Investor Lawyers Blog

FINRA Panel Orders Wedbush Securities to Pay $233,000 in Securities Fraud Damages

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

A Financial Industry Regulatory Authority (FINRA) arbitration panel says Wedbush Securities Incorporated must pay Karen E. Ray $233,000 in damages. Ray had accused the brokerage firm of numerous causes of action, including negligence, purposely negligent misrepresentations, and violating FINRA Rules of Fair Practices.

Rays case isn’t the first one against the broker-dealer. FINRA’s broker report on the financial firm noted that Wedbush has been at the center of a number of customer complaints and over 40 regulatory inquiries brought by the Securities and Exchange Commission, FINRA (previously NASD), the NYSE Division of Enforcement, as well as regulatory bodies in Colorado, Washington, New Jersey, Georgia, Idaho, and Oregon.

Among the allegations are those involving supervisory failures and market timing. The broker report also noted that Wedbush had received over 40 securities arbitration claims by customers alleging unsuitability, negligence, excessive margin, churning, misrepresentation, and/or breach of fiduciary duty. Their cases involved different kinds of securities, such as mutual funds, bonds, stocks, municipal securities, annuities, and options.

Prison Term for Broker Accused of Investment Fraud Affirmed by 7th Circuit Even Though Sentence Exceeds Guidelines

Published on: March 26, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Court of Appeals for the Seventh Circuit has affirmed broker Scott Schlueter’s 48-month prison sentence even though it exceeds sentencing guidelines. Schlueter is accused of conducting an investment scam that resulted in over $300,000 in financial losses for investors, who also happened to be friends of his.

Schlueter has admitted that rather than placing investors’ money in no-risk investments, he kept the funds while paying out interest from time to time. He has pleaded guilty to securities fraud, wire fraud, and mail fraud.

Although sentencing guidelines call for 33 to 41 months behind bars, the district court judge sentenced Schlueter to 48 months. The judge contends that the serious impact of the rogue broker’s actions was not accounted for in the sentencing guideline range and that an above-range sentence was “more than adequate” considering that Schlueter not just bilked investors of money they needed during “critical stages of their lives,” but he also took advantage of his friendships with investors to defraud them.

For example, one 75-year-old man ended up having to go back to work. Another investor, a widow, had to get a second job after she lost her insurance money.

Schlueter, who argued that he should only sentenced for two year because he had a tough childhood and suffered from alcoholism, contested the above-range sentenced. The appeals court, however, turned down his request down and affirmed the four-year sentence.

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
Combatting Elder Financial Fraud: SEC, NASAA, & FINRA Update Their Best Practices to Protect Senior Investor, Stockbroker Fraud Blog, August 29, 2010 Continue Reading ›

FINRA Wants Amerivet Securities Inc.’s Lawsuit Seeking to Inspect the SRO’s Records Dismissed

Published on: March 26, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority wants the District of Columbia Court of Appeals to reverse the D.C. Superior Court’s decision to not dismiss Amerivet Securities Inc.’s lawsuit against the SRO. The broker-dealer wants to inspect FINRA’s records and books.

Amerivet Securities filed its complaint in August 2009 under the Delaware General Corporation Law’s Section 220, which lets a shareholder examine a company’s records and books for “any proper purpose.” The broker-dealer says it needs to inspect FINRA’s books and documents in order to expose the corporate wrongdoing related to the SRO’s 2008 investment losses and and allegedly inflated executive pay practices.

When our securities fraud attorneys covered this case more than a year ago, we noted that Amerivet had accused FINRA of failing to supervise and regulate a number of its larger member firms, including Lehman Brothers, Merrill Lynch, Bernard L. Madoff Investment Securities Inc., Bear Stearns and Co, and Stanford Financial Group. The broker-dealer also claimed that FINRA recklessly pursued high-risk investment strategies that were not appropriate for preserving capital. (Read our previous Stockbroker Fraud Blog post to find out more.) Last month, Judge John Mott ruled in favor of Amerivet and noted that pursuant to Section 220, the broker-dealer had asserted a proper purpose for wanting to make its inspection.

Reductions to SEC’s Budget Will Cause Staff Furloughs, Says Schapiro

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

Securities and Exchange Commission Chairman Schapiro says reducing the agency’s budget to where it was at in 2008 would result in “significant’ staff furloughs. Other likely consequences would be the curtailment of crucial travel, including visits to registered entities, the cessation of technology infrastructure initiatives, and the curtailing of the SEC’s Dodd-Frank enforcement capabilities. House Republicans are the ones pushing for the budget reductions. Schapiro made her case earlier this month while testifying before the Senate Banking Committee’s Securities subcommittee. Our securities fraud law firm will continue to monitor the developments regarding this matter.

Schapiro says that the continuing resolution, which would find the agency at fiscal year 2010 levels, already makes it tough to close deals with top-rank industry experts she has recruited. She also says any steep cuts would impede the SEC’s ability to oversee broker-dealers, mutual funds, investment advisers, and other participants in the retail investing market in “anything but the most cursory way.” Schapiro also expressed concern that credit rating agencies would be able to evade serious examination if the SEC’s budget was tightened.

Sen. Michael Crapo (R-Idaho.), a ranking subcommittee member, noted that while underfunding the SEC can make it hard for the agency it to do its job “aggressively” and “effectively,” he believes that in the wake of the financial crisis, it is now more than ever necessary for all levels of government to perform with greater efficiency. Crapo is calling for an “agency-wide examination” of where the SEC’s resources are going and an assessment of whether they can be “better utilized.” For example, is there technology that can compensate for a reduced staff? What about sharing technology costs over Dodd-Frank oversight needs with the Commodity Futures Trading Commission?

Schapiro also said that the SEC has been effectively implementing a 60-day comment period for most Dodd-Frank rulemaking, rather than just 30 days, to allow time for thoughtful feedback. Current SEC rules are also being examined to determine whether any of them are no longer applicable.

Related Web Resources:
Cuts will stifle, SEC chief warns, The Boston Globe, March 11, 2011
Schapiro Says SEC Will Have to Furlough Staff If House Republican Cuts Are Enacted, BNA Securities Daily, March 11, 2011 Continue Reading ›

FBI Arrests Texas Leader of Pump-and-Dump Scheme

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

FBI agents have arrested Christopher Rad, a Texas man who is charged with one count of conspiracy to commit securities fraud and transmit email messages. Rad, 42, is the alleged ringleader of an international securities fraud group accused of working with botnet operators, hackers, and email spam in a pump-and-dump scam.

Between November 2007 and February 2009, Rad allegedly acted as the middleman between computer experts, who know how to inflate a stock’s value, and stock promoters. The FBI says that he agreed to work with others to trade manipulated stock between themselves to make it appear as if the stocks were active. The hackers that he worked with would break into third-party brokerage accounts, liquidate the stocks, and use the balance to buy shares of the manipulated stock. They also allegedly distributed viruses so that computers around the world became infected. This created a “botnet,” a virtual army of computers that would then send out spam to promote the manipulated stocks. The pump-and-dump scheme let the fraudsters obtain control of “penny stocks” that weren’t traded on major exchanges.

If convicted, Rad end up behind bars for five years. He faces a $250,000 fine.

Juno Mother Earth Asset Management LLC and Its Founders Face SEC Securities Fraud Lawsuit Over Alleged $1.8M Looting of Hedge Fund Assets

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

The US Securities and Exchange Commission has filed a securities fraud complaint accusing Juno Mother Earth Asset Management LLC and its founders Arturo Rodriguez and Eugenio Verzilli of looting over $1.8 million in assets from a hedge fund.

The two hedge fund managers allegedly used the assets to cover Juno’s operating expenses, including rent, payroll, entertainment, and travel. They also are accused of submitting false SEC filings, including telling the SEC that it managed $40 million more than what it in fact did.

The SEC says that Juno’s partners falsely claimed that they had placed $3 million of their own capital in a client fund, when in fact, they never used their own money. In addition to selling securities in client brokerage and commodity accounts, Juno allegedly directed 41 separate transfers of cash to Juno’s bank account and made false claims that they were expense reimbursements for costs incurred on the client fund’s behalf. Rodriguez and Verzilli then issued false promissory notes to cover up the fraud and make it seem as if the fund had invested money in Juno.

The SEC further contends that the three defendants marketed investments in the Juno fund but did not reveal that the hedge fund advisor was having financial problems. When offering and selling the securities, Juno would misrepresent and inflate its assets, even claiming at one point that it was managing up to $200 million.

The government is trying to crack down on hedge fund managers who make it appear as if they’ve invested more personal money than what they’ve actually put in. The agency is seeking disgorgement plus prejudgment interests, permanent injunctions, and civil monetary penalties.

Related Web Resources:
SEC Charges Two Hedge-Fund Managers, The Wall Street Journal, March 16, 2011

Read the SEC Complaint (PDF)

More Blog Posts:

3 Hedge Funds Raided by FBI in Insider Trading Case, Stockbroker Fraud Blog, November 3, 2010

$277 Million Verdict Against Apollo Group for Alleged Misstatements to Investors Upheld by US Supreme Court

Published on: March 22, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The US Supreme Court is upholding a $277 million securities fraud verdict against Apollo Group and two ex-Apollo executives over claims that they misled investors about a Department of Education review report dealing with student recruitment policies. Apollo is the University of Phoenix’s parent company. By issuing its order to uphold the U.S. Court of Appeals for the Ninth Circuit’s decision, which reverses the district court’s ruling to throw out the verdict, the justices denied the defendants’ petition for certiorari. The plaintiffs of this securities case are a class of investors that bought Apollo Group, Inc. common stock.

In 2004, the Education Department gave Apollo a preliminary report noting that the University of Phoenix had violated department regulations. Although the market did not react significantly to the news, Apollo’s stock dropped dramatically after two analyst reports downgraded the stock. Policemen’s Annuity and Benefit Fund of Chicago later submitted a securities class action case claiming that because misleading statements were made during the review, investors ended up sustaining losses when the analyst reports revealed the truth. A jury ruled in favor of the plaintiffs.

The verdict provides damages of $5.55/share for stock bought during the class period. Interest, which has been accruing since 2004, will be included, and may up the amount owed to plaintiffs to over $280 million.

Our securities fraud attorneys are here to fight for our institutional investor clients’ financial recovery. Over the years, we have successfully helped thousands of investors recoup their losses.

Apollo Group, Inc. v. Policemen’s Annuity and Benefit Fund of Chicago, SCOTUS Blog, March 7, 2011

Related Web Resources:

Class Action Securities Fraud Lawsuit Accuses SEC of Gross Negligence Related to Bernard Madoff Ponzi Scam, Institutional Investor Securities Blog, November 23, 2010

Court Rejects Defendants’ Challenge to Poptech LP’s Lead Plaintiff Status in Class Securities Fraud Lawsuit, Institutional Investor Securities Blog, November 10, 2010

FINRA Chief Ketchum Says Securities Regulators Worried Whether Investors Betting on High-Yield Corporate Bonds Really Know What They Are Getting Into

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

At a Financial Industry Regulatory Authority fixed income conference earlier this month, FINRA CEO and Chairman Rick Ketchum says securities regulators are questioning whether investors looking at risky investment, including high-yield corporate bonds, fully understand what they are getting into when they delve into the high-yield market. Last year, approximately $200 billion in high-yield debt were sold-a significant increase from the $49 billion that were sold in 2008. Also, during the first six weeks of 2010, about $6.7 billion in junk bond mutual funds were sold.

However, with all this activity in the past year, Ketchum says regulators are asking if registrants are fully familiar with the risks and complexities of the products they are selling and whether clients’ understand the risks involved. For example, he asked, “In a lower interest rate environment, are investors chasing yield, or being led to chase yield?”

As a result of such concerns, FINRA, for its compliance programs, is focusing on the areas of commodity-based exchange-traded funds, municipal securities, disclosure practices, and investor suitability. Ketchum says to expect several formal actions that will tackle “deficient procedures for disclosing material information” and other actions related to “failure to deliver official statements during the primary offering disclosure period” and insufficient “time-of-trade disclosures of material information.”

Ketchum also says that in addition to taking a closer look at municipal bond underwriters to ensure the fairness of new-issue pricing practices and fees, regulators will be checking for any inappropriate efforts by ratings agency officials to favorably affect how municipal securities issues are rated.

Our securities fraud lawyers represent clients who were inappropriately advised about where to put their funds and as a result sustained significant investment losses.

Related Web Resources:
FINRA

FINRA looks into muni-bond practices, Chicago Breaking Business News/Reuters, March 7, 2011 Continue Reading ›

Dallas-Based Southwest Securities Settles for $500,000 FINRA Charges It Improperly Used Paid Consultants

Published on: March 17, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Southwest Securities Inc., a Dallas-based financial firm, has consented to a $500,000 fine imposed by Financial Industry Regulatory Authority. The SRO claims that the broker-dealer paid consultants to solicit municipal securities business-a violation Municipal Securities Rulemaking Board Rule G-38-and did not comply with a number of the board’s other requirements. FINRA says that the Texas broker-dealer’s alleged misconduct threatened the municipal securities market’s integrity.

Under Rule G-38, municipal securities dealers are not allowed to pay persons not affiliated with the company for the purposes of soliciting business for it. Southwest Securities, however, allegedly worked with these consultants to obtain 24 municipal securities underwritings and roles as financial adviser to Texas municipalities. The consultants were paid over $200,000 and promised a percent of earnings from any municipal securities business solicited. The broker-dealer also allegedly issued $26,000 in one-time payments to three individuals for their involvement in obtaining this type of business for the firm.

Other violations, allegedly included:

• Failing to properly submit MSRB forms.
• Inaccurate reporting to over 300 municipal securities transactions.
• Inadequate supervisory systems and procedure, which should have been revised to meet an MSRB Rule G-38 amendment that doesn’t allow unaffiliated individuals to receive payment soliciting municipal securities business.
• Engaging in prohibited municipal securities business-a violation of MSRB Rule G-37
By settling, the Southwest Securities is not denying or admitting the Texas securities charges.

Related Web Resources:
Dallas broker pays $500,000 to settle bond query, Dallas News, March 7, 2011
FFINRA Fines Southwest Securities $500,000 for Paying Former Texas Municipal Issuer Officials and Others to Solicit Municipal Securities Business on its Behalf, FINRA, March 7, 2011 Continue Reading ›

Michael Kenwood Capital Management, LLC Principal Pleads Guilty to Securities Fraud Involving Ponzi Scam

Published on: March 17, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Last month, our stockbroker fraud lawyers reported on a Securities and Exchange Commission order to freeze the assets of Michael Kenwood Capital Management, LLC and its principal Francisco Illarramendi for their alleged misappropriation of $53 million in investor funds. This month, Illarramendi pleaded guilty to securities fraud, wire fraud, conspiracy to obstruct justice, and investment adviser fraud.

Per the US Department of Justice’s release, a hedge fund that Illarramendi was advising sustained losses in the millions. He had been tasked with investing the money. However, instead of telling clients about their failed investments, the DOJ says that Illarramendi decided to cover up this information by taking part in a securities fraud scam. The hedge funds and other entities that he advised ended up with “outstanding liabilities” far beyond their assets’ values. U.S. Attorney David B. Fein says this securities case this is the largest white-collar prosecution that the office has ever pursued.

Two other men have been detained and criminally charged over their alleged involvement in the hedge fund scam and of aiding Illaramendi. Juan Carlos Horna Napolitano and Juan Carlos Guillen Zerpa are charged with investment adviser fraud and conspiracy to obstruct justice.

Meantime, the SEC says it has amended its civil complaint against Illaramendi and MK Capital Management, LLC. The agency is now alleging that the “breadth” of the securities fraud may be in the “hundreds of millions.”

Our institutional investment fraud law firm represents clients in arbitration and litigation with claims against investment advisers, broker-dealers, brokers, and others in the financial industry. We are dedicated to recovering investor losses.

Related Web Resources:

Order to Freeze Assets in $53M Fund Fraud Allegedly Involving Michael Kenwood Asset Management LLC Obtained by SEC, Stockbroker Fraud Blog, February 21, 2011

SEC adds new charges Connecticut-based hedge fund manager in Ponzi scheme, SEC, March 7, 2011