Investor Lawyers Blog

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.

SEC Revises Dollar Amount Thresholds Determining Whether to An Advisory Client Would Have to Pay Performance Fees

Published on: February 25, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is adopting changes to the dollar amount thresholds, under the 1940 Investment Advisers Act, that are used to determine whether an advisory clients can be made to pay a performance fee. Per the current provision, an adviser has to be managing at least $750k of the client’s money or the adviser must have reasonable grounds for believing that the client’s net worth is over $1M. However, per the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 418, the SEC has directed that inflation adjustments to the dollar amount tests would be made every five years.

Last year the SEC put out an order modifying the “qualified client” assets management test from $750K to $1M. The test for net worth was changed from $1M to $2M. On February 15, 2012, the SEC said it was adopting these amendments to the Advisers Act’s Rule 205-3.

Per the amended rule, an individual’s primary residence worth and specific debt related to property would not be included when determining the net worth calculation. The amended rule comes with a grandfather provision that lets advisers keep charging clients who were qualified clients prior to the rule change performance fees. The amendments will be in effect 90 days after they are published in the Federal Register.

Private REITs: The Need for Tougher Oversight?

Published on: February 25, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Our institutional investment fraud lawyers have reported often on real estate investment trusts (REITs). Today we’d like to talk about private REITs.

An REIT is a trust, corporation, or association that owns income-producing real estate. Investors’ capital is pooled by REITs to buy a portfolio of properties. There are public REITs, which include ones traded on a national securities exchange and those that are not traded but are publicly registered. Then there are non-traded REITs, which cannot be found on a national securities exchange, but may be traded in a limited capacity in a secondary market. There is also another kind of REIT known as the private-placement, or private, REIT.

Private REITs, like their non-traded counterparts, are not traded on an exchange. They also come with significant risks. They are not subject to the disclosure requirements that public non-traded REITs have to honor. The fact that they are unlisted makes them difficult to value and insufficient disclosure documents makes it challenging for investors to make educated choices about their investment.

Appeals Court affirm SEC Finding that Broker Acted “Willfully” When Keeping Tax Liens Information from FINRA

Published on: February 24, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Court of Appeals for the Second Circuit says that the Securities and Exchange Commission did not abuse its discretion when it determined that broker Scott Mathis “willfully” withheld information from the Financial Industry Regulatory Authority about tax liens. Mathis had submitted a petition seeking for the court to review the SEC order. However, the court, denying the request, found that there was “substantial evidence” backing up the SEC’s findings that he did, in fact, hold back information in a willful manner.

Between 1985 and 2002, Mathis was a principal or broker at numerous financial firms. He had submitted three Form U-4 registrations with FINRA. It was after 1996 that the IRS put in five tax liens against him. The federal agency accused him of not paying his personal income taxes over a several-year period. Mathis is accused of not noting the liens in filings with FINRA even though he is purported to have known about them.

According to the court, in 2003 FINRA asked Mathis to explain why he didn’t reveal the liens. He told the SRO he wasn’t aware that they existed or that he had an obligation to note them down on his Form U-4. FINRA then began proceedings against the broker, ultimately holding that he acted “willfully” in failing to report the tax liens. He was suspended for three months and fined $10,000.

Texas Man Sued by CFTC Over Alleged Foreign Currency Fraud

Published on: February 23, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Commodity Futures Trading Commission is suing Texas resident Christopher Cornett for alleged solicitation fraud, issuing false account statements, misappropriation of participants’ funds, and not registering in connection with an off-exchange foreign currency fraud. The CFTC filed its complaint on February 2 in the U.S. District Court for the Western District of Texas.

The CFTC contends that between June 2008 through October 2011, the Texas resident approached prospective clients to try to get them to put money in a pooled investment in forex. He played the role of operator and manager of the pool that was referred to with different names, including ICM, ITLDU, IFM, LLC, and International Forex Management, LLC. Cornett is accused of falsely soliciting these prospective participants and making false claims to them that he never had a losing month or year while engaging in forex trading.

Cornett was allegedly able to solicit about $7.07 million between June 2008 and September 2010. Pool participants were able to redeem about $1.64 million. Meantime, he lost about $4.17 million of the funds’ money. During this period of over two years, Cornett allegedly had only one month that was profitable while engaged in forex trading with the pool funds. He is also accused of misappropriating about $1.26 million and falsely reporting the pool’s profits, account balances, and losses to participants.

$698M MBS Lawsuit Seeking Damages from Goldman Sachs Group Can Take on Class Action Status, Says District Judge

Published on: February 23, 2012 | by Shepherd Smith Edwards & Kantas, LLP

U.S. district judge says that Public Employees’ Retirement System of Mississippi v. Goldman Sachs Group Inc., a securities fraud lawsuit, may proceed as a class action case. Some 150 investors would fall under this class plaintiff category as they seeking damages related to a $698 million mortgage-backed securities offering.

According to the complaint, loan originator New Century Financial Corp. did not abide by its own underwriting standards and overstated what the value was of the collateral backing the loans. The plaintiffs are accusing Goldman Sachs of failing to conduct the necessary due diligence when it purchased the loans seven years ago. The financial firm then structured, issued, and sold the mortgage pass-through certificates in a single offering.
Goldman attempted to fight certification on the grounds of numerosity, typicality, commonality, statute of limitations, typicality, and alleged conflicts involving buyers of different tranches, what investors knew, and other claims.

Judge Harold Baer Jr. turned down the defendants’ contention that class claims wouldn’t predominate due to individual investors’ knowledge of possibly false statements that may have been made in the offering documents when the acquisition took place. The defendants also had argued that class status should not be granted because investors, who conducted their own research and due diligence, interacted directly with loan originators, as well as had access to data that gave them information about New Century’s practices and the loan pool.

The court also turned down the defendants’ claim revolving around investors’ relying on asset managers and the change in information that was made publicly available over time. The court said that determining whether individual or common issues predominate is reliant upon whether putative class members took part in or knew about the alleged behavior and that likelihood of knowledge is not enough.

Public Employees’ Retirement System of Mississippi had been seeking to certify as a Class any entity or person that bought or otherwise publicly acquired offered certificates of GSAMP Trust 2006-S2 and, as a result, sustained damages. Not included in the Class are defendants, respective officials, directors, affiliates, these parties’ immediate relatives, heirs, legal representatives, successors, assigns, and any entity that defendants had or have controlling interested in.

Goldman Sachs Mortgage-Backed Securities Suit Granted Class-Action Status, Bloomberg, February 3, 2012

$698 Million Class Can Sue Goldman, Courthouse News Service, February 7, 2012

More Blog Posts:
Goldman Sachs CEO Hires Prominent Defense Attorney in the Wake of Justice Department Probe into Mortgage-Backed Securities, Institutional Investor Securities Fraud Blog, August 24, 2011

Mortgage-Backed Securities Lawsuit Against Bank of America’s Merrill Lynch Now a Class Action Case, Stockbroker Fraud Blog, June 25, 2011

Two Ex-Credit Suisse Executives Plead Guilty to Mortgage-Backed Securities Fraud, Institutional Investor Securities Fraud Blog, February 7, 2012

Not All Municipal Bond Issuers Are Adjusting Well to the SEC’s Efforts to Make the Market More Transparent

Published on: February 22, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to The New York Times, the Securities and Exchange Commission is attempting to make the municipal bond market less “opaque.” One way it is doing this is by adding more disclosure requirements. For example, muni bond issuers now have to publish bond rating changes, financial statements, and other material on the Municipal Securities Rulemaking Board’s EMMA data site in a timely manner. However, the Times reports that not all 55,000 muni bond issuers are adjusting well to this era of greater transparency.

The newspaper cites the West Penn Allegheny Health System, which has been the target of an SEC probe for more three years after an earnings restatement in July 2008. The examination turned into a formal probe in 2009. (The multi-hospital system is one of the largest municipal bond issuers, with nearly $740 million bonds outstanding.)

Although West Penn posted $1.6B of revenue for fiscal year 2011, during the last six months of the year, it lost $56M. The company’s pension plan is underfunded by $200M. Last year, Fitch Ratings and Moody’s downgraded the West Penn bond rating so that it’s well in the junk category. Also, as of December 31, 2011, the system was in possession of just 58-days worth of cash. Meantime, as West Penn is awaiting the approval of a partnership with health insurer High Mark Inc., which said it would commit up to $475M over three years to support West Penn hospitals, the union has garnered the attention of the Justice Department’s antitrust division. Also, the SEC has been asking for information about West Penn’s financial statements.

ISS Probes Allegations that a Boston Employee Sold Shareholder Information

Published on: February 21, 2012 | by Shepherd Smith Edwards & Kantas, LLP

ISS, a shareholder advisory firm, has placed an employee on administrative leave following allegations that this person sold the confidential voting information of clients in exchange for gifts and cash. MCSI is the parent company of ISS, which advises large shareholders on how to vote their shares while helping them use ProxyExchange.

MSCI CEO Henry A. Fernandez says that the firm decided to conduct its own probe even though the Securities and Exchange Commission has not contacted them about this matter. In papers filed with the SEC, Fernandez noted that client information confidentiality is key to the business and is addressed not just in the ISS Regulatory Code of Ethics, but also is part of employee training.

It was on February 12 that the New York Post reported that a whistleblower complaint had been filed with the SEC accusing the Boston office employee of giving shareholder voting information to corporate boardrooms. The lawsuit claims that the employee provided the information to proxy-solicitation firms working for corporate boards that were seeking to influence the biggest shareholders on executive compensation and profitable mergers. The alleged tipster is accused of using his personal e-mail address to provide the solicitors with the confidential data up to weeks ahead of time. (For example, the Post said that for an upcoming meeting, the ISS employee provided information about upcoming votes from BlackRock and Vanguard. Both companies, however, have refused to confirm whether or not this is true due to a policy to keep voting confidential.)

A shareholder’s votes are supposed to remain private unless he/she chooses to make it known. One reason for this is that shareholders don’t want to experience retaliation in the event that they decide to vote against management. By gaining access to the votes in advance, companies can better strategize on how to get the outcome they want. Sometimes a decision can be so close that just a few votes in favor of/against can make a world of difference.

Shepherd Smith Edwards and Kantas LTD LLP Founder and Stockbroker Fraud Lawyer William Shepherd applauded the whistleblower complaint: “This is exactly how the new ‘Wall Street whistleblower’ law is supposed to work. Improper use of this information would almost certainly not have been reported without this law.”

According to the SEC’s Boston Regional Office, ever since new whistleblower rules were enacted last year, it has received close to seven tips a day. The office’s director, David Berger, noted that unlike in the past, these tips are “sworn… verified.” Financial statements, corporate disclosure, and market manipulation are the topics that have gotten the most tips. Although none of the whistleblowers have yet to receive their percentage of compensation from having stepped forward and notified the government of alleged wrongdoing, Berger says that this is just because not enough time has passed since the lawsuits were filed to allow for the requirements that have to be first fulfilled before the payments can go through.

Advisory firm employee leaking shareholder voting data, whistleblower claims, New York Post, February 12, 2012

Advisory firm probes charge that worker sold shareholder info, Boston Herald, February 17, 2012

More Blog Posts:
SEC’s Office of the Whistleblower Received 334 Tips During FY 2011, Stockbroker Fraud Blog, December 8, 2011

Whistleblower Lawsuit Claims Taxpayers Were Defrauded When Federal Government Bailed Out Houston-Based American International Group in 2008, Stockbroker Fraud Blog, May 5, 2011

SEC is Finalizing Its Whistleblower Rules, Says Chairman Schapiro, Stockbroker Fraud Blog, April 28, 2011

SEC Looking at Other Ways to Communicate with Whistleblowers, Institutional Investor Securities Blog, September 14, 2011 Continue Reading ›