Investor Lawyers Blog

Class Action Plaintiffs Dispute Bank of America’s $137M Settlement with State Attorney Generals Over Municipal Derivatives

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

The plaintiffs in a class action case against Bank of America Corp. (BAC) are asking a court to intervene in the securities settlement reached between the investment bank and 20 state attorneys generals over the alleged manipulation of municipal derivatives bids. As part of the global settlement, BofA agreed to pay approximately $137 million: $9.2 million to the Office of the Comptroller of Currency, $36.1 million to the Securities and Exchange Commission, $25 million in restitution to the Internal Revenue Service, and $66.9 million to the states. The plaintiffs claim that the settlement purports to settle the charges of their case without consulting with or notifying the class counsel.

Fairfax County, Va., the state of Mississippi, and other plaintiffs filed the securities class action against 37 banks. They claimed that the alleged bidding manipulation practices involving municipal derivatives had been occurring as far back as 1992.

Now, the plaintiffs want permission to file a motion to request an enjoinment of the BoA global settlement. Meantime, BoA is arguing that the plaintiffs’ motion is “baseless” and they want the court to not allow it. The investment bank says that it disagrees that the states’ settlement resolves the class claims. BoA also contends that it kept Judge Weinstein and the interim class counsel abreast of settlement negotiations with the state.

Wall Street and its Friends in Washington Want Congress to “Crawfish” on Financial Industry Regulatory Reforms

Published on: December 30, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The Committee on Capital Markets Regulation, a nonpartisan research group, is urging lawmakers to conduct oversight hearings on the way that financial reform legislation is being implemented. CCMR claims that the rulemaking process of the Commodity Futures Trading Commission, the Securities and Exchange Commission, and other regulators is “seriously flawed,” while “sacrificing quality and fairness for apparent speed, risking lengthy court challenges and poor rules.”

CCMR made its allegations in a letter to outgoing Senate Banking Committee chair Christopher Dodd (D-Conn), ranking member Sen. Richard Shelby (R-Ala.), outgoing House Financial Services Committee head Rep. Barney Frank, and ranking member Rep. Spencer Bachus (R-Ala.). CCMR says it is concerned that the Dodd-Frank Wall Street Reform and Consumer Protection Act requires a virtual full “rewrite” of current regulations for the country’s financial markets and that the specific deadlines are “overly ambitious.”

Now, the SEC has until July 2011 to write about 60 new rules-it wrote less than 10 a year in 2005 and 2006-and the CFTC has to issue almost 40 new rules-it made about 11 rules in the couple of years leading up to the economic meltdown. Also, per Dodd-Frank, the SEC has about 200 days to make a rule final. Before the financial crisis the agency would take 524 days for rule adoption from proposal to finalization. The CFTC has 238 to adopt a new rule. Previously the agency would take about 109 days. Also, whereas before, the public was given approximately over 60 days to comment on new rules, agencies on overage are now allowing about 30 days for comments.

CCMR claims that there are now conflicting rules in the asset-backed securities area and regarding over-the-counter derivatives. Recently, Bachus and House Agriculture Committee chairman-elect Rep. Frank Lucas (R-Okla.) wrote CFTC Chairman Gary Gensler and SEC Chairman Mary Schapiro about the direction and pace that swaps rulemaking was taking.

Per Shepherd Smith Edwards and Kantas Founder and Securities Fraud Lawyer William Shepherd, “No one wants to be told what to do, it is human nature, and government regulations should only occur as a ‘necessary evil.’ The test should be whether the evil regulation is better than the evil non-regulation. This one should be easy to answer! Look back at what just happened after Congress deregulated the financial industry over the past decade: Debacle! With taxpayers having to bail out the perpetrators. A little pain on Wall Street can be endured to prevent this from happening in the future. Perhaps these regulations are not perfect, but the de-regulation now in place has proven disastrous.”

Related Web Resources:
Committee on Capital Markets Regulation

Commodity Futures Trading Commission

Securities and Exchange Commission

US Senate Banking Committee

House Agriculture Committee

Dodd-Frank Wall Street Reform and Consumer Protection Act (PDF)

Institutional Investors Securities Blog
Continue Reading ›

Moody’s, Fitch, and Standard and Poor’s Were Exercising Their 1st Amendment Rights When They Gave Inaccurate Subprime Ratings to SIVs, Says Court

Published on: December 30, 2010 | by Shepherd Smith Edwards & Kantas, LLP

According to California Superior Court Judge Richard Kramer Fitch Inc., Standard and Poor’s parent (MHP) McGraw-Hill Companies Inc., Fitch, Inc., and Moody’s Corp. (MCO), were merely exercising their First Amendment right to free speech when they gave their highest rating to three structured investment vehicles (SIVs) that collapsed when the mortgage market failed in 2008 and 2007. The ruling, in California Public Employees’ Retirement System v. Moody’s Corp. now leaves the plaintiffs with a steep burden of proof. The plaintiff, the largest pension fund in the US, is seeking more than $1 billion in securities fraud damages stemming from the inaccurate subprime ratings.

Per the securities complaint, CAlPERS is accusing the defendants of publishing ratings that were “unreasonably high” and “wildly inaccurate” and applying “seriously flawed” methods in an “incompetent” manner. The plaintiff contends that the high ratings that were given to the SIVs contributed to their collapse during the economic crisis.

BNA was able to get court transcripts that indicate that the ruling came on a motion under California’s anti- Strategic Lawsuit Against Public Participation (SLAPP) statute, which offers a special procedure to strike a complaint involving the rights of free speech and petition. If a defendant persuades the court that the cause of action came from a protected activity, the plaintiff must prove that the claims deserve additional consideration. Now CalPERS must show a “probability of prevailing.”

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, there is no longer any protection from private litigation for ratings agency misstatements. Now, an investor only has to prove gross negligence to win the case. However, per Wayne State University Law School Peter Henning, in BNA Securities Daily, Dodd-Frank’s provision may not carry much weight if a ratings agency’s First Amendment rights are widely interpreted.

Shepherd Smith Edwards & Kantas LTD LLP Founder and Stockbroker fraud lawyer William Shepherd had this to say: “There have long been many restrictions on ‘speech,’ including life threats, trademarks, defamation, conspiracy, treason and threats of blackmail. But the age-old standard restriction is ‘you can’t shout fire in a crowded theater.’ The reason is that strangers might rely on the words and be injured by your ‘speech.’ How is this different than shouting ‘AAA- rated,’ knowing that strangers will rely on the words and be harmed by this ‘speech?’ The difference is that Wall Street can say anything it wants, while the rest of us have to just sit down and shut up.”

CalPERS has until March 18, 2011 to respond to the court.

Related Web Resources:
Ratings by Moody’s, Fitch, S&P Ruled to Be Protected Speech, BusinessWeek, December 11, 2010

Calpers Sues Rating Companies Over $1 Billion Loss, Bloomberg, July 15, 2010

CalPERS

California Public Employees’ Retirement System v. Moody’s Corp., Justia Dockets

Credit Ratings Agencies, Stockbroker Fraud Blog

Bank of America and Countrywide Financial Sued by Allstate over $700M in Bad Mortgaged-Backed Securities

Published on: December 29, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Allstate has filed a securities fraud lawsuit against Bank of America (NYSE: BAC) and its subsidiary Countrywide Financial. The insurer claims that it purchased over $700 million in toxic mortgage-backed securities that quickly lost their value. Also targeted in the securities complaint are former Countrywide CEO Anthony Mozilo and other executives. Allstate is alleging negligent misrepresentation and securities violations.

The insurance company purchased its securities between March 2005 and June 2007. According to the federal lawsuit, as far back as 2003 Countrywide let go of its underwriting standards, concealed material facts from Allstate and other investors, and misrepresented key information about the underlying mortgage loans. The insurer contends that Countrywide was trying to boost its market share and sold fixed income securities backed by loans that were given to borrowers who were at risk of defaulting on payments. Because key information about the underlying loans was not made available, Allstate says the securities ended up appearing safer than they actually were. Allstate says that in 2008, it suffered $1.69 billion in losses due largely in part to investment losses.

It was just this October that bondholders BlackRock and Pimco and the Federal Reserve Bank of New York started pressing Band of America to buy back mortgages that its Countrywide unit had packaged into $47 billion of bonds. The bondholder group accused BofA, which acquired Countrywide in 2008, of failing to properly service the loans.

Meantime, BofA says it is looking at Allstate’s lawsuit, which it says for now appears to be a case of a “sophisticated investor” looking to blame someone for its investment losses and a poor economy.

Related Web Resources:
Countrywide Comes Between Allstate And BofA, Forbes, December 29, 2010
Allstate sues Bank of America over bad mortgage loans, Business Times, December 28, 2010 Continue Reading ›

Ex-Financial Adviser Pleads Guilty to Unauthorized Trading Involving Disabled Children’s Assets

Published on: December 28, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Charles Winitch has pleaded guilty to involvement in a securities fraud scam that victimized disabled children. In the U.S. District Court for the Southern District of New York, the ex-financial adviser and “wealth manager” entered a guilty plea to the charge of wire fraud involving unauthorized trading for commissions. While federal prosecutors and United States Attorney for the Southern District of New York Preet Bharara did not name the financial firm that Winitch had been working for at the time, The New York Daily News identified him in 2008 as a stockbroker with Morgan Stanley.

WInitch is accused of taking $198,784 from a trust held by the guardians of disabled children called the Guardian Account. The trust, which is supposed to provide children with long-term income and comes from the youths’ medical malpractice settlements, was only supposed to invest in New York Municipal Bonds or US Treasury Bonds. However, Winitch made unauthorized trades in 11 accounts in the millions of dollars to generate higher commissions even though he lacked the authority or consent to take such actions. According to Bharara, Winitch and co-conspirators made about $198,000 in ill-gotten commissions. Meantime, the fund lost somewhere between $400,000 and $1 million.

Winitch’s criminal defense lawyer says that the former stockbroker did not know that the accounts contained the money of disabled kids. The ex-Morgan Stanley broker is facing up to 63 months behind bars, hefty fines, forfeiture of ill-gotten gains, and restitution. Continue Reading ›

Custodial Firms Get Tougher About Registered Investment Adviser Compliance

Published on: December 28, 2010 | by Shepherd Smith Edwards & Kantas, LLP

According to Investment News, in the wake of the Bernie Madoff Ponzi scam and the recent financial meltdown, custodial firms are taking a tougher stance when it comes to the compliance they expect from registered investment advisers. This tighter scrutiny can make it hard for a new RIA with regulatory issues, as well as for investment advisers that are already at established custodial firms.

Trust Company America chief executive Frank Maiorano is quoted in the publication as saying that if “something came up” during a background check or the ADV, his firm would consider whether to let the RIA go. RBC Correspondent and Advisers says that it has had to ask advisers to leave. Schwab advisers are contractually obliged to tell the company about “material changes in status.” Schwab also monitors regulatory actions and may even look into “certain types of activities” occurring in advisers’ client accounts for red flags that could later impact the firm.

RIAs of both smaller and larger custodial firms are apparently feeling the heat from companies that are no longer willing to put up with potentially bad behavior that can lead to investment adviser fraud. This, even as most custodial firms continue to stay quiet about the type of due diligence they conduct on their advisers because they don’t want investors or plaintiffs’ lawyers to think of them as accountable for an adviser’s investment strategy or his/her supervision.

Just as custodial firms, which are service provider to advisers, are not responsible for supervising RIAs, they also cannot discipline them. They can, however, choose whether or not to work with an adviser.

Custodians usually will work with an independent review committee to vet new clients, conduct background and credit checks, and review ADV and U-4 forms. They may also look out for pending complaints, regulatory issues, and criminal actions.

Related Web Resources:
Custodians taking closer look at adviser compliance, Investment News, December 27, 2010

Investment Adviser, What you need to know before choosing one, SEC

Securities Fraud Attorneys

US Supreme Court Declines to Review Finding that Investor is Bound to Arbitration Agreement Over Disputes with Questar Capital Corp.

Published on: December 24, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The US Supreme Court says that it won’t review a federal appeals court’s finding that even though an investor’s English was limited, he is still bound by a broker-customer agreement that any disputes over the handling of his account must be resolved through arbitration. The U.S. Court of Appeals for the Seventh Circuit had concluded that the issue isn’t about, per the investor’s contentions, enforceability. Rather, it is about whether a contract was formed, which it was.

Plaintiff Alfred Janiga, who is originally from Poland, had signed an agreement containing an arbitration clause when he started investing with Questar Capital Corp. (STR). Janiga’s brother Weislaw Hessek, a registered Questar representative who runs Hessek Financial Services LLC, arranged the investment relationship.

A year after he started investing with Questar, Janiga sued his brother, Questar, and Hessek Financial. While the defendants moved to have the district court stay proceedings and order arbitration, the court said mandating immediate arbitration was not possible because it was unsure whether Janiga and Questar ever had a contract.

The appeals court found that it was up to the court to first determine whether a contract existed before it could stay the complaint and order arbitration. While the district court expressed concern over whether Janiga understood the agreement he had signed, the appeals court noted that the plaintiff had voluntarily signed the contract, which includes an arbitration clause.

Janiga, in his certiorari petition, argued that his case poses a “question of federal law” of whether an arbitration agreement clause is enforceable when he never received the actual document and the terms included were never conveyed to him and that this is a matter that the US Supreme Court should resolve.

Related Web Resource:
Janiga v. Questar Capital Corp., 7th Circuit
Arbitration, FINRA Continue Reading ›

Wells Fargo & Co. May Have to Pay Another $15M to Minnesota Nonprofits For Securities Fraud

Published on: December 24, 2010 | by Shepherd Smith Edwards & Kantas, LLP

A district court judge in Minnesota has ruled that Wells Fargo & Co. must pay four Minnesota nonprofits $15 million or more in costs, fees, and interests for breach of fiduciary and securities fraud. The investment bank has already been slapped with a $29.9 million verdict in this case against plaintiffs the Minnesota Medical Foundation, the Minneapolis Foundation, the Minnesota Workers’ Compensation Reinsurance Association, and the Robins Kaplan Miller & Ciresi Foundation for Children.

Judge M. Michael Monahan, in his order filed on Wednesday, scolded Wells Fargo for its “management complacency, if not hubris” that led to investment losses for clients of its securities-lending investment program. He said that he agreed with the jury’s key findings that the financial firm failed to fully disclose that it was revising the program’s risk profile, impartially favored certain participants, and advanced the interest of borrowing brokers. Monahan said that it was evident that Wells Fargo knew of the increased risks it was adding to the securities lending program and that its line managers did not reasonably manage these, which increased the chances that plaintiffs would suffer financial huge harm.

Monahan noted that because Minneapolis litigator Mike Ciresi provided a “public benefit” by revealing the investment bank’s wrongdoing, Wells Fargo has to pay plaintiffs’ legal fees, which Ciresi’s law firm says is greater than $15 million. Also, the financial firm has to give back to the Minnesota nonprofits an unspecified figure in fees (plus interest) that it charged for managing the investment program, in addition to interest going as far back as 2008 on the $29.9 million verdict.

Monahan also overturned the part of the jury verdict that was in Wells Fargo’s favor and is ordering a new trial regarding allegations that the investment bank improperly seized $1.6 million from a bond account of children’s charity as the lending program was failing. The district judge, however, denied the plaintiffs’ motion for a new trial to determine punitive damages.

Judge unloads on Wells Fargo with order on investment program, Poten.com, December 24, 2010

Wells Fargo ordered to pay $30 million for fraud, Star Tribune, June 2, 2010

Wells Fargo to Pay $30M in Compensatory Damages to Four Nonprofits for Securities Fraud, Stockbroker Fraud Blog, June 3, 2010

Houston Man Indicted in Alleged $17M Texas Securities Fraud

Published on: December 23, 2010 | by Shepherd Smith Edwards & Kantas, LLP

A federal grand jury has indicted Adley Husni Abdulwahab on one count of conspiracy and five counts of Texas securities fraud in connection with an alleged $17 million investment scheme involving the sale of investments issued by W Financial Group. The Houston resident, who is also facing federal charges over an alleged $100 million life insurance scheme, is in custody in Virginia.

Abdulwahab is accused of conspiring with two other men, Michael Wallens, Sr., and Michael Wallens, Jr., to defraud investors in connection with the sales of Collateral Secured Debt Obligations (CSDOs). The three men reportedly received over $17 million from the sales of the promissory notes to over 180 investors.

The three men are accused of issuing a number of misstatements to investors, such as claiming that Republic Group and Lloyd’s of London had “reinsured” the CSDOs, which were not in fact insured. Offering materials made it appear as if the investors’ money were held in insured notes, cash, automotive receivables, or corporate or government AAA bonds, when the three men were actually spending the money. For example, investor money was used to buy Wallens Sr.’s used car dealership for over $300,000, invest in a power company and building company, buy residential lots, and compensate the three men. Wallens, Sr. And Wallens, Jr. have each pleaded guilty to one count of securities fraud.

Related Web Resources:
Houston-area man indicted in W. Financial Group securities fraud matter, Justice.gov, December 15, 2010
Texan indicted in alleged $17M securities fraud, Chron/AP, December 15, 2010
The Texas Securities Act

Securities Fraud Attorneys

Institutional Investors Securities Blogs
Continue Reading ›

Ex-Goldman Sachs Employee Found Guilty of Stealing Code for High-Frequency Trading Activity

Published on: December 23, 2010 | by Shepherd Smith Edwards & Kantas, LLP

A New York jury has found ex-Goldman Sachs & Co. computer programmer Sergey Aleynikov guilty of one count of transportation of stolen property in interstate and foreign commerce and one count of trade-secret theft. Aleynikov is accused of stealing a specialized computer source code used in high-frequency trading activity from the investment bank.

Aleynikov, who worked for Goldman for two years, allegedly transferred “hundreds of thousands” of source-code lines and took the broker-dealer’s source code with him to Chicago, where he went to work with Teza Technologies LLC, a firm that wanted to compete with Goldman’s high-frequency trading operations. Although Aleynikov admitted to uploading parts of the investment bank’s trading codes, he told the FBI that he hadn’t intend to steal Goldman’s proprietary data.

Per the indictment, Goldman had implemented a number of precautions to protect its proprietary source code, including mandating that workers sign confidentiality agreements and requiring employees to “irrevocably assign to Goldman Sachs” the rights to any discoveries invention, ideas, concepts, or information developed while employed by the brokerage firm.

High-Frequency Trading
High-frequency trading is a trading strategy using sophisticated programs that involve the employment of algorithms that can place a series of sell and buy orders for large blocks of stock at a super fast pace while exploiting tiny price discrepancies. This type of trading has become a key source of revenue for hedge funds and investment firms on Wall Street.

In 2009, high-frequency trading was responsible for about $300 million in revenue for Goldman. This is less than 1% of the broker-dealers $45 billion in revenue.

Related Web Resources:
United States v. Aleynikov, Indictment (PDF)

Former Goldman Programmer Found Guilty of Code Theft, NY Times, December 10, 2010

Former Goldman Sachs Programmer Found Guilty After Stealing Computer Code, Security Week, December 14, 2010

Goldman Sachs, Stockbroker Fraud Blog