Investor Lawyers Blog

Morgan Stanley, Barclays, and Merrill Lynch Lose ‘Hot News’ Misappropriation Case Against Theflyonthewall.com Inc. in Appeals Court

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

The U.S. Court of Appeals for the Second Circuit has reversed a lower court’s ruling and decided that under New York law, Theflyonthewall.com Inc., an online financial news service, may not be held liable for disseminating the equity research recommendations found in reports of plaintiffs Barclays Capital Inc., Morgan Stanley & Co. Inc., and Merrill Lynch Pierce Fenner & Smith Inc. The appeals court’s Judge Robert D. Sack concluded that federal copyright law preempts the ‘Hot News’ misappropriation claim.

The financial firms’ reports contain research about public companies, their securities and business prospects, and their respective industries. The reports summarize these findings, which often include recommendations about holding, selling, and buying the subjects’ securities. The firms give clients and prospective ones these reports before the US securities markets open daily as an “informational advantage.”

The plaintiffs accused Fly, which has managed to get a hold of these recommendations and issue them before the brokerage firms had given them to the public or before the exchanges that the securities are traded have opened, of copyright infringement. Concurring with the plaintiffs, a lower court then barred the news service from both infringing on the copyrighted aspects of the brokerage firms’ research reports and publishing their recommendations until after the New York Stock Exchange opened.

Now, however, the appeals court is saying that “a firm’s ability to make news… does not give rise to a right for it to control who breaks the news and how.” The court reversed and remanded the earlier claim and told the district court to dismiss the brokerage firms’ misappropriation claim under New York law.

Related Web Resources:
Theflyonthewall.com Inc.

Read the district court’s opinion (PDF)

Brokerages Lose in Appeals Court On N.Y. ‘Hot News’ Misappropriation Claim, BNA Securities Law Daily, June 20, 2011

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Federal Law Preempts Claims that Morgan Stanley Smith Barney LLC’s Insider Trading Detection Policies are Unlawful Under California Statutes, Says District Court

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

According to the U.S. District Court for the Central District of California, federal law preempts would-be class claims accusing Morgan Stanley Smith Barney LLC of having insider trading detection and deterrent policies that are illegal under California labor and unfair competition statutes. The court says that “conflict preemption” precludes the claims and that letting the plaintiffs move forward with them would create an obstacle to Congress’ objectives in enacting federal securities laws.

Per the court, Morgan Stanley set up employee trading policies to prevent and monitor insider trading. Under the ETPs, employees who had certain kinds of brokerage accounts had to either keep them in-house or disclose and get approval for the accounts to be housed at another firm. However, in 2008, because of possible “state law implications” regarding its policy, Morgan Stanley put into practice granting California employees that asked for an exeption approval as long as they gave the financial firm duplicate brokerage account confirmations and statements.

The plaintiffs of this lawsuit, who are all ex-Morgan Stanley employees, contended that under California labor statute, the firm’s policy was unlawful. Morgan Stanley’s lawyer responded by arguing that federal law preempts the plaintiffs’ claims.

The plaintiffs intend to bring their case to the U.S. Court of Appeals for the Ninth Circuit. Their lead lawyer has said that the brokerage firm’s plan forced the securities traders to pay “huge fees for their own advice.”

Related Web Resources:

Marcia Bloemendaal, et al v. Morgan Stanley Smith Barney, Justia, June 14, 2011

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JP Morgan Settles for $153.6M SEC Charges Over Its Marketing of Synthetic Collateralized Debt Obligation

Published on: June 18, 2011 | by Shepherd Smith Edwards & Kantas, LLP

J.P. Morgan Securities LLC (JPM) has consented to pay $153.6 million to settle Securities and Exchange Commission charges that it misled investors in 2007 when it marketed a synthetic collateralized debt obligation that was linked to the US housing market. The financial firm also agreed to a permanent bar from future violations of the 1933 Securities Act and to bettering its business practices related to mortgage securities transactions. By agreeing to settle, JP Morgan is not denying or admitting to the allegations. The settlement, however, should allow investors to get a “full return” on their losses.

The SEC says that the brokerage firm mainly used credit default swaps that referenced other CDO securities tied to the housing market to structure the Squared CDO 2007-1. While the CDO’s marketing collateral said that GSCP, GSC Capital Corp.’s investment advisory arm, chose the deal’s investment portfolio, investors were not notified that hedge fund Magnetar Capital LLC played a key part in choosing the portfolio’s CDOs and or that it would benefit if the CDO assets defaulted.

The Commission also claims that when JP Morgan discovered in early 2007 that it could sustain huge losses because the housing market was in peril, it started marketing the deal to investors outside its regular client base. Less than a year later, the securities had lost the majority, if not all, of their value.

The SEC’s complaint accuses the investment bank of selling approximately $150 million of “mezzanine notes” of the Squared deal to over a dozen institutional investors who consequently lost their investments. Also, when the Squared deal was shut in May 2007, Magnetar’s short position was $600 million while its long position was $8.9 million.

J.P. Morgan to Pay $153.6 Million to Settle SEC Charges of Misleading Investors in CDO Tied to U.S. Housing Market, SEC, June 21, 2011

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JP Morgan Chase Agrees to Pay $861M to Lehman Brothers Trustee, Stockbroker Fraud Blog, June 28, 2011

Securities Fraud: Mutual Funds Investment Adviser Cannot Be Sued Over Misstatement in Prospectuses, Says US Supreme Court

Published on: June 16, 2011 | by Shepherd Smith Edwards & Kantas, LLP

In a 5-4 ruling, the US Supreme Court placed specific limits on securities fraud lawsuits this week when it ruled in Janus Capital Group v. First Derivative Traders, No. 09-525 that the mutual funds investment adviser could not be sued over misstatements in fund prospectuses. Justice Clarence Thomas, who wrote for the majority, said that only the fund could be held liable for violating an SEC rule that makes it unlawful for a person to make a directly or indirectly untrue statement of material fact related to the selling or buying of securities.

The fund and its adviser were closely connected. Janus Capital Group, which is a public company, created Janus Investment Fund, which then retained Janus Capital Management to deal with management, investment, and administrative services. However, in its appeal to the nation’s highest court, Janus argued that the funds are separate legal entities. He said that the parent company and subsidiary are not responsible for the prospectuses, and they therefore cannot be held liable. The investors filed their securities fraud lawsuit after the New York attorney general sued the adviser in 2003.

The plaintiffs claimed that the funds disclosure documents falsely indicated that the adviser would implement policies to curb strategies based on fund valuation delays. At issue was whether it could be said that the adviser issued misleading statements that the SEC rule addressed. Justice Thomas said no. He noted although the adviser wrote the words under dispute, the fund was the one that issued them. Meantime, Justice Stephen G. Breyer, who wrote the dissent, said that there is nothing in the English language stopping someone from saying that if several different parties that each played a part in producing a statement then they all played a role in making it.

Texas Foreign Currency Trader and Developer of “Alpha One” Convicted of Securities Fraud

Published on: June 15, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The owner of “Alpha One” has been convicted of Texas securities fraud for defrauding investors of millions of dollars. Robert David Watson, 50, pleaded guilty to the charge yesterday.

Watson admits that between 2003 and 2009, he employed deceptive and manipulative devices and contrivances related to the sale and purchase of investments in a series of trading enterprises that he formed. He also acknowledges that he raised tens of millions of dollars from investors and maintained custody and control of the money under the guise that he was using the funds to trade, sell, and buy foreign currencies.

Watson convinced people to put money in his ventures by making representations that he was looking to make money with the “Alpha One” model, which he developed and maintained. He claimed that the model has made high historical returns since 2000 and between June 2006 and February 2009 made an annualized return of 23.04%.

Now, however, Watson says that contrary to what he represented, he did not trade. Instead, he made minimal trades and made little-if any-profits. He also caused bogus account statements to be sent to investors through wire communication, US mail, or electronically and put together sham statements of bank accounts and trading activity to make the account statements appear legitimate. When investors took out these “returns” or their principal investments, he paid them with money from other investors rather than foreign currency trade profits. Despite not doing much trading, he paid himself hundreds of thousands of dollars yearly during the securities scam.

Alpha One: Foreign Currency Trader Convicted of Securities Fraud, LoanSafe, June 13, 2011

“Alpha One” Foreign Currency Trader Convicted of Securities Fraud, FBI, June 10, 2011

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Credit Suisse Ordered to Pay STMicroelectronics N.V. $404M Over Improper ARS Investment

Published on: June 15, 2011 | by Shepherd Smith Edwards & Kantas, LLP

In STMicroelectronics N.V. v. Credit Suisse Securities (USA) LLC, 2d Cir., No. 10-3847-cv, 6/2/11, the US U.S. Court of Appeals for the Second Circuit upheld an arbitration panel’s award against Credit Suisse Securities (USA) LLC for $405 million. The financial firm was accused of improperly investing STMicroelectronics N.V. (STM)’s money in high-risk auction-rate securities.

The court says that Credit Suisse offered ST the opportunity to invest in ARS in April 2006 even though the business needed to have cash or its equivalents easily at hand due to the cyclical nature of what it does. Prior to that, ST had invested its funds in safe, liquid securities, including money market deposits.

The court says that the financial firm “explicitly proposed” ARS investments and ST “explicitly accepted” investing only in these securities, which were supported by student loans that were federally guaranteed. Yet within a few days, the court says that Credit Suisse started buying higher yield, higher risk ARS for ST.

By January 2007, none of the ARS were backed by student loans anymore. Yet the financial firm sent an email to ST that concealed the investments “true nature.” All of ST’s ARS failed after the market collapsed and two of the Credit Suisse brokers in charge of the ST account would go on to be convicted of conspiracy and securities fraud charges.

ST later Financial Industry Regulatory Authority arbitration claim against Credit Suisse. The U.S. District Court for Southern District of New York later confirmed the panel’s $406 million.

In its appeal, Credit Suisse attacked the award, claiming that arbitrator John J. Duval Sr. gave inaccurate and incomplete disclosures and was misleading because he suggested that he “worked for ‘both sides,’” when he actually was an expert witness for the claimants. The court rejected that contention. Credit Suisse also accused the arbitrators of “manifestly disregarding” the law when it reached its finding. The court rejected this contention too. The appeals court did, however, find that the district court should have credited the amount of the award funds that ST got from the sale of certain Deutsche Bank securities and, as a result, lowered the amount of interest due.

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Credit Suisse Broker Previously Convicted for Selling High Risk ARS is Barred from Future Securities Law Violations, Institutional Investors Securities Blog, February 12, 2011

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Judge Gives Lower Sentence to Former Credit Suisse Broker Convicted of Auction-Rate Securities Fraud, Stockbroker Fraud Blog, January 30, 2010

MBIA Can Sue Morgan Stanley Over Alleged Misrepresentation of MBS Risks, Says US New York Supreme Court

Published on: June 14, 2011 | by Shepherd Smith Edwards & Kantas, LLP

In MBIA Insurance Corp. v. Morgan Stanley, N.Y. Sup.Ct., No. 29951-10, the New York Supreme Court says that insurance company MBIA can sue Morgan Stanley and affiliates Saxon Mortgage Services Inc. and Morgan Stanley Mortgage Capital Holdings LLC for alleged misrepresentations about the risks involved in insuring residential mortgages that were sold to investors as mortgage-backed securities. While Judge Gerald Loehr allowed MBIA to bring a cause of auction for fraud against the broker-dealer and its affiliates, he did dismiss an unjust enrichment claim against Saxon.

MBIA claims that the defendants made their representations in their talks leading up to the agreement that had the insurer saying it would insure over $223 million in residential MBS that investors bought in the transaction. The alleged misstatements were over the characteristics of the mortgage loans (both pooled and individual), the quality of the collateral for the loans, and borrowers’ credit ratings. The action dealt with the securitization of a transaction involving about 5,000 subordinate-lien residential mortgages that were bought, structured, and sold by the defendants. Morgan Stanley is also accused of representing to MBIA that the mortgage loans weren’t subprime loans but were instead alternative documentation loans.

MSMCH had acquired the mortgage loans and then transferred and pooled them to Morgan Stanley Capital Inc., which then transferred them to a trust that had LaSalle Bank National Association serve as a trustee. The trust put out certificates secured by groups of those mortgages, which were sold, and paid a yield to certificate holders connecting the cash flow to the loans.

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Ex-Morgan Stanley Trader to Settle SEC Unauthorized Swaps Trading Claims for $150,000

Published on: June 13, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Larry Feinblum, an ex-Morgan Stanley & Co. Inc. (MS) trader, has consented to settle for $150,000 SEC allegations that he hid from risk managers the true extent of risk involved in certain proprietary trading. This move caused the financial firm to suffer about $24.47 million in losses when it unwound the unauthorized positions.

The SEC claims that over a 3-month period in 2009, Feinblum, who was a supervisor on Morgan Stanley’s Equity Financing Products Swaps Desk, and trader Jennifer Kim executed a number of transactions that set up net risk positions that were significantly over limits that “could be exceeded only with supervisory approval.” The two are also accused of submitting swap orders into the firm’s risk management system that they never planned on executing and which they then promptly canceled.

The SEC says that not only did Feinblum and Kim set up their arbitrage trading strategy at positions that exceeded Morgan Stanley’s risk limits, but they also submitted the orders for the purpose of artificially and temporarily lowering the net risk positions in the securities as recorded in the firm’s risk management systems. They also went after a trading strategy that was supposed to create a profit from price discrepancies between foreign markets and US markets.

On December 17, 2009, Feinblum, who had just lost $7 million the day before, admitted that he and Kim had gone beyond the risk limits on repeated occasions and that they hid their misconduct. Morgan Stanley then proceeded to unwind the positions but by then they had already taken the financial hit.

Related Web Resources:
Former Morgan Stanley Trader Barred for Bogus Swaps, Securities Technology Monitor, June 2, 2011
SEC: Morgan Stanley trader’s trick caused millions in losses, The Washington Post, June 2, 2011
SEC Administrative Proceeding

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Houston Securities Arbitration: FINRA Panel Orders Penson Financial Services, Inc. to Pay Boushy North Investments, Ltd. $500,000

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

In Houston, a FINRA arbitration panel has awarded Boushy North Investments, Ltd. $500,000 in its securities arbitration case against Penson Financial Services, Inc. Boushy North Investments had initially sought $4M in punitive damages and more than $3.8M in compensatory damages for negligence, unauthorized trading, breach of fiduciary duty, and gross negligence. At the Texas securities arbitration hearing, however, the Claimant amended and reduced its compensatory damages and withdrew punitive damages and legal fees.

Boushy North Investments accused Penson of failing to prevent an unsuitable and unauthorized day-trading strategy for its family limited-partnership account. Meantime, Penson denied the allegations, asserted specific defenses, and submitted a Third-Party Complaint against Thomas Cooper and Second Mile Wealth Management, Inc., which asserted causes of action over crack of contract, indemnification, and rascal linked to the Third-Party Respondents’ purported element representations about the trade and the direction of the trading in Claimant’s account. Penson eventually discharged its Third-Party Claim’s result of action for fraud.

The claim for unauthorized trading hadn’t been included in the Original Statement of Claim submitted in September 2009. The first effort to amend that was February. However, FINRA denied it because different or new pleadings cannot be turned in after a panel has been chosen and if a leave to amend hasn’t been granted. Last month, however, after the proper motions were submitted, the panel granted the unauthorized trading count.

Penson Faced Multi-Million Dollar Day-Trading Claim in FINRA Arbitration, Broke and Broker, June 1, 2011
Multi-Million Dollar Day-Trading Claim Hits Penson in FINRA Arbitration, Forbes, May 31, 2011

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US Supreme Court Declines Review of Appeals Court Rulings Involving Issues of Antifraud Liability and Institutional Investment Managers’ Disclosure Obligations

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

The nation’s highest court has decided not to review three federal appeals court rulings that brought up the securities law issues of disclosure obligations and antifraud liability. The cases are Amorosa v. Ernst & Young LLP, Pacific Investment Management Co. v. Mayer Brown LLP, and Full Value Advisors LLC v. SEC.

In the liability case against Ernst & Young, the U.S. Court of Appeals for the Second Circuit held that the district court was correct in turning down the investor’s lawsuit, which alleged fraudulent accounting practices at America Online and later at AOLTime Warner. The court had found that the plaintiff failed to adequately allege loss causation.

The appeals court also affirmed the dismissal of the second liability-related securities fraud case, this one against Mayer Brown LLP, over the latter’s alleged involvement in the fraud at Refco Inc. The court concluded that secondary actors can only be held liable for false statements that they made at the time it issued them (this finding rejected the SEC’s broader view of liability for secondary actors in securities fraud cases) and that without attribution the plaintiffs cannot demonstrate that they depended on the defendants’ false statements. The court also said that “participation in the creation of those statements amounts, at most, to aiding and abetting securities fraud.”

In Full Value Advisors LLC v. SEC, the U.S. Court of Appeals for the District of Columbia Circuit had found that the hedge fund adviser’s constitutional challenge to the SEC’s disclosure requirements for large investment advisers was not ripe for judicial review. This ruling prevented the plaintiff from receiving a ruling on the merits of its claims unless the SEC puts together a report that is accessible to the public and includes the allegedly proprietary information.

Pacific Investment Management Co. v. Mayer Brown LLP

Full Value Advisors LLC v. SEC (PDF)

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