Investor Lawyers Blog

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

Morgan Keegan & Co. Inc. Must Pay $250K to Couple that Lost Investments in Hedge Fund with Ties to Bernard L. Madoff Investment Securities

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

Financial Industry Regulatory Authority says that Morgan Keegan & Co, Inc. must pay over $250,000 in punitive and compensatory damages to Jeffrey and Marisel Lieberman. The couple suffered financial losses after investing in Greenwich Sentry LLP, a hedge fund whose assets were funneled to Bernard L. Madoff Investment Securities. FINRA contends that the brokerage firm failed to due enough due diligence on the Madoff feeder fund, and was “grossly negligent.”

The Lieberman, who are accusing the Regions Financial unit of fraudulent misrepresentation, negligence breach of fiduciary duty, and violations of Florida and Tennessee statutes, claim that Morgan Keegan and Julio Almeyda, one of its registered representatives, invested $200,000 of their money with Greenwich Sentry. The fund ended up filing for bankruptcy last November.

Per Morgan Keegan’s internal compliance rules, investors should only be allowed to place money in hedge funds if “speculation” is one among their main objectives when opening an account. “Speculation” was the last objective on the couple’s list. FINRA says that not only must the broker-dealer repay the couple’s entire loss of $200,000, but also they must also give them 6% annual interest from when the investment was made, $50,000 in punitive damages, and $14,000 in expert witness fees.

Meantime, the FINRA panel cleared Almeyda of wrongdoing, finding that he did not know that Morgan Keegan had not provided sufficient due diligence nor was he aware that he had given the Lieberman’s false and misleading information about their investments’ risks.

Over the last year, Morgan Keegan has found itself dealing with hundreds of arbitration cases nvolving mutual fund investors alleging securities fraud related to the significant losses they sustained during the subprime mortgage crisis.

Related Web Resources:
Morgan Keegan Fined $250,000 Over Madoff Fund, Reuters, March 7, 2011

More Blog Posts:
Morgan Keegan to Pay $9.2M to Investors in Texas Securities Fraud Case Involving Risky Bond Funds, Stockbroker Fraud Blog, October 6, 2010
Morgan Keegan & Co., Inc., Morgan Asset Management, and Two Employees Face Subprime Mortgage Securities Fraud Charges by SEC, Stockbroker Fraud Blog, April 8, 2010
Morgan Keegan Ordered by FINRA Panel to Pay Investor $2.5 Million for Bond Fund Losses, Stockbroker Fraud Blog, February 23, 2010 Continue Reading ›

SEC Needs to Keep a Closer Eye on FINRA, Says Report

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

According to the Boston Consulting Group, the US Securities and Exchange Commission should step up its oversight efforts over the Financial Industry Regulatory Authority. The BCG released its findings following a six-month review of the SEC’s internal operations, an examination that was ordered under the new Dodd-Frank law. The consulting group’s job was to examine the SEC’s structure, internal operations, personnel, resources, relationships with self-regulatory organizations, and technology.

BCG notes that with FINRA now providing the majority of market surveillance for most US equity trading, the SEC’s scrutiny of the SRO is now more important than ever. BCG also believes that the SEC should keep a closer watch on FINRA’s member regulation and enforcement units.

Currently, the SEC’s Office of Compliance Inspections and Examinations employs about 50 people tasked with inspecting 12 SROs. Still, BCG says that these SROs are under no obligation to regularly disclose information about their regulatory operations to the SEC. BCG believes that this disclosure of data should become a formal requirement. Also, even though there are over 100 staff attorneys at the SEC’s Division of Trading and Markets looking at SRO filings, the consulting group believes these employees could stand to deepen their understanding of the markets.

SEC Files Securities Charges Against DHB Industries and Three Ex-Board Members

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

The Securities and Exchange Commission has filed and settled securities charges against DHB Industries Inc. without the US defense contractor receiving any penalty. The maker of bulletproof vests for US law enforcement and military agencies, now called Point Blank Solutions, has consented to not committing the alleged violations in the future. SEC charges, however, are still pending against ex-DHB Industries board members Gary Nadelman, Cary Chasin, and Jerome Krantz.

The SEC claims that between 2003 and 2005, the three men let senior managers overstate data in financial reports. The federal agency also contends that as a result of the ex-board members’ “willful blindness,” ex-DHB Industries CEO David Brooks was able to take $10 million from the company and move the funds into another company under his control. Brooks, who is also accused of using another $4.7 million for personal expenses, and ex-DHB Industries COO Sandra Hatfield, were convicted of securities fraud and other charges in criminal court last year.

The SEC wants restitution and civil fines from Krantz, Chasin, and Nadelman. According to the New York Times, it is surprising that the federal regulator has actually filed civil charges against the three men. Save for perhaps a tarnished reputation, corporate directors tend to remain unscathed in cases of securities fraud. For example, no financial firms’ outside directors were named as defendants in SEC cases related to the credit crisis.

While some are expressing hope that the SEC is charting a new course with this case, it is difficult to discern at this point whether this is a one-time deal or the start of a new trend. For a while, there were concerns that the independent director post, assigned specific duties under the Sarbanes-Oxley law in 2002, might be harder to fill because of fear of liability. However, the SEC has only filed cases against them in incidents of alleged severe recklessness. Also, in an attempt to bring in good directors, companies have been offering better pay.

Are board directors held to too low of a standard that allows them to get away with too much?

Related Web Resources:

SEC charges defense contractor, 3 ex-directors, Bloomberg, February 28, 2011

For Directors at DHB Securities, SEC Keeps the Bar Low, New York Times, March 3, 2011

More Blog Posts:
Former DHB Industries CEO and COO Found Guilty of Nearly $200M Securities Fraud Scam, Stockbroker Fraud Blog, September 16, 2010

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

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

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

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

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

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

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

More Blog Posts:
Schwab Settles for $119M SEC Charges It Allegedly Misled YieldPlus Fund Investors, Stockbroker Fraud Blog, January 17, 2011
Class Members of Charles Schwab Corporation Securities Litigation Can Still Opt Out to File Individual Securities Claim, Stockbroker Fraud Blog, December 6, 2010
Charles Schwab & Co. Defendant in Class-Action Securities Fraud Lawsuit Filed on Behalf of Schwab Total Bond Market Fund Investors Over CMOs and Mortgage-Backed Securities, Stockbroker Fraud Blog, September 7, 2010 Continue Reading ›

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

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

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

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

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

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

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

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

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

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

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

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

Related Web Resources:

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

New Mexico State Investment Council

New Mexico Educational Retirement Board

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

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

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

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

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

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

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