Investor Lawyers Blog

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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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

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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

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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

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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

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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

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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

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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

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