Investor Lawyers Blog

SEC Examining Whether Goldman Sachs Violated Bribery Laws When Dealing with Libya’s Sovereign-Wealth Fund

Published on: June 10, 2011 | by Shepherd Smith Edwards & Kantas, LLP

According to the Wall Street Journal, the SEC is trying to figure out whether Goldman Sachs Group Inc. and a number of other financial firms were in violation of bribery laws because of the way they handled Libya’s sovereign-wealth fund. SEC enforcement lawyers are now looking at documents detailing these relationships. Several other companies have had significant interactions with the Libyan Investment Authority, including Och-Ziff Capital Management Group, JP Morgan Chase, and Carlyle Group.

The Journal says that Goldman invested over $1.33 billion from Libya’s fund in a number of trades in 2008. The investment lost over 98% of its value.

US regulators want to know about a $50M and transaction fees that Goldman Sachs said it would pay the fund in exchange for a release of liability and winding down the trades. Although the money reportedly was never handed over before violence flared up last year in Libya, this doesn’t mean that the financial firm is exempt from the federal Foreign Corrupt Practices Act, which does not let US companies offer (or pay) bribes to state-owned company employees or foreign government officials. The money would have gone to an outside advisory firm that was at the time run by the son-in-law of the Libyan national company.

Goldman spokesman Lucas van Praag has said that the financial firm is “confident” that it didn’t do anything that violated any regulation or rule. He noted that the company worked with outside counsel to make sure that it was in compliance with all rules.

Related Web Resources:
SEC Examining If Goldman-Libya Connection Violated Bribery Laws, Huffington Post, June 9, 2010

SEC Looks At Goldman, Others’ Dealing With Libyan Sovereign Fund, The Wall Street Journal, June 9, 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

SEC Approves Proposed FINRA Rule Change Subjecting Back Office Personnel of Broker-Dealers to Registration and Qualification Examination Requirements

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

The Securities and Exchange Commission has approved the Financial Industry Regulatory Authority’s proposed rule change subjecting certain back office personnel of broker-dealers to registration and qualification examination requirements. The changes would be made to FINRA Rule 1230(b)(6).

The SEC says it is approving the proposed change on an expedited basis because it is in line with the 1934 Securities Exchange Act requirement that FINRA rules should protect investors while preventing securities fraud and manipulation. As part of the rule change, registration category and a qualification exam category would be set up for certain operations personnel, who would also be subject to continuing education requirements. The Commission believes that this rule change will take care of certain regulatory gaps that still exist in the industry.

Those subject to the rule change would be three categories of persons:
• Senior management in charge of covered functions (these include customer account data; document maintenance, collection, maintenance and reinvestment of funds; stock loan/securities lending; and delivery and receipt of fund and securities)
• Personnel accountable for authorizing work that advances the covered functions • Persons authorized to commit a member’s capital to directly advance the covered functions
FINRA is recommending that the new requirements be phased in. The SEC is currently soliciting comments.

Related Web Resources:
US SEC Approves Registration of Brokerage Back-Office Employees, Wall Street Journal, June 17, 2011
FINRA to Share Details on New Back-Office Staff Rules, AdvisorOne, June 20, 2011
1934 Securities Exchange Act

More Blog Posts:
SEC Approves FINRA’s Proposal to Give Investors an All-Public Arbitration Panel Option, Stockbroker Fraud Blog, February 12, 2011
Dodd-Frank Reforms Will Lower Deficit by $3.2B Over the Next Decade, Estimates CBO, Institutional Investors Securities Blog, April 8, 2011
Fiduciary Standard in Securities Industry Doesn’t Need New Definition, Stockbroker Fraud Blog, November 26, 2010 Continue Reading ›

David Lerner & Associates Ignored Suitability of REITs When Recommending to Investors, Claims FINRA

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

FINRA has filed securities charges against David Lerner & Associates, Inc. accusing the broker-dealer of not taking into account suitability when soliciting vulnerable investors-in particular, elderly clients, to buy shares in the non-traded, $2B Apple REIT Ten offering. The SRO is also accusing the broker-dealer of posting misleading information online about distributions.

DLA has been Apple REITs only underwriters for nearly two decades. The broker-dealer has sold almost $6.8B of the securities into about 122,600 customer accounts. The series has made $600M in fees and other earnings for the broker-dealer, making up 60 to 70% of the firm’s yearly business. Since January, DLA also has been sole underwriter for Apple REIT Ten, which has sold over $300M of a $2B offering of shares. DLA associates earn numerous fees, including 10% of all offerings.

The SRO says that for at least seven years, the closed Apple REITs have “unreasonably valued” their shares at $11 (notwithstanding performance declines, market fluctuations, and increased leverage). The REITs, which were launched from 2004 and 2008 and were used mainly used to buy extended hotel stays, have managed to keep up “outsized” distributions of 7-8% through leveraged borrowing and returning of capital to investors. The SRO contends, however, that DLA did not disclose on its website that the income from real estate was not enough to support these. FINRA also claims that DLA provides “misleading” distribution rates on its website for all past Apple REITs.

DLA is denying the allegations.

Finra Sues David Lerner Firm, Wall Street Journal, June 1, 2011
FINRA Charges Firm With Ignoring Suitability, Providing Bad Data on REITs, BNA, June 1, 2011
REITs

More Blog Posts:
Ameriprise Must Pay $17 Million for REIT Fraud, Stockbroker Fraud Blog, July 12, 2009
W.P. Carey & Co Settles SEC Charges Over Payments of Undisclosed REIT Compensation, Stockbroker Fraud Blog, March 25, 2008
UBS Financial Services Fined $2.5M and Ordered to Pay $8.25M Over Lehman Brothers-Issued 100% Principal-Protection Notes, Institutional Investors Securities Blog, April 12, 2011 Continue Reading ›

Northern Trust Securities Agrees to $600,000 FINRA Fine Over Charges It Failed to Properly Monitor High-Volume Securities Trades and CMO Sales

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

Northern Trust Securities has consented to pay a $600,000 Financial Industry Regulatory Authority fine over securities charges accusing it of failing to supervise collateralized mortgage obligation sales and lacking the systems set up to properly monitor certain high-volume securities trades. FINRA contends that the alleged actions by the broker-dealer exposed investors to the risk of losing if not all then a significant part of their principal through potential over concentration in CMOs. By agreeing to settle, however, Northern Trust is not admitting to or denying the charges.

According to FINRA, from 10/06 and 10/09, Northern Trust failed to to watch out for unsuitable levels of concentration” in CMOs in customer accounts and this occurred in significant part because Northern Trust employed an exception reporting system that did not analyze or capture significant parts of its business, such as:

• Certain trades of 10,000 equity shares or more
• Certain trades of 250 or more of fixed-income bonds
• All CMO transactions

The SRO contends that from 1/07 to 6/08, 43.5% of the Northern Trust’s business was not included in the review. The SRO claims that not having the proper systems to properly monitor the fixed income trades of over 250 bonds and equity trades of more than 10,000 shares led to a failure on the financial firm’s part to look at the trades for concentration, excessive mark-ups, excessive suitability, trading, or commissions, or for trading in restricted stocks.

Northern Trust reportedly wasn’t aware of this problem until an elderly investor filed an arbitration claim related to the concentration in her Countrywide Financial Corp. CMO account.

Related Web Resources:

FINRA Fines Northern Trust Securities, Inc. $600,000 for Inadequate Supervision of Sales of Collateralized Mortgage Obligations and Certain High-Volume Securities Trades, FINRA, June 2, 2011

More Blog Posts:
Charles Schwab & Co. Defendant in Class-Action Securities Fraud Lawsuit Filed on Behalf of Schwab Total Bond Market Fund Investors Over CMOs and Mortgage-Backed Securities, Stockbroker Fraud Blog, September 7, 2010

HSBC Securities to Pay $375K to Settle FINRA Allegations that It Recommended Unsuitable Collateralized Mortgage Obligations to Retail Clients, Stockbroker Fraud Blog, August 25, 2010

SEC & FINRA Examine CMO Sales and Marketing Practices, Stockbroker Fraud Blog, January 23, 2008

FINRA Wants Brokers Selling Regulation D Private Placements to Take Part in Tougher Due Diligence Process

Published on: June 7, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is calling on broker-dealers that sell high-risk Regulation D private placements to step up their due diligence efforts, including “pushing and pulling” for information about the financial products. FINRA chief executive and chairman Robert Ketchum says that although granted, levels of due diligence will not be the same for each deal, broker-dealers still need to play an active role when examining a Reg D offering.

Due diligence related to the sale of private placements has become a focus of attention since the Provide Royalties LLC and Medical Capital Holdings Inc. deals collapsed and the Securities and Exchange Commission charged them with fraud. With both deals, many of the broker-dealers that sold them depended on third-party firms to write the due diligence reports about the offerings. Yet, despite not doing any due diligence of their own, these broker-dealers still received a 1% “due-diligence fee” as part of the sale.

Ketchum says that attending a “canned information session” or just reading a document is not enough when part of one’s job is to actively sell or offer advice about private placements. He even suggested that in certain instances, such as when selling gas and oil well partnerships, broker-dealers should visit some of the key production areas.

Regulation D Private Placements
Regulation D Private Placements are usually sold to “accredited” investors” and a limited number of non-accredited investors. In addition to investigating Regulation D private placements before selling them, a broker-dealer must have reasonable grounds to believe that the investment is suitable for each customer and that each client fully comprehends the risks involved in investing.

Related Web Resources:
Finra’s Ketchum: B-Ds must ‘push and pull’ for Reg D details, Investment News, June 8, 2011
FINRA Sets Regulatory Guidance for Investigating Private Placements, FINRA, April 20, 2010

More Blog Posts:
Ameriprise to Sell Securities America Even as it Finalizes Securities Settlement with Investors of Medical Capital Holdings and Provident Royalties Private Placements, Stockbroker Fraud Blog, April 26, 2011
Provident Royalties Faces $485 Million Texas Securities Fraud, Says SEC, Stockbroker Fraud Blog, July 26, 2009 Continue Reading ›

District Court in Texas Decides that Credit Suisse Securities Doesn’t Have to pay Additional $186,000 Arbitration Award to Luby’s Restaurant Over ARS

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

The U.S. District Court for the Southern District of Texas has ruled that Credit Suisse Securities shouldn’t have to pay Luby’s Restaurants another $186,000 as part of its arbitration to the investor. The case is Luby’s Restaurants LP v. Credit Suisse Securities (USA) LLC. Shepherd Smith Edwards and Kantas Founder and Texas Securities Fraud Attorney William Shepherd had this to say about the ruling: “Attorneys for each side have the opportunity to submit language to the arbitrators that it desires to be reflected in an award. In cases where the award sought is anything more than payment of a specific amount it is wise to submit such language.”

Luby’s Restaurants LP bought over $30 million in auction-rate securities from Credit Suisse. The investor bought the ARS based on the financial firm’s representation that the instruments were very liquid, safe, and a suitable investment.

Luby’s later filed its arbitration claim with FINRA for ARS losses. By then it had gotten back everything but $8.9 million in securities. Then, after initiating the proceedings-but prior to the arbitration hearing-Luby’s redeemed another one of its securities for less than par and lost $186,000.

The arbitration panel would go on to rule in favor of Luby’s. Credit Suisse was directed to buy back the ARS from Luby’s at par and with interest. While both parties sought to confirm the award, they were in dispute over whether the $186,000 that Luby’s lost after it filed its arbitration case should be included.

The court says that Credit Suisse does not have to pay that amount to Luby’s. The court noted that the Award doesn’t mention the additional damages that Luby’s sustained when it sold some of the securities under par during pendency of the arbitration but prior to the hearing.

Related Web Resources:
$186K Under Arbitration Award, BNA Securities Law Daily, May 31, 2011
Luby’s Restaurants LP v. Credit Suisse Securities (USA) LLC, Justia

More Blog Posts:
Credit Suisse Group AG Must Pay ST Microelectronics NV $431 Million Auction-Rate Securities Arbitration Award, Stockbroker Fraud Blog, April 5, 2010
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Goldman Sachs and Wells Fargo Investments Repurchase $26.9M in Auction-Rate Securities from New Jersey Investors, Institutional Investors Securities Blog, May 25, 2011 Continue Reading ›

District Court Wants to Know Why FINRA Arbitration Panel Denied Freecharm Ltd.’s Securities Fraud Claim Against One Atlas Financial Group LLC

Published on: May 31, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Judge Marcia G. Cooke of the U.S. District Court for the Southern District of Florida is asking why a Financial Industry Regulatory Authority arbitration panel denied Freecharm Ltd.’s breach of fiduciary duty and fraud claims against Atlas One Financial Group LLC. Cooke wants to know about the panel’s reasoning so it can make a ruling regarding the parties’ conflicting motions to modify, confirm, or vacate the award.

The court says that, Freecharm Ltd. began arbitration proceedings against associated entity Atlas One Financial Group LLC and three individuals in 2009. Freecharm accused Atlas of committing Florida statutory violations, breach of fiduciary, fraud, negligence, and other wrongdoings linked to the alleged excessive and/or unauthorized trading in a number of securities accounts.

After the FINRA panel entered an award denying Freecharm’s claims “in their entirety,” Freecharm then submitted a motion to modify or vacate, while Atlas put forward its own motion to have the award confirmed.

Freecharm is claiming that the panel went beyond its powers, exhibited partiality, ignored the law and the facts, and was prejudiced in refusing to see that Atlas allegedly concealed discovery documents. Freecharm is also challenging the credibility of certain witness testimony and discovery documents.

Although the district court has acknowledged that the FINRA panel’s decision deserves “considerable deference,” it also has found that in this instance the award does not “expressly state” the reason Freecharm’s claims were entirely denied. The court says that it needs more information so it can identify the possible evidence for the panel’s logic, as well as determine what principal of law the arbitrators allegedly disregarded. District courts are authorized to remand a case to an arbitration panel for the purpose of getting clarification about the panel’s intent when “in making an award evidences a manifest disregard of the law.”

Related Web Resources:
In Weighing Motion to Confirm, Court Asks Arbitrators to Clarify Basis of Award, Alacra Store, May 25, 2011 Atlas One Financial Group, LLC et al v. Freecharm Limited, Justia Dockets

More Blog Posts:
District Court in Texas Decides that Credit Suisse Securities Doesn’t Have to pay Additional $186,000 Arbitration Award to Luby’s Restaurant Over ARS, Stockbroker Fraud Blog, June 2, 2011
SEC Approves FINRA’s Proposal to Give Investors an All-Public Arbitration Panel Option, Stockbroker Fraud Blog, February 12, 2011
Raymond James Must Pay $925,000 Over Auction-Rate Securities Dispute, Stockbroker Fraud Blog, September 1, 2010 Continue Reading ›

Goldman Sachs Subpoenaed Over Financial Crisis

Published on: May 31, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Manhattan District Attorney Cyrus R. Vance Jr. has subpoenaed Goldman Sachs. The New York Times says that someone familiar with this matter told the newspaper that the prosecutor is seeking information related to the financial crisis. The District Attorney’s request comes following the Senate investigators’ report last April accusing the financial firm of abusive conduct.

The Senate Permanent Subcommittee on Investigations produced the report, which claims that Goldman Sachs contributed to the financial crisis when it developed mortgage-linked investments that allowed it to make money even as its clients sustained financial losses. Per the NY Times, this subpoena, which comes nearly three years after the height of the crisis, is a clear indicator that officials are continuing to probe the role that Wall Street might have played.

It was last year that Goldman Sachs consented to settle for $550 million the Securities and Exchange Commission charges accusing it of misleading investors about an investment package linked to subprime mortgages. Even as it bet against the package, the financial firm neglected to disclose that Paulson & Co. helped choose the loans. While investors in the Abacus 2007-AC1 collateralized debt obligation (CDO) lost over $1 billion, Paulson made approximately $1 billion.

The report is also alleging a wider scope of abusive conduct by Goldman. For example, when the mortgage market was failing in 2007, the financial firm allegedly sold mortgage-related investments to buyers but neglected to tell them that it was betting against the subprime market and would make money if some of these securities lost value. Goldman also allegedly minted CDOs with assets that it thought might “lose money,” while selling them at prices higher than what they thought they were worth.

Per the report, these arrangements resulted in a number of conflicts of interests and allegedly allowed Goldman to put its interests before its clients. One example involves Goldman choosing assets for the Hudson 1, which is a $2 billion CDO. The report says that the financial firm neglected to reveal that it’s $2 billion short position far outweighed the $6 million investment it made on the same side as the buyers of the CDO.

Goldman has said that it disagrees with many of the report’s findings.

Goldman Sachs subpoenaed, Washington Post, June 2, 2011

Wall Street and the Financial Crisis: The Role of Investment Banks, Senate Permanent Subcommittee on Investigations

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

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

Securities Practices of JPMorgan Chase & Goldman Sachs Under Investigation by Federal Investigators, Institutional Investors Securities Blog, May 19, 2011

SEC and FINRA Alerts Retail Investors About Structured Notes with Principal Protection

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

FINRA and the SEC’s Office of Investor Education and Advocacy has put out an alert called Structured Notes with Principal Protection: Note the Terms of Your Investment. The purpose of the alert is to let investors know about the risks involved in investing in this type of note while providing information that will allow them to better understand how the notes work.

These notes usually put together zero-coupon bond that doesn’t pay interest until maturity with a derivative product that has a payoff tied to an underlying asset, benchmark, or index that may consist of commodities, currencies, and spreads between interest rates. The investor can take part in a return tied to a specific change in the underlying asset’s value. That said, investors should be aware that the way these notes may be structured could cap or limit their upside exposure to the underlying asset, benchmark, or index.

Investors with structured notes with principal protection that hold them until they mature will usually get a return of at least part of their investment even if there is a decline in the underlying benchmark, index, or asset. However, protection levels aren’t all the same. Some products are guaranteed just 10%, and all guarantees are dependent on the company that made it and its financial strength.

The SEC and FINRA want investors to know that structured notes with principal protection can have complex pay-out structures, which can make it hard to accurately determine their potential for growth and their risk. Investors should also know that their principal could get tied up for up to 10 years and they may end up not making a profit on their initial investment.

The Alert recommends asking a number of questions before investing in a structured note with a principal protection:
• Is this product appropriate considering your investment objectives?

• What are the risks involved?
•
• What type of principal protection is offered?

• What are the conditions of the protection?

• Are there additional costs?

• How long is your money going to be tied up?

• Are you allowed to liquidate or sell prior to the maturity date?

• Is a call feature provided?

• Are there limits to possible gains?

• Are there tax implications?

• How does the pay-out structure work?

• What are your other investment options?

Usually, investors with structured notes with principal protection that hold them until they mature will usually get a return of at least part of their investment even if there is a decline in the underlying benchmark, index, or asset. However, protection levels aren’t all the same. Some products are guaranteed just 10%, and all guarantees are dependent on the company that makes it and its financial strength.

More Blog Posts:
Wall Street Targeting Older Investors With Structured Product Sales, Reports AARP, Stockbroker Fraud Blog, March 11, 2011
Increase of Structured Notes with Derivatives Sales Seduces Retirees, Reports Bloomberg, Stockbroker Fraud Blog, September 25, 2010
Moody’s, Fitch, and Standard and Poor’s Were Exercising Their 1st Amendment Rights When They Gave Inaccurate Subprime Ratings to SIVs, Says, Institutional Investors Securities Blog, December 30, 2010 Continue Reading ›

New Bill Would Strengthen the US Justice Department’s Ability to Prosecute Fraud

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

The 2011 Fighting Fraud to Protect Taxpayers Act is a new bill that would enhance the ability of the US Justice Department to fight fraud. The legislation would channel part of the money recovered from fines and penalties toward the prosecution and investigation of mortgage fraud, financial fraud, foreclosure fraud, and health care fraud.

In a joint release put out by Senate Judiciary Committee Chairman Patrick Leahy (D-Vt.) and Sen. Charles Grassley (R-Iowa), who is a ranking committee member, the Justice Department collected more than $6 billion in penalties and fines over the last fiscal year. The proposed bill would up the percentage of funds that the agency can retain in its Working Capital Fund from 3% to 3.5%. That additional 5% would go toward fraud enforcement. This would give the DOJ approximately another $15 million to investigate and prosecute fraud. It would also lead to greater accountability and transparency at DOJ.

In addition, bill would authorize more funds to DOJ that would go toward the prosecution and investigation of False Claims Act violations. It would also expand the Secret Service’s authority to use funds to advance under cover operations.

Grassley also recently submitted a separate action to FINRA Chairman Richard Ketchum talking about how insider trading is “alive and well” in the US financial markets. He noted the recent criminal charges against hedge fund SAC Capital Advisors LP employees Noah Freeman and Donald Longueuil, who are among those that the Securities and Exchange Commission filed charges against over the alleged $30 million insider trading scheme involving at least six public companies. Grassley wants FINRA to provide more information about any referrals from self-regulatory organizations involving SAC Capital Advisors.

Related Web Resources:
Leahy, Grassley Roll Out New Anti-Fraud Legislation, May 5, 2011

S. 890: Fighting Fraud to Protect Taxpayers Act of 2011

More Blog Posts:
SEC to Propose Rule Banning “Felons and Bad Actors” From Involvement in Private Offerings, Institutional Investors Securities Blog, May 29, 2011

FINRA Chief Ketchum Says Securities Regulators Worried Whether Investors Betting on High-Yield Corporate Bonds Really Know What They Are Getting Into, Stokbroker Fraud Blog, March 21, 2011

SEC Staff Wants an SRO to Oversee Investment Advisers, Stokbroker Fraud Blog, January 31, 2011