Investor Lawyers Blog

Securities Lawsuit Accusing Merrill Lynch of Facilitating Sale of Mortgage-Backed Securities to King County, Washington Can Proceed, Says Court

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

The U.S. District Court for the Western District of Washington says that King County, Washington has pleaded sufficient facts to continue with its securities fraud lawsuit accusing Merrill Lynch, Merrill Lynch, Pierce, Fenner and Smith Inc. and Merrill Lynch Money Markets Inc. of facilitating its purchase of allegedly toxic mortgage-backed securities and violating the Washington State Securities Act. The defendants had sought to dismiss the securities fraud complaint.

Per the plaintiff, the defendants sold more than $100 million of the toxic assets to King County through the entities Mansail II and Victoria Finance in 2007. At the time, the county had wanted to make conservative investments. Not long after, Mansail failed and Victoria was downgraded to “junk” and placed on negative credit watch.

The county, claiming $60 million in losses, contends that the defendants played the role of seller or dealer of the commercial paper but did not fulfill its responsibility of ensuring there were sufficient procedures in place so that unwise investments were avoided and adequate warning of investment risks were provided. The county also contends that Merrill Lynch and its subsidiaries knew that the securities it was selling were toxic and had even made efforts to get rid of its MBS.

SROs Immune from Broker-Dealer’s Lawsuit Over Bylaw Changes Related to Creation of FINRA, Says Appeals Court

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

Recently, the U.S. Court of Appeals for the Second Circuit dismissed Standard Investment Chartered Inc.’s lawsuit against the Financial Industry Regulatory Authority, New York Stock Exchange Group Inc., and NASD over alleged misstatements in a proxy to obtain member approval for bylaw changes that ultimately resulted in the creation of FINRA. In a per curiam decision, the court held that self-regulatory organizations and their officers are immune from lawsuits over bylaw amendments because these are “inextricable” from the SRO’s regulatory roles.

The plaintiff, broker-dealer and former NASD member Standard Investment Chartered Inc., claims that NASD and certain officials issued material misrepresentations in the proxy statement that solicited approval of bylaw amendments so that the merger between NASD and parts of NYSE Regulation Inc. that became FINRA would take place. The broker-dealer contends that the proxy statement misrepresented that $35,000 was the most that the Internal Revenue Service had authorized NASD to pay members over the union.

Last March, the U.S. District Court for the Southern District of New York dismissed Standard Investment Chartered Inc.’s lawsuit, as well as a similar claim submitted by NASD member Benchmark Financial Services Inc. The court said that the union between the SROs was “entitled to absolute immunity” because it was part of their delegated regulatory functions. Standard Investment Chartered appealed the ruling.

Now, the Second Circuit has affirmed the district court’s ruling. The court also noted that NASD can’t change its bylaws without Securities and Exchange Commission approval.

Other defendants in the lawsuit include Securities and Exchange Commission chairman Mary Schapiro, who was NASD’s CEO when the regulatory body merged with NYSE, Pershing LLC Chairman Richard Brueckner, and FINRA senior vice president Howard Schloss.

Related Web Resources:
Appeals Court Upholds Lower Court Ruling on Finra Damage Suits, Bloomberg, February 23, 2011
Court Finds SROs Immune From Lawsuit Over Bylaw Changes to Effect FINRA Creation, BNA – Securities Law Daily, February 23, 2011
Continue Reading ›

Ameriprise Financial Inc. to Pay $27M to Settle Securities Fraud Lawsuits of Securities America Clients Bilked in Ponzi Scams

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

To settle securities fraud complaints by investors that bought private placements in Provident Royalties and Medical Capital through its independent-brokerage unit Securities America, Ameriprise Financial Inc. will pay $27 million. It was just two weeks ago that Securities America agreed to pay $21 million to settle the same class of approximately 2,000 investors who lost about $300 million through Ponzi scams. Unfortunately, private placements, which should be restricted to rich “accredited ” investors, were offered to a wider range of investors that likely did not fully understand the risks involved.

In its annual report, Ameriprise revealed that Securities America clients sustained nearly $400 million in financial losses from the private placements. The financial planning and wealth management firm has about $40 million in reserves. Aside from the class action lawsuits, Securities America and Ameriprise face lawsuits in Massachusetts and a “significant” number of individual securities claims in arbitration.

To avail of the class-action settlements, an investor would have to drop his/her arbitration case. However, as the proposed settlements are greater than Securities America’s “net worth,” claimants may not get all of the money that they are owed. According to Shepherd Smith Edwards and Kantas Founder and Securities Fraud Lawyer William Shepherd, “With the class legal fees and expenses not yet revealed, this is-at best-nine cents on the dollar for the victims. This would actually be a bit better than most securities class action cases, in which the average paid to victims is closer to seven percent of their losses. Our firm represents securities fraud victims one at a time. These are investors who have losses substantial enough to support their own case. While they have to ‘opt-out’ of the class action in order to file their individual claims, gambling 7% of losses to seek a far higher recovery is often a wise decision.”

Related Web Resources:
Ameriprise settles investor suit for $27 million: lawyer, Reuters, March 3, 2011
Lawsuits suck air out of Securities America’s cash cushion, Investment News, March 1, 2011
Texas Securities Fraud: Three FINRA Cases Against Securities America Over Sale of Private Placements Halted, Stockbroker Fraud Blog, February 22, 2011
Securities America Inc. to Pay $1.2M in Compensatory and Punitive Damages Over Allegedly Fraudulent Medical Capital Notes, Stockbroker Fraud Blog, January 6, 2011 Continue Reading ›

Akamai Technologies Inc’s ARS Lawsuit Against Deutsche Bank Can Proceed

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

The U.S. District Court for the District of Massachusetts says that, under the 1934 Securities Exchange Act and the Massachusetts’ Uniform Securities Act, Akamai Technologies Inc.’s (AKAM) auction-rate securities lawsuit that seeks to hold Deutsche Bank AG liable for $200 million in losses can proceed. The judge ruled that the Internet content delivery firm had properly pleaded a material misrepresentation or omission in violation of Section 10(b) of the ’34 Securities Exchange Act, which is necessary for a control person claim under Section 20(a). The court also held that Akamai clearly pleaded Deutsche Bank’s control over Deutsche Bank Securities Inc., the subsidiary that allegedly advised the company to buy the toxic ARS.

Per the court, DBS was the broker and investment adviser for Akamai Securities Corp. and Akamai Technologies Inc. Akamai told the investment adviser that it wanted to put money in securities that were liquid and safe so it could access the funds when needed. DBS told Akamai that ARS were safe, liquid, and never failed even though the financial firm allegedly knew that they had done so before and, in fact, posed a higher level of risk than what it led Akamai to believe. Even in August 2007, when Deutsche Bank knew that the demand for ARS was going down and the risk of ARS auctions failing was rising, the investment adviser still allegedly did not notify Akamai that the market was changing.

When the ARS market did fall in 2008, Akamai was left with over $200 million in illiquid securities. Its securities fraud lawsuit also claims that even as DBS continued to claim that the securities were liquid and safe, resulting in Akamai increasing its ARS investments, the investment bank was decreasing its own exposure to the market.

Goldman Sachs Reports $3.4 Billion in “Reasonably Possible” Losses from Legal Claims

Published on: March 2, 2011 | by Shepherd Smith Edwards & Kantas, LLP

In its latest 10-K filing with the US Securities and Exchange Commission, Goldman Sachs Group Inc. says that its “reasonably possible” losses from legal claims may be as high as $3.4 billion. The investment bank’s admission comes after the SEC told corporate finance chiefs that the should disclose losses “when there is at least a reasonable possibility” they may be incurred regardless of whether the risk is so low that reserves are not required.

Goldman admits that it hasn’t put side a “significant” amount of funds against such possible losses and its estimate doesn’t factor in possible losses for cases that are in their beginning stages. The $3.4 billion figure comes from a calculation of three categories of possible liability. Also factored in were the number of securities sold in cases where purchasers of a deal underwritten by Goldman Sachs are now suing the financial firm and cases involving parties calling for Goldman Sachs to repurchase securities.

Between 2009 and 2010, the financial firm reported a 38% decline in net income from $13.4 billion to $8.35 billion. Trading revenue dropped while non-compensation expenses, which were affected by regulatory proceedings and litigation, went up 14%. It was just last year that the investment bank paid $550 million to settle SEC charges that it misled investors when selling a mortgage-linked investment in 2007. Goldman Sachs is still contending with state and federal securities complaints alleging improper disclosure related to mortgage-related products. As of the end of 2010, estimated plaintiffs’ aggregate cumulative losses in active cases against Goldman Sachs was at approximately $457 million.

Related Web Resources:
Goldman Sachs Puts ‘Possible’ Legal Losses at $3.4 Billion, Bloomberg Businessweek, March 1, 2011

Form 10-K, SEC

Goldman Sachs Settles SEC Subprime Mortgage-CDO Related Charges for $550 Million, Stockbroker Fraud Blog, July 30, 2010

China-Based Hackers Broke into Morgan Stanley Network, Reports Bloomberg

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

According to Bloomberg, Morgan’s Stanley‘s network experienced a cyber break-in. The culprits were hackers based in China that broke into Google Inc.’s computers over a year ago. The break-in is documented in e-mails stolen from HBGary Inc, a cyber-security company that works for the investment bank.

Known as the Operation Aurora attacks, the break-ins took place in June 2009 and lasted for about six months. More than 20 companies were hit.

The HBGary emails don’t detail what data might have been stolen from Morgan Stanley or which of its multinational operations were hit. The broker-dealer reportedly considers the details of the cyber attacks confidential. Hacker activist group Anonymous stole the emails.

Morgan Stanley hired HBGary last year because of suspected hacker-linked network breaches that resulted in break-ins into the financial firm’s Internet security system. These attacks were not related to Operation Aurora. Per HBGary emails, the hackers that made those breaches were able to implant software for stealing confidential files and communications.

According to FBI Deputy Assistant Director Steven Chabinsky, hackers have stepped up efforts to obtain information involving mergers and acquisitions. The China-based hacker attacks did not help the growing tensions between China and the United States. Calls were even made for Secretary of State Hillary Clinton to look at Google’s claims about the raids and make her findings available to the public.

Following the cyber attacks, Google stopped censoring search results from Google.cn, its Chinese search engine. Google started shuttering its site following lengthy negotiations with officials in China.

Related Web Resources:
Morgan Stanley Attacked by China-Based Hackers Who Hit Google, Bloomberg, February 28, 2011
Operation Aurora, Techie Buzz, January 15, 2010
HBGary

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Morgan Stanley Failed to Disclose Financial Adviser’s Felony Charge to FINRA, Claims Car Accident Victim’s Attorney, Stockbroker Fraud Blog, January 10, 2011
Wall Street Knew 28% of the Loans Behind Mortgage Backed Securities (MBS) Failed to Meet Basic Underwriting Standards, Stockbroker Fraud Blog, January 10, 2011 Continue Reading ›

Worst-Case Scenario Losses for JP Morgan & Chase May Be As High as $4.5 Billion

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

The Wall Street Journal is reporting that JP Morgan Chase & Co., in its yearly Securities and Exchange Commission filing, said it may be facing up to $4.5 billion in legal losses over the losses it accounts for in its established litigation reserves. The SEC had asked for this additional disclosure in the wake of the economic crisis that has left many investment banks contending with securities fraud complaints from investors.

JP Morgan Chase’s $4.5 billion figure is a worst-case estimate. This means that additional losses could be anywhere from 0 to much higher than $4.5 billion. The investment bank is unable to make estimates at this time on over 10,000 legal proceedings.

JP Morgan also included a disclosure that it had received informal requests and subpoenas for information regarding its mortgage business. Many of the investors who have made securities fraud claims sustained their losses from their purchase of mortgage-backed securities during the housing market collapse. The investment bank said that some of the investigations came about following its announcement of a foreclosure moratorium because of issues with its foreclosure practices.

Other investment banks have also provided their worst-case scenarios:

• Citigroup Inc. estimated its worst-case scenario at $4 billion
• Wells Fargo & Co. estimated $1.2 billion
• Bank of America Corp. estimates about $1.5 billion

Related Web Resources:
J.P. Morgan Faces $4.5 Billion in Worst-Case-Scenario Losses, The Wall Street Journal, February 28, 2011

JP Morgan Chase and Co, SEC FIlings, Yahoo Finance

More Blog Posts:
Insurer Claims that JP Morgan and Bear Stearns Bilked Clients Of Billions of Dollars with Handling of Mortgage Repurchases, Institutional Investors Securities Blog, February 3, 2011

JPMorgan Chase & Co. CEO Warns Municipal Bond Investors to Expect More Bankruptcies, Institutional Investors Securities Blog, January 18, 2011

Ex-Wextrust Capital COO Pleads Guilty to Role in $255M Affinity Fraud Scam

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

Joseph Shereshevsky, the ex-COO of Wextrust Capital LLC (Wextrust), has pled guilty to securities fraud, conspiracy and mail fraud charges over his involvement in a $255 million dollar affinity fraud scam. Shereshevsky entered his guilty plea in the U.S. District Court for the Southern District of New York.

He and codefendant Steven Byers, the private equity concern’s ex-CEO and president, diverted millions in investor funds in a Ponzi scam that took place between 2003 and 2008. Many of the approximately 1,200 investment fraud victims belong to the Orthodox Jewish Community.

Shereshevsky and Byers allegedly made misrepresentations by making it appear as if the investors’ money would go toward the purchase and operation of several commercial properties that the federal government had leased. In fact, the properties were never bought and investors’ funds were put to other uses. Byers and Shereshevsky, who are accused of using about $3 million and $9 million raised in a private placement for purposes that weren’t articulated to investors, also allegedly conspired together to “fabricate a story” about why the deal failed.

Byers pleaded guilty to the securities fraud and conspiracy charges against him last year. The two men, Wextrust, and a number of Wextrust entities, including Wextrust Development Group, LLC (WDG), Wextrust Equity Partners, LLC (WEP), Axela Hospitality, LLC (Axela), and Wextrust Securities, LLC (Wextrust Securities), face SEC civil charges over their alleged misconduct related to the affinity fraud scam.

Related Web Resources:
Ex-WexTrust Exec Shereshevsky Pleads Guilty to Fraud, Conspiracy, The Wall Street Journal, February 3, 2011

More Stockbroker Fraud Blog Posts:
Ex-Triton Financial CEO Accused of Using NFL Contacts to Commit $50M Texas Securities Fraud, Stockbroker Fraud Blog, February 17, 2011
Even as Ponzi Schemers Serve Time Behind Bars, Investors Are Left Coping with Millions in Financial Losses, Stockbroker Fraud Blog, January 25, 2011
CFTC Files Charges in Alleged California Ponzi Scam Involving the Fraudulent Solicitation of $14 million in Commodity Futures, Stockbroker Fraud Blog, January 18, 2011 Continue Reading ›

Alleged Pump and Dump Stock Manipulation Scam Leads to Indictment of Six, Including a Securities Attorney

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

An indictment has been unsealed today accusing six people of securities fraud in a stock manipulation scam that bilked investors between 2003 and 2008. The Securities and Exchange Commission has also filed a civil complaint related to this case.

The defendants are securities attorney Michael Simon Krome, Jonathan Randall Curshen, Robert Lloyd Weidenbaum, Ronald Salazar Morales, Izhack Zigdon, and Eric Ariav Weinbaum. They are accused of illegally manipulating stock prices in a pump and dump scam.

Per the indictment, Weinbaum and Zigdon allegedly took charge of the outstanding shares of CO2 Tech, a company that traded in the over-the-counter market through Pink Sheet listings. They are said to have gotten the shares by hiring Krome, who allegedly took action to avoid federal securities registration requirements so that his co-conspirators would get millions of “free-trading” CO2 Tech shares that were unregistered and otherwise could not have been legally obtained. The shares were then allegedly sold to the general public through Sentry Global’s stock trading floor. Curshen was the principal of Sentry Global Securities and Red Sea Management, which are both based on Costa Rica.

Weinbaum and Zigdon are accused of paying Weidenbaum about $1 million to take part in bogus CO2 stock trades to make it seem as if actual investors were purchasing them. False press releases were also allegedly issued to make it seem as if CO2 Tech had substantial business prospects. After “pumping” the market price and demand, the defendants would “dump” the shares by selling them for substantial profit through the Pink Sheet listings. Frequently, these shares were practically worthless.

Related Web Resources:

Securities Attorney and Five Others Indicted for Conspiracy, Wire Fraud, and Mail Fraud in Stock Manipulation Scheme, FBI, February 18, 2011

More Blog Posts:
Ex-Gilford Securities Broker Indicted in International Stock Fraud Scam Involving Pump and Dump of Israeli and Chinese Securities, Stockbroker Fraud Blog, February 19, 2011

Pump and Dump Scheme Involving Prime Time Stores Inc. Sends Global Spam Levels Up 30%, Stockbroker Fraud Blog, September 5, 2007

FINRA Fines Bank of America Corp.’s Merrill Lynch $500,000 Over Alleged Oversight Failures of 529 Plans

Published on: February 23, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is ordering Merrill Lynch, a Bank of America Corp. unit, to pay a $500,000 fine over alleged oversight failures involving 529 plans, a college-savings product. Merrill Lynch has also been censured by FINRA in a disciplinary action.

According to the SRO, Merrill Lynch lacked the adequate supervisory procedures necessary to make sure representatives were taking into account clients’ state income-tax benefits when determining whether they should invest in a 529 plan within their state of residence or in one outside the state. Merrill Lynch sold more than $3 billion in 529 plans between June 2002 and February 2007.

With 529 plans, which are considered municipal securities, money can be withdrawn to pay for college expenses without the imposition of federal taxes. Many states offer credits or state tax deductions for residents that invest in a 529 plans in the state. That said, depending on where the investor resides, investing in a plan outside the state can be more beneficial than the benefits received from a 529 plan in the investor’s home state.

However, FINRA contends that the only 529 plan that the financial firm offered and sold nationally was Maine’s NextGen College Investing Plan. Merrill Lynch must now send letters to clients who lived in states that offered 529-related tax benefits but ended up opening accounts with Maine’s NextGen College Investing Plan through Merrill Lynch. These customers will be given instructions on how to contact the financial firm. If they want to move their funds to a home-state 529 plan, Merrill Lynch has to help, as well as waive a number of fees.

By agreeing to settle with FINRA, Merrill Lynch is not denying or admitting to the SRO’s findings.

Related Web Resources:
Merrill fined $500,000 over college-savings plans, Bloomberg, January 19, 2011
FINRA Censures, Fines Merrill Over Colleges Saving Plans, OnWallStreet, January 19, 2011

More Blog Posts:
Bank of America Merrill Lynch to Settle UIT Sales-Related FINRA Charges for $2.5 Million, Stockbroker Fraud Blog, August 22, 2010
Bank of America To Settle SEC Charges Regarding Merrill Lynch Acquisition Proxy-Related Disclosures for $150 Million, Stockbroker Fraud Blog, February 15, 2010
SEC Submits Amended Complaint Against Bank of America Over Merrill Lynch Merger and Executive Bonuses, Stockbroker Fraud Blog, December 3, 2009 Continue Reading ›