Investor Lawyers Blog

Investments Advisers Told to Look at Recent SEC Enforcement Actions When Preparing for Exams

Published on: April 20, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Securities and Exchange Commission’s Office of Compliance Inspections and Examinations deputy director Norm Champ says that when preparing to be examined, investment advisers should look at recent SEC enforcement actions stemming from problems found during previous exams at other advisers. Champ made this suggestion last month at an American Law Institute-American Bar Association-organized investment adviser conference in New York. Champ says that his views were his own and that he wasn’t speaking for the SEC.

Two cases that he cited as ideal examples were SEC v. Venetis and In re AXA Rosenberg Group LLC. Champ said that three AXA Rosenberg entities ended up paying over $240 million over SEC administrative proceedings because of a key computing error in the Venetis case, which involved a multi-million dollar fraud scam over the sale of bogus promissory notes. Although senior management discovered the mistake, they decided not to tell the SEC. The commission suspected there was a problem when its examiners were prohibited from entering certain rooms.

Champ is suggesting that before an exam, investment advisers should figure out their risk areas and review compliance and control procedures. He says that the SEC chooses which advisers to examine based on complaints, tips, referrals, prior exam history, third party data (including information from regulators), commission filing data, affiliated business activity, firm size, disciplinary history, pay arrangements, and time between exams. Exam teams study the investment adviser’s control environment, engage with senior management, pay attention to interactions within the financial firm, and look at conflicts of interest, valuations, portfolio management, advertising, trade allocations, and custody of assets.

Our stockbroker fraud attorneys are dedicated to helping investors recoup their financial losses caused by investment adviser fraud.

Related Web Resources:
Securities and Exchange Commission

Office of Compliance Inspections and Examinations

More Blog Posts:
AXA Rosenberg Entities Settle Securities Fraud Charges Over Computer Error Concealment for Over $240M, Stockbroker Fraud Blog, February 10, 2011 FINRA Will Customize Oversight to Investment Adviser Industry if Chosen as Its SRO, Stockbroker Fraud Blog, April 8, 2011
Custodial Firms Get Tougher About Registered Investment Adviser Compliance, Institutional Investor Securities Blog, December 28, 2010 Continue Reading ›

Texas Securities Fraud: FINRA Suspends Pinnacle Partners Over Failure to Comply with Temporary Cease and Desist Order Involving “Boiler Room” Operation

Published on: April 19, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority says it is has suspended San Antonio adviser Pinnacle Partners Financial Corp. and its president, Brian K. Alfaro. Both are accused of not complying with a temporary cease and desist order that barred fraudulent misrepresentations.

FINRA issued the temporary order last January over Pinnacle and Alfaro’s alleged written and oral misrepresentations related to their offer and sale of oil and gas joint interests. In December, the SRO filed a complaint accusing Alfaro and Pinnacle of running a boiler room involving brokers who made thousands of calls each week to solicit investments in these ventures, which Alfaro either controlled or owned.

In its Texas securities fraud complaint, FINRA claims that Pinnacle raised over $100 million from over 100 investors and that Alfaro used some of that money for his personal expenses and unrelated business. Some of the funds that Alfaro allegedly misused came from customers that he convinced to let him move their money into fraudulent offerings. He is even accused of collecting over $500,00 in subscription costs for a well that was never drilled.

FINRA contends that Alfaro and Pinnacle grossly inflated natural gas prices, estimated gross returns and monthly cash flows, projected natural gas reserves, and purposely tried to mislead investors by giving them doctored maps that didn’t include dry, abandoned, or plugged wells and getting rid of unfavorable information in well operator reports.

Related Web Resources:
FINRA Suspends Pinnacle Partners and its President Brian Alfaro, FINRA, April 19, 2011
FINRA Suspends San Antonio Advisory Firm for Operating a “Boiler Room”, Financial Planning, April 19, 2011
Read the Cease and Desist Order (PDF)

More Blog Posts:
Texas Securities Fraud Lawsuit Against MetroPCS Communications is Dismissed, Stockbroker Fraud Blog, April 11, 2011
Texas Securities Fraud: SEC Charges Talk Radio “MoneyMan” Over Promissory Note Offerings, Stockbroker Fraud Blog, April 4, 2011
Motion to Dismiss SEC Lawsuit Accusing Dallas Billionaire Brothers of $500,000 Securities Fraud Denied, Stockbroker Fraud Blog, April 1, 2011 Continue Reading ›

Ex-Goldman Sachs Board Member Accused of Insider Trading with Galleon Group Co-Founder Seeks to Have SEC Administrative Case Against Him Dropped

Published on: April 19, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Our securities fraud attorneys had previously reported on the Securities and Exchange Commission’s case against Rajat Gupta, an ex-Goldman Sachs board member accused of passing on confidential information to Galleon Group Co-Founder Raj Rajaratnam about Berkshire Hathaway Inc.’s $5 billion investment in Goldman Sachs. Rajaratnam is accused of making $45 million from the scheme, which has been the target of what is being called one of the largest insider trading crackdowns involving a hedge fund. As part of its Galleon probe, the SEC has filed insider trading lawsuits against at least two dozen businesses and individuals.

The SEC is accusing Gupta of sharing with Rajaratnam details about the respective quarterly earnings of the investment bank and Proctor and Gamble, where Gupta also served as a director. Last month, agency filed its charges insider trading allegations against Gupta in administrative forum—a move that he is contesting.

On March 18, the ex-Goldman Sachs board member filed a lawsuit against the SEC denying the insider trading allegations and asking the federal court to block the SEC’s administrative claims and grant him a jury trial. Gupta contends that the SEC allegations took place at least a year and a half before the Dodd-Frank Wall Street Reform and Consumer Protection Act gave regulators permission to file such an action.

The Dodd-Frank Act has given the SEC the authority to use administrative proceedings to get monetary penalties from all individuals, regardless of whether or not they are connected to regulated entities. The SEC’s administrative trial in the Gupta case is scheduled for July 18. Gupta is the only defendant in the Galleon case that the SEC is pursuing administratively. He is a non-regulated person.

Related Web Resources:
Gupta Says U.S. Judge in New York Should Handle Suit to Block SEC’s Action, Bloomberg, April 11, 2011

Ex-Goldman director charged with insider trading, CBS News, March 1, 2011

Gupta v. Securities and Exchange Commission, Justia Docket Filings

U.S. v. Rajaratnam, SD New York 2011

More Blog Posts:
A Texan is Among Those Arrested in Insider Trading Crackdown Involving Apple Inc., Dell, and Advanced Micro Devices’ Confidential Data, Stockbroker Fraud Blog, December 16, 2010

3 Hedge Funds Raided by FBI in Insider Trading Case, Stockbroker Fraud Blog, November 23, 2010

Ex-Goldman Sachs Associate Will Serve Nearly Five Years in Prison for Insider Trading, Stockbroker Fraud Blog, January 10, 2008

SEC Charges Subprime Auto-Loan Provide Inofin Inc. with Securities Fraud

Published on: April 16, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Securities and Exchange Commission has filed securities fraud charges against Inofin Inc. and three of its executives. The SEC contends that they diverted millions of investor funds’ for their personal use and misled investors. For example, the agency contends that Kevin Mann and Michael Cuomo used about third of the investors’ money to start several real-estate property developments and open four used car dealerships.

The agency claims that Mann, Cuomo, & Melissa George acted illegally when the raised $110 million from hundreds of investors in the District of Columbia and 25 states. They allegedly did this with unregistered notes that they told investors were going to be used only for funding subprime auto loans. Meantime, the subprime auto-loan provider’s clients were told that 9-15% returns could be expected because Inofin charged 20% interest rates on average to subprime borrowers.

Inofin is accused of misrepresenting its financial performance between 2006 and 2010, while its executives allegedly prepared and submitted false financial statements to the Massachusetts Division of Banks. SEC says that Inofin’s worsening financial state was caused by the company’s failure to disclose its business activities and because management decided to sell part of its auto loan portfolio at a considerable discount to deal with cash shortages. Meantime, Inofin and its key officers kept selling Inofit securities while allowing investors to keep believing that it was a profitable business and a solid investment.

The SEC has also charged two sales agents, Thomas K. (Kevin) Keough and David Affeldt, because they allegedly offered to sell company securities even though they were not SEC-registered broker-dealers. The agency says that between 2004 and 2009 the men were unjustly enriched by referral fees of over $500,000.

Related Web Resources:
SEC Charges Subprime Auto Loan Lender and Executives with Fraud, SEC, April 14, 2011
Mass. auto lender, executives charged with fraud, Businessweek/Bloomberg, April 14, 2011
Massachusetts Division of Banks

More Blog Posts:
FINRA Orders UBS Financial Services to Pay $8.25M for Misleading Investors About Security of Lehman Brothers Principal Protected Notes, Stockbroker Fraud Blog, April 15, 2011
Wells Fargo Settles SEC Securities Fraud Allegations Over Sale of Complex Mortgage-Backed Securities by Wachovia for $11.2M, Institutional Investor Securities Blog, April 7, 2011 Continue Reading ›

“Skin in the Game” Mortgage Rule Announced by Federal Regulators

Published on: April 16, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Federal regulators are proposing new risk retention rules geared toward reducing risky low mortgage lending. The ‘skin in the game” rule was articulated in the Dodd-Frank Consumer Protection Act, which mandates credit risk sharing and for mortgage-backed securities (MBS) sponsors and those of other asset classes to align their interests with investors.

Under the new qualified residential mortgage rules, lenders would have to retain 5% of the risk, known as “skin in the game,” for non-qualifying loans that they make rather than selling all of them to investors. The loans would likely include higher mortgage costs. Loans sold to Freddie Mac or Fannie Mae, however, would be exempt from the rules as long as they remain in government conservatorship. Loans through the Federal Housing Administration would also be exempt.

A qualified residential mortgage (QRM) is a mortgage that regulators consider to be a loan that offers a low risk of default. Some of the requirements for qualifying for a QRM loan:

• Placing at least a 25% down if you are buying a house.
• Having at least 25% equity to refinance.
• Having at least 30% equity for cash-out refinancing.
• No 60-day delinquencies over the past two years.
• Not being able to get a loan with interest only payments, negative amortization, or “significant interest rate increases.”

Our securities fraud lawyers represent institutional investors who have lost money from investing in mortgage-backed securities or other investments.

Related Web Resources:

Bankers pleased with ‘skin in the game’ rule, Marketwatch, March 29, 2011

More Blog Posts:
Goldman Sachs Group Made Money From Financial Crisis When it Bet Against the Subprime Mortgage Market, Says US Senate Panel, Institutional Investors Securities Blog, April 15, 2011

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

Citigroup’s $75 Million Securities Fraud Settlement with the SEC Over Subprime Mortgage Debt Approved by Judge, Stockbroker Fraud Blog, October 23, 2010

FINRA Orders UBS Financial Services to Pay $8.25M for Misleading Investors About Security of Lehman Brothers Principal Protected Notes

Published on: April 15, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is ordering UBS Financial Services to pay $8.25 million in restitution and a $2.5 million fine for misleading investors about Lehman Brothers principal protected notes (PPNs). The SRO says that the financial firm presented the investments in a way that caused clients to think that the notes came with 100% principal protection. Many brokers said that the notes, which were a hybrid financial product made up of currencies, bonds, stocks, commodities, and derivatives, were low-risk investments even though they knew (or should have known) that Lehman Brothers was in financial trouble. Also, investors did not know that the notes were only protected to the extent that Lehman Brothers was capable of paying. When Lehman Brothers filed for bankruptcy in September 2008, the PPNs became virtually worthless.

FINRA claims that UBS issued statements and made omissions that did not stress that the PPN’s were unsecured obligations of Lehman Brothers. The SRO is also questioning whether UBS fully understood the complexity of the notes and if this caused some of their mistakes when selling the financial product. FINRA says that not only did UBS lack the adequate supervisory system to overseee its financial advisers that were handling the Lehman notes, but also, the investment firm did not have appropriate suitability procedures to determine whether certain investors could handle the risks involved with the PPNs.

Numerous individual securities fraud arbitration claims and lawsuits have been submitted for investors over the Lehman Brothers structured notes. There was also a UBS class action complaint filed for all Lehman brothers PPN investors in 2008.

Our stockbroker fraud law firm want to remind you that filing your individual claim through FINRA arbitration increases your chances of recovering more than if you were a member of a securities class action case. If you sustained financial losses after investing in Lehman Brothers Principal Protected Notes, do not hesitate to contact Shepherd Smith Edward and Kantas, LLP and ask for your free case evaluation.

UBS Financial Services Fined $2.5M and Ordered to Pay $8.25M Over Lehman Brothers-Issued 100% Principal-Protection Notes, Institutional Investor Securities Blog , April 12, 2011
UBS to Pay $2.2M to CNA Financial Head for Lehman Brothers Structured Product Losses, Stockbroker Fraud Blog, January 4, 2011
Lehman Brothers Lawsuit Claims Its Bankruptcy Was In Part Due to JP Morgan Chase’s Seizure of $8.6 Billion in Cash Reserves, Stockbroker Fraud Blog, June 14, 2010 Continue Reading ›

Goldman Sachs Group Made Money From Financial Crisis When it Bet Against the Subprime Mortgage Market, Says US Senate Panel

Published on: April 15, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Senate’s Permanent Subcommittee on Investigations says that because Goldman Sachs Group Inc. bet billions against the subprime mortgage market it profited from the financial crisis. The panel’s findings come following a two-year bipartisan probe and were released in a 639-page report on Wednesday.

The subcommittee released documents and emails that show executives and traders attempting to get rid of their subprime mortgage exposure, which was worth billions of dollars, and short the market for profit. Their actions ended up costing their clients that purchased the financial firm’s mortgage-related securities.

The panel says that Goldman allegedly deceived the investors when failing to tell them that the investment bank was simultaneously shorting or betting against the same investments. The subcommittee estimates that Goldman’s bets against the mortgage markets in 2007 did more than balance out the financial firm’s mortgage losses, causing it to garner a $1.2 billion profit that year in the mortgage department alone. Also, when Goldman executives, including Chief Executive Lloyd Blankfein appeared before the committee in 2010, the panel says that they allegedly misled panel members when they denied that the financial firm took an a position referred to as being “net short,” which involves heavily tilting one’s investments against the housing market.

It was just last year that the Securities and Exchange Commission ordered Goldman to pay $550 million to settle securities fraud charges over its actions related to the mortgage-securities market. The allegations in this report go beyond the claims covered by the SEC case. The report also names mortgage lender Washington Mutual, credit rating firms, the Office of Thrift Supervision, and a federal bank regulator as among those that contributed to the financial crisis.

Goldman is denying many of the subcommittee’s claims and says its executives did not mislead Congress.

Related Web Resources:
Goldman Sachs shares drop on Senate report, Reuters, April 14, 2011

Senate Panel: ‘Goldman Sachs Profited From Financial Crisis’, Los Angeles Times, April 14, 2011

Senate Permanent Subcommittee on Investigations

More Blog Posts:
Goldman Sachs Sued by ACA Financial Guaranty Over Failed Abacus Investment for $120M, Institutional Investor Securities Blog, January 10, 2011

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

Goldman Sachs COO Says Investment Firm Shorted 1% of CDOs Mortgage Bonds But Didn’t Bet Against Clients, Stockbroker Fraud Blog, July 14, 2010

Citigroup Ordered by FINRA to Pay $54.1M to Two Investors Over Municipal Bond Fund Losses

Published on: April 13, 2011 | by Shepherd Smith Edwards & Kantas, LLP

In what is being called the largest award that a major Wall Street broker-dealer has been ordered to pay individual investors, the Financial Industry Regulatory Authority has ordered Citigroup to pay $54.1 million to investors Suzanne Barlyn and Randall Smith over investment losses they sustained on high risk municipal bond funds that lost 77% of their value during the financial crisis.

Richard Zinman, formerly of Citi’s Smith Barney unit, was the broker for Murdock, a venture capital investor, and Hosier, a retired patent lawyer. Zinman left Citi soon after the funds blew up. During the arbitration hearing, he testified on behalf of the two men, saying that Citi did not tell its brokers how risky and volatile the funds in fact were. Zinman now works for Credit Suisse Group.

Citigroup has been under fire for awhile now over its municipal bond funds. Geared towards wealthier clients, investments were a minimum of $500,000. The bond funds were supposed to deliver returns a few percentage points above that of municipal bonds by borrowing up to $7 for every $1 invested. The proceeds were placed in mortgage debt and municipal bonds. Unfortunately, the municipal bond funds’ value dropped when the mortgage market started to fail. After Citi brokers complained, however, the financial firm offered share buybacks that lowered investor losses to approximately 61%.

As part of this case, Citi must pay $17 million in punitive damages, $3 million in legal fees, and $21,600 for the hearing free expense, which is normally divided between the parties involved. Prior to this award, the largest one Citi was ordered to pay against a bond-fund claimant was $6.4 million.

Related Web Resource:
Citigroup Loses Muni Case, The Wall Street Journal, April 13, 2011
Muni bonds hit by more selling on default fears, Los Angeles Times, January 12, 2011

More Blog Posts:
SEC to Examine Muni Bond Market Issues During Hearings in Texas and Other States, Stockbroker Fraud Blog, February 9, 2011
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
Federal Judge to Approve Citigroup’s $75M Securities Settlement with SEC Over Bank’s Subprime Mortgage Debt Reporting to Investors, Institutional Investor Securities Blog, September 29, 2010 Continue Reading ›

Pump & Dump Scam Alleged in $600 Million Lawsuit Against Law Firm Baker & McKenzie

Published on: April 13, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Industrial Enterprises of America Inc. (IEAM) is accusing Baker & McKenzie, LLP and former partner Martin Weisberg of securities fraud. The $600 million lawsuit, filed in US Bankruptcy Court, accuses the defendants of setting up a legal structure that allowed for an illegal pump-and-dump scheme and causing the company to sustain $150 million in losses and investors to lose $450 million. Facing criminal fraud charges over the scam are Weisberg and ex-CEOs John D. Mazutto and James W. Margulies.

Industrial Enterprises of America says that Weisberg was the one who helped set up its 2004 stock option plan, which provided for the issuance of restricted shares to employees, consultants, and outside directors. Rather than rewarding the Pittsburgh chemical company’s employees, the strategy was to use “print money” for company executives, their girlfriends, and lawyers.

The plaintiff says that since Weisberg was the beneficiary of the sale of the stock, which was improperly issued, the law firm ignored what was going on while helping IEAM officials steal from the company. Industrial Enterprises of America also contends that there were false and misleading SEC and NASDAQ filings and internal corporate malfeasances were set up to “raid the company of its working capital.”

One year after Industrial Enterprises of America filed for bankruptcy in May 2009, Mazzuto was charged over the allegedly $60 million stock fraud scam. He is accused of issuing shares worth tens of millions of dollars to relatives, friends, and other people he personally knows, which fraudulently inflated the value of the stock.

An indictment said that an attorney trust account that Margulies opened received the most company shares—3.5 million shares that he sold for $17.7 million. About $13 million went back to Industrial Enterprises of America. The remaining funds went to accounts that he and Mazzuto controlled.

Industrial Enterprises of America says that Mazzuto personally made $15 million from the stock scam, Margulies gained $6 million, and Baker & McKenzie earned over $1.7 million in fees. The plaintiff wants restitution for the full value of the shares that were improperly issued, as well as compensation for unspecified damages.

Related Web Resources:

Baker & McKenzie Sued For $600 Mln Over ‘Pump And Dump’ Scheme, Morningstar, December 4, 2011

More Blog Posts:
FBI Arrests Texas Leader of Pump-and-Dump Scheme, Texas Stockbroker Fraud Blog, March 23, 2011

Ex-Gilford Securities Broker Indicted in International Stock Fraud Scam Involving Pump and Dump of Israeli and Chinese Securities, Stockbroker Fraud Blog, February 19, 2011

UBS Financial Services Fined $2.5M and Ordered to Pay $8.25M Over Lehman Brothers-Issued 100% Principal-Protection Notes

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

The Financial Industry Regulatory Authority is fining UBS Financial Services, Inc. $2.5 million and ordering it to pay $8.25 million in restitution for allegedly misleading investors about the “principal protection” feature of 100% Principal-Protection Notes. Lehman Brothers Holdings Inc. issued the PPNs Holdings Inc. before it filed for bankruptcy in 2008.

FINRA contends that even as the credit crisis was getting worse, between March and June 2008 UBS advertised and described the notes as investments that were principal-protected while failing to make sure clients knew that they PPNs were unsecured obligations of Lehman and that the principal protection feature was subject to issuer credit risk. UBS also allegedly failed to:

• Properly notify its financial advisers of the impact the widening of credit default swaps was having on Lehman’s financial strength
• Sufficiently analyze how appropriate the Lehman-issued PPNs were for certain clients
• Set up a proper supervisory system for the sale of the Lehman-issued PPNs
• Provide proper training or appropriate written supervisory procedures and policies
• Provide adequate suitability procedures for determining who should invest

FINRA also says that UBS developed and used advertising collateral about the PPNs that misled certain clients, such as the suggestion that a return of principal was certain as long as clients held the product until it matured. FINRA claims that the reason that some UBS financial advisers gave incorrect information to customers was because they themselves didn’t fully understand the product.

FINRA says that because UBS’s suitability procedures were inadequate and certain PPN’s lacked risk profile requirements, the product was sold to investors who were not willing or shouldn’t have been allowed to take on the risks involved. More often than not it was these investors who were likely to depend on the Lehman PPNs’ “100% principal protection” feature that were “risk averse.”

By agreeing to settle, UBS is not denying or admitting to the charges.

UBS to shell out $10.75M to settle Lehman-related row, Investment News, April 11, 2011

More Blog Posts:
UBS to Pay $2.2M to CNA Financial Head for Lehman Brothers Structured Product Losses, Stockbroker Fraud Blog, January 4, 2011

UBS Must Pay Couple $530,000 for Lehman Brothers-Backed Structured Notes, Institutional Investors Securities Blog, November 5, 2010

Lehman Brothers’ “Structured Products” Investigated by Stockbroker Fraud Law Firm Shepherd Smith Edwards & Kantas LTD LLP, Stockbroker Fraud Blog, September 30, 2008