bank to pay for his extravagant quality of life. Davis, who pleaded guilty to helping Stanford defraud investors, is facing up to three decades behind bars.

SEC Asks Federal Judge to Order SIPC Payout Plan for Stanford Investors, Bloomberg, January 24, 2012
SEC Suit Pursues Payouts by SIPC, Wall Street Journal, December 13, 2011
Allen Stanford Was ‘Chief Faker,’ Ex-Finance Chief Testifies, Bloomberg, February 6, 2012

More Blog Posts:
Jury Trial Begins in Ponzi Scammer Allen Stanford’s Criminal Case, Stockbroker Fraud Blog, January 23, 2012

SEC Sues SIPC Over R. Allen Stanford Ponzi Payouts, Stockbroker Fraud Blog, December 20, 2011
SEC Issues Emergency Order to Stop $26M “Green” Ponzi Scam, Institutional Investor Securities Blog, October 13, 2011 Continue Reading ›

AmeriFirst Funding Corp. Owner Convicted of Texas Securities Fraud

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

The former COO of AmeriFirst Acceptance Corp. and AmeriFirst Funding Corp. was recently convicted of multiple counts of Texas securities fraud and mail fraud for his involvement in bilking over 500 investors of over $50 million. A lot of the victims of Dennis Woods Bowden were retirees.

Per evidence that was given at trial, the 58-year-old executive and Jeffrey Charles Bruteyn, who was AmeriFirst’s managing director, made available Secured Debt Obligations (SDOs) as promissory note offerings to raise millions of dollars from investors in Florida and Texas. A lot of these clients, who were no longer employed, had hoped to place their money in investments that were safe.

While Bruteyn, who was convicted of nine counts of Texas securities fraud, directed brokers to sell the securities, it was Bowden who deceived and misled and defrauded them by signing the documents that were given to investors and misrepresenting/not disclosing material facts about the securities and the risks involved. For example, he falsely represented to investors that:

FINRA Investor Education Foundation and NFL Player Join Forces To Protect Pro Football Players from Investment Fraud

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

In an effort to help incoming National Football League members from getting their careers started on solid financial ground, the NFL and the Financial Industry Regulatory Authority Investor Education Foundation are working with each other to help educate players and their families about investment fraud. The joint efforts come in the wake of professional players finding themselves the target of financial scams.

At events held during the East/West Shrine Game in Florida last month, the NFL and FINRA Foundation planed to reach participants through video presentation and other resources regarding:

• Selecting the right financial professionals • Checking these represenatives’ backgrounds • Becoming educated about debt.

CFTC and SEC May Need to Work Out Key Differences Related to Over-the-Counter Derivatives Rulemaking

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

In their efforts to move forward with rulemaking for over-the-counter derivatives, some are saying that the Commodities Futures Trading Commission and the Securities and Exchange Commission may find themselves grappling with differences that could pose a challenge for industry participants. For example, differences between proposed and final regulations could set up compliance issues. Also, the regulators appear to be working at separate paces to put into effect the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Title VII, which issued a directive to both regulators ordering them to establish a regulatory regime to oversee swaps.

According to reform legislation, security-based swaps are swaps based on one loan or security or on a securities index that is narrowly based. In general, the CFTC’s jurisdiction includes all swaps except for security-based swaps, which the SEC oversees.

With the other types of swaps under its charge, the CFTC has to write a lot more swap regulations compared to the SEC. So far, under Title VII the CFTC has finalized 25 swap rules. The SEC has adopted three. (Just last January, the CFTC adopted rules addressing cleared swaps customer collateral segregation, registering significant swap participants and swap dealers, and business conduct for swap dealers interacting with counterparties.) However, together the regulators have jointly put forward proposals for definitions for products and key entities under Title VII. These definitions, however, have yet to be made final and some have expressed concern that the regulators are forging forward with adopting final rules without adopting the key definitions that certain requirements will be relying upon.

FINRA Tells Financial Firms to Heighten Supervision of Complex Products

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

The Financial Industry Regulatory Authority has put out a formal notice to stockbrokers to let them know that complex financial products must come under the focus of heightened supervision. According to the SRO, a complex product is one with numerous features that can impact its investment returns depending on different scenarios-especially if the average retail investor can’t be expected to easily comprehend what these features are and how they can lead to an investment return.

Examples of complex products:

• Investments linked to the way the markets perform, such as certain exchange-traded products that can expose investors to the volatility of the stock market and products that create leveraged or inverse exposure.

Residential Mortgage-Backed Securities Working Group Brings Federal Investigators and State Law Enforcement Officials Together to Investigate How MBS Abuses Contributed to 2008 Financial Crisis

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

55 Federal Bureau of Investigation agents, prosecutors, and analysts have been dispatched by the US government to join up with state law enforcement officials as part of a financial crimes enforcement unit that will investigate how home mortgage abuses played a part in creating the economic meltdown of 2008. The Residential Mortgage-Backed Securities Working Group is headed by the US Department of Justice and New York Attorney General Eric Schneiderman (D). More lawyers, investigators, and support staff will be joining the team in the weeks to come.

Residential Mortgage-Backed Securities were the large investment packages of what proved to be comprised of close to worthless mortgages that not just helped spur on the country’s economic collapse but also bankrupted a lot of investors. SEC enforcement director Robert Khuzami has called the mortgage products the “ground zero” of the crisis.

During his State of the Union speech last week, President Obama announced the expanded federal-state probe that would be conducted by this working unit. The RMBS working group will have collective authority to look into abuses involving all areas of the financial services industry, including the selling, packaging, and valuing of residential MBS.