Investor Lawyers Blog

Standard & Poors Receives SEC Wells Notice Over CDO Rating

Published on: September 30, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Standard & Poor’s Ratings Services has received a Wells Notice from the Securities and Exchange Commission notifying the credit rating agency that it ma be subject to possible enforcement action over alleged violations of federal securities laws. The allegations involve S & P’s ratings for the Delphinus CDO 2007-1, a collateralized debt obligation.

The $1.6 billion hybrid CDO was downgraded just a few months after it received AAA ratings from both S & P and Moody’s Investor Services—the two biggest credit rating agencies in the country—by the end of 2008 its securities that were rated AAA had been downgraded to junk status. S & P’s parent company McGraw-Hill says that the credit rating agency is cooperating with the Commission’s examination into this matter. If the SEC were to file an enforcement action against S & P, it would be its first one against a credit rating agency for the rating of a mortgage-backed security.

Just today, the SEC staff expressed concern that despite changes that were implemented at credit rating agencies to better their operations, the Commission is still concerned about certain deficiencies. The SEC voiced its concerns in its first yearly report on Nationally Recognized Statistical Rating Organizations. Alleged deficiencies include:

• Not always following ratings procedures or methodologies.
• Failure to make accurate and timely disclosures.
• Improper management of conflict of interest.
• Lack of effective internal control structures for the rating process.

The new annual reports was mandated by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection, which is seeking better oversight and regulation of credit rating agencies. 10 credit rating agencies registered as NRSROs were examined. The names of the NRSROs weren’t published.

It was just earlier this year that the Senate Permanent Subcommittee on Investigations issued its bipartisan report noting that the most “immediate cause” of the financial crisis three years ago was the “mass ratings downgrades” of securities in 2007 that were made by Moody’s and S & P. Per the report, credit rating agencies were aware that their ratings wouldn’t “hold” and held back on putting up more strict ratings criteria. When they did modify their risk models that noted there were high-risk mortgages being issued, the revised models were not applied to existing securities. All of this allowed investment banks to push out high-risk investments before the tougher criteria were implemented.

Credit ratings changes can impact not just a company’s bond prices but also its stock price. The market can also be impacted.

For the time ever, S & P downgraded the US credit rating a notch lower than AAA. The credit agency expressed concern about the federal government’s ability to take care of its finances. S & P noted that the bipartisan agreement to look for at least $2.1 trillion in budget savings was not enough to quell the nation’s debt in the long run. Now, the SEC is looking into whether news of S & P’s downgrade of the country’s debt was leaked and the info used for trading before it was officially made known.

S&P downgrades U.S. credit rating for first time, Washington Post, August 5, 2011

S.E.C. Faults Credit Raters, but Doesn’t Name Them, NY Times, September 30, 2011

SEC Staff Issues Summary Report of Commission Staff’s Examinations of Each Nationally Recognized Statistical Rating Organization, SEC, September 30, 2011

More Blog Posts:
Moody’s, Fitch, and Standard and Poor’s Were Exercising Their 1st Amendment Rights When They Gave Inaccurate Subprime Ratings to SIVs, Says Court, Institutional Investment Fraud Blog, December 30, 2010

Standard and Poor’s Ratings Lawsuit to Go Forward, Says Judge, Institutional Investment Fraud Blog, September 16, 2010

SEC’s Handling of Credit Rating Agencies Oversight and Failure to Detect Madoff and Stanford Ponzi Scams Questioned at Senate Appropriations Financial Services Subcommittee, Stockbroker Fraud Blog, May 8, 2010

New Jersey Investment Adviser Who Pleaded Guilty to $11.5M Financial Fraud Gets 168-Month Prison Sentence

Published on: September 29, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Sandra Venetis, a New Jersey investment adviser has been sentenced to 168 months behind bars. Venetis had entered guilty pleas to che charges of securities fraud and transacting in criminal property. She also must pay $11,579,781 in restitution to the investors she defrauded.

The government had accused Venetis, who owns Systematic Financial Associates Inc., of soliciting her financial firm’s clients so that they would put their money in an “alternative investment program” that she ran separate from her registered investment advisory business. This was between 1997 and 2010. To get these clients to invest, she falsely told them the money was being used to pay for loans for doctors’ quarterly pension funds. There were even occasions when Venetis would tell these clients to liquidate their positions in securities so they could take part in her alternate program. 114 clients sent her about $16.7M.

None of the investors’ money went to any doctors-although she did make up fictitious physicians and forged real doctors’ names on promissory notes to make it look as if she was using her clients’ money in the manner promised. Venetis has admitted that not only did she not run a legitimate alternative investment program, but also that she created Systematic Financial Services Inc. so that she could run her financial scam. She acknowledges that she used some of the investor money to help cover her advisory’s operation costs.

It was last year that Venetis and three of her firms, Systematic Financial Services, LLC, Systematic Financial Services, Inc., and Systematic Financial Associates, Inc., settled SEC charges over the multimillion-dollar financial fraud. The Commission said that Venetis and her companies violated sections of the Securities Act of 1933, Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and the Investment Advisers Act of 1940. Relief defendants included Venetis LLC, which Venetis also owned and operated, her brother Kevin Persley, and her daughter Jennifer Venetis.

The Commission accused Venetis of telling investors that the Federal Deposit Insurance Corporation had guaranteed promissory notes that would make about 6-11% tax-free interest annually. Although investors believed their investments were paying for loans to doctors the money paid for Venetis’s business debts and personal spending, including travel abroad, property taxes, home mortgages, gambling, and money for relatives.

Venetis and the companies settled the charges and all agreed to the relief sought by the SEC, including enjoinment from future securities law violation, payment of disgorgement of ill-gotten gains with prejudgment interest, financial penalties, and appointment of an independent monitor.

N.J. IA Sentenced to 168 Months After Pleading Guilty in $11.5M Fraud, BNA Securities Law Daily, September 12, 2011
SEC CHARGES NEW JERSEY INVESTMENT ADVISER IN MULTI-MILLION DOLLAR OFFERING FRAUD, SEC, September 2, 2010

More Blog Posts:
FINRA Tells Congress It Is Ready to Act as SRO for Investment Advisors, Stockbroker Fraud Blog, September 13, 2011
Investors Working with Incompetent Registered Investment Advisers Have Few Protections, Reports Bloomberg, Stockbroker Fraud Blog, August 11, 2011
Harvest Managers, Benchmark Asset Managers, and Investment Advisor to Pay $11.6 Million to Settle SEC Charges Over Allegedly Mishandled Client Funds, Stockbroker Fraud Blog, July 23, 2011
SEC Extends Temporary Rule Allowing Principal Trades by Investment Advisers Registered as Broker-Dealers, Institutional Investment Fraud Blog, January 13, 2011 Continue Reading ›

EagleEye Asset Management LLC Sued by SEC and CFTC for Alleged Forex Trading Scam

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

In separate securities lawsuits, the Securities and Exchange Commission and the Commodity Futures Trading Commission are both suing EagleEye Asset Management LLC, which a Massachusetts asset management firm, and Jeffrey A. Liskov, its principal.

The CFTC is accusing the two defendants of defrauding at least one US-based client while trading forex on a margined or leveraged basis for her. Per the CFTC’s lawsuit, the client decided to grant permission to EagleEye and Liskov to trade part of her retirement money because Liskov allegedly advised her that this type of trading was appropriate for her conservative investment objects.

However, Liskov allegedly did not warn her of the risks involved or tell her that he did not have a successful track record with forex trading. While the trading did generate short-term profits for the woman, she lost most of the money that she invested. The CFTC contends that instead of revealing the trading losses, Liskov allegedly forged the client’s name and set up a new account opening documents and on more than $3 million in secret wire transfers from her mutual fund account to her forex account so that trading wouldn’t have to stop. The woman client lost more than $3.24 million, while Liskov and EagleEye made about $235,000 in performance incentive fees.

Per the SEC, between 4/08 and 8/10, Liskov made misrepresentations to clients to persuade them to move funds they’d placed in securities investments into forex trading. The SEC contends that these investments were not appropriate for elderly clients that had conservative investment objectives and that this caused them to sustain significant financial losses totaling almost $4 million. EagleEye and Liskov allegedly earned performed fees of over $300K, plus management fees. The Commission believes that having clients make short-term investment gains and then earning performance fees before these gains were lost was the defendants’ plan.

Liskov allegedly did not even help some investors understand the nature of forex trading. With other clients, he deemphasized the degree of investment risk involved. The SEC also says that Liskov made false statements with claims that he had achieved success with forex trades when, in fact, the opposite was the case.

Meantime, Massachusetts Secretary of the Commonwealth William Francis Galvin (D) has also filed administrative charges against the investment advisor firm and Liskov. Galvin is accusing them of violating Massachusetts’s Uniform Securities Act.

Our securities fraud law firm has helped thousand of investors recoup their losses caused by broker misconduct and investment adviser fraud. Working with a stockbroker fraud law firm is the best way to help you get back your lost investment.

Read the SEC’s Complaint (PDF)

CFTC Charges Massachusetts Man Jeffrey Liskov and His Company, EagleEye Asset Management, LLC, with Committing a $3 Million Forex Fraud, CFTC, September 8, 2011
State files complaint against local investment advisor, WickedLocal, September 13, 2011
Mass. Adviser Sued by Regulators Over Alleged Forex Trading Scheme, BNA Securities Law Daily, September 9, 2011

More Blog Posts:
Texas Commodity Trading Advisor FIN FX LLC Now Subject to NFA Emergency Enforcement Action, Stockbroker Fraud Blog, April 27, 2011
Commodity Options Fraud Charges by CFTC Prompts District Court to Freeze Assets and Records of 20/20 Trading Co. Inc. & 20/20 Precious Metals Inc., Stockbroker Fraud Blog, May 6, 2011
$63 Million Mortgage-Backed Securities Lawsuit Against Bank of America is Second One Filed by Western and Southern Life Insurance Co. Against the Financial Firm, Institutional Investor Securities Blog, August 29, 2011 Continue Reading ›

Class Action Securities Case Accusing SunTrust Banks of Faulty Financial Disclosures Can Proceed

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

A district court has ruled that Belmont Holdings Corp. v. SunTrust Banks Inc., a putative class securities action claiming that a 2008 SunTrust (STI) securities’ offerings documents contained faulty financial disclosures, can proceed. According to Judge William Duffey Jr. of the U.S. District Court for the Northern District of Georgia, investors’ claims made against SunTrust and affiliates, and a number of underwriters, and Sections 11 and 12(a)(2) of the 1933 Securities Act are enough for moving forward with the case. The statutory provisions place liability on specific participants in a securities offering where these documents have material omissions and misstatements.

Per the court, SunTrust put out securities that were pursuant to a registration statement. This was done as amended by a prospectus supplement, which incorporates by reference SunTrust’s 2007 Form 10-K. In their initial securities lawsuit, the plaintiffs argued that when the offering was made three years ago, the US housing market was in chaos. To raise funds, SunTrust allegedly put out the securities and a prospectus supplement that included misleading and false information about is reserves, capital, and ability to manage risk.

As a result, investors were misled about the degree of risky loans that SunTrust was exposed to in the housing market. An amended complaint was submitted by the plaintiff pushing forward similar claims that were made in the first lawsuit. However, clarifying allegations supporting the claim that the prospectus supplement was misleading because it failed to adequately disclose SunTrust’s ALLL and because the financial firm’s loss reserves were not enough to cover its loan losses were also included with this lawsuit.

The plaintiff contends that SunTrust knew that it used flaw financial information that would lead to misleading information being added to its prospectus supplement. This flawed information was allegedly used to determine loan loss reserves, ALLL, and loan loss.

Because the court determined that there is sufficient grounds to allege that SunTrust defendants “did not truly believe” the Provision and ALLL that were disclosed, the plaintiff was able to sufficiently allege plausible claims. The court said that claims against the underwriter defendants can also proceed. Except for a few exceptions, claims against outsider auditor Ernst & Young can also move forward.

If you have been the victim of securities fraud, you may be able to recover your losses from the negligent party. The best way to do this is to work with an experienced securities fraud attorney. Your case may be able to be resolved in arbitration or in court.

More Blog Posts:
Investor May Proceed With Suit Alleging Faulty Financial Disclosures by SunTrust, Institutional Investor Securities Blog, August 6, 2011

Wells Fargo Settles Mortgage-Backed Securities Class Action Case for $125M, Institutional Investor Securities Blog, July 19, 2011

8/31/11 is Deadline for Opting Out of $100M Oppenheimer Mutual Funds Class Action Settlement, Institutional Investor Securities Blog, August 17, 2011

Measure Banning Insider Trading Gains Support of Congress Members

Published on: September 24, 2011 | by Shepherd Smith Edwards & Kantas, LLP

According to Bloomberg Businessweek, both Republicans and Democrats appear to be getting behind a House measure that forbids insider trading by lawmakers. The legislation would consider any trading on legislation done by lawmakers or their staffers as securities fraud. Also, trades over $1,000 would have to be reported within three months.

The measure mandates that regulators draft rules preventing intelligence firms and individuals from selling nonpublic data that they receive from federal employees. Individuals and firms taking part in political intelligence would have to register just the way federal lobbyists do.

US Senator Kirsten Gillibrand (D-NY)’s bipartisan legislation would revise the definition of insider trading to include information obtained from congressional work. Her bill also calls for new reporting requirements for transactions.

The issue of lawmakers engaging in insider trading grew after 60 Minutes reported that Congressional members purchased companies’ stock during debates on laws that could affect the businesses. The report said that the investments under scrutiny weren’t illegal. Following the airing of the CBS News program, however, the measure, which is called the STOCK (Stop Trading on Congressional Knowledge) Act and was first introduced in 2006, saw its number of co-sponsors rise to 171 House members.

Meantime, the Securities and Exchange Commissioning is cautioning against this type of insider trading ban for lawmakers over concern that this prohibition might narrow certain existing laws. SEC Enforcement Director Robert Khuzami cautioned that any revisions should be “carefully calibrated” so that insider trading prosecutions that don’t involve Congressional members are not negatively impacted. Currently, the SEC uses general anti-fraud provisions to pursue those engaged in insider trading. These laws have never been applied to prosecuting lawmakers.

Rather than a congressional insider trading ban, Khuzami suggested the establishment of an explicit fiduciary obligation among Congress members to keep information obtained while on the job confidential and off limits for purposes of personal gain. General duty would then be used to pursue those that engage in insider trading.

House and Senate panels are expected to vote on an insider-trading ban, possibly as early as next year. The House Financial Services Committee and the Senate Homeland Security and Governmental Affairs Committee will vote on the STOCK Act this year.

Our stockbroker fraud attorneys work victims of insider trading. We have successfully helped thousands of investors throughout the country in recouping their money. We also have represented investors located abroad that have claims against investment firms based in the US.

Congressional Insider-Trading Ban Gains Bipartisan Support, Bloomberg Businessweek, December 7, 2011
SEC warns on congressional insider trading ban, Reuters, December 6, 2011

More Blog Posts:
Fiduciary Standard in Securities Industry Doesn’t Need New Definition, Stockbroker Fraud Blog, November 26, 2010
Hedge Fund Manager Raj Rajaratnam Ordered by SEC to Pay $92.8M Penalty for Insider Trading, Stockbroker Fraud Blog, November 12, 2011
Insider Trading: Former FrontPoint Partners Hedge Fund Manager Pleads Guilty to Criminal Charges, Institutional Investor Securities Blog, August 20, 2011
**This post has been backdated for publication
Continue Reading ›

Some of the SEC Charges Against Investment Adviser Over Alleged Involvement In J.P. Morgan Securities LLC Collateralized Debt Obligation Are Dismissed

Published on: September 24, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Southern District of New York has thrown out some of the Securities and Exchange Commission charges against GSCP (NJ) managing director Edward Steffelin for his alleged involvement in a JP Morgan Securities LLC collateralized debt obligation deal. GSCP (NJ) was the collateral manager for the CDO transaction.

While JP Morgan Securities settled for $153.6 million the SEC’s allegations that it misled investors about the CDO deal by agreeing to pay $153.6 million, Steffelin opted to fight the charges. He claimed that there was no reason for him to think that the CDO offering documents were problematic. He argued that nothing had been left out and nobody was “defrauded.”

In district court, Judge Miriam Goldman Cedarbaum granted Steffelin’s motion to dismiss the SEC’s 1933 Securities Act Section 17(a)(3) claims against him. Per the Act, any person involved in the sale or offer of securities is prevented from taking part in any transaction or practice that would deceive or be an act of fraud against the buyer. Cedarbaum said it would be a “big stretch” to conclude that Steffelin owed the investors that bought the CDO a fiduciary duty. However, she decided not to throw out the SEC’s securities claims related to the 1940 Investment Advisers Act, which has sections that make it unlawful to sell or offer securities to get property or money as a result of an omission or material misstatement. The act also prevents investment advisers from taking part in a transaction or practice that performs a deception or fraud on a client.

The SEC’s charges revolved around a JPM-structured CDO called Squared CDO 2007-1. It mainly included credit default swaps that referred to other CDOs linked to the housing market. Per the Squared CDO’s marketing collaterals, GSCP was noted as the one choosing the portfolio’s deals. What wasn’t included in the disclosure was the fact that Magnetar Capital LLC, a hedge fund, played a key part in choosing the CDOs and had a short position in over 50% of the assets. This meant that Magneta Capital stood to gain financially if the CDO portfolio failed.

JP Morgan Securities is JP Morgan Chase affiliate. Under the terms of its $153.6 million settlement, the financial firm agreed to fully pay back all monies that investors lost. By agreeing to settle, JP Morgan Securities did not admit to or deny wrongdoing. Other large financial firms that have settled SEC securities fraud cases related to CDOs in the last 16 months include Citigroup, which recently reached a $250 million settlement and Goldman Sachs, which settled its case with the SEC last year for $550 million.

More Blog Posts:
Citigroup’s $285M Mortgage-Related CDO Settlement with Raises Concerns About SEC’s Enforcement Practices for Judge Rackoff, Institutional Investor Securities Blog, November 9, 2011

Retirement Fund’s CDO Lawsuit Against Morgan Stanley is Dismissed by District Court, Institutional Investor Securities Blog, October 27, 2011

Stifel, Nicolaus & Co. and Former Executive Faces SEC Charges Over Sale of CDOs to Five Wisconsin School Districts, Stockbroker Fraud Blog, August 10, 2011

***This post has been backdated.

UBS Trader Charged with Fraud Related to $2B Trading Loss

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

Kweku Adoboli, a UBS trader, has been charged with false accounting and fraud allegedly resulting in about $2 billion in losses. Adoboli, 31, was arrested in London.

The alleged financial misconduct is said to have taken place between 10/8 and 12/09 and 1/10 and 9/11 while Adoboli, who works out of UBS’s office in London, was a senior trader with UBS Global Synthetic Equities. FSA, which is Britain’s financial watchdog, and FINMA, which is Switzerland’s, have instigated an investigation into the loss. UBS will pay for the probe, which will be conducted by an independent third party.

UBS is also investigating this trading loss but says that no client positions have been impacted. The financial firm has said that most of the risk exposure went undetected because bogus hedging positions were placed in the bank’s systems.

Adoboli’s arrest for “suspicion of fraud by abuse of position” is bringing up questions about UBS’s risk management systems, which are supposed to prevent unauthorized trading. It was just in 2008 that UBS wrote down $50 billion in securities trades, leading to losses of 34.4 billion francs. That was the year that the Swiss Central Bank had to rescue UBS, which then closed down significant parts of its trading division and revised its risk-management systems.

News of Adoboli’s alleged fraud and the $2B loss has caused shares in UBS to drop, while the expense of insuring its 5-year bonds against default for a year became expanded by 15 basis points to 225 basis points. According to Reuters, analysts are saying that that this latest loss is the “final nail in the coffin” for UBS, which has had to deal with plunging markets, strict new regulation, and a Swiss franc that has gotten stronger.

Moody’s and Standard Poor’s now say that UBS’s credit rating is on negative watch. Meantime, Fitch says it has the financial firm’s viability rating on negative watch and that this latest incident only lends to the argument that UBS needs to downsize its investment banking unit.

The $2B loss and Adoboli’s arrest is unfortunate for UBS, which had just started to regain client confidence this year. This huge loss has pretty much cost the financial firm its first year of saving that was supposed to come from a cost-cutting plan involving the elimination of 3,500 jobs. UBS Chief Executive Oswald Gruebel and Chairman Carten Kengeter, who is the head of UBS’s investment bank division, are also now under fire. Gruebel has dismissed calls to step down.

UBS Raises Tally on Losses, Wall Street Journal, September 19, 2011
UBS trader charged with $2 billion fraud, Reuters, September 16, 2011

More Blog Posts:
Ex-UBS Financial Adviser Pleads Guilty to Defrauding Private Fund Investors, Stockbroker Fraud Blog, July 13, 2011
UBS to Pay $2.2M to CNA Financial Head for Lehman Brothers Structured Product Losses, Stockbroker Fraud Blog, January 4, 2011
UBS Financial Reaches $160M Settlement with the SEC and Justice Department Over Securities Fraud, Antitrust, and Other Charges Related to Municipal Bond, Institutional Investors Securities Blog, May 16, 2011 Continue Reading ›

SEC Chairman Criticized For Allowing Ex-Commission Official that Benefited from the Bernard Madoff Ponzi Scam to Help Craft Policy Regarding Victims’ Compensation

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

Securities and Exchange Commission Chairman Mary Schapiro has been taking some heat because the agency allowed David Becker, a former SEC general counsel, to help develop policy regarding compensation for the victims of the Bernard Madoff Ponzi scam should be compensated even though Becker was someone who benefited from the scheme. SEC Inspector General H. David Kotz has asked the Justice Department to look into whether Becker violated any laws as a result and whether criminal charges should be filed.

At a House hearing this week, Becker testified that SEC ethics officials told him that there was no conflict of interest preventing him from taking on this task. Attendees at the hearing criticized Schapiro for letting Becker participate in establishing compensation policy even though he had inherited his own Madoff account. Schapiro has already admitted that she was wrong in allowing him to stay involved.

Some lawmakers believe that Becker’s participation in this type of policy planning is just one more incident that has caused the public to lose faith in the SEC, which didn’t even realize for almost 20 years that Madoff had been running a multibillion-dollar scam. They are now raising questions about leadership within the agency, the ability of SEC senior management to make decisions, and possible flaws in the Commissions procedures and policies as they apply to ethical matters.

On Tuesday, Kotz issued a report stating that Becker took part “personally and substantially” in matters in which he had a financial interest. Also per his report, Kotz said that the ex-General Counsel had recommended to commissioners that they put into place a policy that would value Madoff clients’ claims in a manner that would have restricted the court-appointed trustee’s power to sue Ponzi scheme beneficiaries to get back fictitious profits. Becker is one of those beneficiaries.

Earlier this year, the trustee, Irving Pickard, filed a lawsuit against Becker and his siblings contending that about $1.5 million of the money in their mom’s account was a bogus profit that should go tot the fund designated to pay back victims of Madoff’s Ponzi scam. Becker, who maintains that he never considered there to be a conflict of interest (he says that on two occasions, the ethics committee even advised him that this was correct) said that if he knew then that the trustee would sue him later he would have recused himself from working on the compensation policy.

According to Reuters, while some lawmakers don’t believe that Becker broke any laws, many are wondering why he didn’t decide on his own to not get involved in Madoff-related SEC matters.

Bernard L. Madoff Investment Securities LLC’s multibillion-dollar Ponzi Scam, which cost investors billions, wasn’t discovered until the end of 2008. Madoff has been sentenced to 150 years behind bars.

Some lawmakers doubt ex-SEC lawyer broke the law, Reuters, September 22, 2011

More Blog Posts:

Texas Congressmen Seek Answers from SEC Chairwoman Regarding Conflict of Interest Related to Madoff Debacle, Stockbroker Fraud Blog, March 8, 2011

Madoff Investors Who Were Victims of “Ponzi” Scam Contact Securities Fraud Law Firm Shepherd Smith Edwards & Kantas LTD LLP to Explore Recovery Options, Stockbroker Fraud Blog, December 17, 2008

Financial Scammers Are Now Using YouTube, Facebook, LinkedIn, Twitter, and Other Websites to Target Investors, Warns Texas Securities Commissioner

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

Texas Securities Commissioner Benette L. Zivley wants investors to be aware that fraudsters are now using the Internet as a vehicle for their investment schemes. Online social networking Websites, such as Facebook, Twitter, YouTube, and Linked in, are among the sites being used to find potential victims, gain access to their personal information, and build relationships of “trust.” Scammers have even been known to purposely “mimicking” a target’s interests to try and get someone to invest. Considering that about 750 million users (who on average are linked to about 80 groups, community pages, and events) are logging 700 billion minutes a month on Facebook alone, this shouldn’t come as a surprise.

Affinity fraud scams are among the easier investment schemes to perpetuate online. This type of financial scam usually targets professional organizations, community service groups, religious communities, and other social networks. Whereas in the real world, a fraudster would have to work to establish actual connections with its target communities, now he/she can easily become part of these groups by pretending to share similar interests, religions, careers, or hobbies.

Online media channels, such as YouTube have now also become video forums through which to market financial scams. Remember, anyone can record an impressive sales pitch or edit professional looking footage to make themselves appear legitimate.

SEC Proposes Restricting Financial Firms From Betting Against Financial Products Sold to Investors

Published on: September 20, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The SEC has taken steps to prevent financial firms from betting against their packaged financial products that they sell to investors. Its proposal, introduced this week, also seeks to prevent the types of conflict witnessed in last year’s civil lawsuit against Goldman Sachs through a ban on third parties being able to set up an asset-backed pool allowing them to make money from losses sustained by investors.

The proposal comes following a report by US Senate investigators accusing Goldman of setting itself up to make money from investor losses sustained from complex securities that the financial firm packaged and sold. It would place into effect a provision from the Dodd-Frank Wall Reform Consumer and Protection Act, which requires that the commission ban for one year placement agents, underwriters, sponsors, and initial buyers of an asset-backed security from shorting the pool’s assets and establishing material conflict. Restrictions, however, wouldn’t apply when a firm is playing the role of market-maker or engaged in risk hedging. The SEC also wants the industry to examine how the proposal would work along with the “Volcker rule,” which would place restrictions on proprietary trading at banks and other affiliates.

SEC’s Securities Case Against Goldman
The SEC accused Goldman of creating and marketing the ABACUS 2007-AC1, a collateralized debt obligation, without letting clients know that Paulson & Co. helped pick the underlying securities that the latter then went on to bet against. Last year, Goldman settled the securities case with the SEC for $550 million.

In settlement papers, Goldman admitted that it did issue marketing materials that lacked full information for its ABACUS 2007-AC1. The financial firm said it made a mistake when it stated that ACA Management LLC “selected” the reference portfolio and did not note the role that Paulson & Co. played or that the latter’s “economic interests” were not in line with that of investors. The $550 million fine was the largest penalty that the SEC has ever imposed on a financial services firm. $250 million of the fine was designated to go to a Fair Fund distribution to pay back investors.

Volcker Rule
Named after former Federal Reserve Chairman Paul Volcker, the proposed rule is designed to limit the kinds of high-risk investments that helped contribute to the recent financial crisis. It would also restrict the financial firms’ use of their own money to trade. Bloomberg.com reports that overseas firms with businesses in the US may also be subject to these limits on proprietary trading. Per Dodd-Frank, October 18 is the deadline to establish rules to execute the provision.

Volcker Rule May Be Extended to Overseas Banks With Operations in the U.S., Bloomberg, September 16, 2011

SEC moves to limit firms’ bets against clients, Reuters, September 19, 2011

Volcker Rule Delay Is Likely, Wall Street Journal, September 12, 2011

More Blog Posts:

Goldman Sachs Ordered by FINRA to Pay $650K Fine For Not Disclosing that Broker Responsible for CDO ABACUS 2007-ACI Was Target of SEC Investigation, Stockbroker Fraud Blog, November 12, 2010