Investor Lawyers Blog

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.

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.

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

Muni Debt Reform: SEC to Proceed with Field Hearing in Alabama

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

According to House Financial Services Committee Chairman Rep. Spencer Bachus (R-Ala.), the Securities and Exchange Commission will proceed with a field hearing in Birmingham, Alabama. The hearing is to let the SEC more fully comprehend Jefferson County, Alabama’s experience as it comes up with policies to enhance disclosure and transparency in municipal finance markets.

Currently, Birmingham, which is the largest city in Jefferson County, is still trying to avoid filing a $4 billion sewer bonds bankruptcy stemming from county officials’ alleged corruption and fraud. The SEC hopes that the hearing will help it in the development of policies to improve disclosure and transparency in municipal finance markets.

Already, the SEC and the Justice Department have filed fraud charges against Jefferson County officials, including ex-mayor Larry Langford, who was convicted in 2009 for taking kickbacks involving the refinancing of county bonds that were for the funding of the reconstruction of the aged sewer system. Charged with alleged involvement in the pay-to-play scam are ex-J.P. Morgan Chase (JPM) managing directors Charles LeCroy and Douglas MacFaddin. JP Morgan Chase has already settled the SEC’s securities charges over the financial fraud, which allowed the financial firm to obtain the rights to some of the sewer bond offerings. It paid Jefferson County $50 million and dropped a $647 million termination fee claim.

Bachus has said that he doesn’t believe that any taxpayer, locality, or ratepayer should have to undergo the same experience as the sewer financing fiasco and the impact it has had. If Jefferson County were to file for bankruptcy, it would be the largest municipal bankruptcy in history.

Related Web Resources:
Congressman Bachus: SEC to Hold Field Hearing on Municipal Debt Reform , Bachus House
Bond Debacle Sinks Jefferson County, Bloomberg Businessweek, November 8, 2009

More Blog Posts:
UBS Financial Reaches $160M Settlement with the SEC and Justice Department Over Securities Fraud, Antitrust, and Other Charges Related to Municipal Bond Market, Institutional Investors Securities Blog, May 16, 2011
Citigroup Ordered by FINRA to Pay $54.1M to Two Investors Over Municipal Bond Fund Losses, Stockbroker Fraud Blog, April 13, 2011
SEC to Examine Muni Bond Market Issues During Hearings in Texas and Other States, Stockbroker Fraud Blog, February 9, 2011 Continue Reading ›

SEC to Propose Rule Banning “Felons and Bad Actors” From Involvement in Private Offerings

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

In a 3-2 vote, the Securities and Exchange Commission has agreed to propose a rule (mandated by Congress) that exempts Felons and Bad Actors” from private offerings pursuant to Rule 506 of Regulation D under the 1933 Securities Act. The SEC has also agreed—again in a 3-2 vote—to adopt final rules to set up a whistleblower bounty program.

Under the financial reform legislation’s Section 926, the SEC must bar the sales and offerings of securities by recidivist violators that are subject to certain disciplinary proceedings and sanctions or have a misdemeanor or a felony related to the sale or purchase of a security from being able to avail of the safe harbor act’s Rule 506. The rule lets issuers avoid the reporting requirements of the 1933 Act. It also makes up for approximately 93% of private securities that Reg D. offers.

The proposal would prevent a private placement from taking advantage of the rule if the issuer or individual covered by the rule had a disqualifying event, such as a criminal conviction, restraining order, court injunction, certain commission disciplinary orders, U.S. Postal Service false representation orders, commission “stop orders” to suspend exemptions, suspension or expulsion from membership in a “self-regulatory organization” (or from association with an SRO member), or final orders of insurance, state securities, banking, or credit union regulators. Covered persons include officers, directors, managing members of the issuer, 10-percent beneficial owners, and promoters of the issuer.

Winell Associates Inc., Maxi Partners GP, and Howard Winell Settle CTFC Charges Accusing Them of Misappropriating Funds and Unauthorized Trading of Over $5.2M

Published on: May 27, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Howard Winell, Winell Associates Inc., and Maxie Partners GP LLC have agreed to pay over $5.2 million to settle Commodity Futures Trading Commission charges accusing them of taking part in unauthorized trading and misappropriating funds related to a commodity futures and options pool. By settling, the respondents are not denying or admitting the allegations. They have, however, agreed to a permanent ban from both trading and registering with the CFTC.

The agency says that in 2005, Winell and the two firms solicited and pooled about $20 million from approximately 25 participants to trade commodity futures and options on commodity futures through Maxie Partners LP, which is a commodity pool. In May 2007, one of the largest participants in the pool asked to redeem about $7 million. The agency says that while the respondents segregated that amount to meet this request, before the redemption was issued the pool suffered substantial losses and had margin calls of about $4 million issued by futures commission merchants that held the pool’s trading accounts. The CFTC says that to keep on trading and meet the margin calls, Winell had to transfer those segregated funds back to the pool’s trading accounts. About $3.8 million of the participant’s money was lost.

It is wrong for brokers and financial advisers to misappropriate funds when doing their job. If you believe that you have suffered financial losses because of broker misconduct, do not hesitate to contact our stockbroker fraud lawyers immediately.

Related Web Resources:
Howard Winell and Winell Associates fined USD5.2m for fraud, HedgeWeek, May 3, 2011
CFTC Sanctions New York Resident Howard Winell and His Companies, Winell Associates, Inc., and Maxie Partners GP, LLC, More than $5.2 Million for Fraud, CFTC, May 2, 2011
Commodity Futures Trading Commission

More Blog Posts:
Commodity Options Fraud Charges by CFTC Prompts District Court to Freeze Assets and Records of 20/20 Trading Co. Inc. & 20/20 Precious Metals Inc., Stockbroker Fraud Blog, May 6, 2011
Commodities Industry Fears being held to Regulatory Standards of Securities Industry, Stockbroker Fraud Blog, February 4, 2011
CFTC Files Charges in Alleged California Ponzi Scam Involving the Fraudulent Solicitation of $14 million in Commodity Futures, Stockbroker Fraud Blog, January 18, 2011 Continue Reading ›

Court Refuses McGinn Smith & Co. Owners’s Request that It Stay the FINRA Disciplinary Proceedings Until The Related SEC Civil Action Against Them Ends

Published on: May 27, 2011 | by Shepherd Smith Edwards & Kantas, LLP

A district court has denied the bids of Timothy McGinn and David Smith that the Financial Industry Regulatory Authority disciplinary proceedings against them be stayed until after the conclusion of the Securities and Exchange Commission’s related civil action. Judge Colleen Kollar-Kotelly of the U.S. District Court for the District of Columbia said the court doesn’t have jurisdiction over this stay request. While noting that the judicial review of this type of FINRA proceeding is vested in the federal courts of appeal, the district court said that it did not believe that transfer, rather than dismissal, was “in the interest of justice” because the plaintiffs were not likely to succeed on their claim’s merit and had not shown that they would be irreparably harmed because of the FINRA proceedings.

McGinn and Smith are part owners of McGinn Smith & Co, Inc., as well as stockbrokers. Last year, FINRA’s Department of Enforcement submitted a complaint accusing them and their firm of taking part in four fraudulent securities offerings between September 2003 and November 2006. FINRA asked the SEC to look into the matter because it believed that the plaintiffs had violated securities law.

The SEC began its own formal probe and went on to sue the plaintiffs and their securities firm for securities fraud and other violations. A receiver was appointed by the federal court to seize control of McGinn Smith & Co. and its assets.

While a FINRA officer did stay proceedings against the financial firm, it refused to do so against the two men, who then filed their case requesting that the court stay the FINRA proceedings until the SEC case has concluded. The plaintiffs believe that the SRO violated their constitutional rights when it acted as a proxy for the SEC.

SEC seeks shutdown of McGinn and Smith venture, TimesUnion.com, November 4, 2010

More Blog Posts:

Wells Fargo Advisors LLC Agrees to $1 Million FINRA Fine for Securities Charges Related to Mutual Fund Prospectus Delivery, Stockbroker Fraud Blog, May 12, 2011

Day Trader Pleads Guilty to Securities Fraud Charges Related to Insider Trading Scam

Published on: May 25, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Day trader Daniel Corbin has pleaded guilty to a securities fraud charge accusing him of conspiring to make illegal trades based on confidential tips from the wife of an ex-Lehman Brothers salesman. He was one of five people indicted over this insider trading scam in 2008 and the last to plead guilty.

Corbin says that it was his partner, Jamil Bouchareb, who gained access to the material non-public information about Veritas DGC Inc. The information came from ex-Lehman Brothers salesman Matthew Devlin whose wife Nina Devlin worked at the public relations company Brunswick Group LLC at the time and had access to information about mergers and other deals. Devlin gave away that information without her consent.

Following the insider tip, Corbin and Bouchareb used their joint account to purchase 2,500 shares of the company on September 1, 2006. On September 5, 2006, Compagnie Generale de Geophysique SA purchased Veritas DGC. Corbin and Bouchareb made a $16,000 profit from the trade.

Goldman Sachs and Wells Fargo Investments Repurchase $26.9M in Auction-Rate Securities from New Jersey Investors

Published on: May 25, 2011 | by Shepherd Smith Edwards & Kantas, LLP

According to the New Jersey Bureau of Securities, Wells Fargo Investments Inc. (WFC) and Goldman Sachs & Co. (GS) has repurchased $26.9 million in ARS tosettle securities allegations that they sold auction-rate securities to New Jersey investors without disclosing the risks involved. Goldman bought back $25.5 million in ARS (it will also pay a $959,794 civil penalty), while Wells Fargo Investments repurchased $1.37 million in ARS.

The Bureau says that Goldman Sachs did not properly supervise and train its salespeople to make sure that all of its clients knew of the mechanics involved in the auction market and that the ARS could become illiquid. The financial firm also is accused of failing to disclose to investors the risks involved in buying or owning ARS even as it was becoming aware that the market was in trouble. The Bureau also accused Wells Fargo Investments of not properly supervising or training its agents that marketed the securities.

The two Consent Orders against Goldman Sachs and Wells Fargo Investments are the 11th and 12th that the state’s Bureau of Securities has reached with financial firms over ARS that were sold to investors in New Jersey. As part of the settlements, several firms that sold and marketed ARS have offered to buy back $2.8 billion of these securities.

It was in 2008 that state offices started getting complaints from investors about problems related to ARS investments. New Jersey was one of the 12 states that became part of a task force that looked into whether financial firms misled investors that bought ARS, which were sold and marketed as liquid, safe, and like cash. When the ARS market did fail, many investors were unable to access their money as the securities became illiquid.

New Jersey Bureau of Securities

More Blog Posts:
Anschutz Corp.’s Securities Fraud Lawsuit Against Deutsche Bank and Credit Rating Agencies Over Their Alleged Mishandling of Auction-Rate Securities Can Proceed, Says District Court, Institutional Investor Securities Blog, April 21, 2011

Akamai Technologies Inc’s ARS Lawsuit Against Deutsche Bank Can Proceed, Institutional Investor Securities Blog, March 4, 2011

Auction-Rate Securities Investigations by SEC and NY Attorney General Are Ongoing, Stockbroker Fraud Blog, April 21, 2011

SEC to Up Dollar Thresholds for When an Investment Adviser Can Charge Investors Performance Fees

Published on: May 24, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission says it will raise the dollar thresholds that would need to be met before an investment adviser can charge a client a performance fee. The monetary thresholds are related to two tests under the 1940 Investment Advisers Act that let investment advisers charge performance-based fees to “qualified clients.”

Under the Act’s Rule 205-3, advisers can charge performance fees in certain circumstances: The investment adviser needs to be managing at least $750,000 for the client or the advisers must reasonably believe that the client’s net worth is over $1.5 million. Shepherd Smith Edwards & Kantas LTD LLP founder and securities fraud lawyer William Shepherd says, “Sharing in performance is dangerous because the advisors can afford to take large risks with ‘other people’s money’ – risks that the investor may not be able to afford. A combined life savings of $750,000 is not a large sum for retirees, and what does it even mean to ‘reasonably believe’ someone has a net worth of $1.5 million?”

The SEC says that now it will issue an order to revise rule 205-3’s dollar amount tests to $1 million for assets under management and $2 million for net worth. It also proposed amendments to the rule, including:

• Excluding the individual’s primary residence when determining net worth.
• Providing a method to figure out future inflation adjustments of the dollar amount tests.
• Modifying the rule’s transition provisions to factor in account performance fee arrangements that were allowed when the client and the adviser entered into their contract.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 418, the SEC has until July 21, 2011 to adjust for inflation the dollar amount tests under Rule 205-3 of this year and after every five years from then on. The act has also directed the SEC to adjust under 1933 Securities Act the net worth standard of an “accredited investor” so that it doesn’t include that individual’s primary residence.

Related Web Resources:
SEC Issues Notice of Plan to Adjust Adviser Performance Fee Dollar Thresholds, BNA Securities Law Daily, May 13, 2011
SEC Publishes Notice Regarding Inflation Indexing of Performance Fee Rule, SEC.gov, May 10, 2011
1940 Investment Advisers Act

More Blog Posts:
Investments Advisers Told to Look at Recent SEC Enforcement Actions When Preparing for Exams, Stockbroker Fraud Blog, April 20, 2011
No Need for New SRO Overseeing Investment Advisers, Says NASAA Official to Congress, Stockbroker Fraud Blog, April 10, 2011
SEC Extends Temporary Rule Allowing Principal Trades by Investment Advisers Registered as Broker-Dealers, Institutional Investor Securities Fraud Blog, January 13, 2011 Continue Reading ›