Investor Lawyers Blog

Mortgage-Backed Securities Lawsuit Against Bank of America’s Merrill Lynch Now a Class Action Case

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

Merrill Lynch, a unit of Bank of America Corp. (BAC) is now the defendant of a class action securities fraud lawsuit filed on behalf of at least 1,800 investors. A federal judge certified the class status, which involves all investors in mortgage-backed securities that were sold beginning February 2006 through September 2007.

The named plaintiffs of the MBS lawsuit are the Connecticut Carpenters Annuity Fund, the Wyoming state treasurer, Mississippi Public Employees’ Retirement System, the Connecticut Carpenters Pension Fund, and the Los Angeles County Employees Retirement Association. The investors are accusing Merrill of misleading them in the offering documents for $16.5 billion of certificates.

While including yourself as a class action plaintiff may seem like an easy way to recoup your losses, Shepherd Smith Edwards & Kantas LTD LLP founder and stockbroker fraud attorney William Shepherd says, “On average, victims with securities class action claims usually get back a net recovery of about 8% of their losses.” Such claims often face numerous obstacles. Also, only federal securities claims can be brought in class action cases, and these can be challenging to prove. “Some securities class action complaints end up settled but with the terms favoring the defendants and with large fees going to the investors’/victims’ attorneys,” notes Shepherd. Many consider the investor class the losers when such a case is concluded. ** It is important, however, to note that our securities fraud law firm has no information at this time to suggest that this is going to be the result in this matter.

One alternative you should explore is filing your own, individual claim. While many securities class action cases have very short “opt out” dates, if you “opt out” of the class in a timely manner, you can file an individual case ( claims under state law are often easier to prove). Our securities fraud law firm has represented many investors who have done both.

Merrill Must Face Class Action Over Mortgage Securities, Bloomberg, June 20, 2011

More Blog Posts:
Ambac Financial Group, Insurers, and Bank Underwriters to Pay $33M to Settle Securities Lawsuits Alleging Concealed Risks Related to its Bond-Insurance Business, Stockbroker Fraud Blog, May 18, 2011
Number of Securities Class Action Settlements Reached in 2010 Hit Lowest Level in a Decade, Says Report, Stockbroker Fraud Blog, March 31, 2011
Class Action Plaintiffs Dispute Bank of America’s $137M Settlement with State Attorney Generals Over Municipal Derivatives, Institutional Investor Securities Blog, December 31, 2010 Continue Reading ›

Bank of America Cop. (BAC)’s Merrill Lynch a Defendant of Class-Action Mortgage-Backed Securities Lawsuit Against at Least 1,800 Investors

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

U.S. District Judge Jed S. Rakoff has ruled that Merrill Lynch must face a class action securities fraud lawsuit over mortgage-backed securities. The class of at least 1,800 investors consists of the buyers of 31 tranches of MBS in 18 different offerings that were sold between February 2006 and September 2007. Merrill Lynch is a unit of Bank of America Corp. (BAC).

The investors, who filed their litigation in 2008, are accusing Merrill of misleading them in the offering documents for certificate valued at $16.5 billion and of falsely claiming that the underlying mortgages were in compliance with underwriting guidelines. Plaintiffs include the Los Angeles County Employees Retirement Association, the Mississippi Public Employees’ Retirement System, the Wyoming state treasurer, the Connecticut Carpenters Annuity Fund, and the Connecticut Carpenters Pension Fund. The class action certification lets the investors put their claims together into one lawsuit rather than having to individually push their cases through.

Meantime, Bloomberg.com is reporting that in a separate securities fraud lawsuit, also against Bank of America, U.S. District Judge William Pauley in Manhattan consolidated three cases accusing the investment bank of hiding the risks involved in mortgage-backed securities and of not using appropriate controls in processing foreclosures. The lead plaintiff in this case is Pennsylvania Public School Employees’ Retirement System.

Securities Class Actions
“The average net recovery for victims in securities class action claims is about 8% of their losses because such claims face many problems,” says Shepherd Smith Edwards and Kantas founder and securities fraud attorney William Shepherd. “For example, only federal securities fraud claims can be made in such cases, which are often difficult to prove. However, investors who “opt out” of the class in a timely manner can file their own individual claims, including under state law claims often easier to prove. Our stockbroker fraud lawyers has represented many investors who have opted-out of securities class actions.”

Shepherd continues, “Unfortunately, many securities class action claims are filed with very short “opt out” dates and some of these cases are later settled on terms that arguably favor the defendants while large payments end up going to the lawyers representing the investor/ victims in the class. Many believe the true losers in such cases are the members of the investor class who suffered the losses. [We have no information at this time to suggest such a result in this matter.] ”

Related Web Resources:
Merrill Must Face Class Action Over Mortgage Securities, Bloomberg, January 20, 2011

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

MBIA Can Sue Morgan Stanley Over Alleged Misrepresentation of MBS Risks, Says US New York Supreme Court, Institutional Investor Securities Blog, June 14, 2011

Dow Corning Corp.’s $165M Securities Fraud Lawsuit Against Merrill Lynch & Co. Can Proceed, Says District Court Judge, Stockbroker Fraud Blog, April 7, 2011

Bill Funding SEC at $1.185B for Fiscal Year 2012 Approved by House Committee

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

The House Appropriations Committee has voted to approve an appropriations bill to bill fund the Securities and Exchange Commission for fiscal year 2012 at $1.185 billion. The appropriations level is equivalent to what the SEC was given for FY 2011. However, it is $222 million less than what the White House requested for the next fiscal year. The bill also would bar the funding of the SEC’s “reserve fund,” which the committee believes would work as a “slush fund” for the SEC for programs that Congress has not approved.

According to committee chairman Rep. Hal Rogers (R-Ky.), the House Appropriations Committee has taken steps to funding for programs that are “ineffective and unproven” and stop taxpayer money from going toward waste and redundancy. The committee, however, also reports that it continues to be troubled by the way the SEC handles its funds and is “reticent” to give the commission more funding until it deals with the efficiencies noted in the Boston Consulting Group’s (BCG) report, which recommends important structural and operational improvements at the Commission. It remains worried about the SEC’s ability to successfully handle Ponzi scams and has concerns that a proposed rulemaking to register municipal advisors may be too broad.

Says Shepherd Smith Edwards & Kantas LTD LLP Founder and Securities Fraud Attorney William Shepherd, “At one time, the SEC was one of the few agencies that actually produced revenues for our government (along with the IRS and the Interior Department, which leases federal minerals, etc.). It seems to me that this agency could be self-funding again if it simply imposed heavy fines for actions such as short-selling rule violations. An interesting statement by the committee is ‘we have cut funding for ineffective and unproven programs.’ Judging by the SEC’s recent performances, why would this not include virtually all the Commission’s programs”?

Appropriations Committee Approves Fiscal Year 2012 Financial Services Appropriations Bill, US House of Representatives Committee on Appropriations, June 23, 2011

More Blog Posts:
Impartiality of SEC Report by Boston Consulting Group Questioned by Key House Republicans, Institutional Investors Securities Blog, March 30, 2011
SEC Needs to Keep a Closer Eye on FINRA, Says Report, Stockbroker Fraud Blog, March 15, 2011
MSRB Seeks Public Comment on New Fiduciary Duty Rule for Municipal Advisors, Institutional Investors Securities Blog, February 21, 2011 Continue Reading ›

“Poohster” Consultant Found Guilty of Insider Trading

Published on: June 23, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Winifred Jiau, a Fremont, California consultant, has been convicted of insider trading and conspiracy. The network consultant was accused of selling technology company secrets to hedge fund traders for hundreds of thousands of dollars. The trial against Jiau was the first one involving an expert network firm. Primary Global Research in Mountain View employed her.

Expert networks reportedly connect hedge fund mangers and “consultants,” who are usually insiders at publicly traded companies, for a price. At least seven people linked to PGR have been charged with insider trading crimes.

According to Manhattan US Attorney Preet Bharara, Winnie Jiau exploited friends at public companies so she could get and then sell insider information. Noah Freeman, the government’s central witness and an ex- SAC Capital Advisors hedge fund portfolio manager who has pleaded guilty to his involvement, testified that she gave him illegal stock tips. He says that not only did he and his co-conspirators pay her $120,000 annually, but also she expected them to give her presents, which included iPhones, gift certificates, and lobsters. Those who paid her off received reaped substantial rewards. One hedge fund manager says that the tips he received were usually more “accurate” and “detailed” than any source and that the insider information allowed him to make $5 million to $10 million.

Some of Jiau’s hedge fund clients reportedly called her “the Poohster” after Winnie the Pooh, the fictitious bear that is always looking for a honey pot. Also, she reportedly used the code word “sugar” in emails and instant messages to refer to her payoffs. She called her tipsters “cooks” and her tips “recipes.”

Related Web Resources:
Expert Network Consultant is Convicted in Insider Trading Case, NY Times, June 20, 2011
Bay Area inside trader, Winifred Jiau, convicted, SF Gate, June 21, 2011

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Day Trader Pleads Guilty to Securities Fraud Charges Related to Insider Trading Scam, Stockbroker Fraud Blog, May 25, 2011
Motion to Dismiss SEC Lawsuit Accusing Dallas Billionaire Brothers of $500,000 Securities Fraud Denied, Stockbroker Fraud Blog, April 1, 2011
Guilty Plea for Financial Adviser Who Used UBS Tips in $1M Healthcare Insider Trading Scheme, Stockbroker fraud Blog, January 28, 2011 Continue Reading ›

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

Published on: June 23, 2011 | by Shepherd Smith Edwards & Kantas, LLP

This week, the National Credit Union Administration Board filed two securities fraud lawsuits accusing a number of financial institutions of misrepresenting the risks involved in the mortgage-securities that they sold to investors. The federal credit union is seeking a combined $800 million.

JP Morgan Securities LLC, Novastar Mortgage Funding Corp, and RBS Securities Inc. are just a few of the defendants, who are accused of committing securities fraud against five wholesale credit unions. Both mortgage-backed securities lawsuits claim that large investment banks sold securities to institutional investors that held subprime loans as Triple-A rated investments. The financial firms allegedly omitted material facts, including that the securities were larded with loans issued to borrowers at high risk of default. The defendants are accused of getting the wholesale credit unions to purchase over $3 billion in mortgage-backed securities that, according to The Wall Street Journal, were “destined to perform poorly.” Subsequently, the credit unions became 5 of the over 40 in the US that have failed since 2009. It has since been up to the approximately 7,000 remaining credit unions to take on some of the loans, while charging higher interest rates to stay in operation. Meantime, the failures of the credit unions have forced NCUA to take on about $50 billion in battered bonds that are currently valued at a fraction of their original value.

When a borrower defaults on a loan payment, the value of the mortgage-backed security suffers. The NCUA’s complaint says that as a result, the credit ratings assigned too many mortgage-backed securities that the credit union purchased collapsed in short order. The NCUA plans to file more securities fraud complaints. Goldman Sachs will likely be among the new defendants.

Feds Sue Bankers Over Fall in Bonds, The Wall Street Journal, June 21, 2011

National Credit Union Administration Board sues big banks for $800M, Biz Journals, June 20, 2011

National Credit Union Administration

More Blog Posts:
MBIA Can Sue Morgan Stanley Over Alleged Misrepresentation of MBS Risks, Says US New York Supreme Court, Institutional Investor Securities Blog, June 14, 2011

“Skin in the Game” Mortgage Rule Announced by Federal Regulators, Institutional Investor Securities Blog, April 16, 2011

Ambac Financial Group, Insurers, and Bank Underwriters to Pay $33M to Settle Securities Lawsuits Alleging Concealed Risks Related to its Bond-Insurance Business, Stockbroker Fraud Blog, May 18, 2011

Texas Minister Pleads Guilty to Involvement in $7.2M “White Hat Guys” Securities Fraud that Bilked Thousands of Petro America Corporation Investors in the US and Canada

Published on: June 21, 2011 | by Shepherd Smith Edwards & Kantas, LLP

According to the US Attorney for the Western District of Missouri Beth Phillips,two ministers, a Waco, Texas minister and the other from Kansas City, Kansas, have pleaded guilty to participating in a $7.2M security fraud scheme that caused thousands of investors in Canada and the US to sustain losses. The investors had purchased shares in Petro America Corporation, which was reputed to have $284 billion in assets, including gold mines.

The two men are Texas minister Joseph Harrell and Kansas Minister Edward D. Halliburton. They pleaded guilty to conspiracy to commit securities fraud and wire fraud. They also admitted that they and others conspired together to obtain money through the bogus sale of the stock and the issuing of misrepresentations and omissions. Both men made almost $400,000 from the stock sales, selling millions of shares despite knowing that both Kansas and Missouri had put out cease and desist orders forbidding the sale of unregistered Petro stock.

Harrell, who acted as Petro America’s CFO, was affiliated with Ministers Alliance, of which Halliburton was President. The alliance was comprised of about 15 ministers who promoted and supported Petro American, sold shares to congregants, and called themselves the “White Hat Guys.” They even conducted weekly in-person meetings at a Denny’s and took part in regular calls with hundreds of investors in many US states.

Harrell, who sold stock to at least 90 investors reportedly laced many of his sales pitches with religious wording and claimed that Petro was a blessing from God. He has admitted to knowing that the company was fraudulent. He acknowledges giving investors information that was not complete and also misleading. Harrell said he agreed to sell the stock because he wanted to make a profit. According to the Justice Department, even as he was bilking investors and renting cars at $423/week, he was availing of food stamp benefits and Social Security disability.

Related Web Resources:
Texas minister’s scam had him living the high life — while collecting food stamps, June 17, 2011
Kansas City, Kansas and Texas Ministers Plead Guilty to Securities Fraud Conspiracy, Infozine, June 15, 2011

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

More Blog Posts:
Mortgage-Backed Securities Lawsuit Against Bank of America’s Merrill Lynch Now a Class Action Case, Stockbroker Fraud Blog, June 25, 2011
China-Based Hackers Broke into Morgan Stanley Network, Reports Bloomberg, Stockbroker Fraud Blog, February 28, 2011
Dismissal of Lone Star’s $60 Mortgage-Backed Securities Texas Fraud Action Against Barclays is Affirmed by Federal Appeals Court, Stockbroker Fraud Blog, January 17, 2010 Continue Reading ›

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

More Blog Posts:
MBIA Can Sue Morgan Stanley Over Alleged Misrepresentation of MBS Risks, Says US New York Supreme Court, Institutional Investor Securities Blog, June 14, 2011

Ex-Morgan Stanley Trader to Settle SEC Unauthorized Swaps Trading Claims for $150,000, Stockbroker Fraud Blog, June 13, 2011

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

More Blog Posts:
Washington Mutual Bank Bondholders’ Securities Fraud Lawsuit Against J.P. Morgan Chase & Co. is Revived by Appeals Court, Institutional Investor Securities Blog, June 29, 2011

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

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.