Investor Lawyers Blog

Morgan Stanley Failed to Disclose Financial Adviser’s Felony Charge to FINRA, Claims Car Accident Victim’s Attorney

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

According to Harold Haddon, the civil attorney for car accident victim Dr. Steven Milo, Morgan Stanley (MS) failed to disclose to the Financial Industry Regulatory Authority that financial adviser Martin Erzinger had been charged with a felony. Securities firms have 30 days from the time anyone working for them is charged with a felony to file a “Form U4” notifying FINRA.

Erzinger, who works with approximately $1 billion in accounts, was charged with a felony after he struck bicyclist Steven Milo in a car crash last July and then fled the collision site. Milo sustained serious injuries in the traffic crash. In December, the Morgan Stanley Smith Barney financial adviser struck a plea agreement. The felony charge against him was dropped and he pleaded guilty to misdemeanors. Erzinger claimed that at the time of the auto accident, he was suffering from undiagnosed sleep apnea, fell asleep at the steering wheel, and did not realize that he had hit anyone with his vehicle.

Erzinger was sentenced to community service and probation. Judge Fred Gannett also ordered him to tell FINRA about the felony charge. Attorney Haddon, however, says the court-ordered disclosure, which was submitted on December 22, doesn’t meet requirements because it only reveals that Erzinger was charged with a felony crime that was later dropped but does not mention the financial adviser’s misdemeanor guilty pleas or the sentence he must now serve.

Milo had opposed the plea agreement. Dow Jones Newswires reports that in court, Milo’s father-in-law Tom Marisco, who founded Marisco Funds and used to manage Janus mutual funds, blamed Morgan Stanley for not making the disclosures, which are mandatory. Morgan Stanley, however, says it contacted FINRA about the issue last July and believes that it satisfied all reporting requirements.

FINRA spokesperson Nancy Condon says the only way to notify FINRA about a reporting requirement is to electronically submit a Form U4.

Related Web Resources:
Lewis: Simple question tough for Morgan Stanley to answer, Denver Post/Dow Jones, January 8, 2010
Financial manager Martin Erzinger to accept plea bargain in Vail hit-and-run, 9News, November 2010
Form U4 Checklist, FINRA
Institutional Investors Securities Blog
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Goldman Sachs Sued by ACA Financial Guaranty Over Failed Abacus Investment for $120M

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

ACA Financial Guaranty Corporation is seeking $90 million in punitive damages and $30 million in compensatory damages from Goldman Sachs over its failed Abacus investment. The insurer contends that the broker-dealer sold a mortgage-backed investment that was designed to fail, causing investors to lose $1 billion.

ACA says that not only did it spend $15 million insuring Abacus, but also that the investment caused it to lose $30 million. The insurer contends that Goldman deceived it into thinking that hedge fund manager John Paulson also had invested in Abacus, when allegedly, the point of the flawed investment was so that Paulson & Co. could make huge profits by shorting the portfolio and the broker-dealer would then earn large investment banking fees.

ACA says that the Abacus 2007-AC1 collateralized debt obligation investment was already “was worthless” when Goldman marketed it to the insurer. Not only did ACA insure the underlying portfolio’s super-senior parts for $909 million, but also it purchased Abacus notes worth millions of dollars. Goldman hired ACA asset-management unit ACA Management LLC as “portfolio selection agent” to choose the securities for the Abacus deal.

Goldman has already settled for $550 million the Securities and Exchange Commission’s securities case against it over the failed collateralized-debt obligation investment. SEC had accused the federal agency the investment bank and its employee Fabrice Tourre of failing to tell investors that Paulson was involved in choosing the securities for Abacus and wanted to bet against the portfolio. Goldman has since acknowledged that it had provided incomplete marketing materials and agreed to business practice reforms.

Related Web Resources:

UPDATE: ACA Financial Sues Goldman For Alleged Abacus-Related Fraud, Wall Street Journal/Dow Jones, January 6, 2011

Goldman Sach’s $550 Million Securities Fraud Settlement Not Tied to Financial Reform Bill, Says SEC IG, Institutional Investor Blog, October 27, 2010

$1 Billion Goldman Sachs Synthetic CDO Debacle a Reminder that Even Highly Sophisticated Investors Can Be Defrauded, Stockbroker Fraud Blog, April 30, 2010

ALJ to Determine Whether to Revoke Registration of STS-Advisors Ltd. and Investment Adviser Representative Richard Lewis Bruce Over Alleged Texas Securities Fraud

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

A hearing will be held next month to determine whether the investment adviser registrations of STS-Advisors Ltd. and Richard Lewis Bruce with the Securities Commissioner of Texas should be revoked and a cease and desist order issued over allegations of securities fraud. STS and Bruce reportedly gave investment advice to STS-STATS, L.P., and from April 2003 through December 2005 24 investors put more than $2,130,000 into STS Fund. Unfortunately, many of the investors their entire investments.

Last September, an inspection of STS-Advisors revealed that the respondents had taken out money from the STS Fund beyond the fees and expenses that were allowed. These unauthorized withdrawals allegedly took place between at least June 2007 through September 2010 and even as the STS Fund lost value. The alleged withdrawals may have contributed to the fund’s losses.

For example, even though the STS Fund’s monthly ending balance never went above $721,000 between June 2007 and September 2010, the respondents allegedly took out nearly $400,000 during this time. Also, during the quarter that ended last September, the STS Fund’s value was just over $10,000 but respondents allegedly withdrew $9,000.

Related Web Resources:

Texas State Securities Board

Read the Docket (PDF)
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Securities America Inc. to Pay $1.2M in Compensatory and Punitive Damages Over Allegedly Fraudulent Medical Capital Notes

Published on: January 6, 2011 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority arbitration panel has ordered Securities America Inc. and broker Randall Ray Talbott to pay an investor nearly $1.2 million in damages over the sale of allegedly fraudulent Medical Capital notes. Claimant Josephine Wayman had charged the respondents with a number of actions, including securities fraud, deceit, breach of fiduciary duty, industry rules violation, financial elder abuse, and negligence. Ameriprise Financial Inc. owns Securities America.

The award includes $734,000 in compensatory damages, $250,000 in punitive damages, and $171,000 in expert witness and legal fees. Punitive damages are not common in FINRA arbitration awards.

Dozens of other claimants are pursuing securities claims against Securities America over the sale of private placements prior to the financial collapse in 2008. The securities divisions of Montana and Massachusetts are among those suing the broker-dealer. Meantime, Securities America has said that Medical Capital Holdings Inc., which issued the private placements, is the one that should be held liable for investors’ financial losses.

From 2003 to 2008, dozens of independent broker-dealers sold private Medical Capital notes, with Securities America considered the biggest seller at nearly $700 million. The private placements raised $2.2 billion. Unfortunately, many of the medical receivables that were supposed to be underlying the notes were in fact non-existent. Medical Capital has been accused of running a Ponzi-like scam and using newer investors’ funds to pay promised returns to older investors. Securities America has said that it did not act inappropriately when selling the MedCap notes.

Medical Capital is bankrupt and $1.1 billion of investors’ funds are gone. In 2009, the Securities and Exchange Commission charged Medical Capital with securities fraud.

Related Web Resources:

Securities America and Rep to Pay Over $1 Million in FINRA Fraud Case, AdvisorOne, January 5, 2011
Arbitrators hit Securities America, rep with $1.2 million in damages, legal fees over MedCap, Investment News, January 3, 2011
Financial Industry Regulatory Authority Continue Reading ›

School Districts Files Securities Fraud Lawsuit San Mateo County Over Lehman Brothers-Related Investment Losses

Published on: January 6, 2011 | by Shepherd Smith Edwards & Kantas, LLP

12 San Mateo County school districts have filed a $20 million securities fraud lawsuit against the county and its former treasure Lee Buffington. The securities complaint says that the plaintiffs lost approximately that amount in school district funds when Lehman Brothers filed for bankruptcy in 2008. The school districts contend that Buffington should have made smarter investments to protect their money. Instead, they claim that San Mateo County put too much of its pulled investment funds in the Lehman Holdings. The county lost approximately $155 million in the funds.

According to county schools Superintendent Anne Campbell, who is also a plaintiff of the securities case, the intention is to recover the $20 million, which has exacerbated the districts’ financial problems, and make the county change its investment policy so that it gets “specific” about the terms of the portfolio’s diversification. The plaintiffs are accusing Buffington and other county investment managers of negligent management and breach of fiduciary duty.

Meantime, Stuart Gasner, the county’s attorney, has called his client a “victim of Lehman Brothers’ nondisclosures.” He contends that the county did not do anything wrong. Also, not only is he accusing the school districts of failing to follow proper procedures when filing their securities complaint, but he also says that the complaint is not beneficial to taxpayers because it won’t “bring in any new money” while costing funds for the county’s defense.

School districts who are plaintiffs of the securities lawsuit against San Mateo County include Woodside Elementary School District, Belmont-Redwood Shores Elementary School District, San Mateo Union High School District, Burlingame Elementary School District, San Carlos Elementary School District, Cabrillo Unified School District, San Bruno Park Elementary School District, Jefferson Elementary School District, Ravenswood City Elementary School District, Las Lomitas Elementary School District, Portola Valley Elementary School District, and Menlo Park City Elementary School District.

UBS to Pay $2.2M to CNA Financial Head for Lehman Brothers Structured Product Losses

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

A Financial Industry Regulatory Authority arbitration panel says that UBS Financial Services Inc. must pay $2.2 million to CNA Financial Corp. Chief Executive and Chairman Thomas F. Motamed for losses that he and his wife Christine B. Motamed sustained from investing in Lehman Brothers structured products. The Motameds, who filed their claim against the UBS AG (UBS, UBSN.VX) unit and ex-UBS brokers Judith Sierko and Robert Ashley early in 2009, are alleging misrepresentation, breach of fiduciary duty, and other charges.

This is the largest award involving UBS-sold Lehman structured products. However, the Motameds’ securities fraud case is just one of many against UBS over its sale of about $1 billion in Lehman-related structured investment products to US clients. Many of the claimants contend that the broker-dealer failed to properly represent the investments. As part of this arbitration case, UBS must also pay 6% yearly interest on the $2.2 million to the Motameds from April 4, 2008 until payment of the award is complete. The ruling is supposed to represent rescission of the Motameds’ structured products purchase.

UBS reportedly has not won even one case over the Lehman structured products where the claimant had legal representation. Just a few months ago, UBS AG was ordered to pay $529,688 to another couple over their Lehman structured notes purchase. Steven and Ellen Edelson bought the notes while under the impression that they were “principal protected” when in fact the securities did not have such protection.

The award is the largest involving Lehman structured products purchased through UBS, which has expressed disappointment over the panel’s ruling. The broker-dealer maintains that the losses sustained by the Motameds are a result of Lehman Brothers’s failure and not UBS’s handling of the products.

To Pay $2.2 Mln To CNA Chief for Lehman-Related Losses, The Wall Street Journal, December 23, 2010
UBS Must Pay Couple $530,000 for Lehman Brothers-Backed Structured Notes, Institutional Investors Securities Blog, November 5, 2010 Continue Reading ›

Quadrangle Cofounder and CalPERS Partner Steven Rattner Settles NY Pension Fund Corruption Probe for $10M

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

Quadrangle investment group founding partner Steven Rattner has settled for $10 million allegations that he bribed officials to obtain a substantial investment from New York State’s pension fund. The financier, who is a California Public Employees’ Retirement System (CalPERS) outside investment partner and previously served as President Barack Obama’s “car czar,” is accused of being involved in a “pay-to-play” scam involving Quadrangle. Pension officials were allegedly given kickbacks for directing state pension money to the fund.

It was just last April that Quadrangle settled charges over the pension fund scheme with then-New York Attorney General Andrew Cuomo and the US Securities and Exchange Commission. Rattner, who is no longer with Quadrangle, was not part of that agreement. He had left the investment group to help President Obama restructure the auto industry. Rattner was forced to step down last summer because of the allegations related to the pension scam.

The probe has resulted in eight guilty pleas. Cuomo, who was just sworn in as New York’s governor, has called the state pension fund a “valuable asset held in trust for retirees.”

The NY pension fund case is not related to Rattner’s work with the $218.8 billion CalPERS, which is also dealing with its own bribery scandal. The allegations involve Alfred Villalobos, a businessman who made millions from representing firms that wanted investment money from the California pension fund. Governor Jerry Brown, who was at the time the state’s attorney general, sued ex- CalPERS Chief Executive Fred Buenrostro and Villalobos last May. The $95 million securities complaint accused Villalobos of bribing Buenrostro and two others. Villalobos, who has denied any wrongdoing, has since filed for bankruptcy. An independent examiner has recommended that stricter ethics rules for CalPERS managers be put in place.

Related Web Resources:
Former auto czar pays $10 million fine, CNN.com, December 30, 2010

CalPERS

Financial Services Institute Wants FINRA to Serve as SRO for RIAs

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

The Financial Services Institute wants the Financial Industry Regulatory Authority to be the main watchdog over registered investment advisers. FSI, which represents 126 broker-dealers’ interests, endorsed FINRA in a letter to the Securities and Exchange Commission. Many of the broker-dealers that FSI represents are also RIAs.

FSI believes that not only has FINRA shown the ability to “equitably” distribute enforcement, examination, technology, and surveillance resources, but also, that the latter is knowledgeable about “the overlapping nature” of the services and financial products that both investment advisers and broker-dealers may offer. Coordinated Capital Securities, Inc. and 2010 FSI chair and president Mari Buechner believes that having a regulatory structure that puts the same emphasis on examining broker-dealers, investment advisers, and their affiliated financial advisers will improve investor protection.

Currently, pursuant to Section 914 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC is analyzing the need for improved oversight of investment advisers. Already, FINRA closely scrutinizes broker-dealers, while the SEC has acknowledged that insufficient resources prevents it from regularly inspecting over 11,000 registered advisers.

SEC’s Proposal on Implementing Whistleblower Rule Draws Mixed Reactions

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

Comments to the Securities and Exchange Commission’s proposal to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act’s whistleblower protections have drawn mixed reactions. While some commenters think that employees of publicly traded companies should have to report alleged wrongdoing to internal compliance programs before they can be eligible to a monetary award, others believes that this requirement would make whistleblowers less willing to come forward. Still others have said that whistleblowers shouldn’t be allowed to hire lawyers on a contingency basis. Commenters also were in disagreement over the proposed rule’s overall impact.

Per new Section 21F of the Securities Exchange Act of 1934, a whistleblower program has been established that requires the SEC to monetarily award eligible whistleblowers that voluntarily give the agency original information about a federal securities laws violation if the tip results in successful enforcement of an administration or judicial action that leads to sanctions of over $1 million. The SEC proposed rule has the agency’s Whistleblower Office administering the program, prohibits whistleblowers that engaged in wrongdoing from being eligible for the financial award, and includes anti-retaliatory provisions protecting whistleblowers.

One theme touched upon in many of the comment letters is the desire for the SEC to make the final rule more “user friendly,” which is a term found in the statute. Critics believe that the SEC’s proposal doesn’t meet that standard. Still others expressed concern about what the SEC would consider “original” information presented by a whistleblower. Also, while some commenters wanted firms’ internal compliance programs to have the opportunity to initiate its own meaningful investigation first before the whistleblower gives the SEC a similar submission, the National Whistleblowers Center submitted a comment letter arguing that employees shouldn’t have to report alleged wrongdoing internally first to qualify for the SEC whistleblower program.

Claims over failed tax-avoidance scheme brought under Texas Securities and Federal Racketeering Laws Against Prominent Law Firm is Dismissed by Fifth Circuit

Published on: December 31, 2010 | by Shepherd Smith Edwards & Kantas, LLP

According to the U.S. Court of Appeals for the Fifth Circuit, the entities and individuals that took part in a disallowed tax avoidance scheme did not prove the reliance necessary under securities laws to hold Proskauer Rose LLP liable as a secondary actor. In Affco Investments 2001 LLC v. Proskauer Rose L.L.P, Affco LLC, Affco Investments 2001 LLC, Lewis W. Powers, Kenneth Keeling, John H. Powers, Lewis W. Powers, Shannon Ellis, Albert Gunther III, Heidi Gunther, Gretchen Linquest, and Eric Linquest claimed that they decided to take part in a tax avoidance scam solicited them by accounting firm KPMG LLP under the alleged guise that national law firms had approved the strategy.

Soon after, the IRS began giving out notices of transactions that it considered prohibited. The plaintiffs then looked to Proskauer Rose for legal advice. The law firm allegedly told them that they did not have to disclose that they were taking part in the scheme, which involved the sale and purchase of options that were roughly identical, and that the transactions were not substantially too much like the ones that were prohibited.

In 2001, the plaintiffs reported their losses from the scam on their 2001 returns without disclosing that they were taking part in the scheme. After an IRS probe, however, they ended up paying millions in back taxes, penalties, and interests. They also did not get the amnesty that was awarded to those who revealed that they had taken part in the scam.

The plaintiffs filed a securities lawsuit that made claims under Texas law, the 1934 Securities Exchange Act, and the Racketeer Influenced and Corrupt Organizations Act against the 17 entities (including Proskauer) purportedly involved in the schemes. While the other defendants have settled, Proskauer filed a motion to dismiss.

The district court dismissed the case against Proskauer and said that the Private Securities Litigation Reform Act of 1995 does not allow “civil RICO actions based on predicate acts of securities fraud.” Now the appeals court has determined that the district court acted correctly when it dismissed the securities case. The court noted that “[w]ithout direct attribution to Proskauer of its role in the tax scheme, reliance on Proskauer’s participation in the scheme is too indirect for liability.”

Related Web Resources:
Read the 5th Circuit’s Opinion (PDF)

Racketeer Influenced and Corrupt Organizations Act

1934 Securities Exchange Act (PDF)
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