Investor Lawyers Blog

Ban on Private Securities Offerings Solicitations Could Be Revised by SEC or Congress, Says Ex-Official

Published on: July 11, 2011 | by Shepherd Smith Edwards & Kantas, LLP

According to ex- SEC’s Office of International Corporate Finance chief Sarah Hanks, there is the strong possibility that Congress or the Securities and Exchange Commission will modify the agency’s ban on the general solicitation for private securities offerings and the number of shareholders that trigger reporting requirements. Hanks says that comments made by lawmakers and SEC Chairman Mary Schapiro indicate congressional intent to loosen the requirements, as well as “regulatory momentum.” Such changes could happen in the next couple of years.

Restricted securities are securities that did not go through the SEC’s registration and public processes. Requirements don’t allow issuers of nonpublic offerings relying on Section 4(2) of the 1933 Act or its safe harbor—Rule 506 of Regulation to use advertising or general solicitation to draw investors to their placements. The 1934 Securities Exchange Act’s Section 12(g) mandates that an issuer register securities “held of record” by at least 500 individuals and if the issuer’s total assets are over $10 million.

It was just recently that it became known that the SEC was investigating Goldman Sachs Group Inc.’s (GS)’s reselling of Facebook-issued securities to investors. Earlier this year, the investment bank made the decision to limit the offering to offshore investors over concerns that the degree of media attention might result in a violation of US securities laws. According to The Wall Street Journal, although Facebook executives had to restructure the deal, the private offering of up to $1.5 billion in Facebook shares stayed on track. As of January, more than $7 billion in orders came through from foreign investors.

JPMorgan Chase to Pay $211M to Settle Charges It Rigged Municipal Bond Transaction Bidding Competitions

Published on: July 9, 2011 | by Shepherd Smith Edwards & Kantas, LLP

JPMorgan Chase & Co. will pay $211 million to settle charges that its JP Morgan Securities LLC Division rigged dozens of bidding competitions for reinvesting the proceeds from municipal bond transactions to win business from local and state governments. The settlement is for complaints that the US Securities and Exchange Commission, the Justice Department, the Internal Revenue Service, 25 state attorneys general, and bank regulators had filed against the investment bank. JPMorgan has also agreed to give back approximately $129.7 million to the municipalities that were harm.

JP Morgan Securities is accused of making at least 93 secret deals with companies that take care of the bidding processes in 31 states. The arrangement let the investment bank see competitors’ offers.

According to regulators, between 1997 and 2005, members of JPMorgan’s municipal derivatives desk made misrepresentations and omissions in the secret deals, which impacted the prices the governments ended up paying while jeopardizing the tax-exempt position of billions of dollars worth of securities in the billions. This alleged misconduct also undermined JP Morgan’s competitors, who, along with the financial firm, are supposed to offer cities and states the opportunity to bid for competitive interest rates when they invest their tax-exempt proceeds from municipal bonds in municipal reinvestment products. JPMorgan is accused of also sometimes turning in nonwinning bids on purpose to meet tax requirements.

While The New York Time reports that by agreeing to settle JPMorgan Chase is not denying or admitting to wrongdoing, Yahoo reports that the financial firm has admitted to the illegal conduct and agreed to cooperate with the Justice Department’s probe as long as it wasn’t prosecuted. JPMorgan, however, did blame the illegal activity on ex-employees at a division that is no longer in operation.

To settle, JPMorgan will pay $51.2 million to the SEC, $35 million to the Office of the Comptroller of the Currency, $50 million to the IRS, and $75 million to a number of state attorneys general. It also reached a settlement with the Federal Reserve Bank of New York.

Related Web Resources:
JPMorgan Settles Bond Bid-Rigging Case for $211 Million, NY Times, July 7, 2011
JPMorgan pays $211M to settle bid-rigging charges, Yahoo, July 7, 2011

More Blog Posts:
JP Morgan Chase Agrees to Pay $861M to Lehman Brothers Trustee, Stockbroker Fraud Blog, June 28, 2011
Citigroup Ordered by FINRA to Pay $54.1M to Two Investors Over Municipal Bond Fund Losses, Stockbroker Fraud Blog, April 13, 2011
UBS Financial Reaches $160M Settlement with the SEC and Justice Department Over Securities Fraud, Antitrust, and Other Charges Related to Municipal Bond Market, May 16, 2011 Continue Reading ›

Securities Fraud Plaintiffs Don’t Have to Show Loss Causation to Obtain Class Action Status, Rules US Supreme Court

Published on: July 9, 2011 | by Shepherd Smith Edwards & Kantas, LLP

In Erica P. John Fund Inc. v. Halliburton Co., the US Supreme Court said that securities fraud plaintiffs don’t have to demonstrate loss causation to receive class certification. The unanimous ruling reinstated claims made by investors that defendant Halliburton Inc. (HAL) made material misrepresentations and misstatements.

In its securities complaint, Archdiocese of Milwaukee Supporting Fund Inc.—now known as Erica P. John Fund Inc.—wanted to certify as a class all investors who had obtained Halliburton stock between June 3, 1999 and December 7, 2001. The plaintiff contends that investors in the proposed class lost money because of securities fraud committed by the defendant, including making material misstatements about litigation expenses, a merger’s benefits, and accounting methodology changes, making misrepresentations in order to up Halliburton stocks’ price rise, and making corrective disclosures to make the price fall.

The district court, however, refused to give class certification on the ground that the plaintiff did not demonstrate loss causation regarding the claims it made. The U.S. Court of Appeals for the Fifth Circuit affirmed that ruling.

The Supreme Court, however, said that even though private securities plaintiffs must show that the defendant’s misconduct was the cause of their economic loss, loss causation does not have to be demonstrated to obtain class certification. Chief Justice John G Roberts authored the decision, which also said that the court didn’t have to address questions related to its in 1988 ruling Basic Inc. v. Levinson, 485 U.S. 224.

Related Web Resources:
Erica P. John Fund Inc. v. Halliburton Co. (PDF)

More Blog Posts:
Securities Fraud: Mutual Funds Investment Adviser Cannot Be Sued Over Misstatement in Prospectuses, Says US Supreme Court, Stockbroker Fraud Blog, June 16, 2011

Number of Securities Class Action Settlements Reached in 2010 Hit Lowest Level in a Decade, Says Report, Stockbroker Fraud Blog, March 31, 2011

Sonoma Valley Bank Shareholders File Both a Class Action Lawsuit and An Insurance Claim Seeking to Recoup Millions, Institutional Investor Securities Blog, June 30, 2011

Two Years of Wall Street Executives’ Pay To Be Seized For Role Played in a Financial Firm’s Collapse, Says FDIC

Published on: July 8, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Federal regulators have approved a plan that would make Wall Street executives forfeit two years’ pay if it was discovered that he/she played a part in a major financial firm’s collapse. Executives who are considered “negligent” and “substantially responsible” are subject to this rule, which clarifies that “negligence,” rather than “gross negligence,” is the standard.

Banks had complained that an earlier version of the rule, which said that any executive who had made strategic decisions could be found responsible for a financial firm’s failure. They were worried that key executives would quit upon initial signs of trouble rather than risk their pay.

The provision is part of a Federal Deposit Insurance Corporation rule, which is supposed to help retain stability within the economy by unwinding beleaguered firms in a manner that is less disruptive than major bankruptcies and taxpayer-financed bailouts. The rule lets the government take over a failing financial company, break it apart, and sell it off.

The liquidation authority is a significant part of the Dodd-Frank financial oversight law. It also designates the order that creditors will be paid whenever a government liquidates a large financial firm. For example, FDIC or the receiver that carried part of the expense of taking over a firm, administrative costs, and employees that are owed money for benefits are among those that would top the list. General creditors fall lower down in order of priority.

It is not enough that a Wall Street executive pay the government or other entities for any misconduct that caused a financial firm to fail. There are also the investors who sustained financial losses as a result of his/her negligence. Here is where our securities fraud attorneys step in. We are committed to helping institutional investors recoup their money.

Related Web Resources:

Federal Deposit Insurance Corporation

More Blog Posts:

SEC Needs to Keep a Closer Eye on FINRA, Says Report, Stockbroker Fraud Blog, March 15, 2011

SEC is Finalizing Its Whistleblower Rules, Says Chairman Schapiro, Stockbroker Fraud Blog, April 28, 2011

Former Texas Securities Regulator Says Self-Regulation of Securities Industry Does Not Work

Published on: July 6, 2011 | by Shepherd Smith Edwards & Kantas, LLP

According to Ex-Texas State Securities Board Denise Voigt Crawford, giving oversight of nearly 12,000 investment advisers to the Financial Industry Regulatory Authority to cut costs is a bad idea and one for which investors will end up paying the price. FINRA is Wall Street’s self-funded regulator. Already charged with overseeing brokers, it is now pushing to take over the U.S. Securities and Exchange Commission’s role as adviser regulator.

Crawford says that having FINRA oversee the industry’s activities doesn’t make sense when FINRA is the industry. She also points out that since the SRO was established in 2007, it hasn’t been successful in protecting investors, while imposing fines that are usually a fraction of the damages they sustained from securities fraud and other misconduct. Last year, FINRA fined members just $43 million while the SEC imposed over $1 billion in penalties.

Also, according to U.S. Securities and Exchange Commission data, investors who received FINRA arbitration awards usually got under half of what they initially sought. In 2010, FINRA ordered that harmed investors get $6 million in restitution, while the SEC ordered that investors recover $1.82 billion. However, through May of this year, FINRA had already ordered that investors who sustained losses get recoup $9.8 million. The SRO believes that it is ideally suited to do the job for a number of reasons, including its technological capabilities and resources and the fact that most advisers are already affiliated with broker-dealers.

Allstate Files Mortgage-Backed Securities Fraud Lawsuit Against Morgan Stanley

Published on: July 6, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Allstate Insurance Co., which bought over $104M in residential mortgage-backed securities in 6 offerings from Morgan Stanley between ‘05 and ’07 is suing the broker-dealer for securities fraud. The insurer claims that the financial firm sold it RMBS under the assurances that they were in alignment with “conservative” underwriting standards and that the properties had received accurate appraisals when, actually, Morgan Stanley RMBS did not meet these standards and had come from originators that Allstate categorizes as among “worst” in the subprime lending:

• New Century Financial Corp.
• Decision One Mortgage Co.
• WMC Mortgage Corp.
• First NLC Financial Services
• Wilmington Finance Inc.
• AIG Federal Savings Bank

Allstate says that leading up to the financial collapse, it had acquired $2.78 billion in mortgage-backed securities. It bought RMBS from Morgan Stanley because of the “central role” the financial firm made in creating and selling the securities, the latter’s assurances that it had done its due diligence on the mortgages backing the securities, and because of the prospectuses, registration statements, and other documents. Now, the insurance company believes that the brokerage firm either knew that the lenders were putting forth risky loans that did not conform to standards or recklessly disregarded the facts.

Allstate is seeking unspecified compensatory and/or “recessionary” damages and is asking for a jury trial. This is not the first RMBS that the insurance company has filed. Allstate has already sued several other brokerage firms for MBS fraud including:

• Merrill Lynch (a Bank of America unit)
• Countrywide (also a Bank of America units)
• Citigroup Inc.
• JP Morgan Chase & Co.
• Deutsche Bank AG
• Credit Suisse Group AG

Related Web Resources:
Morgan Stanley Sued by Allstate Over Mortgage Securities Fraud Claims, Bloomberg, July 6, 2011

Allstate adds Morgan Stanley to RMBS litigation pool, Housing Wires, July 6, 2011

More Blog Posts:
Bank of America Cop. (BAC)’s Merrill Lynch a Defendant of Class-Action Mortgage-Backed Securities Lawsuit Against at Least 1,800 Investors, Institutional Investors Securities Blog, June 25, 2011

National Credit Union Administration Board Files $800M Mortgage-Backed Securities Fraud Lawsuits Against JP Morgan Securities, RBS Securities, and Other Financial Institutions, Institutional Investors Securities Blog, June 23, 2011

Morgan Keegan Settles Subprime Mortgage-Backed Securities Charges for $200M, Stockbroker Fraud Blog, June 29, 2011

Most Investors Ignore Prospectus for Variable Annuities, Reports IRI

Published on: July 5, 2011 | by Shepherd Smith Edwards & Kantas, LLP

According to the Insured Retirement Institute, the majority of consumers don’t read the prospectus that accompanies a variable annuity purchase. IRI, which issued its report last week, also found that:

• 94% of consumers would like to get a prospectus summary that is shorter and is available either online or per their request. Most variable annuity prospectuses are 100 to 300 pages long.

• 59% of consumers said they would more likely discuss the product with their investment adviser if they were given a prospectus that was shorter and easier to understand.

$750,000 Arbitration Award Against Stone & Youngberg LLC Confirmed by District Court

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

A district court has confirmed an arbitration panel’s $750,000 award to the Kay Family Revocable Trust in its securities case against Stone & Youngberg LLP. The trust sustained financial losses when its money was invested in the FutureSelect Prime Advisor II, which had most of its capital invested with Ponzi scam mastermind Bernard Madoff.

In its arbitration claim, Kay Family Revocable Trust claimed that S & Y failed to perform its requisite due diligence before recommending that the trust invest in the fund. S & Y rejoined with the argument that the trust had not succeeded in proving a causal link between the Madoff scheme and any alleged lack of due diligence. S & Y also argued it shouldn’t have to be responsible for the harm that the Trust suffered as a result of Madoff’s financial fraud. The brokerage firm even pointed to a federal district court ruling of a professional malpractice claim that concluded that “a simple ‘but for’ relationship between the claimed negligence and the injury” will not back up a finding of legal causation. S & Y also cited a decision by a federal appeals court that said it was up to a securities fraud plaintiff to prove that the loss it sustained was a foreseeable outcome of the alleged misrepresentation.

The U.S. District Court for the Northern District of California, however, concluded that the panel’s decision to confirm the award in favor of the investor and against S & Y was not manifest disregard of the law, but rather the application of the law to the facts the way it found them.

STONE & YOUNGBERG, LLC v. KAY FAMILY REVOCABLE TRUST UAD 02-07-90 FBO LENORE BLEADON UNDER TRUST A, Leagle.com, June 22, 2011

More Blog Posts:
Houston Securities Arbitration: FINRA Panel Orders Penson Financial Services, Inc. to Pay Boushy North Investments, Ltd. $500,000, Stockbroker Fraud Blog, June 11, 2011
District Court Wants to Know Why FINRA Arbitration Panel Denied Freecharm Ltd.’s Securities Fraud Claim Against One Atlas Financial Group LLC, Stockbroker Fraud Blog, June 11, 2011, May 31, 2011
Raymond James Must Pay $925,000 Over Auction-Rate Securities Dispute, Institutional Investor Securities Blog, September 1, 2010 Continue Reading ›

Sonoma Valley Bank Shareholders File Both a Class Action Lawsuit and An Insurance Claim Seeking to Recoup Millions

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

Sonoma Valley Bank shareholders have submitted a class action complaint accusing the financial institution’s chief financial officer, chief executive officer, and six corporate directors of mismanaging over $40 million in loans. The plaintiffs are placing most of the blame for this alleged financial negligence, and the bank’s collapse, on bank CEO Sean Cutting.

The class action complaint will cover any shareholder (except for the defendants) that owned shares in the bank as of August 25, 2010. Shareholders, most of them from Sonoma Valley, saw their stock drip in price from $31/share in 2007 to under a penny in 2010 when the bank was seized. $71 million was lost and the federal government says it lost $20 million because of the closure.

Per the class action complaint, the bank’s demise can be attributed in great part to the approval of loans worth over $40 million to Marin County developer Bijan Madjlessi’s companies and his business partners. Some $35 million in loans were never paid back. State regulators have arrested Madjlessi for alleged insurance fraud. He pleaded not guilty to felony insurance fraud.

Shareholders also recently filed an insurance claim with Progressive Casualty Insurance Co. seeking to recover $20 million in equity that they lost when the financial institution collapsed. Under the insurance policy, some $20 million is designated to protect the leadership of the bank from such a lawsuit as the one that was just filed.

“Many people have asked: Where are the convictions over the financial mess? Finally, someone goes to jail, but who’s heard of Colonial BankGroup? I guess it was just not too big to fail,” says Shepherd Smith Edwards and Kantas founder and stockbroker fraud lawyer William Shepherd.

Related Web Resources:
Sonoma Valley Bank shareholders file lawsuit blaming CEO, PressDemocrat.com, June 29, 2011

More Blog Posts:
Bank of America Cop. (BAC)’s Merrill Lynch a Defendant of Class-Action Mortgage-Backed Securities Lawsuit Against at Least 1,800 Investors, Institutional Investors Securities Blog, June 25, 2011

Class Members of Charles Schwab Corporation Securities Litigation Can Still Opt Out to File Individual Securities Claim, Stockbroker Fraud Blog, December 6, 2010

Class Action Securities Fraud Lawsuit Accuses SEC of Gross Negligence Related to Bernard Madoff Ponzi Scam, Institutional Investors Securities Blog, November 23, 2010

Morgan Keegan Settles Subprime Mortgage-Backed Securities Charges for $200M

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

According to the SEC, FINRA, and state regulators, Morgan Keegan & Company and Morgan Asset Management have consented to pay $200 million to settle subprime mortgage-backed securities-related charges. Also agreeing to pay penalties over their alleged misconduct are Morgan Keegan comptroller Joseph Thompson Weller and ex- portfolio manager James C. Kelsoe Jr.

The two men were accused of causing the false valuation of subprime mortgage backed securities in five Morgan Asset Management-related funds. Per the SEC’s administrative order, Kelsoe directed the fund accounting department to arbitrarily execute price adjustments to the fair values of certain portfolio securities. These adjustments disregarded the lower values for the same securities that outside broker-dealers provided as part of the pricing process. Kelsoe’s directives and the actions that were taken as a result would sometimes cause Morgan Keegan to not price the bonds at current, fair value.

The SEC also says that Kelsoe screened and affected at least one broker-dealer’s price confirmations. That broker-dealer had to provide interim price confirmations that were below the value that the funds were valuing certain bonds at but greater than the initial confirmations that the broker-dealer meant to provide. The interim price confirmations allowed the funds to not mark down the securities’ value to reflect current fair value. Kelsoe is also accused of getting the broker-dealer to withhold price confirmations in certain instances where they would have been significantly lower than the funds’ current valuations of the relevant bonds. The SEC says that Kelsoe fraudulently kept the Navs of funds from being reduced when they should have gone down when the subprime securities market deteriorated in 2007.

Of the $200 million, Morgan Keegan must pay a $75 million penalty to the SEC, $25 million in disgorgement, and $100 million to a state fund that would then pay investors.

Morgan Keegan to Pay $200 Million to Settle Fraud Charges Related to Subprime Mortgage-Backed Securities, SEC, June 22, 2011
Morgan Keegan Entities to Pay $200M In Settlement Over Subprime MBS Valuations, Law 360, June 22, 2011

More Blog Posts:
Morgan Keegan Ordered by FINRA to Pay RMK Fund Investors $881,000, Stockbroker Fraud Blog, April 24, 2011
Morgan Keegan & Co. Inc. Must Pay $250K to Couple that Lost Investments in Hedge Fund with Ties to Bernard L. Madoff Investment Securities, Stockbroker Fraud Blog, March 16, 2011
Morgan Keegan to Pay $9.2M to Investors in Texas Securities Fraud Case Involving Risky Bond Fund, Stockbroker Fraud Blog, October 6, 2010 Continue Reading ›