Investor Lawyers Blog

Documents in Case of Ex-Oppenheimer Manager Who Was Fired for Cooperating with Elder Financial Fraud Probe Shed Some Light on What Goes on in Private Arbitration

Published on: January 31, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Even though former Oppenheimer manager James F. Dever won a $74,000 award over his dismissal at the brokerage firm in private arbitration, he has pushed to have the records from the case made public. Dever contends that he was fired because he cooperated with the state in its probe of an Oppenheimer broker who stole money from an elderly couple. In December, a judge granted his request, and over 1,600 documents were made public, creating a rare opportunity for seeing what goes on in private arbitration within the financial industry.

The Boston Globe reports that according to the documents, a banker contacted Oppenheimer’s general counsel in 2004 to let the firm know that Stephen J. Toussaint was depositing checks from an elderly couple’s Oppenheimer account and putting the funds in his own account. Dever was told to investigate the matter—even though the authorities or an Oppenheimer attorney should have been contact.

After discovering that Toussaint had stolen at $350,000 from the elderly couple, Dever pushed to get the broker fired, but the latter stayed at Oppenheimer for another year.

The FBI would later indict Toussaint with an 11-count fraud indictment in February 2007. Meantime, Dever cooperated with the Massachusetts Securities Division’s probe. The state would go on to charge Oppenheimer with unethical and dishonest conduct and failing to supervise the broker. Its CEO, and Dever’s boss, Albert “Bud’’ G. Lowenthal, was also charged in the securities fraud case. Oppenheimer settled with the state over the Toussaint case for $1 million. Lowenthal also settled.

Dever, who had launched Oppenheimer’s Boston office, says his reputation in the financial industry has been damaged because of his firing and his career has experienced severe setbacks as a result. He also says that he sustained financial losses because of the legal costs he has incurred during the last few years because from case. Meantime, Oppenheimer maintains that it wasn’t getting back at Dever when he was at first demoted in the summer of 2007 and then given six months to leave the brokerage firm.

Related Web Resources:
Oppenheimer fight proves costly for ex-manager, Boston.com, January 18, 2011

Massachusetts Securities Division

Yet Another Securities Case Against a Financial Firm Alleged to Have Aided Enron in its Scams is Dismissed Without Liability in Texas!

Published on: January 29, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Many financial firms settled claims filed by those defrauded in the Enron debacle. Meanwhile, many more Enron securities fraud cases have been dismissed by a court system riddled with special interest influence. No financial firm has been held liable and certain individuals at those firms were held liable only to have their convictions reversed. Thus, perhaps the largest, most notorious and most brazen fraud ever perpetuated by a publicly traded firm against its own shareholders will end not with a bang, but with a whimper.

Earlier this month, securities charges against Deutsche Bank Securities Inc. were dropped in the U.S. District Court for the Southern District of Texas. The financial firm was accused of fraudulently getting two entities to buy beneficial ownership interests in Osprey Trust. The special purpose entity was allegedly secured using worthless investments bought from Enron. The plaintiffs contend that the assets were “dumped” into Osprey as part of a bigger scheme to defraud investors and manipulate Enron’s financial statements.

The court said that because the plaintiffs did not specify any affirmative misrepresentation made by a Deutsche Bank official, they did not and “cannot plead with particularity either scienter on the part of a Deutsche Bank speaker or writer or reasonable reliance … on a claimed misrepresentation.” The court also said that the financial firm’s stated motive for alleged defraud, which allegedly was for tax benefits and high fees, is a common incentive among financial firms and their officers and therefore is not enough for stating “a claim for fraud” under the laws of Texas and New York.

Related Web Resources:
Newby, et al v. Enron Corporation, et al., U.S. District Court for the Southern District of Texas
The Fall of Enron, Chron.com Continue Reading ›

SEC Adopts New Rules Regarding Shareholder Say-On-Pay

Published on: January 29, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Us Securities and Exchange Commission has adopted a “say-on-pay” rules that will allow the shareholders of publicly listed companies to weigh in on executive compensation via advisory votes. The new rules, which implements a Dodd-Frank Wall Street Reform and Consumer Protection Act, gives shareholders more input regarding executive compensation. This should hopefully help curb the practice of paying financial firm executives lavish compensation packages. The SEC approved the vote by 3-2 on Tuesday.

Shareholders would get a vote on “golden parachute” pay packages related to an acquisition or merger and companies would have to offer up more disclosures. Although the vote on say-on-pay is non-binding, companies will likely want to avoid being associated with a “no” vote. Some companies, including Apple Inc. and Microsoft Corp, have already adopted say-on-pay proposals on their own.

Also that day, the SEC proposed new reporting requirements for private fund advisers, with advisers to private funds valued at more than $1 billion upheld to more frequent and rigorous reporting. Reporting requirements would vary depending on the type of fund. Meantime, advisers to funds valued at under $1 billion would only have to report once a year on leverage, credit providers, fund strategy, and credit risk related to trading partners.

In addition, advisers of large hedge funds would also be required to disclose more information than private equity fund managers because hedge funds are considered more high risk and use leverage more often than private equity funds. Per SEC Chairman Mary Schapiro, the toughest reporting requirements under the rule would affect approximately 200 large hedge fund advisers in the US who represent over 80% of assets under management, as well as some 250 large private equity fund advisers.

The rule requires that the Financial Stability Oversight Council be given better information about hedge funds, liquidity funds, and private equity funds. This is for making sure that trading activities do not endanger the wider marketplace.

The SEC is also proposing to make it tougher for individuals to qualify as “high net-worth” when it comes to certain high risk investments.

Related Web Resources:

SEC, in Split Vote, Adopts ‘Say on Pay’ Rule, Wall Street Journal, January 25, 2011

Say-on-pay rule proposal, SEC, January 25, 2011

Financial Stability Oversight Council, US Department of the Treasury

Guilty Plea for Financial Adviser Who Used UBS Tips in $1M Healthcare Insider Trading Scheme

Published on: January 28, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Registered investment adviser Alexei Koval has pleaded guilty to three counts of securities fraud and one count of conspiracy to commit securities fraud over his role in a $1 million insider trading scheme. Koval, a registered investment adviser, allegedly acted on tips about provided by his friend Igor Poteroba, an ex-UBS Securities LLC investment banker, about the healthcare industry.

Koval admitted to U.S. District Judge Paul Crotty that he and Poteroba engaged in securities fraud between 2005 and February 2009. The two of them used coded email messages to communicate. Poteroba also provided the tips to a third person, Alexander Vorobiev.

Koval, who used to work for Citigroup Asset Management (C.N), Northern Trust Bank (NTRS.O), and Legg Mason Inc. (LM.N) subsidiary Western Asset Management, says he paid money for the insider information about upcoming announcements regarding acquisitions or mergers involving Molecular Devices Corp, Guilford Pharmaceuticals Inc, Via Cell Inc, PharmaNet Development Group Inc, Indevus Pharmaceuticals Inc., and Millennium Pharmaceuticals Inc.

As part of Koval’s plea deal, he will forfeit at least $1,414,290 in illegal proceeds. He is facing fines in the millions of dollars and up to 65 years in prison. Koval is also facing civil securities fraud charges with the US Securities and Exchange Commission.

Illegal Insider Trading
The SEC describes this type of illegal trading usually refers to the selling or buying of a security that involves a breach of fiduciary trust or duty while in possession of nonpublic, material information about the security. It can involve the “tipping” of such information to others, actual trading by the person who was “tipped,” and trading by those who were in possession of the insider information.

Related Web Resources:
UBS Banker Poteroba’s Co-Defendant Koval Pleads Guilty, Business Week, January 7, 2011
Securities and Exchange Commission v. Igor Poteroba, Aleksey Koval, Alexander Vorobiev, and Relief Defendants Tatiana Vorobieva and Anjali Walter, Civil Action No. 10-civ-2667 (AKH), SEC, November 4, 2011
Insider Trading, SEC Continue Reading ›

Do Brokers Owe a Fiduciary Duty to Clients?

Published on: January 27, 2011 | by Shepherd Smith Edwards & Kantas, LLP

An article published this week in Slate talks about how despite what many might think, brokers in fact do not owe clients a fiduciary duty to give them the best advice possible. This could very well explain why some brokers don’t believe they are really crossing the line-or, at the very least, that they can get away with it-when giving advice that isn’t necessarily bad but doesn’t take into account a client’s best interests.

In the olden days, giving a broker this much leeway made more sense. Brokers were there to sell or buy bonds and stocks and it was the investment adviser whose job it was (and still is) to give advice about financial goals and investment strategy. The latter is already upheld to a fiduciary standard requiring that he/she act in a customer’s best interests without regard to personal interest.

Now, however, the distinction between investment advisers and brokers has gotten blurrier. Brokers also now give advice and investment advisers also buy for clients the securities that they’ve recommended.

The Securities and Exchange Commission is now recommend a common fiduciary standard that would apply to both brokers and investment advisers. The Dodd-Frank Wall Street Reform and Consumer Protection Act gave the SEC the power to set up a uniform fiduciary standard, which would hold brokers much more accountable than the current “suitability standard” that they must meet. Under the suitability standard, a broker can meet the standard just by recommending a suitable financial product to the investor even if it isn’t the best one for that client.

With the current lack of a fiduciary standard for brokers, it is the investor who suffers when sustaining losses because of investing in a product that was recommended but not necessarily the most suitable. This lack of standard can also negatively impact how much a broker fraud victim can recover in arbitration or in court. For many investors, not being able to recoup their losses can mean the loss of their life savings, no early retirement, a decreased standard of living, and other consequences.

Related Web Resources:
Does Your Broker Love You?, Slate, Monday, January 24, 2011
SEC Recommends Common Standard for Brokers, Advisers, BusinessWeek, January 22, 2011
Study on Investment Advisers and Broker Dealers, SEC, January 11, 2011 (PDF)

Most Investors Want Fiduciary Standard for Investment Advisers and Broker-Dealers, Say Trade Groups to SEC, Stockbroker Fraud Blog, October 12, 2010 Continue Reading ›

SEC Proposes New Rule to Verify Swap Transactions

Published on: January 27, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Under Rule 15Fi-1, the Securities and Exchange Commission’s proposed rule under the 1934 Securities Exchange Act, certain security-based swap participants and security-based swap dealers would provide counterparties with an electronic “trade acknowledgement” to acknowledge and verify specific security-based swap transactions. The SEC’s proposal comes under the Dodd-Frank Wall Street Reform and Consumer Protection Act’s mandate that the commission set up standards for the documentation and confirmation of SBS transactions.

Per the proposal, an SBC entity would have to fulfill the following requirements:
• Depending on how the transaction is executed, give trade acknowledgement within 15 minutes, 30 minutes, or 24 hours of execution.

• Electronic processing of security-based transactions for SBS entities that have the capability.

• Written policies and procedures designed to get verification of the terms delineated in the trade acknowledgement.

The proposed rule would specify which SBC entity has to provide trade acknowledgement, let an SBS entity fulfill the requirements of the rule through the processing of the transaction through a registered clearing house, identify which details must be contained in the trade acknowledgement, and for SBS Entities that are also brokers, give limited exemption from the requirements of Rule 10b-10 under the Exchange Act.

Other recent SBS-related rules that the SEC has proposed under the Dodd-Frank Act deal with the mandatory clearing of security-based swap, the defining of security-based swap terms, security-based swap reporting and repositories, security-based swap fraud, and security-based swap conflicts.

Related Web Resources:
SEC Proposes Rule for the Timely Acknowledgment and Verification of Security-Based Swap Transactions, SEC.gov, January 14, 2011

Proposed Rule, SEC (PDF)

Even as Ponzi Schemers Serve Time Behind Bars, Investors Are Left Coping with Millions in Financial Losses

Published on: January 25, 2011 | by Shepherd Smith Edwards & Kantas, LLP

While the multi-billion dollar Stanford and Madoff Ponzi scams are among the larger fraud schemes that have dominated the news headlines, “smaller” Ponzi scams resulting in losses in the millions have cropped up throughout the US. Some of these fraudsters have been convicted and are paying for their crimes behind bars. Unfortunately, the many investors who have not recovered their lost investments are still paying a price, too.

Ponzi scammer Jeremy Hart is now sentenced 9 years in prison after pleading guilty to one count of felony securities and one count of felony theft. Hart and Richard Novaria ran a Ponzi scam between July 2006 and May 2008 that defrauded investors of $3.4 million. Many of the investors were clients of Hart Financial Inc. and they had placed their money in Dreamweaver Foundation, which was run by Novaria. Although they were promised returns of 7 to 14%, no money was made and Hart used investors’ funds to pay for personal expenses.

Also recently pleading guilty to fraud, including money laundering and mail fraud, is ex-Park Capital Management Group manager Donna Jones. She served as the assistant of Brentwood financial adviser Michael J. Park. Jones has admitted to running a Ponzi scam with Park that bilked investors of PCMG funds of over $10 million. The money was supposed to have been invested in marketable securities.

More than 10 investors invested more than $10 million in the bogus PCMG investment accounts. Only $4 million has been recovered. Park has already been sentenced to 8 years in prison. Jones hasn’t received her sentence yet.

Also now behind bars is Keith Epstein of Epstein and Rich Investment Firm. He is accused of defrauding elderly members and their families of millions. Investors wrote Epstein personal checks for investments that he was supposed to make on their behalf. Instead, he deposited the funds in his personal account.

Related Web Resources:
Fort Collins man sentenced to 9 years for Ponzi scheme, Coloradoan, January 21, 2011
Assistant pleads guilty in Brentwood Ponzi scheme, Tennessean, January 21, 2011
Victims Of Ponzi Scheme Hope Others Come Forward, WNEM, January 21, 2011
Number of Ponzi Scam Collapses Increased Significantly Last Year, January 4, 2011 Continue Reading ›

44% of Insider Traders Convicted of Insider Trading in New York Manage to Get Out of Jail Before Even Serving Time

Published on: January 25, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Nearly Half of Those Committed Of Insider Trading Crimes Avoid Prison

According to Bloomberg News, nearly half of the defendants sentenced for insider trading crimes Manhattan federal court since 2003 have managed to avoid prison because they cooperated with prosecutors. That’s 19 out of the 43 people. The average defendant received a prison sentence of 18.4 months.

How are these insider traders managing to get such light sentences or getting away with not serving any time at all? Cooperating with prosecutors and pleading guilty to insider trading helps. So does suffering from an illness or having to take care of a sick family member.

US sentencing guidelines factor in how much of a profit an offender actually made, as well as the defendant’s scope of involvement in the crime. The US Sentencing Commission reports that in 7,617 fraud cases in fiscal 2009, the average sentence was 21.8 months. 94.9% of the cases ended with guilty pleas. 5.1% went to trial.

Sentences for Insider Traders Include Probation or Home Confinement

Bloomberg reports that per a review of government statements put out by the Manhattan U.S. Attorney’s Office since 2003, sentences for many of the insider traders convicted included home confinement or probation. Payment of restitution and fines also were usually required.

Insider traders who pleaded guilty generally received sentences of about 14.6 months—although if the case received a lot of media attention, lengthier prison sentences can result.

Of the four insider trading cases since 2003 that did go before a Manhattan jury, one case was thrown out right before sentencing. That said, persons convicted of insider trading generally are sentenced to longer prison terms (on average, the three defendants convicted in court of insider trading received 68 months sentences) than the ones received by those who pleaded guilty.

For example, Ex-Credit Suisse Group AG banker Hafiz Muhammad Zubair Naseem was sentenced to 10 years behind bars after a jury convicted him of leading a $7.8 million insider trading scam. Last December, ex-Jefferies Paragon Fund manager Joseph Contorinis was ordered to serve six years in prison for making over $7 million through insider trading.

Related Web Resources:
Insider Defendants Avoid Prison in 44% of N.Y. Cases, Bloomberg, January 19, 2011

Insider Trading, SEC

US Sentencing Commission

Ex-Portfolio Managers to Pay $700K to Settle SEC Charges that They Defrauded the Tax Free Fund for Utah

Published on: January 22, 2011 | by Shepherd Smith Edwards & Kantas, LLP

According to the US Securities and Exchange Commission, while working at Aquila Investment Management LLC, ex-portfolio managers Thomas Albright and Kimball Young allegedly defrauded the Tax Free Fund for Utah (TFFU)-a mutual fund that was heavily invested in municipal bonds. Now, the two men have settled the securities fraud charges for over $700,000. However, by agreeing to settle, Young and Albright are not admitting to or denying the allegations.

The SEC claims that without notifying the TFFU’s board of trustees or Aquila management, the two men started making municipal bond issuers pay “credit monitoring fees” on specific private placement and non-rated bond offerings. The fees, which were as high as 1% of each bond’s par value, were charged to supposedly compensate Albright and Young for additional, ongoing work that they say was required because the bonds were unrated. The SEC says that credit monitoring was actually part of the two men’s built-in job responsibilities and that although deal documents made it appears as if the fees (totaling $520,626 from 2003 to April 2009) had to be paid and would go to TFFU, they actually end up in a company that Young controlled and that Albright owned equal shares in.

The SEC says that after management at Aquila found out in 2009 that Young and Albright were charging these unnecessary fees, the financial firm suspended the two men right away and reported them to the agency. The agency says the two men violated their basic responsibilities as investment advisers of mutual funds when they failed to act in the fund’s best interests.

Related Web Resources:
The SEC Order Against Young (PDF)

The SEC Order Against Albright (PDF)

Tax Free Fund for Utah

Municipal Bonds, Stockbroker Fraud Blog Continue Reading ›

Bank of America Settles for $4.25M New York Securities Fraud Allegations that Merrill Lynch & Co. Inc. Hid Subprime Mortgage Risks from Investors

Published on: January 22, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Bank of America Corp. (BAC) and the New York State Common Retirement Fund have settled the latter’s securities fraud lawsuit accusing Merrill Lynch & Co. Inc. of concealing the risks involved in investing in the subprime mortgage market. Under the terms of the settlement, Bank of America, which owns Merrill Lynch, will pay $4.25 million.

The comptroller’s office is keeping the terms of the securities settlement confidential. State Comptroller Thomas P. DiNapoli did announce last July that the New York pension fund wanted to recover losses sustained by investors from Merrill’s alleged “fraud and deception” that “artificially inflated” the value of Merrill stock, which rapidly declined when the extent of exposure was revealed.

By opting out of a similar class action complaint involving other funds, the state pension fund has a chance of recovering more from the investment bank. Another securities lawsuit that has yet to be resolved seeks to recover losses related to Bank of America’s proxy disclosure when acquiring Merrill.

The demise of the subprime mortgage market a few years ago contributed to the crisis in the housing market and the economic collapse that has affected millions in the US and the rest of the world. Investors have since stepped forward and filed securities claims and lawsuits against investment banks, brokers, and others in the financial industry for misrepresenting the risks involved with subprime mortgages that have resulted in losses in the billions.

DiNapoli, BOA/Merrill Lynch settle for $4.25 million, Capitol Confidential, January 13, 2011

The Subprime Mortgage Market Collapse: A Primer on the Causes and Possible Solutions, The Heritage Foundation

NY comptroller settles Merrill Lynch fraud suit, BusinessWeek, January 13, 2011

New York State Common Retirement Fund