Investor Lawyers Blog

Oppenheimer & Co. Ordered to Reveal Documents Related to Employee Dispute

Published on: December 22, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Superior Court Judge Frances McIntyre has denied brokerage firm Oppenheimer & Co.‘s request to impound hundreds of records that are key in a dispute with an ex-employee. The ex-employee is James Dever, who used to be a manager at the broker-dealer’s Boston office. Judge McIntyre found that public interest in the records “substantially outweighs” the financial firm’s interest in keep the documents in secret.

Oppenheimer has been especially invested in keeping two documents confidential. One document is ann internal memo about a 2004 audit involving the Boston branch. Dever has contended that he needs the document to prove that Oppenheimer hid facts for its own protection and so that it could blame him for the alleged financial fraud committed by broker Stephen J. Toussaint, who stole $135,000 from a couple of senior investors.

Dever says that Oppenheimer did not act upon his advice when in 2004 he pressed the brokerage firm to let go of Toussaint. The ex-Oppenheimer manager says that Oppenheimer fired him because he wouldn’t lie to regulators about the broker, who ended up in jail over a related case. Dever also says that no real audit took place in 2004, which is a claim that Oppenheimer has said is “baseless and without merit.”

He contends that because his name is linked to the Toussaint securities case, which Oppenheimer and its Albert “Bud” G. Lowenthal settled with Massachusetts for $1 million, he has had a hard time finding clients and work.

The case puts to the test the confidential arbitration system that has been set up to resolve disputes within the investment industry. Whether it is an employee or a customer is in a dispute with a brokerage firm, almost all disagreements with a brokerage firm have to go to arbitration.

Related Web Resources:
Judge tells Oppenheimer to reveal documents, Boston.com, December 21, 2010
Secrecy Order May Go Too Far, December 30, 2009 Continue Reading ›

Merrill Lynch Doesn’t Have to Arbitrate ARS Claims by LSED, Says Appeals Court

Published on: December 22, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Court of Appeals for the Second Circuit is affirming a district court’s ruling that Merrill Lynch & Co. Inc. does not need to arbitrate a disputes over auction-rate securities losses suffered by the state of Louisiana and the Louisiana Stadium and Exposition District (known collectively as LSED). The court noted that even assuming that LSED was entitled to arbitration, the district court reached the right conclusion when it found that LSED waived its right to arbitrate when it made known that it intended to resolve its ARS dispute through litigation and took numerous steps to make this happen.

Per the court, LSED, which owns the New Orleans Superdome, retained Merrill Lynch as the broker-dealer and underwriter to restructure its bond debt. After Hurricane Katrina damaged the Superdome, LSED also looked to Merrill about financing the repairs.

In 2006, LSED issued $240 million in municipal bonds as ARS. LSED’s auctions failed in 2008.

In 2009, LSED filed ARS lawsuits against three Merrill entities and bond insurer Financial Guaranty Insurance Co. One complaint was submitted to the U.S. District Court for the Eastern District of Louisiana, while another was filed in Louisiana state court. The Judicial Panel on Multidistrict Litigation would go on to centralize the cases, along with other ARS lawsuits, in the Southern District of New York. Meantime, the defendants sent a letter to LSED asserting that the plaintiff could not obtain relief on the basis of the factual allegations it submitted in its lawsuit.

Prior to filing its third amended complaint, LSED suggested that the case be resolved in arbitration. When the defendants did not respond, LSED moved to compel arbitration. It claimed that because Merrill subsidiary Merrill Lynch Pierce Fenner & Smith Inc. is a Financial Industry Regulatory Authority member, the broker-dealer is required to arbitrate customer disputes.

The district court denied LSED’s motion.

Louisiana Stadium and Exposition District

Analyst’s downgrade tanks Skechers’ stock (SKX). Should Wall Street analysts be immune from scrutiny?

Published on: December 21, 2010 | by Shepherd Smith Edwards & Kantas, LLP

It is often said that one critical statement to a child offsets 10 positive ones. The same effect can be found in the stock market, where an analyst’s downgrade is worth, in dollars and cents, sometimes ten times that of an upgrade. Take for example the price movement of shares of shoe company Skechers (SKX) which today fell almost 8%, over $70 million in market capitalization, after an analyst downgraded the stock.

For the most part, the law protects opinions from prosecution or law suits. But shouldn’t regulators be allowed to look behind reported opinions to determine whether action is warranted? Huge damages can result from inaccurate opinions. The best example is bond ratings by recognized services, with mega-billions recently lost on investments which had been deemed ultra-high grade. But losses can also result from negative opinions.

There is no proof, evidence or even insinuation that an analyst at Sterne Agee had any nefarious goal to cause holders of Skechers stock to lose $70 million today. Nor is there any information to link this downgrade to the short interest in Skechers’ stock, last reported at one-fourth of the stock’s float. Yet, those short the shares collectively profited by about $10 million today.

SEC Charges Two Ex-Wachovia Brokers Over Alleged $8 Million Elder Financial Fraud

Published on: December 20, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Two former Wachovia Securities LLC brokers, Eddie W. Sawyers and William K. Harrison, have been charged by the Securities and Exchange Commission with six counts of securities fraud. The two men, who previously operated Harrison/Sawyers Financial Services, are accused of defrauding at least 42 elderly investors of their retirement savings, which resulted in some $8 million in financial losses. The SEC is seeking a permanent injunction against the two men and their representatives from further violations of securities regulations, as well as the repayment of the funds (with interest) and civil penalties.

Per the SEC, between December 2007 and October 2008, Sawyers and Harrison, who are related by marriage, pitched investments with Harrison/Sawyers Financial Services to Wachovia clients. They claimed the investments were “foolproof,” a “sure thing,” and an opportunity to make a 35% without risking their principal investment. This was not, however, the case. One couple, who Sawyers convinced that they should invest $100,000 later discovered that only $16,000 remained in their account.

The SEC claims that the two men solicited unsophisticated clients who were heavily invested in equities and mutual funds and had a conservative investment approach. Sawyers and Harrison also transferred assets to online options-trading accounts under their control.

While some online optionsXpress accounts were set up in clients’ names, others were in accounts under the name of Harrison’s spouse Deana or under both both their names. Clients did not receive statements from the group.

After getting a client’s signature on a blank-trading authorization form, Deanna Harrison would then be appointed the client’s power of attorney and agent for the accounts. In 2008, Sawyers and Harrison allegedly took out $234,000 from three client accounts as compensation for their services.

The SEC says that in a resignation letter to Wachovia, Harrison confessed to misdirecting about $6.6 million from 17 Wachovia clients to trade online. He also admitted that he ran the online trading without getting the authorization of Wachovia or the investors.

Wachovia says that the minute they discovered the alleged securities fraud, it notified its primarily regulator, cooperated with regulators and law enforcement, and took proactive steps to give clients that were impacted full restitution.

Related Web Resources:
Former Wachovia brokers charged with defrauding elderly customers in Surry, losing $8 million, Winston-Salem Journal, December 17, 2010
SEC accuses 2 NC brokers of defrauding clients, Bloomberg/AP, December 16, 2010
Wachovia, Stockbroker Fraud Blog
Institutional Investor Securities Blog
Continue Reading ›

Why Whistleblowers Should Act Quickly and Consult Competent Legal Counsel

Published on: December 18, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Court of Appeals for the Ninth Circuit has affirmed that an ex-Nordstrom Inc’s (JWN) technology official’s complaint that her firing violated the Sarbanes-Oxley Act’s whistleblower protections is untimely. According to Judge Milan D. Smith Jr., SOX’s 90-day limitations period started running on plaintiff Carole Coppinger-Martin’s last day on the job and not when she discovered that her termination by Nordstrom was in alleged retaliation for reporting potential Securities and Exchange Commission violations. The decision affirms an administrative law judge’s ruling.

Coppinger-Martin was hired as the business information systems strategic planning group chief technical architect for Nordstrom in 1999. Per the court, during the summer of 2005, she told her immediate supervisor that she thought that Nordstrom’s information systems had “security vulnerabilities” that exposed the company to the possible SEC violations. Soon after making her report, Coppinger-Martin was given an unfavorable review. In November of that year, Nordstrom told her that it was eliminating her job responsibilities, there were no other opportunities for her within the company, and that they were terminating her employment in January 2006. Coppinger-Martin worked for the company until April 21, 2006.

On July 19, a Nordstrom employee allegedly told her that other workers were attending to her former job duties. It was then that she realized that she may have been let go for notifying senior management about her SEC concerns.

On October 13, Coppinger-Martin submitted a SOX whistleblower claim to the Occupational Safety and Health Administration, which denied her relief. While asked that an administrative law judge hear case, Nordstrom moved to have the case dropped as untimely on the grounds that the 90-day limitations period started running either in November 2005, when she was told that she was being let go, or on April 21, 2006, which was her last day on the job.

Coppinger-Martin argued that the 90-day limitations period did not start running until July 19 when she first found out that her job duties had not been eliminated. She attributed Nordstrom’s alleged hiding of the facts behind its retaliatory motive to her accrual date of claim.

In affirming the ALJ’s finding, the 9th Circuit noted that it has held in the past that a plaintiff’s claim accrues upon finding out about the actual injury and not when a “legal wrong” is suspected. The court concluded for Coppinger-Martin, this would have been when she found out that she was fired.

Related Web Resources:
Coppinger-Martin v. Solis

Sarbanes-Oxley Act

Institutional Investor Securities Blog
Continue Reading ›

Hedge Fund Owner of Trueblue Strategies LLC Settles SEC Charges that He Hid Investor Trading Losses

Published on: December 18, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Hedge fund manager and investment adviser Trueblue Strategies LLC owner Neil Godbole has agreed to settle for $40,000 Securities and Exchange Commission charges that he hid his investors’ trading losses. Godbole also agreed to an advisory industry bar for a minimum of five years and to cease and desist from future 1940 Investment Advisers Act violations. By settling, he is not denying or agreeing that he committed any wrongdoing.

Per the securities fraud charges, Godbole started to manage the Opulent Lite LP, a now failed hedge fund, in 2005. At its height, the hedge fund managed about $30 million in assets and had about 70 investors. Until 2008, Godbole invested mainly in S&P index options and short term Treasury bonds.

In February 2008, he lost about $8.3 million as a result of a number of unprofitable deals, which he did not disclose. Also, the SEC claims that Godbole told investors that the fund was valued at $28.7 million when it was actually worth $18.5 million.

In attempt to make up the financial losses, Godbole started to use what he called a “rollover strategy” that involved the opening of options positions when each monthly trading period ended. The SEC says that throughout that year, the hedge fund manager misrepresented the fund’s trading results and asset value. When he told investors in December 2008 that the fund’s asset value was more than $26 million, the asset value had actually dropped to under $14.4 million.

The SEC says that any losses for that year that Godbole did disclose were “paper losses” related to the rollover strategy and in 2008, he had the hedge fund pay his management fees based on the inflated fund value. Investors were harmed when he had the fund redeem units at an inflated value.

It wasn’t until 2009 that Godbole notified investors of the funds’ losses and actual financial state. Many investors sought to pull out. The hedge fund was liquidated by March of that year.

Related Web Resources:

Saratoga fund manager settles with SEC, Business Journal, December 2, 2010

1940 Investment Advisers Act, SEC

A Texan is Among Those Arrested in Insider Trading Crackdown Involving Apple Inc., Dell, and Advanced Micro Devices’ Confidential Data

Published on: December 16, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Federal prosecutors have arrested four people on insider trading charges related to the alleged revealing of secrets about Apple Inc.’s iPhone and other technology products to hedge funds looking for a trading advantage. Those arrested included Primary Global Research executive James Fleishman and “expert consultants” Mark Anthony Longoria from Texas, Walter Shimoon from California, and Manosha Karunatilaka of Massachusetts. All of the defendants are charged with wire fraud. The three “expert consultants” are also charged with conspiracy to commit securities fraud and wire fraud.

According to prosecutors, Fleishman arranged it so that Primary Global Research clients, such as hedge funds, could talk to the consultants, who gave them highly confidential information about Apple sales forecasts, new iPhone product features, and a secret project that was to become the iPod. Primary Gold Research allegedly paid consultants over $400,000 to engage in these phone conversations.

The case is an offshoot of an investigation into Galleon Funds founder Raj Rajaratnam and more than 20 others. Rajaratnam has pleaded not guilty to securities fraud. He claims that he only traded information to which the public also had access. Wiretaps were used to build the Galleon Funds case and this insider trading case.

According to the complaint, Flextronics International Limited business development senior director Shimoon illegally gave out insider information about the iPhone that had been given to Flextronics employees. The company and Apple had worked together on charger and camera components for both the iPod and iPhone. Shimoin was also caught on wiretaps saying he would obtain secrets about sales involving Research In Motion Ltd., which is the company that manufacturers Blackberries.

Texan Longoria is accused of giving out confidential information about Advanced Micro Devices, where he used to work as a supply chain manager. Another Primary Global Research consultant, ex- Dell global supply manager Daniel Devore, has pleaded guilty to conspiracy and wire fraud charges. Devore has said that Primary Gold Research paid him approximately $145,000 to provide insider information to company employees and clients about Dell.

Related Web Resources:
Insider trading case focuses on Apple’s secrets, Victoria Advocate/AP, December 16, 2010
Four more arrests in insider trading case involving Primary Global Research, SFGate, December 16, 2010
Texas Securities Fraud, Stockbroker Fraud Blog
Insider Trading, Stockbroker Fraud Blog Continue Reading ›

Bank of America to Pay $137M Over Alleged Investment Scam To Pay Municipalities Low Interest Rates on Investments and $9M Over Alleged Bid-Rigging Scheme to Nonprofits

Published on: December 16, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Bank of America has agreed to pay $137 million to settle charges that it was involved in a financial scheme that allowed it to pay cities, states, and school districts low interest rates on their investments. The financial firm allegedly conspired with rivals to share municipalities’ investment business without having to pay market rates. As a result, government bodies in “virtually every state, district, and territory” in this country were paid artificially suppressed yields or rates on municipal bond offerings’ invested proceeds.

Bank of America has agreed to pay $36 million to the Securities and Exchange Commission and $101 million to federal and state agencies. The Los Angeles Times is reporting that $67 million will go to 20 US states. BofA will also make payments to the Office of the Comptroller of the Currency and the Internal Revenue Service. The SEC contends that from 1998 to 2002 the investment bank broke the law in 88 separate deals.

In its Formal Agreement with the Office of the Comptroller of the Currency, Bank of America agreed to strengthen its procedures, policies, and internal controls over competitive bidding in the department where the alleged illegal conduct took place, as well as take action to make sure that sufficient procedures, policies, and controls exist related to competitive bidding on an enterprise wide basis. The OCC is accusing the investment bank of taking part in a bid-ridding scheme involving the sale and marketing of financial products to non-profit organizations, including municipalities.

Per their Formal Agreement, the bank must pay profits and prejudgment interest from 38 collateralized certificate of deposit transactions to the non-profits that suffered financial harm in the scam. Total payment is $9,217,218.

Related Web Resources:

Bank of America to Pay $137 Million in Muni Cases, Bloomberg, December 7, 2010

OCC, Bank of America Enter Agreement Requiring Payment of Profits Plus Interest to Municipalities Harmed by Bid-Rigging on Financial Products, Office of the Comptroller of the Currency, December 7, 2010

Securities Fraud Lawsuit Seeks to Recover $49M From 96 Independent Broker-Dealers Liable Over Sales of Tenant-In-Common Exchanges

Published on: December 15, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The trustee for the DBSI Inc. bankruptcy is suing 96 independent broker-dealers for securities fraud related to suspect tenant-in-common exchanges that were sold to investors. James Zazzali is seeking about $49 million in commissions earned.

In his securities fraud complaint, Zazzali, who is a retired Supreme Court of New Jersey justice, claims that DBSI’s TIC deals were part of a $600 million Ponzi scam. The lawsuit contends that the following companies made the most commissions from selling DBSI:

• Berthel Fisher & Company Financial Services Inc.
• QA3 Financial Corp.
• DeWaay Financial Network LLC,
• The Private Consulting Group • Questar Capital Corp.

22 of the broker-dealers named as defendants are no longer in business. Zazzali contends that the commissions were fraudulent transfers by DBSI and that due to the Ponzi nature of the enterprise, old investors benefited from funds put in by new investors. The trustee believes that the broker-dealers should return investor payments and commissions, which should be distributed to DBSI creditors.

The Securities and Exchange Commission has not filed securities fraud charges against DBSI. Other private placement issuers, such as Provident Royalties and Medical Capital Holdings, were charged by the regulator last year. Provident Royalties’ receiver sued over 40 broker-dealers this year in an effort to obtain claw-back in principal and commissions from firms that sold private placements.

TICs are a form of real estate ownership involving two or more parties with fractional interests in a property. DBSI Inc. was one of the biggest distributors and creators of the product until it defaulted on investor payments and filed for Chapter 11 bankruptcy protection in November 2008. Before then, independent broker-dealers actively sold DBSI TICs. The financial product grew in popularity in 2002 after the Internal Revenue Service issued a ruling that let investors defer capital gains on commercial real estate transaction involving property exchanges.

Related Web Resources:
Sour real estate deals land B-Ds in hot water, Investment News, December 12, 2010
Something in common: Firms that sold TICs from DBSI, Investment News, December 15, 2010
Iowa brokerages included in lawsuit, DesMoines Register, December 14, 2010
Institutional Investors Securities Blog
Continue Reading ›

Goldman Sachs & Co. Clearing Unit Must Pay Unsecured Creditors of Bayou Hedge Funds $20.5M FINRA Arbitration Award, Says District Court

Published on: December 14, 2010 | by Shepherd Smith Edwards & Kantas, LLP

A district court has rejected Goldman Sachs & Co.’s (GS ) challenge to a $20.5 million securities fraud award for unsecured creditors of the failed Bayou hedge funds. The unsecured creditors are blaming the investment bank of failing to look at certain red flags and, as a result, facilitating the massive scam. The U.S. District Court for the Southern District of New York said it was sustaining the award issued by the Financial Industry Regulatory Authority arbitration panel.

The court said that contrary to Goldman’s argument, the FINRA panel “did not ‘manifestly disregard the law’ when reaching its conclusion. Also, the court noted that the panel had found that Goldman Sachs Execution and Clearing unit was not innocent of wrongdoing in that it failed to take part in a “diligent investigation” that could have uncovered the fraud.

The Bayou Hedge Funds group collapsed in 2005. According to regulators, investors lost over $450 million as a result of the false performance data and audit opinions that were issued. The Securities and Exchange Commission and the Justice Department sued the group’s founders, Daniel Marino and Samuel Israel III over the investors’ financial losses and the firm’s collapse. Both men have pleaded guilty to criminal charges and are behind bars.

The court not only disagreed with the Goldman Sachs clearing unit that the panel was not in manifest disregard of the law, but also, it found that as Goldman’s client agreements with the Bayou funds provided it with “broad discretion” over the use of securities and money in the funds’ accounts, it was not unusual for a “reasonable arbitrator” to find that Goldman’s rights in relation to the accounts provided it with “sufficient dominion and control to create transferee liability.”

Related Web Resources:

Court Rebuffs Goldman ChallengeTo $20.5M Bayou Arbitration Award, BNA, December 9, 2010

Goldman Sachs, Stockbroker Fraud Blog