Investor Lawyers Blog

Goldman Sachs Reports $3.4 Billion in “Reasonably Possible” Losses from Legal Claims

Published on: March 2, 2011 | by Shepherd Smith Edwards & Kantas, LLP

In its latest 10-K filing with the US Securities and Exchange Commission, Goldman Sachs Group Inc. says that its “reasonably possible” losses from legal claims may be as high as $3.4 billion. The investment bank’s admission comes after the SEC told corporate finance chiefs that the should disclose losses “when there is at least a reasonable possibility” they may be incurred regardless of whether the risk is so low that reserves are not required.

Goldman admits that it hasn’t put side a “significant” amount of funds against such possible losses and its estimate doesn’t factor in possible losses for cases that are in their beginning stages. The $3.4 billion figure comes from a calculation of three categories of possible liability. Also factored in were the number of securities sold in cases where purchasers of a deal underwritten by Goldman Sachs are now suing the financial firm and cases involving parties calling for Goldman Sachs to repurchase securities.

Between 2009 and 2010, the financial firm reported a 38% decline in net income from $13.4 billion to $8.35 billion. Trading revenue dropped while non-compensation expenses, which were affected by regulatory proceedings and litigation, went up 14%. It was just last year that the investment bank paid $550 million to settle SEC charges that it misled investors when selling a mortgage-linked investment in 2007. Goldman Sachs is still contending with state and federal securities complaints alleging improper disclosure related to mortgage-related products. As of the end of 2010, estimated plaintiffs’ aggregate cumulative losses in active cases against Goldman Sachs was at approximately $457 million.

Related Web Resources:
Goldman Sachs Puts ‘Possible’ Legal Losses at $3.4 Billion, Bloomberg Businessweek, March 1, 2011

Form 10-K, SEC

Goldman Sachs Settles SEC Subprime Mortgage-CDO Related Charges for $550 Million, Stockbroker Fraud Blog, July 30, 2010

China-Based Hackers Broke into Morgan Stanley Network, Reports Bloomberg

Published on: February 28, 2011 | by Shepherd Smith Edwards & Kantas, LLP

According to Bloomberg, Morgan’s Stanley‘s network experienced a cyber break-in. The culprits were hackers based in China that broke into Google Inc.’s computers over a year ago. The break-in is documented in e-mails stolen from HBGary Inc, a cyber-security company that works for the investment bank.

Known as the Operation Aurora attacks, the break-ins took place in June 2009 and lasted for about six months. More than 20 companies were hit.

The HBGary emails don’t detail what data might have been stolen from Morgan Stanley or which of its multinational operations were hit. The broker-dealer reportedly considers the details of the cyber attacks confidential. Hacker activist group Anonymous stole the emails.

Morgan Stanley hired HBGary last year because of suspected hacker-linked network breaches that resulted in break-ins into the financial firm’s Internet security system. These attacks were not related to Operation Aurora. Per HBGary emails, the hackers that made those breaches were able to implant software for stealing confidential files and communications.

According to FBI Deputy Assistant Director Steven Chabinsky, hackers have stepped up efforts to obtain information involving mergers and acquisitions. The China-based hacker attacks did not help the growing tensions between China and the United States. Calls were even made for Secretary of State Hillary Clinton to look at Google’s claims about the raids and make her findings available to the public.

Following the cyber attacks, Google stopped censoring search results from Google.cn, its Chinese search engine. Google started shuttering its site following lengthy negotiations with officials in China.

Related Web Resources:
Morgan Stanley Attacked by China-Based Hackers Who Hit Google, Bloomberg, February 28, 2011
Operation Aurora, Techie Buzz, January 15, 2010
HBGary

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Worst-Case Scenario Losses for JP Morgan & Chase May Be As High as $4.5 Billion

Published on: February 28, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Wall Street Journal is reporting that JP Morgan Chase & Co., in its yearly Securities and Exchange Commission filing, said it may be facing up to $4.5 billion in legal losses over the losses it accounts for in its established litigation reserves. The SEC had asked for this additional disclosure in the wake of the economic crisis that has left many investment banks contending with securities fraud complaints from investors.

JP Morgan Chase’s $4.5 billion figure is a worst-case estimate. This means that additional losses could be anywhere from 0 to much higher than $4.5 billion. The investment bank is unable to make estimates at this time on over 10,000 legal proceedings.

JP Morgan also included a disclosure that it had received informal requests and subpoenas for information regarding its mortgage business. Many of the investors who have made securities fraud claims sustained their losses from their purchase of mortgage-backed securities during the housing market collapse. The investment bank said that some of the investigations came about following its announcement of a foreclosure moratorium because of issues with its foreclosure practices.

Other investment banks have also provided their worst-case scenarios:

• Citigroup Inc. estimated its worst-case scenario at $4 billion
• Wells Fargo & Co. estimated $1.2 billion
• Bank of America Corp. estimates about $1.5 billion

Related Web Resources:
J.P. Morgan Faces $4.5 Billion in Worst-Case-Scenario Losses, The Wall Street Journal, February 28, 2011

JP Morgan Chase and Co, SEC FIlings, Yahoo Finance

More Blog Posts:
Insurer Claims that JP Morgan and Bear Stearns Bilked Clients Of Billions of Dollars with Handling of Mortgage Repurchases, Institutional Investors Securities Blog, February 3, 2011

JPMorgan Chase & Co. CEO Warns Municipal Bond Investors to Expect More Bankruptcies, Institutional Investors Securities Blog, January 18, 2011

Ex-Wextrust Capital COO Pleads Guilty to Role in $255M Affinity Fraud Scam

Published on: February 27, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Joseph Shereshevsky, the ex-COO of Wextrust Capital LLC (Wextrust), has pled guilty to securities fraud, conspiracy and mail fraud charges over his involvement in a $255 million dollar affinity fraud scam. Shereshevsky entered his guilty plea in the U.S. District Court for the Southern District of New York.

He and codefendant Steven Byers, the private equity concern’s ex-CEO and president, diverted millions in investor funds in a Ponzi scam that took place between 2003 and 2008. Many of the approximately 1,200 investment fraud victims belong to the Orthodox Jewish Community.

Shereshevsky and Byers allegedly made misrepresentations by making it appear as if the investors’ money would go toward the purchase and operation of several commercial properties that the federal government had leased. In fact, the properties were never bought and investors’ funds were put to other uses. Byers and Shereshevsky, who are accused of using about $3 million and $9 million raised in a private placement for purposes that weren’t articulated to investors, also allegedly conspired together to “fabricate a story” about why the deal failed.

Byers pleaded guilty to the securities fraud and conspiracy charges against him last year. The two men, Wextrust, and a number of Wextrust entities, including Wextrust Development Group, LLC (WDG), Wextrust Equity Partners, LLC (WEP), Axela Hospitality, LLC (Axela), and Wextrust Securities, LLC (Wextrust Securities), face SEC civil charges over their alleged misconduct related to the affinity fraud scam.

Related Web Resources:
Ex-WexTrust Exec Shereshevsky Pleads Guilty to Fraud, Conspiracy, The Wall Street Journal, February 3, 2011

More Stockbroker Fraud Blog Posts:
Ex-Triton Financial CEO Accused of Using NFL Contacts to Commit $50M Texas Securities Fraud, Stockbroker Fraud Blog, February 17, 2011
Even as Ponzi Schemers Serve Time Behind Bars, Investors Are Left Coping with Millions in Financial Losses, Stockbroker Fraud Blog, January 25, 2011
CFTC Files Charges in Alleged California Ponzi Scam Involving the Fraudulent Solicitation of $14 million in Commodity Futures, Stockbroker Fraud Blog, January 18, 2011 Continue Reading ›

Alleged Pump and Dump Stock Manipulation Scam Leads to Indictment of Six, Including a Securities Attorney

Published on: February 27, 2011 | by Shepherd Smith Edwards & Kantas, LLP

An indictment has been unsealed today accusing six people of securities fraud in a stock manipulation scam that bilked investors between 2003 and 2008. The Securities and Exchange Commission has also filed a civil complaint related to this case.

The defendants are securities attorney Michael Simon Krome, Jonathan Randall Curshen, Robert Lloyd Weidenbaum, Ronald Salazar Morales, Izhack Zigdon, and Eric Ariav Weinbaum. They are accused of illegally manipulating stock prices in a pump and dump scam.

Per the indictment, Weinbaum and Zigdon allegedly took charge of the outstanding shares of CO2 Tech, a company that traded in the over-the-counter market through Pink Sheet listings. They are said to have gotten the shares by hiring Krome, who allegedly took action to avoid federal securities registration requirements so that his co-conspirators would get millions of “free-trading” CO2 Tech shares that were unregistered and otherwise could not have been legally obtained. The shares were then allegedly sold to the general public through Sentry Global’s stock trading floor. Curshen was the principal of Sentry Global Securities and Red Sea Management, which are both based on Costa Rica.

Weinbaum and Zigdon are accused of paying Weidenbaum about $1 million to take part in bogus CO2 stock trades to make it seem as if actual investors were purchasing them. False press releases were also allegedly issued to make it seem as if CO2 Tech had substantial business prospects. After “pumping” the market price and demand, the defendants would “dump” the shares by selling them for substantial profit through the Pink Sheet listings. Frequently, these shares were practically worthless.

Related Web Resources:

Securities Attorney and Five Others Indicted for Conspiracy, Wire Fraud, and Mail Fraud in Stock Manipulation Scheme, FBI, February 18, 2011

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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

Pump and Dump Scheme Involving Prime Time Stores Inc. Sends Global Spam Levels Up 30%, Stockbroker Fraud Blog, September 5, 2007

FINRA Fines Bank of America Corp.’s Merrill Lynch $500,000 Over Alleged Oversight Failures of 529 Plans

Published on: February 23, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is ordering Merrill Lynch, a Bank of America Corp. unit, to pay a $500,000 fine over alleged oversight failures involving 529 plans, a college-savings product. Merrill Lynch has also been censured by FINRA in a disciplinary action.

According to the SRO, Merrill Lynch lacked the adequate supervisory procedures necessary to make sure representatives were taking into account clients’ state income-tax benefits when determining whether they should invest in a 529 plan within their state of residence or in one outside the state. Merrill Lynch sold more than $3 billion in 529 plans between June 2002 and February 2007.

With 529 plans, which are considered municipal securities, money can be withdrawn to pay for college expenses without the imposition of federal taxes. Many states offer credits or state tax deductions for residents that invest in a 529 plans in the state. That said, depending on where the investor resides, investing in a plan outside the state can be more beneficial than the benefits received from a 529 plan in the investor’s home state.

However, FINRA contends that the only 529 plan that the financial firm offered and sold nationally was Maine’s NextGen College Investing Plan. Merrill Lynch must now send letters to clients who lived in states that offered 529-related tax benefits but ended up opening accounts with Maine’s NextGen College Investing Plan through Merrill Lynch. These customers will be given instructions on how to contact the financial firm. If they want to move their funds to a home-state 529 plan, Merrill Lynch has to help, as well as waive a number of fees.

By agreeing to settle with FINRA, Merrill Lynch is not denying or admitting to the SRO’s findings.

Related Web Resources:
Merrill fined $500,000 over college-savings plans, Bloomberg, January 19, 2011
FINRA Censures, Fines Merrill Over Colleges Saving Plans, OnWallStreet, January 19, 2011

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Bank of America Merrill Lynch to Settle UIT Sales-Related FINRA Charges for $2.5 Million, Stockbroker Fraud Blog, August 22, 2010
Bank of America To Settle SEC Charges Regarding Merrill Lynch Acquisition Proxy-Related Disclosures for $150 Million, Stockbroker Fraud Blog, February 15, 2010
SEC Submits Amended Complaint Against Bank of America Over Merrill Lynch Merger and Executive Bonuses, Stockbroker Fraud Blog, December 3, 2009 Continue Reading ›

Kentucky Workers’ Compensation Funding Commission Paid Morgan Stanley Smith Barney $510,000 for Financial Advice, Says Auditor

Published on: February 23, 2011 | by Shepherd Smith Edwards & Kantas, LLP

State auditor Crit Luallen is accusing the Kentucky Workers’ Compensation Funding Commission of breaking the law when, rather than seeking financial advice from the Kentucky Finance and Administration Cabinet’s Office of Fiscal Management, it paid Morgan Stanley Smith Barney for private financial advice. Luallen contends that the workers’ compensation agency has paid the broker-dealer about $510,000 for help received in making investments since 1999. The funding commission’s board has accepted the audit’s findings and it will only work with state-employed advisers from now on.

The Kentucky Workers’ Compensation Funding Commission oversees over $350 million in assets. It collects over $70 million annually from assessments on employers’ workers’ compensation premiums. The funding commission’s investments suffered $71 million in lost investments during the fiscal years of 2009 and 2008.

There has been no evidence that there were any conflicts of interest between Morgan Stanley and the funding commission. The broker-dealer is defending its handling of the agency’s investments. Morgan Stanley senior vice president Frank Thompson says the firm did an “outstanding job” and that it strongly recommended that the funding commission not work with the state’s OFM, which it said proposed poor investments.

Related Web Resources:

Kentucky Workers’ Compensation Panel Criticized Over Outside Adviser, Insurance Journal, February 22, 2011 Continue Reading ›

Texas Securities Fraud: Three FINRA Cases Against Securities America Over Sale of Private Placements Halted

Published on: February 22, 2011 | by Shepherd Smith Edwards & Kantas, LLP

In what Investment News is describing as a legal victory for Securities America, a federal judge in Dallas has placed a restraining order on three upcoming FINRA arbitration claims against the broker-dealer and its brokers. The cases will be combined with two class action. This will likely limit Securities America’s liability. Ameriprise Financial Inc. owns this brokerage firm.

In the U.S. District Court for the Northern District of Texas, Judge W. Royal Furgeson, Jr. ordered the broker-dealer to set up a $21 million settlement fund for investors. The Texas securities fraud claims involve the allegedly bogus sale of private placement notes from Provident Royalties LLC and Medical Capital Holdings Inc.

A number of plaintiff’s attorneys have expressed dismay at Furgeson’s decision because they are worried that their clients won’t get as much from a class action case. Furgeson, however, says that combining the cases protects the financial recovery for all investors and not just those with FINRA arbitration claims.

Per court documents, Securities America sold approximately $18 million of Provident shares and $700 million of Medical Capital notes. Some 20,000 investors purchased the Medical Capital notes from independent broker-dealers and approximately $2.2 billion was raised from the private placements. Unfortunately, many of the medical receivables believed to be underlying the notes never existed.

Dozens of claimants, including the securities divisions of Massachusetts and Montana, have filed securities claims against Securities America. The financial firm, however, maintains that it did not engage in any wrongdoing when it sold the MediCap notes.

Related Web Resources:

Securities America scores huge victory in Reg D case, Investment News, February 18, 2011

More Stockbroker Fraud Blog Posts:

Securities America Inc. to Pay $1.2M in Compensatory and Punitive Damages Over Allegedly Fraudulent Medical Capital Notes, January 6, 2011

FINRA Fines H & R Block Financial Advisors (Now Ameriprise Advisor Services) over Sales of Reverse Convertible Notes (RCN), February 17, 2010

Securities America & Ameriprise Financial Inc. Sued For Selling Allegedly Faulty Private Settlements, November 10, 2009 Continue Reading ›

Order to Freeze Assets in $53M Fund Fraud Allegedly Involving Michael Kenwood Asset Management LLC Obtained by SEC

Published on: February 21, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The SEC has obtained an order to freeze the assets of investment adviser Michael Kenwood Capital Management LLC and firm principal Francisco Illarramendi, who is accused of taking at least $53M from a hedge fund and fraudulently transferring investor money from several funds to bank accounts he controlled. Illarramendi then allegedly took that money and placed it in private-equity investments.

The SEC’s securities fraud complaint charges the investment adviser and Illarramendi with violating the 1940 Investment Advisers Act. Rather than using the money to benefit investors, Illarramendi allegedly used the money to his benefit and for the benefit of the entities under his control. The SEC says that it sought emergency relief because it was afraid that Illarramendi was going to make additional, unauthorized investments.

The largest private equity investment Illarramendi made was in an unnamed West Coast nuclear energy company. The SEC says he used $23 million in investor funds. A foreign company pension fund that was his biggest investor contributed 90% of the money in his funds.

In December 2009, Illarramendi allegedly authorized for $3.5 million to be transferred from an account to a Spanish company that makes rolled steel. In May 2010, he approved the transfer of $20 million from the financial firm’s $540 million Short Term Liquidity Fund to pay for shares in a clean-tech manufacturing company. He transferred another $4 million from the short-term fund to purchase shares in a development stage energy company. Another $3.1 million was transferred from different funds to the Spanish steel company.

The SEC is accusing Illarramendi of using clients’ money as if they were his and diverting millions of the investors’ funds. The commission says he breached his responsibilities as an investment adviser and abused clients’ trust. The SEC is seeking disgorgement of ill-gotten gains, permanent injunction, plus prejudgment interest.

Named as relief defendants that received investor money that they weren’t entitled are Michael Kenwood Asset Management LLC, MKEI Solar LP., and Kenwood Energy and Infrastructure LLC. Illarramendi, who is the majority owner of Michael Kenwood Group LLC, managed several hedge funds. One of the hedge funds has held up to $540 million in assets.

Related Web Resources:
SEC Charges Connecticut-Based Hedge Fund Manager for Fraudulent Misuse of Investor Assets, SEC, January 28, 2011
Read the SEC Complaint (PDF)

1940 Investment Advisers Act

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MSRB Seeks Public Comment on New Fiduciary Duty Rule for Municipal Advisors

Published on: February 21, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Municipal Securities Rulemaking Board is currently asking for public comment on several rulemaking proposals and draft interpretive guidance, including the proposed Rule G-36, a new fiduciary duty rule for municipal advisors. Comment is also being sought on proposed rule amendments and guidances related to gifts by municipal advisors and fair practice duties of underwriters.

Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act is extending the MSRB’s authority to municipal advisors. Under Section 975, municipal advisors have a federal fiduciary duty to clients. MSRB has been directed to implement this requirement. Our institutional investment fraud lawyers would like to remind investors that breach of duty by investment advisers and brokers can be grounds for a securities fraud case when investor losses result.

The draft interpretive guidance regarding advisors’ fiduciary duty address a number of issues, including duty of care, conflicts of interest disclosures, and when conflicts of interest can be waived by a client’s informed consent. The proposed guidance would require municipal advisors to have a fiduciary duty to clients under federal law—not just a fiduciary duty under state and common laws.

The MSRB is also asking for public comment on draft interpretive guidance related to the extension of Rule G-17 to municipal advisors. Also called the “fair dealing” rule, Rule G-17 specifies a code of conduct for all individuals and entities that the MSRB regulates. The draft guidance gives details about how the rule applies to municipal advisers. The MSRB also wants public comment on interpretive guidance of Rule G-17 to underwriters. Both municipal advisers and underwriters would be required to disclose material terms, proposed transaction risks, and related conflicts and incentives to clients.

Related Web Resources:

Municipal Securities Rulemaking Board

More Blog Posts:
JPMorgan Chase & Co. CEO Warns Municipal Bond Investors to Expect More Bankruptcies, Institutional Investor Securities Blo, January 18, 2011

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Bank of America to Pay $137M Over Alleged Investment Scam To Pay Municipalities Low Interest Rates on Investments and $9M Over Alleged Bid-Rigging Scheme to Nonprofits, Institutional Investor Securities Blog, December 16, 2010