Investor Lawyers Blog

NYSE Proposal for Retail Order Execution Pilot Program Gets SEC Approval

Published on: July 12, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has approved the New York Stock Exchange LLC and NYSE Amex LLC proposal for a pilot program that lets them set up for one year a private trade execution venue for retail investors. The “retail liquidity program” will go up against internalizing brokerage firms for retail order flow while offering price improvements at mere fractions of a penny. (Currently retail brokers send most of their orders through broker dealers that internalize or execute them in over-the-counter markets instead of bilateral exchanges.)

According to NYSE Euronext (NYX), the program will be implemented on the NYSE MKT and NYSE on August 1 and is complimentary to the trade execution options that currently exist for retail investors. The program is for direct use by retail brokerages and market intermediaries that work with retail order flow providers.

In a release issued last week, NYSE Euronext executive vice president Joseph Mecane said that giving improved prices for retail orders in an exchange environment lets individual investors afford new economic incentives while creating greater liquidity, transparency, and competition through the US cash equities marketplace. The program will set up two new market participant classes at NYSE exchange: 1) retail member organizations that will turn in retail orders to the exchanges and 2) retail liquidity providers that will have to give price improvements as interest that is more competitively priced than the exchange’s best protected bid/offer as a tradeoff for specific economic benefits. A NYSE member can qualify as a liquidity provider by obtaining approval as a market maker or supplementary liquidity provider on the exchange, while demonstrating that it can meet retail liquidity provider requirements.

Institutional Investor Roundup: Evergreen Ultra Short Investor Lawsuit Settled for $25M, FINRA Launches Pilot Program for Huge Claims, Ex-AmeriFirst Funding Manager’s Conviction Appeal is Rejected, & EU Regulator Examines Credit Raters’ Bank Downgrade

Published on: July 12, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Evergreen Investment Management Co. LLC and related entities have consented to pay $25 million to settle a class action securities settlement involving plaintiff investors who contend that the Evergreen Ultra Short Opportunities Fund was improperly marketed and sold to them. The plaintiffs, which include five institutional investors, claim that between 2005 and 2008 the defendants presented the fund as “stable” and providing income in line with “preservation of capital and low principal fluctuation” when actually it was invested in highly risky, volatile, and speculative securities, including mortgage-backed securities. Evergreen is Wachovia’s investment management business and part of Wells Fargo (WFC).

The plaintiffs claim that even after the MBS market started to fail, the Ultra Short Fund continued to invest in these securities, while hiding the portfolio’s decreasing value by artificially inflating the individual securities’ asset value in its portfolio. They say that they sustained significant losses when Evergreen liquidated the Ultra Short Fund four years ago after the defendants’ alleged scam collapsed. By settling, however, no one is agreeing to or denying any wrongdoing.

Meantime, seeking to generally move investors’ claims forward faster, the Financial Industry Regulatory Authority has launched a pilot arbitration program that will specifically deal with securities cases of $10 million and greater. The program was created because of the growing number of very big cases.

CFTC Accuses Peregrine Financial Group of Securities Fraud Related to $200M Customer Funds Shortfall

Published on: July 10, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The CFTC is accusing Peregrine Financial Group and its owner Russell R. Wasendorf, Sr. of misappropriating client monies, including statements that were untrue in financial statements submitted to the CFTC, and violating customer fund segregation laws. The Commission filed its securities fraud complaint against the registered futures commission merchant in the United States District Court for the Northern District of Illinois.

Per the CFTC’s complaint, during an audit by the National Futures Association, Peregrine misrepresented that it was holding more than $200M of client funds when it only held about $5.1M. The regulator says that the whereabouts of this at least $200 million in customer fund shortfall are not known at this time. In the wake of the allegations, Peregrine has told its clients that it was being investigated for “accounting irregularities.”

The Commission contends that beginning at least 2/2010 until now, Peregrine and Wasendorf did not meet CFTC Regulations and the Commodity Exchange Act by not maintaining enough client money in accounts that were segregated. The brokerage and its owner also are accused of making false statements about the funds that were being segregated for clients that were trading on US Exchanges in required filings.

Wasendorf, who reportedly tried to kill himself on Monday is now in a coma. The NFA just recently was given information that he may have been responsible for a number of falsified bank records.

The CFTC wants a restraining order to preserve records, freeze assets,, and establish a receiver. It is seeking disgorgement, restitution, financial penalties, and other appropriate financial relief.

Yesterday, Peregrine’s clearing broker Jefferies Group Inc. said that it had started unloading positions held for the futures brokerage’s clients after a margin call was not met. Jeffries Group doesn’t expect to sustain losses.

Meantime, the NFA and “other officials, have frozen all customer funds and Peregrine is not allowed to accept or solicit new client funds or accounts or make trades for customers unless it involves liquidating positions or distributing their money. Also looking into this financial matter is the US Federal Bureau of Investigation.

It was just this year that a court-appointed receiver in Minnesota sued Peregrine over allegedly disregarding warning signs that the futures brokerage’s client Trevor Cook was running a Ponzi scam. According to the securities lawsuit, investments by Cook and others with Peregrine that were supposedly profitable sustained over $30 million in losses as the allegedly culpable participants moved about $48 million from clients to Peregrine accounts.

According to Fox Business, the fallout from these latest allegations against Peregrine could be bigger than the MF Global collapse as traders blame regulators for not doing enough and industry members fight to recapture investor confidence.

CFTC Files Complaint Against Peregrine Financial Group, Inc. and Russell R. Wasendorf, Sr. Alleging Fraud, Misappropriation of Customer Funds, Violation of Customer Fund Segregation Laws, and Making False Statements, CFTC, July 10, 2012

Peregrine Financial Allegedly Has $200 Million Shortfall, Bloomberg, July 10, 2012

PFG Scandal Deepens as CFTC Files Claim, Fox Business News/Reuters, July 10, 2012

More Blog Posts:
ABA Presses for Self-Funding for SEC and CFTC, Institutional Investor Securities Blog, May 31, 2012

CFTC and SEC May Need to Work Out Key Differences Related to Over-the-Counter Derivatives Rulemaking, Institutional Investor Securities Blog, January 31, 2012

SEC and CFTC Say They Found Out About JPMorgan’s $2B Trading Loss Through Media, Institutional Investor Securities Blog, May 31, 2012

Texas Securities: SEC’s Bid To Get Stanford Ponzi Scam Victims SIPC Coverage is Denied by District Court

Published on: July 9, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the District of Columbia has rejected the Securities and Exchange Commission’s lawsuit, which sought Securities Investor Protection Corporation protection for the investors that were defrauded in R. Allen Stanford’s $7 billion Ponzi scam. Federal Judge Robert Wilkins said that under the definition of the Securities Investor Protection Act, the SEC did not meet its burden in proving that more than 7,000 Stanford investors were “victims” and, as a result, eligible for SIPC coverage of up to $500,000 each. Wilkins therefore has decided not to order a liquidation proceeding in federal court in Texas.

SIPC, which has a special reserve fund to compensate investors that sustain financial losses in brokerage firms that fail, has been adamant that it cannot cover Stanford’s Ponzi victims because their losses were not in a failed brokerage firm. The investors had bought CDs issued by Stanford International Bank Ltd., which is a foreign-based bank, and not through Stanford Group Co., the broker-dealer based in Houston.

The SEC disagrees, which is why it brought this lawsuit to get the court to make SIPC start liquidation proceedings. The Commission doesn’t believe that an actual separation between the Antigua- located bank and Stanford Group existed and that clients who invested with Stanford International Bank effectively placed their money in the broker-dealer. It also said customer status shouldn’t only depend on the identity of the entity where the clients’ funds have been placed and pointed out that Stanford used his control over both banks to divert the CD sale proceeds toward Stanford Group obligations and expenses. The regulator noted how certain investors were given information that caused them to believe that they were buying SIPA-protected CDs.

In his ruling, however, Judge Wilkins, decided that the SEC’s interpretation of SIPA was “extraordinarily broad and would unreasonably contort” the language of the statute. The district court said that while it sympathized with Stanford’s victims, it had an obligation to apply SIPA the way Congress intended and to stick to the statute’s narrow definition of what constitutes a “customer.” Wilkins noted that an investor is eligible to SIPC compensation only if he/she has placed securities or money in a broker-dealer that becomes insolvent. If the investor did not entrust securities or cash, then he/she is not a “customer” and not entitled to recovery from SIPC. The court said that seeing as Stanford’s investors put money into Stanford International Bank accounts to buy their CDs and not Stanford Group, then within the meaning of SIP the defrauded investors that bought the CDs are not Stanford Group customers.

SEC Loses Bid To Force SIPC Payout For Stanford Investors, Bloomberg, July 3, 2012

SEC Loses Bid to Gain SIPC Coverage for Stanford Investors, Bloomberg/BNA, July 5, 2012
Securities Investor Protection Act, US Courts
Securities Investor Protection Corporation

More Blog Posts:
Texas Securities Roundup: Morgan Stanley Smith Barney Sued Over Financial Adviser’s Ponzi Scam, Judge Dismisses Ex-GE Executive Whistleblower’s Lawsuit Over His Firing, & Ex-Stanford Financial Group CIO Pleads Guilty to Obstructing the SEC’s Probe, Stockbroker Fraud Blog, July 3, 2012

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

Madoff Trustee Files Clawback Lawsuits Collectively Seeking Over $1B For BLMIS Feeder Fund Transfers, Institutional Investor Securities Blog, June 12, 2012 Continue Reading ›

SEC to Push for Money Market Mutual Fund Reform Provisions Despite Opposition

Published on: July 6, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to Securities and Exchange Commission Division of Investment Management deputy director Robert Plaze, the division is ready to recommend new reforms for mutual market funds as soon as Chairman Mary Schapiro gives the go ahead. Plaze spoke to reporters following at panel at the Mutual Fund Directors Forum’s yearly policy conference in DC on June 19. He was clear to note that the opinions he expressed are his own. On June 21, Schapiro said that she plans to wait until later in July to decide whether to push the division’s recommendations to a commission vote.

While lawmakers and industry members disagree, Schapiro has stayed firm in her belief that money market funds are risky and require more reforms beyond the changes to MMF requirements that the Commission signed off on in 2010. Among the options to increase money market fund resiliency that staff has been considering are mandating capital buffers accompanied by redemption limits or fees or transferring the funds from their fixed $1 net value asset to a floating one.

However these reform measures, even without their formal proposal, are already being heavily criticized. Some are worried that the potential measures might cause investors to abandon the products and sponsors to leave the industry. These critics generally believe that the changes that were made to SEC regulations in 2010 have been sufficient to strengthen the funds’ framework. For example, the Commission amendment to the 1940 Investment Company Act’s Rule 2a-7 improved fund disclosures while limiting fund risks.

Will the JOBS ACT Will Expand Private Offerings But Hurt Public Markets?

Published on: July 6, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Participants at the D.C. Bar panel on June 21 talked about whether the Jumpstart Our Business Startups Act is going to increase private placements but at a cost to public markets. The JOBS Act, which was enacted in April, facilitates the IPO process for emerging growth companies, ups the threshold for activating registration requirements, creates, under Regulation A, new exempt securities of up to $50 million, and gets rid of the general advertising and solicitation restrictions for Regulation D Rule 505 offerings.

Meantime, Attorney Tyler Gellasch, who is Sen. Carl Levin’s (D-Mich.) counsel (he was clear to articulate that his views are his own and don’t necessarily reflect the opinions of the senator), also said that he doesn’t expect there to be a lot of IPOs with this easing of rules for private offerings. He noted that while changes to Reg D Rule 506’s offerings would broaden the world of private securities, the greater threshold now provided for issuer registrations under the 1934 Securities Exchange Act has “significantly” reduced the impetus for going public.

Gellasch believes that many investors have become mistrusting of IPOs in the wake of so many of them lately not performing well upon completion of their first year. The controversies this year involving the IPOs of Facebook (FB) and BATS Global Markets Inc. haven’t helped.

He also talked about how Congress failed to perform its own cost-benefit analysis when it enacted the statute and that no extensive hearings took place about the new requirements. Among the unforeseen circumstances that have already developed are the efforts that have been made reverse merger companies to employ the on-ramp provisions to obtain a foothold in US markets.

Gellasch said that JOBS Act brings up questions that it fails to answer, such as whether the benefits that the act creates for some entities should also be given to other entities that are similar and involved in analogous circumstances. (For example, while mutual fund advertising continues to be very regulated, hedge funds are getting to avail of fewer restrictions imposed on their advertising.) He also wondered about who is now responsible for supervising Rule 506 offerings, determining whether advertisements and solicitations are accurate, and ensuring that offerings don’t turn into boiler rooms as they relate to the act’s crowdfunding provisions.

Gellasch wants to know who will now be liable for investor losses.

The JOBS Act (PDF)

More Blog Posts:

Should Retail Investors Be Given Greater Access to IPO Information?, Stockbroker Fraud Blog, June 29, 2012

JPMorgan Chase Brokers Say the Financial Firm Prioritized Sales Over Investors’ Needs

Published on: July 5, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to a number of its current and former brokers, as JPMorgan Chase (JPM) was growing into one of the largest mutual fund managers in the country, it was placing a greater emphasis on sales than it was on the needs of its clients. These financial advisors say that JPMorgan encouraged them on occasion to promote its products over competitors even when what the others were offering was less expensive or had been performing better.

The New York Times, which wrote a news report about the brokers’ claims, says that if these allegations are true then the benefit to JPMorgan is obvious. The more money investors put into the investment bank’s funds the greater the fees it collects for managing the funds. One ex-JPMorgan employee, Geoffrey Tomas said he frequently would sell JPMorgan funds with poor performance records for the sole purpose of making the financial firm more money. Thomas now works with Urso Investment Management.

JPMorgan is one of a number of investment banks that turned to retail investors in the wake of the economic crisis. UBS (UBS) and Morgan Stanley (MS) have also attempted to target mom and pop investors. The Times says that JPMorgan’s approach is to concentrate on selling funds of its own creation. This is a practice that many companies, who don’t want to be thought of as having conflicts of interest, have decided to abandon.

NYSE Euronext Head Wants SEC to Revive Rule Proposal Enhancing Dark Pool Transparency

Published on: July 4, 2012 | by Shepherd Smith Edwards & Kantas, LLP

NYSE Euronext (NYX) CEO Duncan Niederauer wants the Securities and Exchange Commission to act on a rulemaking proposal from 2009 that seeks to improve transparency in “dark pools.” Testifying in front of a House Financial Services Committee panel, Niederauer talked about how the dramatic increase in off-exchange trading has resulted in a U.S. equity market structure that continues to become more bifurcated. During the June 20 hearing, held by the committee’s Capital Markets Subcommittee, participants looked at the U.S. equity market structure and how it affects competition and innovation.

Dark pools, which are off-exchange private trading venues that don’t show quotes to the public, are involved in about 15% of off-exchange trading. It was in 2009, even before the flash crash of May 6, 2010 that the SEC issued a proposal that would expose dark pools by making certain actionable order information subject to SEC quoting requirements. (The proposal also would substantially reduce the threshold volume that activates public display obligations for ATSs from 5% to .25%.)

At the hearing, Niederauer pressed regulators and policy makers to even matters out between alternative trading systems and exchanges, while recommending the fair distribution across all trading pools of regulatory costs. He also suggested that national exchanges be given permission to avail of lighter disclosure requirements under Regulation ATS (Alternative Trading System), which regulates non-exchange trading venues.

Texas Securities Roundup: Morgan Stanley Smith Barney Sued Over Financial Adviser’s Ponzi Scam, Judge Dismisses Ex-GE Executive Whistleblower’s Lawsuit Over His Firing, & Ex-Stanford Financial Group CIO Pleads Guilty to Obstructing the SEC’s Probe

Published on: July 3, 2012 | by Shepherd Smith Edwards & Kantas, LLP

In Dallas County Court, 11 investors are suing Morgan Stanley Smith Barney and its financial adviser Delsa Thomas for bilking them in an alleged Texas Ponzi scam. They say that Thomas “took advantage of their trust in her when she suggested that they invest in Tejas Eagle Financial LLC. (She gave them the choice of investing $250,000 or $125,000.) They invested hundreds of thousand dollars of their retirement money and savings.

The plaintiffs contend that the financial firm breached its duty of care to them by allowing Thomas to give them unsuitable financial advice that “would destroy their investments.” They are seeking damages for negligent misrepresentation, fraud, negligent supervision, and vicarious liability.

In other Texas securities news, ex-Stanford Financial group chief investment officer Laura Pendergest Holt has pled guilty to charges that she obstructed the SEC’s probe into Stanford International Bank, which was owned by Ponzi scammer Robert Allen Stanford. Holt, who testified before the Commission about SIB’s investment portfolio, now admits that she did so as a “stall tactic” to impede the agencies efforts to get key information. Stanford is behind bars for running a $7 billion Ponzi scam.

Ex-Money Concepts Registered Representative Faces SEC Charges For Running Astrology-Influenced Ponzi Scam

Published on: June 30, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is charging Gurudeo “Buddy” Persaud,” an ex-Money Concepts registered representative, with financial fraud. The SEC alleges that while running a Ponzi scam involving transactions influenced by his astrological beliefs, Persaud lost $400,000 of investor money in trades while diverting at least $415,000 to cover his personal spending. The Commission is seeking Persaud’s alleged ill-gotten gains and wants injunctive relief and financial penalties imposed against him. (A spokesperson for Money Concepts, which is based in Florida, says that none of the investors that were bilked in the scam were its clients at the time.)

According to the SEC, Persaud believes that the gravitational forces of the earth can influence stock prices, while the moon can make people feel like selling their securities. When he made trading decisions between 6/07 and 1/10, he is accused of mainly depended on an online service that offers directional market forecasts according to the earth’s gravitational pull and the moon’s cycles. Clients were not aware that he was using astrology to make trades.

Persaud raised about $1 million from 14 investors, while drawing in investments through White Elephant Trading Co., his now defunct company that sold and offered securities in investment contract form for its supposed private equity fund. The Commission says that to hide his involvement with White Elephant, Persaud appointed two of his sons as its only managing members even though he was the one who ran the company, made all trading decisions, controlled is bank and brokerage accounts, and had contact with its clients.

Persaud’s alleged victims included family and friends, who were told that their money would be placed in stock, debt, real estate markets, and futures and bring in 6-18% percent returns. The Commission says that Persaud used investors’ money to pay other investors while he generated bogus account statements to make clients feel secure and conceal trading losses. He promoted the fund as an investment opportunity that was a risk-free/low risk way to make high returns within a short time frame, while presenting White Elephant as employing strict financial management strategies.

One investor who was allegedly told he would get an 18% return at year’s end gave Persaud $50,000. Another prospective client received a marketing document called the White Elephant Trading Co. LLC, Conservative Fixed Income Fund that said White Elephant planned to raise up to $10 million and built Persaud up as an experienced, licensed certified financial planner. The Commission contends that Persaud violated sections of the Securities Act of 1933, the Securities Exchange Act of 1934, Exchange Act Rule 10b-5, the Investment Advisers Act, and Advisers Act Rules (2) and 206(4)-8(a)(1).

SEC Charges Rep for Running Astrology-Based Ponzi Scheme, Financial Planning, June 21, 2012

Read the SEC Complaint (PDF)

More Blog Posts:
Alleged Ponzi-Like Real Estate Investment Scam that Defrauded Victims of $9M Leads to SEC Charges Against New Jersey Man, Institutional Investor Securities Blog, May 24, 2012

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

SEC Charges New York-Based Fund Manager and His Two Financial Firms Over Alleged $11M Ponzi Scheme, Stockbroker Fraud Blog, May 28, 2012 Continue Reading ›