Investor Lawyers Blog

FINRA Orders Charles Schwab to Pay $18M to Fair Fund for YieldPlus Investors

Published on: March 12, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulation Authority wants Charles Schwab & Company, Inc. to pay $18 million to a Fair Fund set up by the SEC to payback investors of the Schwab YieldPlus Funds. FINRA found that even after changes to the fund’s portfolio resulted in it being affected by the mortgage-backed securities market crisis, Schwab did not change its marketing of the fund and instead provided inaccurate material.

The FINRA order was announced just as the Securities and Exchange Commission revealed that $119 million settlement was reached with Charles Schwab & Co., Inc. and Charles Schwab Investment Management for their alleged misleading of Schwab YieldPlus Fund investors and failure prevent nonpublic information from being misused. According to the SEC, investors were not adequately told about the risks associated with the Schwab fund. Instead, they were provide with allegedly misleading statements, such as those claiming that investing in the ultra-short bond funds was only slightly riskier than investing in a money market fund. Read our earlier stockbroker fraud blog post for more information.

Schwab has said that it is still facing about 20 individual securities arbitration claims asking for $3 million in damages related to the YieldPlus Fund. Last year, it resolved federal and California state law claims-for $200 million and $35 million, respectively, over the fund.

In other recent Charles Schwab Corp. news, FINRA has announced that it isn’t going to recommend disciplinary action over the firm’s auction-rate securities sales to clients. Charles Schwab had received two Wells notices in 2009 indicating that regulators were recommending enforcement actions.

Related Web Resources:
UPDATE: Finra Won’t Discipline Schwab For Auction-Rate Securities-Filing, The Wall Street Journal, February 25, 2011
SEC Reaches $119 Million Settlement with Charles Schwab, The Blog of Legal Times, January 11, 2011
FINRA Orders Schwab to Pay $18 Million to Investors for Improper Marketing of YieldPlus Bond Fund, FINRA, January 11, 2011

More Blog Posts:
Schwab Settles for $119M SEC Charges It Allegedly Misled YieldPlus Fund Investors, Stockbroker Fraud Blog, January 17, 2011
Class Members of Charles Schwab Corporation Securities Litigation Can Still Opt Out to File Individual Securities Claim, Stockbroker Fraud Blog, December 6, 2010
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 Continue Reading ›

Wall Street Targeting Older Investors With Structured Product Sales, Reports AARP

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

Unfortunately, there are elderly investors who end up suffering financial losses because a broker placed their money in investments that are unsuitable for their needs. Many of these investors don’t realize that they may have grounds for a securities fraud claim.

The AARP says that for many elderly Americans, the prospect of running out of money is scarier to them than the thought of dying-especially for those who are too old or sick to go back to work and rebuild their nest eggs. Although broker-dealers and investment advisers know how important it is for older investors to make sure that their money is placed in investments that are low risk, this isn’t always what happens, such as with structured products.

While highly profitable for sellers, structured products aren’t always a great benefit to buyers who could stand to lose everything on an illiquid investment that has limited potential gain. Already, investors have lost about $164 billion in such risky investment. Yet structured product sales continue to grow.

Countrywide Finance. Corp, UBS Securities LLC, and JPMorgan Securities LLC Settle Mortgage-Backed Securities Lawsuit Filed by New Mexico Institutional Investors for $162M

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

New Mexico’s State Investment Council and Public Employees Retirement Association have settled their securities lawsuit with Countrywide Finance Corp. and two underwriters for $162 million. These details, from the confidential settlement agreement, were was obtained by the Albuquerque Journal through an Inspection of Public Records request.

The Countrywide investments were made up of mortgage-backed securities that the company had written. JPMorgan Securities and UBS Securities LLC were the two underwriters.

The securities were obtained through securities lending, which involved the SIC lending one batch of securities in return for another batch that paid a slightly higher interest rate. Although securities lending is generally considered safe for institutional investors like the SIC and PERA, mortgage-backed securities played a key role in the recent financial collapse. Even now, since the market has rebounded, the Countrywide securities are still worth less than what the state got.

In their institutional investment fraud lawsuit, the SIC and PERA accuse the defendants of disregarding their own underwriting guidelines and dumping the securities on investors, including the state of New Mexico, “to generate high volume loan business regardless of credit risk.” The New Mexico agencies opted to file their complaint in state court instead of taking part in a class-action lawsuit with other US states.

Of the $162 million, $149 million goes to SIC, PERA gets $6 million, the Educational Retirement Board receives $100,000, and the lawyers hired by the state are to receive $7 million. Bank of America bought out Countrywide in 2008.

Related Web Resources:

Countrywide sued by 3 New Mexico funds, Pensions & Investments, Pension and Investments, August 20, 2008

New Mexico State Investment Council

New Mexico Educational Retirement Board

More Blog Posts:
Bank of America and Countrywide Financial Sued by Allstate over $700M in Bad Mortgaged-Backed Securities, Stockbroker Fraud Blog, December 29, 2010

Countrywide Financial, Merrill Lynch, and Citigroup Executives Defend Their Hefty Compensations Following Subprime Mortgage Crisis, Stockbroker Fraud Blog, March 12, 2008

Texas Congressmen Seek Answers from SEC Chairwoman Regarding Conflict of Interest Related to Madoff Debacle

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

Texas Congressman Jeb Hensarling is one of four Republican members of the House Financial Services Committee wanting to know more about Securities and Exchange Commission Chairwoman Mary Schapiro’s role in managing the conflict of interest presented by appointing David M. Becker as the SEC’s general counsel. Becker, who is no longer in this post, is with someone with a financial interest in a Bernard Madoff investment account. As a senior policy director for the SEC involved in dealing with Madoff Ponzi scam, he played a role determining how victims would be compensated.

Becker’s ties with Madoff didn’t come to light until trustee Irving H. Picard sued him and his two brothers to get back more than $1million of the $2 million they had inherited from their late mother’s Madoff investment. The former SEC general counsel claims that he told Schapiro and the chief ethics officer of his Madoff-related financial interest. Now, however, SEC inspector general H. David Kotz says he wants to probe possible conflicts of interest related to Becker’s role with the SEC as someone who stood to benefit from decisions involving Madoff Ponzi scam victims. According to the New York Times, two unnamed sources say while the SEC agreed to return to investors only the funds they had placed in their Madoff accounts, Becker had pushed for allowing the victims to keep some of their investment gains.

Lawmakers say they want details of Schapiro’s talks with Becker about his Madoff ties. They also want to know whether she followed all the steps delineated in government ethics rules. Also getting into the mix is Texas Representative and Republican Randy Neugebauer, who is quoted in the New York Times as stating that he believes the SEC should be held to the same high standard of “transparency and disclosure” as it holds other companies.

Securities Lawsuit Accusing Merrill Lynch of Facilitating Sale of Mortgage-Backed Securities to King County, Washington Can Proceed, Says Court

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

The U.S. District Court for the Western District of Washington says that King County, Washington has pleaded sufficient facts to continue with its securities fraud lawsuit accusing Merrill Lynch, Merrill Lynch, Pierce, Fenner and Smith Inc. and Merrill Lynch Money Markets Inc. of facilitating its purchase of allegedly toxic mortgage-backed securities and violating the Washington State Securities Act. The defendants had sought to dismiss the securities fraud complaint.

Per the plaintiff, the defendants sold more than $100 million of the toxic assets to King County through the entities Mansail II and Victoria Finance in 2007. At the time, the county had wanted to make conservative investments. Not long after, Mansail failed and Victoria was downgraded to “junk” and placed on negative credit watch.

The county, claiming $60 million in losses, contends that the defendants played the role of seller or dealer of the commercial paper but did not fulfill its responsibility of ensuring there were sufficient procedures in place so that unwise investments were avoided and adequate warning of investment risks were provided. The county also contends that Merrill Lynch and its subsidiaries knew that the securities it was selling were toxic and had even made efforts to get rid of its MBS.

SROs Immune from Broker-Dealer’s Lawsuit Over Bylaw Changes Related to Creation of FINRA, Says Appeals Court

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

Recently, the U.S. Court of Appeals for the Second Circuit dismissed Standard Investment Chartered Inc.’s lawsuit against the Financial Industry Regulatory Authority, New York Stock Exchange Group Inc., and NASD over alleged misstatements in a proxy to obtain member approval for bylaw changes that ultimately resulted in the creation of FINRA. In a per curiam decision, the court held that self-regulatory organizations and their officers are immune from lawsuits over bylaw amendments because these are “inextricable” from the SRO’s regulatory roles.

The plaintiff, broker-dealer and former NASD member Standard Investment Chartered Inc., claims that NASD and certain officials issued material misrepresentations in the proxy statement that solicited approval of bylaw amendments so that the merger between NASD and parts of NYSE Regulation Inc. that became FINRA would take place. The broker-dealer contends that the proxy statement misrepresented that $35,000 was the most that the Internal Revenue Service had authorized NASD to pay members over the union.

Last March, the U.S. District Court for the Southern District of New York dismissed Standard Investment Chartered Inc.’s lawsuit, as well as a similar claim submitted by NASD member Benchmark Financial Services Inc. The court said that the union between the SROs was “entitled to absolute immunity” because it was part of their delegated regulatory functions. Standard Investment Chartered appealed the ruling.

Now, the Second Circuit has affirmed the district court’s ruling. The court also noted that NASD can’t change its bylaws without Securities and Exchange Commission approval.

Other defendants in the lawsuit include Securities and Exchange Commission chairman Mary Schapiro, who was NASD’s CEO when the regulatory body merged with NYSE, Pershing LLC Chairman Richard Brueckner, and FINRA senior vice president Howard Schloss.

Related Web Resources:
Appeals Court Upholds Lower Court Ruling on Finra Damage Suits, Bloomberg, February 23, 2011
Court Finds SROs Immune From Lawsuit Over Bylaw Changes to Effect FINRA Creation, BNA – Securities Law Daily, February 23, 2011
Continue Reading ›

Ameriprise Financial Inc. to Pay $27M to Settle Securities Fraud Lawsuits of Securities America Clients Bilked in Ponzi Scams

Published on: March 4, 2011 | by Shepherd Smith Edwards & Kantas, LLP

To settle securities fraud complaints by investors that bought private placements in Provident Royalties and Medical Capital through its independent-brokerage unit Securities America, Ameriprise Financial Inc. will pay $27 million. It was just two weeks ago that Securities America agreed to pay $21 million to settle the same class of approximately 2,000 investors who lost about $300 million through Ponzi scams. Unfortunately, private placements, which should be restricted to rich “accredited ” investors, were offered to a wider range of investors that likely did not fully understand the risks involved.

In its annual report, Ameriprise revealed that Securities America clients sustained nearly $400 million in financial losses from the private placements. The financial planning and wealth management firm has about $40 million in reserves. Aside from the class action lawsuits, Securities America and Ameriprise face lawsuits in Massachusetts and a “significant” number of individual securities claims in arbitration.

To avail of the class-action settlements, an investor would have to drop his/her arbitration case. However, as the proposed settlements are greater than Securities America’s “net worth,” claimants may not get all of the money that they are owed. According to Shepherd Smith Edwards and Kantas Founder and Securities Fraud Lawyer William Shepherd, “With the class legal fees and expenses not yet revealed, this is-at best-nine cents on the dollar for the victims. This would actually be a bit better than most securities class action cases, in which the average paid to victims is closer to seven percent of their losses. Our firm represents securities fraud victims one at a time. These are investors who have losses substantial enough to support their own case. While they have to ‘opt-out’ of the class action in order to file their individual claims, gambling 7% of losses to seek a far higher recovery is often a wise decision.”

Related Web Resources:
Ameriprise settles investor suit for $27 million: lawyer, Reuters, March 3, 2011
Lawsuits suck air out of Securities America’s cash cushion, Investment News, March 1, 2011
Texas Securities Fraud: Three FINRA Cases Against Securities America Over Sale of Private Placements Halted, Stockbroker Fraud Blog, February 22, 2011
Securities America Inc. to Pay $1.2M in Compensatory and Punitive Damages Over Allegedly Fraudulent Medical Capital Notes, Stockbroker Fraud Blog, January 6, 2011 Continue Reading ›

Akamai Technologies Inc’s ARS Lawsuit Against Deutsche Bank Can Proceed

Published on: March 4, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the District of Massachusetts says that, under the 1934 Securities Exchange Act and the Massachusetts’ Uniform Securities Act, Akamai Technologies Inc.’s (AKAM) auction-rate securities lawsuit that seeks to hold Deutsche Bank AG liable for $200 million in losses can proceed. The judge ruled that the Internet content delivery firm had properly pleaded a material misrepresentation or omission in violation of Section 10(b) of the ’34 Securities Exchange Act, which is necessary for a control person claim under Section 20(a). The court also held that Akamai clearly pleaded Deutsche Bank’s control over Deutsche Bank Securities Inc., the subsidiary that allegedly advised the company to buy the toxic ARS.

Per the court, DBS was the broker and investment adviser for Akamai Securities Corp. and Akamai Technologies Inc. Akamai told the investment adviser that it wanted to put money in securities that were liquid and safe so it could access the funds when needed. DBS told Akamai that ARS were safe, liquid, and never failed even though the financial firm allegedly knew that they had done so before and, in fact, posed a higher level of risk than what it led Akamai to believe. Even in August 2007, when Deutsche Bank knew that the demand for ARS was going down and the risk of ARS auctions failing was rising, the investment adviser still allegedly did not notify Akamai that the market was changing.

When the ARS market did fall in 2008, Akamai was left with over $200 million in illiquid securities. Its securities fraud lawsuit also claims that even as DBS continued to claim that the securities were liquid and safe, resulting in Akamai increasing its ARS investments, the investment bank was decreasing its own exposure to the market.

Goldman Sachs Reports $3.4 Billion in “Reasonably Possible” Losses from Legal Claims

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

In its latest 10-K filing with the US Securities and Exchange Commission, Goldman Sachs Group Inc. says that its “reasonably possible” losses from legal claims may be as high as $3.4 billion. The investment bank’s admission comes after the SEC told corporate finance chiefs that the should disclose losses “when there is at least a reasonable possibility” they may be incurred regardless of whether the risk is so low that reserves are not required.

Goldman admits that it hasn’t put side a “significant” amount of funds against such possible losses and its estimate doesn’t factor in possible losses for cases that are in their beginning stages. The $3.4 billion figure comes from a calculation of three categories of possible liability. Also factored in were the number of securities sold in cases where purchasers of a deal underwritten by Goldman Sachs are now suing the financial firm and cases involving parties calling for Goldman Sachs to repurchase securities.

Between 2009 and 2010, the financial firm reported a 38% decline in net income from $13.4 billion to $8.35 billion. Trading revenue dropped while non-compensation expenses, which were affected by regulatory proceedings and litigation, went up 14%. It was just last year that the investment bank paid $550 million to settle SEC charges that it misled investors when selling a mortgage-linked investment in 2007. Goldman Sachs is still contending with state and federal securities complaints alleging improper disclosure related to mortgage-related products. As of the end of 2010, estimated plaintiffs’ aggregate cumulative losses in active cases against Goldman Sachs was at approximately $457 million.

Related Web Resources:
Goldman Sachs Puts ‘Possible’ Legal Losses at $3.4 Billion, Bloomberg Businessweek, March 1, 2011

Form 10-K, SEC

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

China-Based Hackers Broke into Morgan Stanley Network, Reports Bloomberg

Published on: February 28, 2011 | by Shepherd Smith Edwards & Kantas, LLP

According to Bloomberg, Morgan’s Stanley‘s network experienced a cyber break-in. The culprits were hackers based in China that broke into Google Inc.’s computers over a year ago. The break-in is documented in e-mails stolen from HBGary Inc, a cyber-security company that works for the investment bank.

Known as the Operation Aurora attacks, the break-ins took place in June 2009 and lasted for about six months. More than 20 companies were hit.

The HBGary emails don’t detail what data might have been stolen from Morgan Stanley or which of its multinational operations were hit. The broker-dealer reportedly considers the details of the cyber attacks confidential. Hacker activist group Anonymous stole the emails.

Morgan Stanley hired HBGary last year because of suspected hacker-linked network breaches that resulted in break-ins into the financial firm’s Internet security system. These attacks were not related to Operation Aurora. Per HBGary emails, the hackers that made those breaches were able to implant software for stealing confidential files and communications.

According to FBI Deputy Assistant Director Steven Chabinsky, hackers have stepped up efforts to obtain information involving mergers and acquisitions. The China-based hacker attacks did not help the growing tensions between China and the United States. Calls were even made for Secretary of State Hillary Clinton to look at Google’s claims about the raids and make her findings available to the public.

Following the cyber attacks, Google stopped censoring search results from Google.cn, its Chinese search engine. Google started shuttering its site following lengthy negotiations with officials in China.

Related Web Resources:
Morgan Stanley Attacked by China-Based Hackers Who Hit Google, Bloomberg, February 28, 2011
Operation Aurora, Techie Buzz, January 15, 2010
HBGary

More Blog Posts:
Morgan Stanley Failed to Disclose Financial Adviser’s Felony Charge to FINRA, Claims Car Accident Victim’s Attorney, Stockbroker Fraud Blog, January 10, 2011
Wall Street Knew 28% of the Loans Behind Mortgage Backed Securities (MBS) Failed to Meet Basic Underwriting Standards, Stockbroker Fraud Blog, January 10, 2011 Continue Reading ›