Investor Lawyers Blog

Pump & Dump Scam Alleged in $600 Million Lawsuit Against Law Firm Baker & McKenzie

Published on: April 13, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Industrial Enterprises of America Inc. (IEAM) is accusing Baker & McKenzie, LLP and former partner Martin Weisberg of securities fraud. The $600 million lawsuit, filed in US Bankruptcy Court, accuses the defendants of setting up a legal structure that allowed for an illegal pump-and-dump scheme and causing the company to sustain $150 million in losses and investors to lose $450 million. Facing criminal fraud charges over the scam are Weisberg and ex-CEOs John D. Mazutto and James W. Margulies.

Industrial Enterprises of America says that Weisberg was the one who helped set up its 2004 stock option plan, which provided for the issuance of restricted shares to employees, consultants, and outside directors. Rather than rewarding the Pittsburgh chemical company’s employees, the strategy was to use “print money” for company executives, their girlfriends, and lawyers.

The plaintiff says that since Weisberg was the beneficiary of the sale of the stock, which was improperly issued, the law firm ignored what was going on while helping IEAM officials steal from the company. Industrial Enterprises of America also contends that there were false and misleading SEC and NASDAQ filings and internal corporate malfeasances were set up to “raid the company of its working capital.”

One year after Industrial Enterprises of America filed for bankruptcy in May 2009, Mazzuto was charged over the allegedly $60 million stock fraud scam. He is accused of issuing shares worth tens of millions of dollars to relatives, friends, and other people he personally knows, which fraudulently inflated the value of the stock.

An indictment said that an attorney trust account that Margulies opened received the most company shares—3.5 million shares that he sold for $17.7 million. About $13 million went back to Industrial Enterprises of America. The remaining funds went to accounts that he and Mazzuto controlled.

Industrial Enterprises of America says that Mazzuto personally made $15 million from the stock scam, Margulies gained $6 million, and Baker & McKenzie earned over $1.7 million in fees. The plaintiff wants restitution for the full value of the shares that were improperly issued, as well as compensation for unspecified damages.

Related Web Resources:

Baker & McKenzie Sued For $600 Mln Over ‘Pump And Dump’ Scheme, Morningstar, December 4, 2011

More Blog Posts:
FBI Arrests Texas Leader of Pump-and-Dump Scheme, Texas Stockbroker Fraud Blog, March 23, 2011

Ex-Gilford Securities Broker Indicted in International Stock Fraud Scam Involving Pump and Dump of Israeli and Chinese Securities, Stockbroker Fraud Blog, February 19, 2011

UBS Financial Services Fined $2.5M and Ordered to Pay $8.25M Over Lehman Brothers-Issued 100% Principal-Protection Notes

Published on: April 12, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is fining UBS Financial Services, Inc. $2.5 million and ordering it to pay $8.25 million in restitution for allegedly misleading investors about the “principal protection” feature of 100% Principal-Protection Notes. Lehman Brothers Holdings Inc. issued the PPNs Holdings Inc. before it filed for bankruptcy in 2008.

FINRA contends that even as the credit crisis was getting worse, between March and June 2008 UBS advertised and described the notes as investments that were principal-protected while failing to make sure clients knew that they PPNs were unsecured obligations of Lehman and that the principal protection feature was subject to issuer credit risk. UBS also allegedly failed to:

• Properly notify its financial advisers of the impact the widening of credit default swaps was having on Lehman’s financial strength
• Sufficiently analyze how appropriate the Lehman-issued PPNs were for certain clients
• Set up a proper supervisory system for the sale of the Lehman-issued PPNs
• Provide proper training or appropriate written supervisory procedures and policies
• Provide adequate suitability procedures for determining who should invest

FINRA also says that UBS developed and used advertising collateral about the PPNs that misled certain clients, such as the suggestion that a return of principal was certain as long as clients held the product until it matured. FINRA claims that the reason that some UBS financial advisers gave incorrect information to customers was because they themselves didn’t fully understand the product.

FINRA says that because UBS’s suitability procedures were inadequate and certain PPN’s lacked risk profile requirements, the product was sold to investors who were not willing or shouldn’t have been allowed to take on the risks involved. More often than not it was these investors who were likely to depend on the Lehman PPNs’ “100% principal protection” feature that were “risk averse.”

By agreeing to settle, UBS is not denying or admitting to the charges.

UBS to shell out $10.75M to settle Lehman-related row, Investment News, April 11, 2011

More Blog Posts:
UBS to Pay $2.2M to CNA Financial Head for Lehman Brothers Structured Product Losses, Stockbroker Fraud Blog, January 4, 2011

UBS Must Pay Couple $530,000 for Lehman Brothers-Backed Structured Notes, Institutional Investors Securities Blog, November 5, 2010

Lehman Brothers’ “Structured Products” Investigated by Stockbroker Fraud Law Firm Shepherd Smith Edwards & Kantas LTD LLP, Stockbroker Fraud Blog, September 30, 2008

Texas Securities Fraud Lawsuit Against MetroPCS Communications is Dismissed

Published on: April 11, 2011 | by Shepherd Smith Edwards & Kantas, LLP

A district court judge has dismissed the Texas securities fraud case against MetroPCS Communications Inc. (PCS). The telecom services provider is accused of putting out false or misleading statements about its 2009 earnings guidance, which was issued in November 2008 and reaffirmed for the duration of the class period.

The plaintiff also claimed that MetroPCS or its executives made misleading and false statements about the strength of the companies business model, the effect of competition on the cell phone provider, and the relationship between churn, which is the percentage of subscribers that stop using the company’s services during a given time frame, and subscriber growth, such as how the $49 handset promotion was likely to (and did) increase churn when it brought in customers who were likely to leave MetroPCS when the promotional period was over. When MetroPCS eventually lowered its guidance, its stock price dropped to $6.01/share, which was a lot lower than its $18.85 class period high.

In his ruling, Judge A. Joe Fish said that the lead plaintiff did not sufficiently allege scienter and the lawsuit did not plead fraud with the requisite specificity in regards to certain claims. He also said that certain challenged statements were either immaterial puffery or forward-looking statements protected under the Private Securities Litigation Reform Act’s safe harbor.

In dismissing the case, the court said while the plaintiffs emphasized three allegations that allegedly support a solid inference of scienter, which their 1934 Securities Exchange Act claims require, these alone were not enough support. That said, the court noted that even if the allegations of scienter did suffice, it would have still dismissed the Texas securities fraud lawsuit. The court also noted that allegations regarding churn-related misrepresentations weren’t specific enough.

Related Web Resources:
Telecom Services Provider Wins Dismissal of Investor Securities Suit, BNA Daily Securities, March 31, 2011
Hopson v. MetroPCS Communications Inc.

More Blog Posts:
Texas Securities Fraud: SEC Charges Talk Radio “MoneyMan” Over Promissory Note Offerings, Stockbroker Fraud Blog, April 4, 2011
Motion to Dismiss SEC Lawsuit Accusing Dallas Billionaire Brothers of $500,000 Securities Fraud Denied, Stockbroker Fraud Blog, April 1, 2011
FBI Arrests Texas Leader of Pump-and-Dump Scheme, Stockbroker Fraud Blog, March 23, 2011 Continue Reading ›

No Need for New SRO Overseeing Investment Advisers, Says NASAA Official to Congress

Published on: April 10, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Florida’s Office of Financial Regulation’s securities director Frank Widman says Congress should ignore calls for a new SRO to help the Securities and Exchange Commission oversee any investment advisers. Widmann spoke last month at the North American Securities Administrators Association’s public policy conference in DC.

Widmann, who previously served as NASAA president said that rather than set up a new SRO for IA’s, Congress should concentrate on making sure that state regulators and the SEC are fully funded so they are able to do their job. Widmann says that unlike the SEC, the federal regulator, and state securities regulators, SROs aren’t sovereign. Widmann says that giving SROs too much independence has proven problematic in the past.

As our stockbroker fraud law firm reported previously, SEC staff recently put out a report recommending that Congress either set up at least one SRO to oversee investment advisers, impose user fees on industry members to support Office of Compliance Inspections and Examination’s probes, or appoint the Financial Industry Regulatory Authority as the SRO for investment advisers. FINRA is already the SRO for broker-dealers.

Also at the NASAA Conference was SEC Commissioner Luis Aguilar, who said that the federal regulator was in the process of putting into place a system to gather and examine data from money market funds. He says funding limitations at the SEC have impeded the system’s implementation. Aguilar called on the financial services industry to “re-dedicate itself to basic principles,” including those of meaningful disclosure, fair dealing, integrity, and good business practices.

Related Web Resources:
NASAA Official Says Congress Should Ignore Calls to Create New SRO, BNA Securities Law Daily, March 29, 2011

Speech by SEC Commissioner Luis Aguilar, SEC, March 28, 2011
North American Securities Administrators Association

More Blog Posts:
FINRA Will Customize Oversight to Investment Adviser Industry if Chosen as Its SRO, Stockbroker Fraud Blog, April 8, 2011
SEC Staff Wants an SRO to Oversee Investment Advisers, Stockbroker Fraud Blog, January 31, 2011 Continue Reading ›

FINRA Will Customize Oversight to Investment Adviser Industry if Chosen as Its SRO

Published on: April 8, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Financial Industry Regulatory Authority CEO and Chairman Richard Ketchum says that if the SRO is chosen to regulate investment advisers, it will tailor its oversight to that industry. At a compliance conference run by the Financial Market Association and the Securities Industry last month, Ketchum said that advisers’ concerns that FINRA would not comprehend the IA model are “simply wrong.”

FINRA oversees some 4,560 brokerage firms. Ketchum says that the SRO would set up a separate affiliate that would supervise investment advisers, who would not be subject to the same rules as broker-dealers. He stressed the needs for more examinations to discourage securities fraud and check on compliance as two of the reasons why FINRA should become the regulatory agency over investment advisers.

Per a Securities and Exchange Commission study mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, the agency’s Office of Compliance Inspections and Examinations only examines about 9% of the investment adviser industry each year. On average, an adviser is examined by the SEC once every 11 years. The study offered recommendations:

• The creation of a new SRO for investment advisers
• Giving FINRA jurisdiction over investment advisers • Using user fees to fund the SEC’s exam program

Many investment advisers do not want FINRA to become their SRO and are pushing for lawmakers to increase SEC funding. Also opposing FINRA as the advisers’ SRO is the Investment Adviser Association, which alleges lack of accountability, transparency, and a bias toward the broker-dealer model.

Our investment fraud lawyers represent clients that have suffered financial losses because of investment adviser misconduct.

Related Web Resources:
FINRA: We Understand Investment Advisers, OnWallStreet, March 27, 2011
FINRA, if Empowered to Regulate Advisers, Will Tailor Oversight to Industry, Chair Says, BNA Broker/Dealer Compliance Report, March 30, 2011
FINRA

More Blog Posts:
SEC Needs to Keep a Closer Eye on FINRA, Says Report, Stockbroker Fraud Blog, March 15, 2011
SROs Immune from Broker-Dealer’s Lawsuit Over Bylaw Changes Related to Creation of FINRA, Says Appeals Court, Stockbroker Fraud Blog, March 7, 2011
FINRA Investigating Whether Broker-Dealers Providing Adequate Risk Controls to High-Frequency Traders, Stockbroker Fraud Blog, September 19, 2010
FINRA CEO Ketchum’s Speech, FINRA, March 22, 2011 Continue Reading ›

Dodd-Frank Reforms Will Lower Deficit by $3.2B Over the Next Decade, Estimates CBO

Published on: April 8, 2011 | by Shepherd Smith Edwards & Kantas, LLP

According to the Congressional Budget Office, between 2010 and 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act will lower the federal deficit by $3.2 billion as it takes in more money than what will go toward enforcement and implementation. CBO Director Douglas Elmendorf released the cost projection at a recent House Financial Services Oversight and Investigations Subcommittee hearing on the reform law.

Although Dodd-Frank will require $10.2 billion in direct spending over the next decade, it will take in $13.4 billion, said Elmendorf. He said that revenues would come mainly from fees assessed on different financial institutions and participants as new rules determine how financial firms can do business and what it will cost them.

The Government Accountability Office has said it could cost over $1 billion to implement Dodd-Frank, a bill that nearly all House Republicans were against. CBO said that even though Dodd-Frank calls for $37.8 billion in spending, savings that the law creates will lower that amount by $27.6 billion, which equals the $10.2 billion projection for final spending. Also, federal deposit insurance changes will lower costs by $16.3 billion and lower TARP authority by $11 billion.

CBO also noted that to create new agencies, including the Financial Stability Oversight Council, Office of Financial Research, Consumer Financial Protection Bureau, and Office of National Research, the government will spend $6.3 billion. It will also spend $100 million to change the current oversight structure, as well as $1.5 billion for subsidies to assist homeowners in foreclosure. A liquidation program for insolvent financial entities is expected to cost $20.3 billion.

Throughout the US, our securities fraud attorneys represent clients that have sustained financial losses because of broker and investment advisor misconduct.

CBO Says Dodd-Frank Act Will Reduce U.S. Deficit by $3.2 Billion, Bloomberg, March 30, 2011

Congressional Budget Office

More Blog Posts:
Commodities Industry Fears being held to Regulatory Standards of Securities Industry, Stockbroker Fraud Blog, February 4, 2011

Impartiality of SEC Report by Boston Consulting Group Questioned by Key House Republicans, Institutional Investors Securities Blog, March 30, 2011

Dow Corning Corp.’s $165M Securities Fraud Lawsuit Against Merrill Lynch & Co. Can Proceed, Says District Court Judge

Published on: April 7, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Southern District of New York’s Chief Judge Loretta A. Preska says that Dow Corning Corp. can sue Merrill Lynch & Co. for securities fraud. Dow Corning is claiming $165 million in auction-rate securities losses. Dow Corning says that it still has not been able to sell its ARS. The company and two affiliates, its Devonshire Underwriters unit and Hemlock Semiconductor Corp., had filed their complaint against the Bank of America-owned Merrill for falsely misrepresenting the ARS, for which Merrill acted as managing broker and underwriter.

Preska denied Merrill’s motion to dismiss the complaint, noting that this securities fraud lawsuit is different from other ARS lawsuits, in which motions to the defendants’ motions to dismiss were granted. Unlike other ARS cases, Dow Corning is challenging certain omissions and statements that Merrill allegedly made to reassure the company that the investments were safe even while knowing the ARS market was failing. The court says that for purposes of its ruling, it is taking the allegations to be true.

Dow Corning says Merrill’s actions violated the Michigan Uniform Securities Act, the 1934 Securities Exchange Act’s Section 10(b), and breached a number of common law duties. The contends that Merrill knew as far back as early 2007 that trouble was brewing with the ARS market yet the broker allegedly stepped up efforts to sell ARS to investors. Even though Dow Corning asked questions about possible issues with the market, the broker is accused of not revealing the information it had and, instead, making reassuring statements that were actually misleading misstatements. The court says Merrill was obligated to “speak truthfully.”

Related Web Resources:
Merrill Loses Bid to Throw Out Dow Corning Auction-Rate Lawsuit, Bloomberg, March 30, 2011
Dow Corning Suit Against Merrill Lynch Over ARS Losses Survives Motion to Dismiss, BNA Securities, April 4, 2011

More Blog Posts:
Akamai Technologies Inc’s ARS Lawsuit Against Deutsche Bank Can Proceed, Institutional Investor Securities Blog, March 4, 2011
Citigroup Global Markets to Pay Back $95.5M Over ARS Sold to LandAmerica Exchange Fund, Institutional Investor Securities Blog, November 11, 2010
Class Auction-Rate Securities Lawsuit Against Raymond James Financial Survives Dismissal, Stockbroker Fraud Blog, September 27, 2010 Continue Reading ›

Wells Fargo Settles SEC Securities Fraud Allegations Over Sale of Complex Mortgage-Backed Securities by Wachovia for $11.2M

Published on: April 7, 2011 | by Shepherd Smith Edwards & Kantas, LLP

For a payment of $11.2 million, Wells Fargo & Co. will settle US Securities and Exchange Commission allegations that Wachovia Capital Markets LLC misled investors and improperly sold two collateralized debt obligations in 2007 and 2006. Wachovia was bought by Wells Fargo in 2008.

Wells Fargo Securities now manages Wachovia. By agreeing to settle, the investment bank is not admitting to or denying the findings.

According to the SEC, Wachovia Capital Markets LLC, now called Wells Fargo Securities, violated securities law anti-fraud provisions when it sold the complex mortgage-backed securities to investors despite the red flags indicating that there was trouble brewing with the US housing market.

The SEC says that Wachovia charged excessive markups in the sale of part of a $1.5 billion CDO called Grand Avenue II. Unable to sell the CDOs $5.5 million equity portion in October 2006, it kept the shares on the trading desk while dropping their value to 52.7 cents on the dollar. Wachovia later sold the shares for 90 and 95 cents on the dollar to an individual investor and the Zuni Indian tribe. Both did not know that they had purchased the shares at a price that was 70% above their accounting value. The transaction went into default in 2008.

The SEC claims that in 2007, Wachovia Capital Markets misrepresented to investors in Longshore 3, a $1.3 billion CDO, that assets had been acquired from Wachovia affiliates on an “arms’-length basis” when actually, 40 residential mortgage-backed securities were transferred at $4.6 million over market prices. The SEC contends that Wachovia was trying to avoid sustaining losses by transferring the assets at “stale” prices.

Related Web Resources:

Wells Fargo-Wachovia settles CDO claim with SEC for $11 million, Housing Wire, April 5, 2011

CDO News, New York Times

Mortgage-Backed Securities, SEC.gov

More Blog Posts:

Houston Man Indicted in Alleged $17M Texas Securities Fraud, Stockbroker Fraud Blog, December 23, 2010

Goldman Sachs COO Says Investment Firm Shorted 1% of CDOs Mortgage Bonds But Didn’t Bet Against Clients, Stockbroker Fraud Blog, July 14, 2010

Texas Securities Fraud: SEC Charges Talk Radio “MoneyMan” Over Promissory Note Offerings

Published on: April 4, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has charged Daniel Frishberg, a Houston businessman and the host of Business Radio Network’s “The MoneyMan” show, with fraudulent conduct related to promissory note offerings that his investment advisory firm made to clients. Frishberg, who founded BizRadio and heads up Daniel Frishberg Financial Services (DFFS), has agreed to settle the Texas securities fraud charges with a $65,000 penalty. By settling, Frishberg is not denying or admitting to the alleged wrongdings. He has, however, agreed to an entry of permanent injunction and consented to a bar from associating with certain registered entities, including other investment advisers.

DFFS allegedly advised clients to invest in notes that BizRadio had issued. Some $11 million promissory notes were put out. The offering reportedly generated approximately $5.5 million between April 2008 and September 2009.

According to the SEC, Frishberg did not tell clients that his media company was in poor financial health or that the note offerings helped pay his salary at BizRadio. Instead, he allegedly approved high risk recommendations without properly disclosing the conflicts and risks. Frishberg also “personally benefited” from these investments.

Also offering the notes was Kaleta Capital Management, whose owner, Albert Fase Kaleta, jointly controls BizRadio with Frishberg. In 2009, Kaleta and his financial firm were charged with securities fraud. Frishberg is accused of knowing that prior complaints had been made about Kaleta and his handling of sales representations related to other investments yet still opting to have him recommend the promissory notes.

The SEC contends that Frishberg has violated the Investment Advisers Act of 1940’s Section 206(2). He also allegedly abetted and aided violations of Sections 206(1) and 206(2) of the Advisers Act.

Related Web Resources:
SEC Charges Houston-Area Businessman and Talk Radio “MoneyMan” for Fraudulent Conduct at Advisory Firm, SEC, March 25, 2011
SEC charges radio personality with fraud, Investment News, April 5, 2011
The Money Man Report

Investment Advisers Act

More Blog Posts:
Motion to Dismiss SEC Lawsuit Accusing Dallas Billionaire Brothers of $500,000 Securities Fraud Denied, Stockbroker Fraud Blog, April 1, 2011
FBI Arrests Texas Leader of Pump-and-Dump Scheme, Stockbroker Fraud Blog, March 23, 2011
Dallas-Based Southwest Securities Settles for $500,000 FINRA Charges It Improperly Used Paid Consultants, Stockbroker Fraud Blog, March 17, 2011 Continue Reading ›

Motion to Dismiss SEC Lawsuit Accusing Dallas Billionaire Brothers of $500,000 Securities Fraud Denied

Published on: April 1, 2011 | by Shepherd Smith Edwards & Kantas, LLP

A district court has denied Charles and Samuel and Wyly’s motion to dismiss the SEC lawsuit accusing them of insider trading and running a 13-year securities fraud that generated $550 million in undisclosed gains. U.S. District Judge Shira Scheindlin says that the SEC did an adequate job of alleging the Texas billionaire brothers’ liability for fraud. She also said the federal agency adequately pled the concealment of sales in Michaels Stores Inc, Sterling Software, Scottish Annuity & Life Holdings Ltd., and Sterling Commerce Inc.

Last year, the SEC accused the brothers of setting up sham offshore trusts in the Cayman Islands and the Isle of Man to hide 13 years of stock sales, valued at over $750 million, in four companies that they founded.

The allegations were made following a six-year investigation. The SEC contends that with their improper gains, the brothers were able to acquire almost $100 million of real estate, purchase tens of millions of dollars in jewelry, art, and collectibles, and donate a great deal of money to charity. The agency also claims that the brothers either knew or were reckless if they didn’t know what their legal obligations were as public company owners directors and beneficial owners who owned more than 5%. Under the law, such persons have to report trading and holdings in their companies securities on Form 4 and Schedule 13D to the SEC. The SEC says that the brothers either knew or should have known that such disclosures are used by the investing public to get a sense of how a public company’s shareholders and insiders feel about prospects and financial conditions and that they depend on these disclosures to make investment decisions.

Judge Scheindlin also said that the SEC can pursue a claim accusing Dallas-based brothers of making $31.7 million from the alleged insider trading that they engaged in after they decided to sell Sterling Software in 1999.

Related Web Resources:
Billionaire Wyly Brothers Lose an Effort to Dismiss Insider-Trading Charges, NY Times, April 1, 2011
Wyly brothers lose bid to dismiss SEC fraud suit, Reuters, March 31, 2011
SEC Charges Corporate Insider Brothers With Fraud, SEC, July 29, 2010
Billionaire Brothers Samuel and Charles Wyly Charged With $550 Million Fraud, Daily Finance, July 30, 2010

More Blog Posts:
FBI Arrests Texas Leader of Pump-and-Dump Scheme, Stockbroker Fraud Blog, March 23, 2011
Dallas-Based Southwest Securities Settles for $500,000 FINRA Charges It Improperly Used Paid Consultants, Stockbroker Fraud Blog, March 17, 2011
Texas Securities Fraud: SEC Halts Alleged Ponzi Scheme in the Dallas-Fort Worth Area, Stockbroker Fraud Blog, March 2, 2011 Continue Reading ›