Investor Lawyers Blog

Texas Financier Allen Stanford’s Ponzi Scam: SIPC Asks District Court to Toss Out SEC Lawsuit Seeking to Reimburse Fraud Victims

Published on: March 5, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Securities Investor Protection Corp. is asking the U.S. District Court for the District of Columbia to reject the SEC’s request for an order that would make it pay back the victim of Texas financier R. Allen Stanford’s $7 Billion Ponzi scam. The brokerage industry-funded nonprofit claims that the Commission has not demonstrated that these investors are eligible to receive this type of coverage from SIPC.

Standing by SIPC is the National Association of Independent Broker/Dealers. The group wrote a letter to SEC Chairman Mary Schapiro contending that forcing the nonprofit to pay back Stanford’s victims is not only a “misfit solution,” but also, it will establish an “unsustainable precedent.”

The SEC’s securities lawsuit against SIPC is an attempt to force a brokerage’s liquidation, which is the first step that SIPC must take under the Securities Investor Protection Act to pay back the clients of its member firms. SIPC, however, has refused to do so on the grounds that Stanford International Bank, which is based in Antigua, is not one if its member firms. Stanford International Bank is the financial firm that issued the more than $7.2 billion CDs that were sold to investors. (It is Stanford Group Co. that belongs to SIPC.) The CDs now have no value.

House To Vote On GOP Legislation Related to Small Business’ Access to Capital

Published on: March 5, 2012 | by Shepherd Smith Edwards & Kantas, LLP

This week, the House is slated to vote on a Republican legislative package to make it easier for small businesses to access capital. On February 28, House Majority Leader Eric Cantor (R-Va.) presented his Jumpstart Our Business Startups Act’s final version, which is comprised of six bills that would revise securities laws to make this capital flow happen. Included in this package is a bill calling for more shareholder reporting triggers for community banks. Meantime, Senate Majority Leader Harry Reid (D-Nev) has said he plans to push forward a similar package in the US Senate.

As both the House and Senate move forward with their legislative packages, Senator Scott Brown (R-Mass) is asking the Senate to push forward his bill, which would allow for a crowdfunding-related securities registration exemption. His bill (S. 1971) and Sen. Jeff Merkley’s (D-Ore.) S. 1970 similarly are pressing for letting issuers raise up to $1 million yearly through crowdfunding. However, Merkley’s bill establishes a part for states to play in regulating crowdfunding securities, while Brown’s bill does not. The Senator from Massachusetts believes a national framework is necessary, rather than making entrepreneurs comply with each state’s securities law mandate. Also, while Merkeley’s bill calls for giving investors a private right of action to file a civil suit against fraud issuers, Brown doesn’t believe this is necessary and sees current fraud laws as “solid” and merely in need of enforcement. He did, however, say that he and Merkeley share the same desire for investor protection.

Regarding the issue of the Securities and Exchange Commission’s capital formation efforts on small businesses, SEC Division of Corporation Finance Director Meredith Cross said it is hard right now for the regulator to evaluate their impact. Cross, who was part of a panel at the Practising Law Institute’s SEC Speaks conference on February 24, said her views are her own.

FINRA May Surrender Proprietary BrokerCheck Lock

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

The Financial Industry Regulatory Authority Inc. is thinking of giving up its proprietary lock on BrokerCheck information. This would allow for greater examination of a broker’s disciplinary data, including regulatory and arbitration actions, as well as customer complaints. The SRO is currently seeking public comment on this matter through April 6.

Opening up access to BrokerCheck data would allow commercial users to make the reports, known for being pretty dense, friendlier for users. (Some people have said that the information available is “convoluted” and uses language that can be hard for an investor to comprehend.) This could help investors more easily find information about a broker. Also, vendors might be able to establish comparison data and some complaint data on the firm-level could become accessible.

Up until this point, FINRA has been protective about keeping its disciplinary information confidential. Not only has it prevented the automatic downloading of the BrokerCheck database, but also, this information has only been available through one-off data requests by individuals.

Critics of FINRA’s closed door policy have said these limitations protect the financial industry by keeping embarrassing information about firms and brokers private. While this has allowed financial advisers with numerous complaints against them to keep such secrets quiet, invaluable information, such as whether one broker has received more complaints than another, ends up not becoming known. The SRO, however, maintains that it hasn’t been shielding the industry with its BrokerCheck restrictions.

One reason that FINRA is considering making its BrokerCheck data more easily accessible is because it has been under pressure to merge the database’s search results with the Investment Adviser Public Disclosure database. IAPD data is pubic information and can be downloaded automatically. (Last year, FINRA considered putting the two systems together into one database to be made public but now says it is more practical to keep them separate.)

It wasn’t until recently that FINRA was the only regulator to have an online tool that let investors look into the backgrounds of members of the financial services industry. It was in 2010 that the Securities and Exchange Commission widened the IAPD database to include not just investment advisor firm information, but also data about IA representatives.

Last year, as mandated by Dodd-Frank’s Section 919B, the Commission put out a study and recommendations on how to better investor access to information related to broker-dealer and investment adviser registration. AdvisorOne reports that to improve how investors can better access this type of data, the SEC is recommending that search findings for it and the IAPD databases be unified, zip code and other location indicator-related searches be implemented, and educational content to help investors navigate any unfamiliar term definitions or links be included. Dodd-Frank wants these recommendations implemented soon, and FINRA plans to have this completed by the July deadline.

FINRA to Restructure BrokerCheck, Giving Investors More Power, AdvisorOne, March 2, 2012

Finra may give up lock on BrokerCheck, InvestmentNews, March 1, 2012

More Blog Posts:
Appeals Court affirm SEC Finding that Broker Acted “Willfully” When Keeping IRS Lien Information from FINRA, February 24, 2012

FINRA Says Charles Schwab Corp. is Making Customers Waive Right to Pursue Class Action Lawsuits, February 8, 2012

Merrill Lynch, Pierce, Fenner & Smith Ordered to Pay $1M FINRA Fine for Not Arbitrating Employee Disputes Over Retention Bonuses, Institutional Investor Securities Blog, January 6, 2012 Continue Reading ›

US Sentencing Commission is Open to Public Comment on Proposed Amendments that Could Impact Insider Trading Convictions

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

The U.S. Sentencing Commission is welcoming public comment on amendments that have been proposed to its sentencing guidelines, which would ramp up the offense level for certain insider trading cases. Also, there are other proposals, related to amendments to the guidelines that get specific about determining loss in fraud cases, dealing with the rehabilitative efforts of offenders, and assessing the harm related to bank and mortgage fraud.

The proposed amendment to Section 2B1.4 of the US Sentencing Guidelines calls for an offense-level enhancement if the defendant accused of insider training had occupied a position of trust (four levels) or used sophisticated means (two levels), with the latter requiring a minimum base offense level of 12. Right now, insider trading’s base offense level is eight.

Under the proposed amendment, the term “sophisticated” would mean a very complex offense conduct as it relates to hiding or executing the offense. Factors that courts would take into account to determine whether sophisticated means were applied by the inside trader include how many transactions were made, the monetary value of each transaction, the number of securities involved, the duration of time that the offense took place for, whether shell companies, fake entities, or offshore accounts were used to hide the transactions, and if auditing mechanisms, internal compliance policies, and compliance and ethics programs were undermined to cover up the insider trading scam.

The proposed amendment as it relates to mortgage fraud and other financial institution-related frauds would deal with foreseeable pecuniary harm (including costs the lending institution involved with foreclosure on the mortgaged property would have to pay), as long as the institution had applied due diligence during initiation, monitoring, the processing of the loan, and collateral disposal.

The US Sentencing Commission also wants to look at making clear what method or methods would be used to figure out securities fraud losses. Commission members are hoping this will stop sentencing disparities from occurring. Methods that have been used to figure out loss have included the modified rescissory method, the simple rescissory method, the market-adjusted method, and market capitalization.

Modified rescissory method: Concentrates on the difference between the average security price after market disclosure and the average security price while the fraud was occurring.

Simple rescissory method: Looks at the price paid for the security and what that was after the fraud was uncovered.

Market-adjusted method: Can turn according to changes in the values of the securities (but doesn’t include changes related to external market forces.)

Market capitalization: Looks at the difference between the price after disclosure and beforehand.

The commission is looking into providing a loss-causation standard not unlike the one for civil securities fraud cases.

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

SEC Wants Proposed Securities Settlements with Bear Stearns Executives to Get Court Approval

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

The Securities and Exchange Commission wants the U.S. District Court for the Eastern District of New York to approve the proposed securities settlements that it reached with Matthew Tannin and Ralph Cioffi, two former Bear Stearns & Co. portfolio managers. The SEC says the deals are “fair, adequate, and reasonable.”

The settlements are to resolve SEC allegations that the two men misled bank counterparts and investors about two hedge funds’ financial states. Subprime mortgage-backed securities exposure caused the funds to collapse in 2007 and investors lost about $1.8 billion. (Bear Stearns’ hedge funds were some of the first to fail when the housing bubble popped.)

According to federal prosecutors, Cioffi and Tannen promoted the prospects of the funds even though they knew that their portfolio and the housing market were in dire straights. In the process, they earned millions of dollars.

A jury acquitted both of them criminal charges in these matters in 2009. This was a criminal case filed separate from the SEC’s securities fraud complaint against them. The proposed securities fraud settlement with the Commission allows Tannin and Cioffi to not have to go through a second trial.

As part of the settlement, Tannin and Cioffi have agreed to pay $1 million-Cioffi’s portion would be $700,000 in disgorgement plus a fine of $100,000 and Tannin would pay $200,000 in disgorgement and a $50,000 fine. Also, Cioffi wouldn’t be allowed to associate with any municipal securities dealers, investment advisers, or other financial industry professionals for three years. The ban for Tannin would be two years. Both of them would not have to admit wrongdoing.

Federal Judge Frederic Block, who will decide whether or not to approve the securities fraud settlement, has referred to the money the two men have agreed to pay as “chump change.” He has, however, indicated that he will likely sign off on it.

That said, as our securities fraud lawyers have reported in recent blog posts, the SEC recently came under fire for allowing parties to settle securities fraud cases by paying fines that some don’t believe reflect the true damages sustained by investors and others. Critics have also taken issue with the SEC’s practice of letting financial firms, brokers, and investment advisers settle without having to admit to any wrongdoing.

In response to Block’s concerns, the SEC noted that although courts should just approve Commission settlements, they also shouldn’t replace their own judgments with what the parties involved have agreed upon. The regulatory agency says that as long as the settlements reached don’t ignore any state or federal laws that apply and fail to create a burden on judicial resources, there is no reason why a court shouldn’t approve these agreements. The SEC pointed out that the financial settlement reached with Cioffi and Tannen is in the range of what might have been arrived at had the case gone to court.

Bear Stearns Ex-Managers to Pay $1 Million to Settle Fraud Case, New York TImes, February 13, 2012

SEC Charges Two Former Bear Stearns Hedge Fund Portfolio Managers with Securities Fraud, SEC, June 19, 2008

More Blog Posts:
Motion for Class Certification in Lawsuit Against J.P. Morgan Securities Inc. Over Alleged Market Manipulation Scam Granted in Part by Court, Stockbroker Fraud Blog, July 23, 2010
Bear Stearns Sold to JP Morgan – One Firm’s Trash Is Another Firm’s Treasure!, Stockbroker Fraud Blog, March 17, 2008
Insurer Claims that JP Morgan and Bear Stearns Bilked Clients Of Billions of Dollars with Handling of Mortgage Repurchases, Stockbroker Fraud Blog, February 3, 2011 Continue Reading ›

Investment Adviser Roundup: Two Firms Pay Over $47M For Alleged Failure to Properly Disclose Allegations, District Court Allows Claims Involving Excessive Mutual Fund Fees, and Conn. Firm to Settle CDO Misrepresentation Allegations for $1.62M

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

Investment Advisory Firms Settle SEC’s Failure to Disclose Mutual Fund Risk Allegations for Over $47M

Claymore Advisors LLC and Fiduciary Asset Management LLC have agreed to pay over $47 million to settle SEC proceedings related to the roles that they allegedly played in failing to properly disclose the risky derivative strategies of a closed-end mutual fund. The strategies are partially to be blame for the collapse of the

Fiduciary/Claymore Dynamic Equity Fund (HCE) during the economic crisis. The two firms are resolving the claims without denying or admitting to wrongdoing, and some of the money will go toward reimbursing shareholders.

Democrats Want to Volcker Rule to Be Clear About Banks Being Allowed to Invest in Venture Capital Funds

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

With regulators tasked with finalizing the Volcker rule, Democratic lawmakers want them to make sure that the rule makes clear that banks are allowed to invest in venture capital funds. The proposed rule is geared toward lowering financial system risk by not letting banks to take part in proprietary trading, while limiting how much they can invest in private equity and hedge funds.

The lawmakers, 26 of whom have written to the federal agencies working on the rule, noted that venture capital firms are not as high risk as private equity and hedge funds. The Volcker rule would be an implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 619. Once finalized, it will go into effect on July 21.

Meantime, European Union Council of Ministers President Margrethe Vestager wants to make sure that the Volcker rule treats non-U.S. sovereign debt and US government securities the same. Vestager wrote to Federal Reserve Chairman Ben Bernanke making her case that the federal agencies need to make sure the extraterritorial application of the Volcker rule doesn’t happen. Vestager is concerned that otherwise the competition for non-US banks would be impeded.

SEC Warning to Investors: Watch Out for Fraudsters Posing As Regulators

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

The Securities and Exchange Commission wants investors to watch out for scammers pretending to be SEC employees who are soliciting investments. The warning is an update of a previous alert. The Commission is issuing it once again in the wake of a rise in the number complaints about this type of fraud.

In its alert, the SEC said that it does not endorse financial solicitation offers, help in the sale or purchase of securities, or take part in money transfers. The agency also noted that it isn’t associated with any drawings, sweepstakes, lotteries, or other events involving prizes, winnings, or money windfalls.

Fraudsters have been known to solicit targets by phone, e-mail, and other means, and they are likely to ask for detailed financial and personal information. The SEC says to watch out for anyone claiming to be affiliated with the federal agency and who claims to be looking for help with a fund transfer, wants to send over an investment offer, offers to provide advise about securities or financial assistance (for an upfront fee), or tells you that you are eligible for disbursements from a class action settlement or an investor claim fund.

SEC Chairwoman Defends ‘No Wrongdoing’ Settlements

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

Securities and Exchange Commission Chairwoman Mary L. Schapiro said that the agency’s practice of reaching settlements with financial firms without them having to admit wrongdoing has “deterrent value” despite the fact that some of these firms have been charged more than once for violating the same securities laws. Schapiro noted that the commission ends up bringing a lot of the same kinds of securities cases so that people don’t forget their obligations or that they are being watched by an entity that will hold them responsible.

The SEC will often settle securities fraud cases with a financial firm my having the latter pay a fine and not denying (or admit) that any wrongdoing was done. Expensive court costs are avoided and a resolution is reached.

The SEC has said that financial firms won’t settle if they have to acknowledge wrongdoing because this could make them liable in civil cases filed against them over the same matters. Schapiro says the SEC only settles when the amount it is to receive by settling is about the same as it would likely get if the commission were to win the lawsuit in court.

NFA Enforcement Action Filed Naming Texas Financial Firm J Hansen Investments

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

The National Futures Association has put out an emergency enforcement action against J Hansen Investments LLC and Jonathan Hansen, who is the financial firm’s principal. The Houston, Texas financial firm is a commodity pool operator and an NFA member.

NFA actions taken against JHI and Hansen are the Associate Responsibility Action and the Member Responsibility Action. The Houston financial firm and its principal are accused of failing to cooperating with NFA during a firm examination.

NFA began an unannounced exam of JHI following the latter’s submission of its yearly questionnaire. On it, the financial firm noted that it was running as a commodity pool despite the fact that it had no commodity pools listed with the NFA, never turned in a disclosure document with the association, and lacks CFTC exemptions.