Investor Lawyers Blog

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.

KBS Cap Markets Non-Traded REITs May Be Too Risky for Some Retail Investors

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

If you have sustained losses from investing in KBS Cap Markets Non-Traded REITs or any other non-traded REITs, do not hesitate to contact the securities fraud law firm of Shepherd Smith Edwards and Kantas, LTD, LLP right away to request your free case evaluation. While publicly registered non-exchange traded real estate investment trusts have become popular in the wake of investors looking for financial products that come with attractive yields, there are certain risks involved that could prove detrimental to some. Non-traded REITs are also often accompanied by high commissions and fees, which cam prompt some brokers to push these products even if they aren’t in the best interests of a client.

REITs

An REIT is an investment firm that purchase and manages real estate and related assets. When thousands of investors financially back an REIT, this can generate a purchasing power allowing the real estate investment trust to purchase significant properties that an individual investor would not be able to afford. With non-traded REITS, performance is related to how well the real estate and related assets do. Unlike traded REITs, non-traded REITs are considered illiquid for about eight years or longer.

Despite Tougher Investigations, SEC is Still Letting Wall Street Firms Avoid Punishments for Financial Fraud

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

According to The New York Times, by allowing that there be exemptions to certain regulations and laws, the Securities and Exchange Commission is letting Goldman Sachs, JPMorganChase, Bank of America, and other large financial firms avoid the liability that is supposed to come with losing securities fraud lawsuits while still making it possible for them to avail of the certain advantages that make it easier for them to raise investor money.

The newspaper analyzed investigations conducted by the SEC in the last decade and discovered almost 350 instances involving the federal agency giving Wall Street firms and other financial institutions a break. In one example cited by The New York Times, although JPMorganChase has settled six securities fraud cases in the past 13 years, the financial firm has also been granted at least 22 waivers. (Waivers may grant permission to underwrite certain bond and stock sales and/or manage mutual fund portfolios.) Another example involves Merrill Lynch and Bank of America (The two financial firms merged in 2009) settling 15 securities fraud cases while being granted at least 39 waivers.

Former regulators and securities experts say that granting the Wall Street firms the waivers gave them certain powerful advantages. According to former SEC chairman David S. Ruder, without the waivers a financial firm that agrees to settle securities fraud charges could be faced with “vast repercussions” that could prevent them from staying in operation.

SEC officials say the waivers are to allow for the stock and bond markets to stay accessible to companies that have the actual need to raise capital, which they believe is just as important as protecting investors. While the SEC has taken away certain privileges in securities fraud cases over misleading or false statements that were made about a financial firm’s own business, it doesn’t do the same when a Wall Street firm faces civil charges for allegedly lying about a specific security that it created and it is selling.

Many believe that the government is continuing to be “too soft” on Wall Street—even as the SEC has toughened up its investigations against financial firms accused of alleged fraud. Recently, there have been federal judges that have spoken out against the SEC’s habit of letting financial firm’s settle by letting them promise not to violate the law again. More than half the waivers issued have gone to Wall Street firms that had settled fraud charges at least once before.

The SEC has complained that settling is more affordable for it than going to court. However, even as the Commission has turned to Congress for tougher laws against fraud as well as increased penalties, why have nearly half of the waivers it has granted gone to Wall Street firms that have settled fraud charges in the past with the promise to never violate those laws again? That’s what many want to know.

S.E.C. Is Avoiding Tough Sanctions for Large Banks, The New York Times, February 3, 2011

SEC Seeks to Impose Tougher Penalties for Securities Fraud, Institutional Investor Securities Fraud, December 29, 2011

SEC Issues Emergency Order to Stop $26M “Green” Ponzi Scam, Institutional Investor Securities Fraud, October 13, 2011

Securities and Exchange Commission Charges Investment Adviser with Committing Securities Fraud on LinkedIn, Stockbroker Fraud Blog, January 6, 2012

SEC Charges First Resource Group LLC in Alleged Florida Penny Stock Boiler Room Scam

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

The SEC is accusing First Resource Group LLC and its founder David H. Stern of violating sections of the Securities Act of 1933 and the Securities Exchange Act of 1934. The Commission contends that they ran a boiler room scam involving penny stock companies while selling the same stocks to make illegal earnings.

First Resource and Stern allegedly hired telemarketers to make fraudulent solicitations to brokers to buy Cytta Corporation and TrinityCare Senior Living Inc. stocks. Meantime, Stern was also selling Cytta stock and TrinityCare shares to investors while buying small quantities to make it look as if actual trading activity was taking place so that investors would buy the shares.

The SEC claims that Stern and First Resources used a telephone sales boiler room to defraud investors and make inflated claims while manipulating the stocks’ price and making a profit. The Commission says they acted as unregistered brokers.