Investor Lawyers Blog

Stanford Ponzi Scam Investors File Class Action Lawsuit Suing The Securities and Exchange Commission

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

Accusing The SEC of negligent supervision and failure to act, a number of Stanford investors have filed a putative class action seeking damages from the Commission. In Anderson v. United States, the plaintiffs submitted an amended complaint to the U.S. District Court for the Middle District of Louisiana earlier this month. They are bringing their securities case under the Federal Tort Claims Act.

They contend that the losses they sustained in Stanford’s $7 billion Ponzi scam occurred because the SEC was negligent in supervising Spencer Barasch, who is the former enforcement director of the SEC’s Forth Worth Regional Office. They also are arguing that there was enough information available about R. Allen Stanford for the SEC to merit bringing an enforcement action or a referral to other agencies. The investors believe that an alleged failure to act by Barasch and the SEC let Stanford’s Ponzi scheme go undetected for years. They especially blame Barasch.

According to an April 2010 report by the Commission’s Office of the Inspector General, although the SEC’s Dallas office was aware as far back as 1997 that Stanford was running a Ponzi scam, it was unable to persuade the SEC’s Enforcement Division to investigate the scheme. The report also concluded that Barasch played a key part in a number of decisions to squelch the possible probes against Stanford.

After Barasch left the SEC, he represented Stanford on more than one occasion until 2006 when the SEC Office of Ethics told him that this was not appropriate. Earlier this year, he settled US Department of Justice civil charges over this alleged conflict of interest restrictions violation by paying a $50,000 penalty and consenting to a yearlong ban from SEC practice. (He did not, however, admit or deny wrongdoing.)

Now, the investor plaintiffs want the government to compensate them for their losses: Reuel Anderson is seeking $1,295,481.37, Timothy Ricketts wants $353,216.31, and Gary Greene is asking for his $443,302.09. The plaintiffs believe their class action securities complaint represents approximately 2,000 members.

This class action case comes more than a year after another group of plaintiff investors brought a similar securities lawsuit in the U.S. District Court for the Northern District of Texas. In Robert Juan Dartez LLC v. United States the plaintiffs sought to hold the government liable for losses they sustained in Stanford’s Ponzi scam. The district court, however, dismissed the case without prejudice due to lack of subject matter jurisdiction in that it found that the plaintiffs’ claims landed in the discretionary function exception of the Federal Tort Claims Act.

Approximately 30,000 investors bought fraudulent CD’s from Stanford International Bank in Antigua. That’s a lot of customers getting hurt financially by one scam.

Stanford Investors Sue SEC Over Losses, Citing Negligent Supervision, Failure to Act, Bloomberg BNA, July 16, 2012

Anderson v. United States (PDF)

Robert Juan Dartez LLC v. United States

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Texas Financier Allen Stanford’s Ponzi Scam: SIPC Asks District Court to Toss Out SEC Lawsuit Seeking to Reimburse Fraud Victims, Stockbroker Fraud Blog, March 5, 2012

Texas Securities: SEC’s Bid To Get Stanford Ponzi Scam Victims SIPC Coverage is Denied by District Court, Stockbroker Fraud Blog, July 9, 2012
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Ex-Stanford Group Compliance Officer, Now MGL Consulting CEO, Says SEC’s Delay Over Whether to Charge Him in Ponzi Scam is Denying Him Right to Due Process

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

According to Reuters, Bernerd Young, a former compliance officer for the Texas-based Stanford Group. Co., contends that the Securities and Exchange Commission’s lack of decision over whether to charge him in R. Allen Stanford’s $7 billion Ponzi scam is not only a denial of his right to due process but also has hurt his professional life. Young, who is now the CEO of MGL Consulting, also used to work as a regulator with the National Association of Securities Dealers in Dallas. NASD is now the Financial Industry Regulatory Authority.

While Stanford has already been sentenced to 110 years in prison over his use of bogus CDs from his Stanford International Bank in Antigua to defraud his victims, the SEC has been constructing cases against a number of executives and financial advisers that worked for Stanford Group. However, legal disagreements and recusals between SEC officials and commissioners have reportedly caused delays to these probes that have left not just the bilked investors but also certain possible defendants waiting for resolution one way or another.

Young maintains that he didn’t know about the Ponzi scam. He says that the SEC came after him in Houston about one year after he was told by other Stanford executives that the Antigua bank’s portfolio was comprised of at least $1.6 billion in personal loans to Stanford himself. The Commission contended that it had evidence linking his actions to investors who were wrongly led believe that their CD’s were insured. Young received a Wells notice in June 2010 notifying him that the SEC intended to recommend that charges be filed against him.

Although the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act gives the Commission six months to decide on a Wells notice, SEC lawyers are allowed to file extensions, which they have done in their potential case against Young. The Commission’s current extension of 180-days on the case will expire in September.

Meantime, Young believes that MLG Consulting losing 20% of its clients, regulators terminating the firms’ plans to expand, and its need to file for bankruptcy is a result of the stigma associated with the Stanford Ponzi scam probe. As for the investors who were victimized by the fraud and who have expressed dismay at the SEC’s delay in deciding whether/not to charge certain ex-Stanford employees, their worry is that these same individuals could go on to defraud other investors in the meantime.

These Investors have also had to deal with a federal district judge’s recent decision to reject the SEC’s request that the Securities Investor Protection Corporation start liquidation proceedings to compensate Stanford’s victims, some of whom sustained millions of dollars in losses. SIPC had argued that it only protects customers against losses involving missing securities or cash that had been in the in custody of insolvent or failing brokerage firms members of the protection corporation. While Stanford Group was a SIPC member, Stanford International Bank in Antigua was not.

Former Stanford executive says in limbo as SEC case drags, Reuters, July 22, 2012

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CFTC Files Texas Securities Fraud Against TC Credit Services and its Houston Owner Over $1.4M Commodity Pool Scam, Stockbroker Fraud Blog, July 17, 2012

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Dodd-Frank Whistleblower Protection Amendment Must Be Applied Retroactively, Said District Court

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

The U.S. District Court for the Southern District of New York has ruled that a Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 amendment to Section 806 of the Sarbanes-Oxley Act of 2002 must be applied retroactively to clarify congressional intent. The amendment specifies that public company subsidiary employees, and not just parent company employees, are protected under the whistleblower statute. The court, however, did not reach merits of the plaintiff’s claim regarding his firing and told the parties to turn in a joint letter about what steps will need to happen to get the matter ready for trial.

The lawsuit, Leshinsky v. Telvent GIT SA, involves whistleblower claims made by plaintiff Phillip Leshinsky. He contends that Telvent GIT SA (TLVT), Telvent Caseta Inc., Telvent Farradyne Inc., and a number of individuals wrongly fired him while violating Sarbanes-Oxley’s whistleblower provisions. Leshinsky, who was employed by nonpublic subsidiaries of the publicly traded Telvent GIT, contends that he was let go when he expressed opposition to using allegedly fraudulent information to secure a contract with the New York Metropolitan Transit Authority. His claims pertain to a period prior to the 2010 Dodd-Frank amendment.

The court noted that while before the Dodd-Frank amendment, Sarbanes-Oxley only protected employees who worked for publicly traded companies from retaliation when they blew the whistle, the 2010 revision does apply retroactively “as a clarification of the statute.” Leshinsky is therefore covered under Section 806.

No SIPA Coverage for Soft Dollar Credits, Says Bankruptcy Court

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

The U.S. Bankruptcy Court for the Southern District of New York has decided that claims stemming from soft dollar credits aren’t qualified to avail of Securities Investor Protection Act. According to Judge James Peck, this is the first time a court has had to determine whether soft dollar claims qualify as customer claims under SIPA.

The motion was filed by James Giddens, the Lehman Brothers Inc. trustee, who sought to affirm the denial of securities claims made by dozens of hedge funds and money managers seeking to get back soft dollar credits in their accounts with Lehman. Soft dollars are commission credits that can be used for buying research and brokers services that fall under the Securities Exchange Act of 1934’s Section 28(e)’s “safe harbor” parameters. (Generally, a soft dollar arrangement includes an understanding or agreement through which a discretionary money manager obtains research or other services from a broker-dealer. This is done in return for brokerage commission from transactions involving the accounts of discretionary clients.) While Giddens decided that these claims did not have SIPA protection and were “general unsecured claims,” a number of claimants disagreed.

The bankruptcy court, however, sided with Giddens. The court said that not only are soft dollar credits not securities and can only be used for the purposes identified under the Securities Exchange Act of 1934’s Section 28(e), but also, soft dollar accounts are “exclusively” available to “brokerage and research services” that a broker provides and cannot go toward the purchase of securities. Therefore, said Judge James Peck, Soft Dollar Claimants’ claims involving their Soft Dollar Accounts can’t be dealt with as if they were customer claims made under SIPA.

The bankruptcy court disagreed with claimants’ argument that because the credits could be used for research that would direct the clients in their purchase of securities there was a “sufficient connection” between a securities purchase and the soft dollars. The claimants had argued that this type of link made them customers under SIPA’s meaning. The court said no, finding that under the statute, the definition of a customer is meant to be “narrowly construed” and credits that can only go toward market research expenses are not tangential or direct enough to fulfill SIPA’s definition of what is a customer.

The court also disagreed with the claimants’ argument that the credits, which are proceeds of securities that have been sold or converted, should be considered customer property under SIPA. The court said that soft dollar credits are associated not with securities trade proceeds but with broker-dealer commissions. Peck also said that considering their character and source, the “credits are not customer property.” The court said that the claims were “really breach of contract claims” falling under the unsecured claims umbrella.

More Blog Posts:

Montana Supreme Court Says Lower Court’s Finding that Tenancy-in-Common Investment Is Not A Securities Was In Error, Stockbroker Fraud Blog, July 20, 2012

Montana Supreme Court Says Lower Court’s Finding that Tenancy-in-Common Investment Is Not A Securities Was In Error

Published on: July 20, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Supreme Court of Montana says that a lower court erred when it found that an investor’s stake in a tenancy-in-common venture promising fixed return rates is not a securities under the Montana Securities Act. The case is Redding v. Montana 1st Judicial District .

Holding that the Montana First Judicial District Court improperly ruled that the plaintiff failed to invest in a common venture that would be considered an “Investment contract” under the act, the state’s highest court granted plaintiff Billie Redding’s petition seeking writ of supervisory control over the district court.

Redding had filed her Montana securities lawsuit against her accountant and number of entities, after a failed $4.5M investment in four TICs in commercial property through DBSI Housing Inc., which promised a steady return and that it would manage the properties. (Unfortunately, DBSI not only had to file for bankruptcy protection in 2008, but also its receiver found out that the company had been running a Ponzi scam.) Both sides moved for summary judgment on a number of matters, including whether a TIC constitutes a security under the state’s law.

Finding there was no common venture between DBSI and Redding, the district court said that the TICs in question are not to be considered securities. The lower court applied the horizontal commonality approach to reason that the plaintiff hadn’t been burdened with the same risks as other investors because her contract stated there would be fixed profit returns. The court also said that the vertical commonality test was not satisfied because Redding stood to gain regardless of how much was collected from the properties at any month.

Montana Supreme Court Justice Michael Wheat noted that under the Montana securities law, the courts in the state interpret that an investment contract has to satisfy the prongs that it is an a) investment having a b) common venture that c) comes with reasonable expectations and profits d) through the managerial or entrepreneurial efforts of others. Wheat said that seeing as the state hasn’t adopted a method to determine what satisfies the common prong venture for the Montana Securities Act’s purposes, a common venture can be set up by fulfilling the element of “either horizontal, broad vertical, or narrow vertical commonality.” In the matter of Redding, the state’s Supreme Court said that the district court’s finding in regards to common venture conflicted with United States Supreme Court precedent in SEC v. Edwards and was therefore incorrect.

In that case, the nation’s highest court determined that a fixed return rate could be an investment contract and, hence, a security that was “subject to federal securities laws.” The Montana Supreme Court found that the district court’s “reliance on a promised return as dispositive of common venture” needed to be reversed. The state’s highest court said that vertical commonality or horizontal community is the “keystone” when it comes to common venture and not the investment return’s accompanying fluctuation and risk.

Court Erred in Finding TIC Investments Not Securities, Montana High Court Rules, Bloomberg/BNA, July 10, 2012

Redding v. Montana 1st Judicial District (PDF)

SEC v. Edwards

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Securities Fraud Lawsuit Seeks to Recover $49M From 96 Independent Broker-Dealers Liable Over Sales of Tenant-In-Common Exchanges, Stockbroker Fraud Blog, December 15, 2010
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Institutional Investor Roundup: Ex-IndyMac Executives Class Action Securities Case for $6.5M, New York Fed Sells $828M of Mortgage Debt Securities from AIG Bailout, and Survey Says That 25% of Wall Street Employees Believe Cheating is Necessary to Succeed

Published on: July 18, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The former executives of IndyMac Banccorp have consented to settle class-action securities lawsuit related to bank holding company’s collapse when the housing bubble burst. Per the settlement terms, the financial firm’s insurer will pay investors $6.5 million in cash.

IndyMac shareholders had gone after ex-CEO Michael Perry and ex-finance officer Scott Keys in 2008, contending that they had misled investors about the mortgage lender’s poor financial condition. A month later, federal bank regulators closed down IndyMac Bank. Although the two of them are settling, they were not required to admit to any wrongdoing.

“Again, no jail time for anyone,” commented Shepherd Smith Edwards and Kantas, LTD, LLP Founder and Stockbroker Fraud Lawyer William Shepherd.

CFTC Files Texas Securities Fraud Against TC Credit Services and its Houston Owner Over $1.4M Commodity Pool Scam

Published on: July 17, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Commodity Futures Trading Commission is charging TC Credit Service, LLC, doing business as Del-Mair Group, LLC), and its owner Christopher D. Daley with Texas securities fraud. In its anti-fraud enforcement action, the CFTC is accusing them of running a $.1.4 million commodity pool scheme.

According to the CFTC, beginning at least as early as the start of 2010 and up until at least November 2011, the defendants fraudulently accepted and solicited at least $1.4 million from at least 55 participants who became involved in a commodity pool for trading crude oil futures contracts. However, alleges the agency, TC Credit Services wasn’t maintaining any commodity accounts under its name during this time, while Daley’s personal trading accounts were suffering net losses monthly.

The Texas securities complaint accuses Daley of omitting material fact, giving pool participants fake account statements to hide the fraud, and making fraudulent misrepresentations that: his trading in crude oil futures contracts would make 20% monthly returns on deposits, the pool never experienced a month of losses, and its value had grown 60% for the year starting March 2011. Daley also allegedly omitted that the pool did not keep any commodity interest account under its name, his personal futures trading accounts lost money each month, and he was not a properly registered Commodity Pool Operator with the agency.

The CFTC claims that Dailey used just a part of the participants’ money to trade futures contracts while he misappropriated the rest of the cash, including at least $100,000 to cover his own expenses and about $195,000 toward his own bank accounts.

One day after the agency submitted its complaint to the U.S. District Court for the Southern District of Texas, Judge Lynn N. Hughes issued an emergency order freezing the defendants assets and barring them from destroying records and books. The CFTC wants restitution for the defrauded pool participants and for the defendants to pay civil penalties and give back ill-gotten gains. It also wants registration and trading bans and permanent injunctions against future federal commodities laws violations.

Commodity Pool Fraud
These scams usual involve unregistered commodity pool operators that promise investors big profits with low risks. These fraudsters will usually capitalize on their personal relationships or reputations to get people to invest. Unfortunately, every year, investors end up losing millions of dollar in commodity pool scams and fake “hedge funds” that trade in commodity futures and options.

CFTC Charges Houston-based Christopher Daley and his company, TC Credit Service, LLC, with Solicitation Fraud and Misappropriation in $1.4 Million Dollar Commodity Pool Scheme, CFTC, July 11, 2012

Read the Complaint (PDF)

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Ponzi Scam Receiver Can Go Forward with Securities Claim Against Texas Investor Who Benefited From the Fraud, Stockbroker Fraud Blog, June 26, 2012 Continue Reading ›

Barclays LIBOR Manipulation Scam Places Citigroup, Credit Suisse, Deutsche Bank, JP Morgan Chase, and UBS Under The Investigation Microscope

Published on: July 16, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The London Inter-Bank Offer Rate (LIBOR) manipulation scandal involving Barclays Bank (BCS-P) has now opened up a global probe, as investigators from the United States, Europe, Canada, and Asia try to figure out exactly what happened. While Barclays may have the settled the allegations for $450 million with the UK’s Financial Services Authority, the US Department of Justice, and the Commodity Futures Trading Commission, now a number of other financial firms are under investigation including UBS AG (UBS), JPMorgan Chase (JPM), Deutsche Bank AG, Credit Suisse Group (CS), Citigroup Inc., Bank of Tokyo-Mitsubishi UFJ, HSBC Holdings PLC (HBC-PA), Lloyds Banking Group PLC (LYG), Rabobank Groep NV, Mizuho Financial Group Inc. (MFG), Societe Generale SA, RP Martin Holdings Ltd., Sumitomo Mitsui Banking Corp., and Royal Bank of Scotland PLC (RBS).

In the last few weeks, the accuracy of LIBOR, which is the average borrowing cost when banks in Britain loan money to each other, has come into question in the wake of allegations that Barclays and other big banks have been rigging it by submitting artificially low borrowing estimates. Considering that LIBOR is a benchmark interest rates that affects hundreds of trillions of dollars in financial contracts, including floating-rate mortgages, interest-rate swaps, and corporate loans globally, the fact that this type of financial fudging may be happening on a wide scale basis is disturbing.

“It’s my understanding the total financial paper effected by LIBOR is close to $500 trillion dollars. This is a half-quadrillion dollars if you are wondering about the next step up,” said Shepherd Smith Edwards and Kantas, LTD, LLP Founder and Institutional Investment Fraud Attorney William Shepherd.

FINRA Sustained $84.1M Net Loss in 2011

Published on: July 14, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to its yearly financial report, in 2011 the Financial Industry Regulatory Authority sustained an $84 million net loss last year primarily because of “non-recurring costs” involving new data centers in Maryland and New York and a rise in integration expenses related to the enhancement of cross market surveillance capabilities. A poor economy also reportedly played a role in the SRO’s decrease in revenues. The report came out on June 29.

FINRA Chairman and Chief Executive Officer Richard Ketchum attributed the decrease of regulatory fees of close to $50 million-a 10% drop since the financial crisis hit in 2008-to a drop in transaction volumes and industry revenues, as well as lower investment returns because of overall market returns and a more conservative investment allocation policy. (FINRA also noted net losses of $696.3 million in 2008, $48.6 million in 2009, and $54.6 million in 2010. )

Ketchum said that due to its “static funding levels,” FINRA is closely examining the organization’s spending habits, which it plans to lower by approximately $35 million this year. He expects that this will creative cumulative savings of close to $60 million by the end of next year while keeping the SRO’s regulatory mission intact.

Goldman Sachs Execution and Clearing Must Pay $20.5M Arbitration Award in Bayou Ponzi Scam, Upholds 2nd Circuit

Published on: July 14, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Court of Appeals for the Second Circuit is allowing a $20.5M award issued by a Financial Industry Regulatory Authority arbitration panel against Goldman Sachs Execution & Clearing LP to stand. The court turned down Goldman’s claim that the award should be vacated because it was issued in “manifest disregard of the law” and said that the clearing arm must pay this amount to the unsecured creditors of the now failed Bayou hedge fund group known as the Bayou Funds, which proved to be a large scale Ponzi scam.

Goldman was the prime broker and only clearing broker for the funds. After the scheme collapsed in 2005, the Bayou Funds sought bankruptcy protection the following year. Regulators would go on to sue the fund’s funders over the Ponzi scam and the losses sustained by investors. Meantime, an Official Unsecured Creditors’ Committee of Bayou Group was appointed to represent the debtors’ unsecured debtors. Blaming Goldman for not noticing the red flags that a Ponzi fraud was in the works, the committee proceeded to bring its arbitration claims against the clearing firm through FINRA. In 2010, the FINRA arbitration panel awarded the committee $20.58M against Goldman.

In affirming the arbitration award, the 2nd Circuit said that in this case, Goldman did not satisfy the manifest disregard standard. As an example, the court pointed to the $6.7M that was moved into the Bayou Funds from outside accounts in June 2005 and June 2004. While the committee had contended during arbitration that these deposits were “fraudulent transfers” and could be recovered from Goldman because they were an “initial transferee” under 11 U.S.C. §550(a), Goldman did not counter that the deposits weren’t fraudulent or that it was on inquiry notice of fraud. Instead, it claimed the deposits were not an “initial transferee” under 11 U.S.C. §550 and the panel had ignored the law by finding that it was.