Investor Lawyers Blog

SEC Approves FINRA’s Proposal to Give Investors an All-Public Arbitration Panel Option

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

The Securities and Exchange Commission has approved the Financial Industry Regulatory Authority’s proposal to give investors the choice of having their securities claims against broker-dealers heard by an arbitration panel that doesn’t include any industry members. FINRA says that its Rule 12403, which lets investors choose between a majority-public panel and all-public panel, will go into effect right away. Arbitration cases that began prior to the SEC’s decision to approve the proposal will be notified of this new rule.

Prior to submitting its proposal to the SEC, FINRA tested the idea as a pilot program for more than two years. FINRA says that while investors regularly chose to have nonpublic arbitrators hear their securities case, it became clear that giving them other options improved their perception that the arbitration process was a fair one.

State securities regulators are praising the SEC’s decision. However, they are calling for even more reform.

Optional All Public Panel Rule 12403(d):
FINRA will send the parties three lists. One list will contain the name of 10 non-public arbitrators. The other list will name 10 chair-qualified public arbitrators. The other list will name 10 public arbitrators. Each party will be able to strike up to four arbitrators from the public and chair-qualified lists. Parties can strike the names of all 10 arbitrators from the non-public arbitrator list.

Majority Public Panel Rule 12403(c):
This panel will include one non-public arbitrator, one public arbitrator, and one chair-qualified public arbitrator. The same three lists as the ones mentioned for the All Public Panel will be sent to the parties. Up to four arbitrators from each list can be struck.

Related Web Resources:
Notice to Parties – New Optional All Public Panel Rules, FINRA

SEC Approves FINRA Proposal to Give Investors Permanent Option of All Public Arbitration Panels, FINRA, February 1, 2011

Related Blog Posts:
FINRA Wants to Make All-Public Arbitration Panel for Investors Permanent, Stockbroker Fraud Blog, October 7, 2010
Number of FINRA Arbitration Claims Rose in 2009 Following Market Crisis, Stockbroker Fraud Blog, January 13, 2010
FINRA Says Number of Stockbroker Fraud Arbitration Claims by Plaintiffs is Rising, Stockbroker Fraud Blog, July 14, 2009 Continue Reading ›

Credit Suisse Broker Previously Convicted for Selling High Risk ARS is Barred from Future Securities Law Violations

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

Credit Suisse Securities (USA) LLC (CS) broker Eric Butler is permanently barred from future violations of securities laws. The U.S. District Court for the Southern District of New York granted the Securities and Exchange Commission’s motion for the permanent injunction late last month.

Butler was convicted of criminal charges related to the unauthorized sale of more than $1 billion in subprime-related auction-rate securities to clients. A jury found him guilty of three counts of securities fraud and he was sentenced to five years in prison. Butler is appealing is sentence and conviction.

The SEC’s securities fraud‘s complaint in 2008 against Butler and co-defendant Credit Suisse broker Julian Tzolov accused the two men of engaging in a bait-and-switch approach that left unsuspecting foreign corporate customers with high-risk ARS, rather than the more conservative financial products they had given the defendants permission to buy. The collapse of the ARS market left clients with $800 million in illiquid products.

According to the court, the SEC made a motion for summary judgment against Butler on the grounds of collateral estoppel related to the criminal case against him. The commission also sought to permanently bar him from future violations. Meantime, Butler opposed the injunctive relief and summary judgment on the grounds that the criminal case did not “necessarily” decide the issues in this case, he was not given the fair and complete opportunity to litigate the criminal charges against him, and the SEC was not entitled to injunctive relief. The district court, however, determined that the criminal case did “actually” decide the issues the SEC wanted to establish by collateral estoppel and that given the circumstances “totality,” it was appropriate to permanently bar Butler from future SEC violations.

Related Web Resources:

Ex-Credit Suisse Broker Butler Gets Five-Year Prison Sentence, Bloomberg, January 23, 2011

Related Web Posts:
Judge Gives Lower Sentence to Former Credit Suisse Broker Convicted of Auction-Rate Securities Fraud, Stockbroker Fraud Blog, January 30, 2010

Will Two Former Credit Suisse Group AG Brokers Convicted of Securities Fraud Get More Lenient Sentences Because of Industry’s “Culture of Corruption?”, Stockbroker Fraud Blog, August 21, 2009

Ex-Credit Suisse Broker Who Pleaded Guilty to Securities Fraud for Role in Auction-Rate Securities Scam Knew in Late 2007 that Clients’ Funds Were in Trouble, Stockbroker Fraud Blog, July 29, 2009

AXA Rosenberg Entities Settle Securities Fraud Charges Over Computer Error Concealment for Over $240M

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

AXA Rosenberg Investment Management LLC (ARIM), AXA Rosenberg Group LLC (ARG), and Barr Rosenberg Research Center LLC (BRRC) have agreed to pay over $240 million to settle administrative securities fraud charges that they hid an important error in the computer code of the quantitative investment model used for managing client assets. The Securities and Exchange Commission says the error resulted in investor losses worth $217 million. As part of the settlement, the three Axa Rosenberg entities will repay the investors who sustained financial losses, as well as a $25 million penalty.

The SEC says that the institutional money manager’s concealment of “material error in its computer code” from investors was a violation of federal securities laws. The commission also claims that the three entities made material misrepresentations, such as failing to disclose the error or its effect and did not properly represent “the model’s ability to control risks.”

Per the charges, the error, which was discovered by ARG and BRRC senior managers in June 2009, disabled a key risk-management component. Instead of fixing the problem right away, senior management told others not to reveal the error, which they did not remedy at the time.

The SEC says that quantitative investment managers have been known to “isolate their complex computer models from the firm’s compliance and risk management function” in an attempt to protect trade secrets.” The SEC also claims that BRRC failed to implement and adopt compliance procedures and policies to make sure the model would work as intended. Although the error was eventually remedied, ARG’s Global CEO was not notified of it until five months after its discovery.

As of last December, Axa Rosenberg Group LLC said that as “the specialist active global equity investment management firm” managed over $31 billion in assets. ARG is the holding company of investment advisers ARIM, which used the investment model to manage client portfolios, and BRRC, which developed the quantitative investment model’s code.

Related Web Resources:
SEC Charges AXA Rosenberg Entities for Concealing Error in Quantitative Investment Model, SEC, February 3, 2011
Read the corrected SEC order (PDF)

More Blogs on SEC Enforcement:
Ex-Portfolio Managers to Pay $700K to Settle SEC Charges that They Defrauded the Tax Free Fund for Utah, Stockbroker Fraud Blog, January 22, 2011
Schwab Settles for $119M SEC Charges It Allegedly Misled YieldPlus Fund Investors, Stockbroker Fraud Blog, January 17, 2011
Broker Settles SEC Charges He Defrauded Elderly Nuns, Stockbroker Fraud Blog, January 13, 2011 Continue Reading ›

CalPERS Files Securities Fraud Lawsuit Against Lehman Brothers

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

The California Public Employees’ Retirement System is suing Lehman Brothers Holdings Inc., its ex-executives, and a number of bond underwriters for fraud and of making materially false statements about mortgage-backed securities losses. CalPERS, a $229 billion public pension fund, owned about $700 million Lehman bonds and 3.9 million shares of Lehman bonds when Lehman filed for bankruptcy in September 2008. Because of the economic crisis, CalPERS funds lost $100 billion in value from September 2008 and March 2009.

In its securities fraud complaint, CalPERS accused Lehman of “dramatically” borrowing to fund its real estate investments from 2004 to 2007—high-risk activity that investors were not told about. Other defendants include ex-Lehman Chief Executive Richard S. Fuld Jr., ex-Lehman Chief Financial Officers Erin Callan and Christopher O’Meara, 9 Lehman directors, and 33 others firms, including Wells Fargo Securities, Citigroup Global Markets Inc., and Mellon Financial Markets. The defendants allegedly failed to disclose not just Lehman’s exposure to Alt-A lending and subprime, but also its mortgage-related assets’ true value.

This securities complaint is CalPERS second action against members of Wall Street that sold mortgage-backed securities. In July 2009, CAlPERS sued Standard & Poor’s, Moody’s Investors Services Inc., and Fitch Inc. The complaint accused the financial rating companies of giving top grades to bonds that ended up sustaining huge financial losses when the subprime mortgage securities market collapsed.

Also, CalPERS has a shareholder lawsuit against Bank of America Corp. (BAC) over its Merrill Lynch acquisition. The pension fund also has a case against BofA’s Countrywide Financial.

Related Web Resources:

CalPERS suit accuses Lehman Bros. of fraud, Los Angeles Times, February 9, 2011

CalPERS

SEC to Examine Muni Bond Market Issues During Hearings in Texas and Other States

Published on: February 9, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is expecting to accelerate its regulatory and enforcement activity over the $2.8 trillion municipal bond market. The SEC will be holding hearings in a number of US states, including Texas, to go over Muni bond market issues.

Among the issues likely to receive attention from the SEC:
• “Conduit” financing, which involves bonds sold by municipal entities for third parties, including private companies and colleges.
• The need for practical, applicable guidance for state and local officials that is more specific than the prohibitions provided under Section 17(a) of the 1933 Securities Act and Section 10(b) of the 1934 Securities Exchange Act.

Although municipal securities issuers are exempt from SEC registration, reporting, and disclosure requirements-per the 1934 Act’s Tower Amendment-they still have to abide by the commission’s antifraud provisions. The SEC has also sent compliance messages to issuers, improved disclosures, and discouraged bid-rigging, pay-to-play and other bad conduct.

Among its recent enforcement efforts, the SEC is investigating bond issuances in Rhode Island. It is also is looking into disclosures over Illinois’ funding of pension plans.

SEC Commissioner Elisse Walter will lead the hearings in Texas, Florida, Illinois, and Alabama this year. Staff will then put together a report that will include recommendations for legislative and regulatory changes and “best practices.”

Related Web Resources:
Second SEC Municipal Market Hearing Continues to Raise Disclosure, Tower Amendment Issues, NCSHA, December 15, 2010
SEC Sets Field Hearings on State of Municipal Securities Markets, SEC, September 7, 2010

QA3 Financial Corp. Notifies Its Brokers It is Closing Its Doors

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

QA3 Financial Corp. has announced that it will be closing down its business. In an email sent to its 400 brokers after the market closed on Friday, QA3 owner and CEO Steve Wild says the decision was made following the securities arbitration award that was issued against the independent brokerage firm last month and the fact that its errors and omissions carrier has yet to provide coverage.

Catlin Specialty Insurance Co. is QA3’s insurer. The broker-dealer sued the insurer last year alleging failure to uphold the insurance contract, which QA3 claims is supposed to provide $7.5 million in coverage for legal claims, expenses, and damages related to private placement. Catlin then sued QA3, contending that there was a $1 million cap on QA3 private-placement claims.

Once a leading seller of high-risk private placements, QA3 has been dealing with dozens of arbitration cases and securities lawsuits from clients that purchased private placements, such as Medical Capital Holdings Inc, DBSI Inc., and Provident Royalties LLC.

Recently, a Financial Industry Regulatory Authority Inc. panel ordered QA3 to pay $1.6 million after losing an arbitration claim filed by an elderly couple. The panel found that the brokerage firm failed to adequately supervise broker James R. Files or provide sufficient training regarding the sale of tenant-in-common exchanges (TIC’s). The plaintiffs, Mary-Ann and Arthur Cargill, are in their 70’s, possess limited financial resources, and don’t have a great deal of investment experience. The FINRA panel also says that the brokerage firm appears to have routinely disregarded sales and marketing approval practices.

Related Web Resources:
B-D down: QA3 to close up shop next week, Investment News, February 7, 2011
Arbitrator awards Wilton couple nearly $1.6 million for investment, American Chronicle, January 19, 2011
Catlin Specialty Insurance Company v. QA3 Financial Corp., Justia Dockets and Filings, November 23, 2010
Private Placements, Stockbroker Fraud Lawyers Continue Reading ›

The 2008 Financial Crisis was Avoidable, Says FCIC

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

According to the Financial Crisis Inquiry Commission, the 2008 financial crisis could have been avoided, but, instead it was caused by Wall Street’s thoughtless risk-taking, corporate mismanagement, and government regulation-related failures. The New York Times says that the FCIC blames the Federal Reserve, two administrations, and other regulators for allowing the excessive packaging and sale of loans, poor mortgage lending, and risky bets on securities backed by loans. The FCIC reached its conclusions after 19 days of interviews and hearings. Over 700 witnesses were involved. The findings can be found in a 576-page book and transcripts and raw material are to be placed online.

However, not all 10 commission members are endorsing the final report. The three Republican members have put together their dissent that concentrates on a narrower set of causes. A fourth Republican panel member, Peter J. Wallison, has his own reason for dissent. The six Democrat members have endorsed the report.

The majority report places some blame on former Fed chair Alan Greenspan and his successor Ben S. Bernanke. While Greenspan was in charge of the central bank when the housing bubble was expanding, Bernanke was instrumental in responding to the financial crisis when it happened. The report describes the Bush Administration’s response as “inconsistent,” such as when it let Lehman Brothers collapse even after bailing out Bear Stearns. The decision by the Clinton Administration to shield over-the-counter derivates from regulation in 2000 is considered a “key turning point” leading to the economic collapse.

Also receiving some of the blame is current Treasury Secretary Timothy F. Geithner, who once served as Federal Reserve Bank of New York head. The report says that the New York Fed failed to detect signs that there were problems at Lehman and Citigroup. Regulators were blamed for not having the “political will” to scrutinize and hold responsible the institutions they were tasked with overseeing. Meantime, the FCIC says that the Securities and Exchange Commission failed to stop risky practices and make banks hold greater capital so that there would be a cushion for possible losses. It also accuses the Office of Thrift Supervision and the Office of the Comptroller of the Currency of stopping states from curtailing abuses.

Related Web Resources:
Financial Crisis Was Avoidable, Inquiry Finds, The New York Times, January 25, 2011

The FCIC Report

FCIC Report Misses Central Issue: Why Was There Demand for Bad Mortgage Loans?, Huffington Post, January 31, 2011

Commodities Industry Fears being held to Regulatory Standards of Securities Industry

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

The Securities Industry and Financial Markets Association, the International Swaps and Derivatives Association, and the Futures Industry Association have told the Commodity Futures Trading Commission that the 1934 Securities Exchange Act’s Rule 10b-5 not be the model for how it polices market manipulation under the Dodd-Frank Wall Street Reform and Consumer Protection Law. In a comment letter, SIFMA, FIA, and ISDA told the CFTC not to impose additional duties of inquiry, disclosure, or diligence during bilateral transactions on sophisticated parties.

The groups were responding to a rule proposal involving the CFTC expanding its authority over manipulative and fraudulent conduct. CFTC says the proposal was patterned on Rule 10b-5 and Section 10(b). They contend that securities law standards, such as Rule 10b-5, are hard to adapt and “largely inapplicable” to the derivatives and future arena because the two market frameworks have key structural differences. They want the CFTC to “adopt an antifraud rule” that takes “into account the nature of material information in these markets and the types of duties that may exist.”

The associations also want the CFTC to give guidance that offers market participants clear principals on how to distinguish between “prohibited manipulative conduct” and “legitimate competitive trading practices.” In addition, they want “extreme recklessness” as the scienter standard and any anti-manipulation rule’s scope clarified in regards to the CFTC’s current anti-manipulation authority. ISDA, FIA, and SIFMA want commercial traders to be allowed to trade using their own, nonpublic data about company-specific assets and liabilities.

Shepherd Smith Edwards and Kantas Founder and Securities Fraud Lawyer William Shepherd has this to say: “Our country has just experienced the worst securities debacle in nearly 90 years, which many experts claim was largely caused by deregulation of the securities industry. Despite the ineffectiveness of watered-down securities regulation, the Commodities Industry fears being held to even this weak standard. First among these fears is that those who market commodities contracts to the public may be held to a similar duty as those selling securities. When smooth-talking phone jockeys call dangling profits and little or no risk they should be held responsible for their actions. In other words ‘there ought to be a law.'”

Commodities Future Trading Association

Financial Markets Association

Securities Industry and Financial Markets Association
Continue Reading ›

Insurer Claims that JP Morgan and Bear Stearns Bilked Clients Of Billions of Dollars with Handling of Mortgage Repurchases

Published on: February 3, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Ambac Assurance Corp., a mortgage insurance company, claims that not only did JP Morgan Chase & Co. resist repurchasing loans from Bear Stears-created bonds, but also, it demanded that a lender buy back the bad mortgages. Ambac made the claim in a proposed amended securities lawsuit against Bear Stear’s EMC Mortgage unit. JP Morgan now owns Bear Stearns.

Ambac filed its securities lawsuit in 2008, claiming that ex-Bear Stearns mortgage executives that currently head mortgage divisions at Bank of America, Goldman Sachs, and Ally Financial defrauded and cheated investors, while hiding their actions from the public. Its complaint lists more than $600 million in claims with $1.2 billion in damages from the bad mortgage securities that it insured against and invested in. The insurer is now adding the claim of fraud to its case.

According to the complaint, on March 11, 2008, Bear Stearns, who had bought loans and packaged them into bonds for investors to buy, sought to have a lender repurchase mortgages in bonds that Syncora Guarantee Inc. had insured because it claimed that they did not meet promised standards of quality. This, at the same time that Bear Stearns refused, per Syncora’s demands, that it buy back the loans over the same flaws.

Bear traders allegedly sold the toxic mortgage securities to investors and then resold the bad loans with early payment defaults to banks that originated them. Because investors were not notified that the time allowed for early default payments had been cut, this allowed the investment bank to swiftly securitize defective loans without giving investors time conduct due diligence.

Former EMC analysts have stepped forward admitting that they were ordered to falsify loan-level performance data and that the information was passed on to ratings agencies, who would then approve Bear’s billion-dollar deals. They also claim that senior traders were taking money that should have gone to the security holders that bought the bonds and loans from Bear. Due diligence standards were allegedly ignored. Executives allegedly made tens of millions of dollars in compensation.

Ambac claims that Bear knew that what traders were doing in its mortgage trading division yet chose to conceal the defective loans and ignore contractual obligations. The insurer is now holding JP Morgan accountable for the accounting fraud that began at Bear. Ambac also contends that JP Morgan has continued to ignore the vast off-balance sheet exposure linked to its contractual repurchase agreements.

Related Web Resources:
E-mails Suggest Bear Stearns Cheated Clients Out of Billions, The Atlantic, January 25, 2011

Ambac Says JPMorgan Refused Mortgage Repurchases It Also Sought, Bloomberg Businessweek, January 25, 2011

JP Morgan and Chase, Institutional Investors Securities Blog, February 3, 2011

Fontana Capital LLC Founder Violated Short-Selling Rule, Says SEC

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

The U.S. Securities and Exchange Commission has charged Forrest Fontana with violating Rule 105 of Regulation M and illegally making more than $1 million. The rule prohibits investors from taking part in public offerings when they have shorted the same securities. Fontana, who allegedly violated the rule three times, helped investors make the unlawful profits.

The SEC contends that in 2008, the ex-hedge fund manager and founder of Fontana Capital LLC, allegedly shorted 60,000 shares of XL Capital (now XL Group) and then shorted 40,000 shares of Bank of America‘s Merrill Lynch (BAC). On July 29, 2008, regulators claim that Fontana bought 50,000 shares of XL Capital and 200,000 shares of Merrill Lynch in secondary offerings. He made $149,000 off his XL capital bets and $792,000 from Merrill Lynch. Later that year, he allegedly shorted 100,000 Wells Fargo (WFC) shares. Fontana bought the same amount the next day and made a profit of about $160,000.

Under the 1933 Securities Act, Rule 105 of Regulation M is there to prevent short selling that can decrease proceeds for shareholders and companies by artificially depressing a stock’s market price right before a company prices its public offering. Rule 105 of Regulation is there to make sure that offering prices are established through the natural forces of supply and demand. Traders must wait five days after shorting a stock before they can take part in that company’s public offering. This prevents investors from using shorting to lower the price that they will pay later in the offering.

There will be a hearing to determine the veracity of the allegations against Fontana and whether sanctions should be issued.

Related Web Resources:
Hedge fund manager faces SEC allegations, Boston.com, January 8, 2011
Read the SEC’s administrative order (PDF)
Continue Reading ›