Investor Lawyers Blog

Citigroup Global Markets Fined $500,000 by FINRA for Inadequate Supervision of Broker Accused of Bilking Sick and Elderly Investors

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

Two months after a federal grand jury indicted Tamara Lanz Moon for misappropriating more than $800,000 in clients’ money, the Financial Industry Regulatory Authority (FINRA) has fined Citigroup Global Markets $500,000 for failing to properly supervise her. Moon is charged with six counts of mail fraud. The acts of broker misconduct allegedly took place between 2001 and 2008, when the 43-year-old broker was employed by Citigroup Global Markets as a registered sales assistant with Series 7 and 63 licenses.

Court documents report that Moon targeted at least 22 Citigroup clients who were sick, elderly, or for some reason couldn’t properly monitor their accounts. Her alleged victims included an elderly client suffering from Parkinson’s disease. Moon also allegedly forged signatures, changed account documents, opened accounts with deceased clients’ social security numbers, created bogus letters of authorization, revised customer addresses, and made unauthorized trades. She was fired in 2008 after Citigroup finally discovered her alleged misconduct. FINRA would go on to permanently barred her from the industry. Moon, who was arrested by the FBI following recent indictment, is out on bail.

According to FINRA, Citigroup failed to investigate or detect a number of “red flags” that should have let the financial firm know that Moon was improperly handing client funds. The SRO is also accusing FINRA of failing to put into place reasonable controls and systems related to the supervisory review of client accounts, which allowed Moon to falsify records, and neglecting to identify suspicious activity related to disbursements and transfers in the accounts that she was using to misappropriate clients’ money.

Morgan Stanley Reports a Possible $1.7B in Mortgage-Backed Securities Losses

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

Morgan Stanley says it may sustain $1.7B in losses over a number of securities fraud cases related to subprime mortgage deals. Citigroup Inc.’s (C.N) Citibank is the plaintiff of the securities lawsuit over the Capmark VI CDO and STACK 2006-1 CDO deals, while there are 15 plaintiffs seeking punitive damages over Cheyne Finance, a structured investment vehicle. Morgan Stanley is also reporting losses over a mortgage-backed security deal involving MBIA Corp.

Our securities fraud attorneys would like you to contact us if you are someone who sustained financial losses in any of these MBS deals with Morgan Stanley. Here are more details about the cases:

• Morgan Stanley says the losses in the Citibank securities fraud lawsuit may be a minimum of $269M over a credit default swap on the Capmark VI CDO deal and another one on the credit default swap involving the STACK 2006-1 CDO deal.

CapWest Loses $940,000 Dallas Securities Case in FINRA Arbitration

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

Financial Industry Regulatory Authority (FINRA) has ordered CapWest Securities Incorporated to pay nearly $940,000 in a Texas securities fraud case filed by a group of investors over the recommendation and sale of numerous illiquid, risky, convertible debentures. The claimants had accused CapWest of breach of fiduciary duty, breach of contract, state and federal securities law violations, fraud, gross negligence, negligence, and other actions.

Last month, the FINRA arbitration panel ordered CapWest to pay claimant Robert E. Lee, both as an individual and as a Robert Earl Lee Revocable Trust trustee, $137,000 in compensatory damages. CapWest was also ordered to pay $478,500 in compensatory damages to Beatrice M. McCrae and Buford E. McCrae, both as individuals and on behalf of B.E. McCrae Family Limited Partnership. Robert E. Lee was also to receive $37,330 in interest for the period of October 25, 2008 through July 15, 2011 at a 5% per annum rate. For Buford E. McCrae and Beatrice E. McCrae, the interest of 5% per annum was $95,180 for the period of October 16, 2006 through July 15, 2011. Under the Texas Deceptive Trade Practices Act, Robert E. Lee is to receive $17,450 in punitive damages. Buford E. McCrae and Beatrice M. McCrae are to get paid $57,370. Payment of the claimants’ costs, legal fees, and other fees were also granted.

Convertible Debentures

AIG Files $10 Billion Mortgage-Backed Securities Lawsuit Against Bank of America

Published on: August 13, 2011 | by Shepherd Smith Edwards & Kantas, LLP

American International Group (AIG) is seeking to recover over $10 billion in mortgage-backed securities-related losses from Bank of America (BAC). The losses were allegedly sustained on $28 billion in investments.

In what may be the largest MBS-related action filed by one investor, the complaint accuses Bank of America and its units Countrywide Financial and Merrill Lynch of misrepresenting the quality of the mortgages that were in the securities that investors bought. AIG also claims that Bank of America used false data to persuade the credit rating agencies to give the MBS high ratings.

Bank of America, which contends that the disclosures that were made were robust enough for sophisticated investors and that AIG is a “seasoned investor,” is denying AIG’s allegations against it. According to Bank of America spokesperson Lawrence Di Rita, the reason AIG suffered the financial losses at issue is because it was reckless in pursing profits and high yields in the “mortgage and structured finance markets.”

Bank of America’s 2008 acquisition of Countrywide for $4 billion has cost the financial firm much more in mortgage-related fines, losses, loan buybacks, and litigation expenses. Courthouse News Service database reports that Countrywide and Bank of America have been named as defendants in 1300 lawsuits in 2011 alone. Recently, Bank of America agreed to settle investor MBS claims for $8.5 billion. Parties to the settlement included the Bank of NY Mellon, BlackRock, the Federal reserve Bank of New York, and PIMCO. However, the New York Attorney General is now calling that settlement inadequate.

As for AIG, which is still largely owned by taxpayers following its 2008 government bailout, the New York Times says that the insurer is preparing similar securities fraud complaints against JPMorgan Chase, Goldman Sachs, and Deutsche Bank to try to recover some of the billions that it lost during the economic crisis.

Government Not Proving Helpful In Pursuing Investment Banks
Contrary to investors, who are seeking to hold big banks accountable in civil court, the Justice Department closed many of its investigations into Wall Street’s big banks without filing any criminal charges. Although it has brought cases against three employees at big financial banks, no executives have been charged. However, a spokesperson for the Justice Department says that the government has pursued the cases were appropriate and that it is much more difficult to prove that a crime has been committed beyond a reasonable doubt than to find a party liable in civil court.

The New York Times reports that a person familiar with the case says that the Justice Department has concluded its investigation into Countrywide’s actions heading into the financial crises and that there will be no charges filed. The government also recently closed its probe into Washington Mutual, with the finding that there was no evidence of criminal wrongdoing. The Washington bank almost failed because of high-risk mortgages.

Related Web Resources:

AIG sues Bank of America for $10 billion over mortgages, USA Today/AP, August 8, 2011

Investors Working with Incompetent Registered Investment Advisers Have Few Protections, Reports Bloomberg

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

According to Bloomberg.com, the registered investment adviser industry may offer little protection to investors who end up with an incompetent adviser. This, even though investment advisers, unlike brokers, are upheld to a fiduciary standard to make their clients’ interests a priority and charge fees rather than commissions.

With over 14,000 independent RIA firms controlling about $1.5 trillion of assets (says Aite Group), this is important for investors to know. Problems they could face include too high fees, inappropriate investments, and a hard time collecting on legal awards. Unfortunately, many investors would rather deal with their losses rather than spend the time and money to take legal action against a negligent registered investment adviser.

Currently, advisers who manage at least $25 million have to register with the SEC. If the amount under management is less than that then they must register with the states where they do business. On June 28, 2012, however, the threshold will go up to $100 million, which means that approximately 3,200 advisers will be subject to state rather than SEC oversight.

It was just this January that the U.S. Securities and Exchange Commission recommended that traditional brokers also be upheld to the fiduciary standard that RIAs must meet. Currently, the nation’s approximately 632,000 brokers have to fulfill a suitability standard requiring them to offer advice that meets a client’s needs at the time that the sale of the product is made.

Yet even with the fiduciary standard, advisers don’t have to disclose their performance history to prospective clients. Because SEC-registered advisers don’t have to deal with net capital requirements, some of those that are ordered to pay an investor award cannot afford to and don’t. Unlike brokers, who may face suspension of their registration suspended if they don’t pay, advisers must only disclose that they have unpaid judgment.

The nonprofit firm Sunlight Foundation says that more than 1 in 10 RIAs is subject disciplinary actions, including convictions for felony crimes. Last year, the SEC took 113 enforcement actions against investment firms and investment advisers. That said, legal settlements and arbitration awards have to be disclosed on an adviser’s ADV form, which an RIA must register with the states or the SEC. Customer disputes involving investment adviser representatives can also be found on the SEC Web site.

Advisers will usually include arbitration clauses in agreements requiring clients to work through disputes through JAMS private arbitration of the American Arbitration Association. However, standard initial filing fees can start in the high hundreds and go into the thousands of dollars. Additional fees that may follow run into the tens of thousands of dollars.

Consumer Federation of America investor protection director Barbara Ropers says that because the majority of advisers don’t accept commissions, they may have less conflicts of interests than brokers. However, where there can be a conflict interest is in the charging of adviser fees (usually range from under 1% to 2%) of assets under management, which can compel an adviser to plays clients in higher-fee or –risk investments.

The SEC reports that most federally registered investment advisers charge client fees based on the percentage of assets under management (just 9% of them get commissions). Some advisers, however, may be charging fees that are too high.

Our securities fraud lawyers represent clients who have suffered losses because an investment adviser or a broker dealer was negligent.

Related Web Resources:
Safeguards Scant for U.S. Investors as Registered Advisers Increase by 39, Bloomberg, July 6, 2011
Investment Advisers Could Arbitrate Through Finra Under New Plan, The Wall Street Journal, April 11, 2011
Protect Your Money: Check Out Brokers and Investment Advisers, SEC

More Blog Posts:
SEC Extends Temporary Rule Allowing Principal Trades by Investment Advisers Registered as Broker-Dealers, Institutional Investor Securities Blog, January 13, 2011 Financial Services Institute Wants FINRA to Serve as SRO for RIAs, Stockbroker Fraud Blog, January 3, 2011
Most Investors Want Fiduciary Standard for Investment Advisers and Broker-Dealers, Say Trade Groups to SEC, Stockbroker Fraud Blog, October 12, 2010 Continue Reading ›

Stifel, Nicolaus & Co. and Former Executive Faces SEC Charges Over Sale of CDOs to Five Wisconsin School Districts

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

The SEC is charging Stifel, Nicolaus & Co. and its former Senior Vice President David W. Noack with securities fraud over the sale of unsuitable, high-risk complex investments to 5 Wisconsin school districts. Stifel and Noack allegedly misrepresented the risks involved in investing $200 million in synthetic collateralized debt obligations (CDOs) and did not disclose certain material facts. The investments proved a “complete failure.”

The Five Wisconsin School Districts:
• Kimberly Area School District • Kenosha Unified School District No. 1 • School District of Waukesha • School District of Whitefish Bay • West Allis-West Milwaukee School District

All five school districts are suing Stifel and Royal Bank of Canada in civil court. Robert Kantas, partner of Shepherd Smith Edwards & Kantas LTD LLP, is one of the attorneys representing the school districts in their civil case against Stifel and RBC. Attorneys for the school districts issued the following statement:

“We believe that Stifel, Royal Bank of Canada and the other defendants defrauded the five Wisconsin school districts, along with trusts set up to make these investments. In 2006, these defendants devised, solicited and sold $200 million ‘synthetic collateralized debt obligations’ (CDOs), which were both volatile and complex, to these districts and trusts. While represented as safe investments, these were in fact very high risk securities, which were wholly unsuitable for the districts and trusts. In an attempt to protect taxpayers and residents, the districts hired attorneys and other professionals to investigate the investments and the potential for fraud. Then, with a goal of seeking full recovery of the monies lost in this scheme, a lawsuit was filed in Milwaukee County Circuit Court in 2008 to seek fully recovery of the losses and maintain and protect valuable credit ratings of these districts. To date, more than 3 million pages of documents have been obtained and examined by the attorneys for the districts. The districts also properly reported to the SEC the nature and extent of the wrongdoing uncovered. Over the past year, they have provided the SEC with volumes of documents and information to facilitate its investigation.”

In its complaint filed in federal court today, the SEC says that Stifel and Noack set up a proprietary program to assist the school districts in funding retiree benefits through the investments of notes linked to the performance of CDOs. The school districts invested $200 million with trusts they set up in 2006. $162.7 million was paid for with borrowed funds.

The SEC contends that Stifel and Noack, who both earned substantial fees even though the investments failed completely, took advantage of their relationships with the school districts and acted fraudulently when they sold financial products that were inappropriate for the latter. The brokerage firm and its executive also likely were aware that the school districts weren’t experienced or sophisticated enough to be able to evaluate the risks associated with investing in the CDOs. Both also likely knew that the school districts could not afford to suffer such catastrophic losses if their investments were to fail. Despite this, says the SEC, Noack and Stifel assured the school districts that for the investments to collapse there would have to be “15 Enrons.” They also allegedly failed to reveal certain material facts to the school districts, including that:

• The first transaction in the portfolio did poorly from the beginning.
• Within 36 days of closing, credit rating agencies had placed 10% of the portfolio on negative watch.
• There were CDO providers who said they wouldn’t participate in Stifel’s proprietary program because they were worried about the risks involved.

The SEC claims that Stifel and Noack violated the:

• Securities Exchange Act of 1934 (Section (10b))
• The Securities Act of 1933 (Section 17(a))
• The Securities Act of 1934 (Section 15(c)(1)(A))

The Commission is seeking, permanent injunctions, disgorgement of ill-gotten gains, financial penalties, and prejudgment interest.

Related Web Resources:
SEC Charges Stifel, Nicolaus & Co. and Executive with Fraud in Sale of Investments to Wisconsin School District, SEC.gov, August 10, 2011
SEC Sues Stifel Over Wisconsin School Losses Tied to $200 Million of CDOs, Bloomberg, August 10, 2011
Read the SEC Complaint (PDF)

School Lawsuit Facts

More Blog Posts:
Wisconsin School Districts Sue Royal Bank of Canada and Stifel Nicolaus and Co. in Lawsuit Over Credit Default Swaps, Stockbroker Fraud Blog, October 7, 2008
SEC Inquiring About Wisconsin School Districts Failed $200 Million CDO Investments Made Through Stifel Nicolaus and Royal Bank of Canada Subsidiaries, Stockbroker Fraud Blog, June 11, 2010 Continue Reading ›

SEC Charges Filed Against Stifel, Nicolaus & Co. and Former Sr. VP David Noack Over CDO Sales to Wisconsin School Districts

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

Three years after five Wisconsin school districts filed their securities fraud lawsuit against Stifel, Nicolaus & Company and the Royal Bank of Canada, the Securities and Exchange Commission has filed charges against the brokerage firm and former Stifel Senior Vice President David W. Noack over the same allegations. The charges stem from losses related to the sale of $200 million in high-risk synthetic collateralized debt obligations (CDOs) to the Wisconsin school districts of West Allis-West Milwaukee School District, the School District of Whitefish Bay, the Kimberly Area School District, the School District of Waukesha, and the Kenosha Unified School District No. 1.

The SEC says that not only were the CDOs inappropriate for the school districts that would not have been able to afford it if the investments failed, but also the brokerage firm did not disclose certain material facts or the risks involved. The school districts are pleased that the SEC has decided to file securities charges.

Robert Kantas, partner of Shepherd Smith Edwards & Kantas LTD LLP, is one of the attorneys representing the school districts in their civil case against Stifel and RBC. Attorneys for the school districts issued the following statement:

“It is our belief that the five Wisconsin school districts and the trusts established to make these investments were defrauded by Stifel, Royal Bank of Canada and the other defendants. Contrary to the way they were represented, the $200 million CDOs that were devised, solicited, and sold by the defendants to our clients in 2006 were volatile, complex, extremely high risk, and totally inappropriate for them. To protect residents and taxpayers, the districts later hired lawyers and others to investigate the investments and their fraud risk. Unfortunately, the failure of the investments did result in losses for the school districts, which in 2008 filed their Wisconsin securities fraud complaint in Milwaukee County Circuit Court. The school districts’ goal was to obtain full recovery of the monies lost in this scheme, while protecting and maintaining the districts’ valuable credit ratings. The districts’ lawyers have already examined three million pages of documents regarding in this matter. Meantime, the districts have taken the proper steps to report to the SEC the nature and extent of the wrongdoing uncovered. In the past year, the districts have given the SEC volumes of documents and information for its investigation.”

The school districts had invested the $200 million ($162.7 million was borrowed) in notes that were tied to the performance of synthetic CDOs. This was supposed to help them fund retiree benefits. According the SEC, however, Stifel and Noack set up a proprietary program to facilitate all of this even though they knew that they were selling products that were inappropriate for the school districts and their investment needs.

Stifel and Noack allegedly told the school districts it would take “15 Enrons” for the investments to fail, while misrepresenting that 30 of the 105 companies in the portfolio would have to default and that 100 of the world’s leading 800 companies would have to fail for the school districts to lose their principal. The SEC claims that the synthetic CDOs and the heavy use of leverage actually exposed the school districts to a high risk of catastrophic loss.

By 2010, the school districts’ second and third investments were totally lost and the lender took all of the trusts’ assets. In addition to losing everything they’d invested, the school districts experienced downgrades in their credit ratings because they didn’t put more money in the funds that they had set up. Meantime, despite the fact that the investments failed completely, Stifel and Noack still earned significant fees.

The SEC is alleging that Noack and Stifel violated the:
• The Securities Act of 1933 (Section 17(a))
• Securities Exchange Act of 1934 (Section (10b))
• The Securities Act of 1934 (Section 15(c)(1)(A))

The Commission wishes to seek disgorgement of ill-gotten gains along with prejudgment interest, permanent injunctions, and financial penalties.

Related Web Resources:
SEC Charges Stifel, Nicolaus & Co. and Executive with Fraud in Sale of Investments to Wisconsin School Districts, SEC.gov, August 10, 2011

SEC Sues Stifel Over Wisconsin School Losses Tied to $200 Million of CDOs, Bloomberg, August 10, 2011

Read the SEC Complaint

School Lawsuit Facts

More Blog Posts:
Stifel, Nicolaus & Co. and Former Executive Faces SEC Charges Over Sale of CDOs to Five Wisconsin School Districts, Stockbroker Fraud Blog, August 10, 2011

JP Morgan Settles for $153.6M SEC Charges Over Its Marketing of Synthetic Collateralized Debt Obligation, Institutional Investor Securities Blog, June 18, 2011

Wells Fargo Settles SEC Securities Fraud Allegations Over Sale of Complex Mortgage-Backed Securities by Wachovia for $11.2, Institutional Investor Securities Blog, April 7, 2011

Texas Securities Fraud: Insurance Agent Could Get 100 Years Behind Bars for Using Fraudulent Annuities to Bilk Elderly Seniors of Over $5M

Published on: August 9, 2011 | by Shepherd Smith Edwards & Kantas, LLP

A 76-year-old Amarillo insurance agent has pleaded guilty to 15 counts of Texas securities fraud over the sale of bogus investments and unregistered securities that resulted in over $5 million in losses for primarily elderly investors. The Texas State Securities Board won’t sentence John F. Langford until next month, but he faces up to 100 years in prison for running this Ponzi scam.

Meantime, Langford’s business partner, Jimmy Don King, has been indicted on 10 criminal counts, including selling securities despite not having a license, selling unregistered securities, and acting as an agent/dealer but without the appropriate registration. King was the voice and face of Langford & Associates’ commercials on TV and commercials guaranteeing “not to make you poor.” (Langford also did business as Langford Funding and Langford Investments.)

The two men came under suspicion after an elderly woman sued them for securities fraud. She said that they persuaded her to invest $941,756 in private annuities. Later, a court found that the woman who suffered from dementia had been incompetent and therefore wasn’t fit to make a decision about whether investing in bogus annuities that weren’t going to be due until her 90’s-a decade from when she signed on-was a good decision to make.

Investors in Oppenheimer Mutual Funds Considering Opting Out of $100M Class Action Settlement Have Until August 31

Published on: August 6, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Recently, our stockbroker fraud law firm reported on the $100 million class action settlement that Massachusetts Mutual Life Insurance Co.’s OppenheimerFunds Inc. has agreed to pay to settle allegations that it did not properly manage its Oppenheimer Core Bond Fund (OPIGX) and Oppenheimer Champion Fund (OCHBX, OPCHX and OCHCX). The securities case was brought by investors who claimed that the offering documents and sales pitches misrepresented the risks involved in credit default swaps (CDS), mortgage-backed securities (MBS), and other complex securitized financial instruments. Instead, they contend that the funds were marketed and sold as high yielding, diversified, and conservative investments.

The Champion Fund would go on to lose about 80% of its value in 2008. (55% was lost just in November of that year.) The Core Bond Fund lost 33%. (Compare that to the rest of its peer group, which lost 5%.) As a result, Champion Fund investors sustained extremely significant financial losses and Core Bond investors also suffered.

The class action settlement distributes the $100 million between the two groups of mutual fund investors. While Core Bond investors will get $47.5 million, Champion investors are slated to receive $52.5 million. The Boards of Trustees for the funds have already given their approval. However, even in settling, OppenheimerFunds is not admitting to any wrongdoing. Its spokesperson has said that the proposed settlement is in the best interests of its Funds’ shareholders.

SEC’s Proxy Access Rule is Rejected by Appeals Court

Published on: August 5, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Court of Appeals for the District of Columbia Circuit has struck down a Securities and Exchange Commission rule that would have let company shareholders nominate one or two director nominees to their boards. The proxy access rule would have allowed groups with possession of a minimum 3% voting power of a company’s stock for a minimum of three years to nominate board candidates. Companies would have had to include information about these shareholder-nominated director candidates in their proxy materials.

The SEC had approved the regulation last year. It would have gone into effect in November, but the Commission stayed it after the US Chamber of Commerce and the Business Roundtable filed their legal challenge asking for the stay. The Business groups had said the rule was in violation of the Administrative Procedure Act and would “handcuff directors and boards,” exclude the majority of retail shareholders, and worsen the “short-term focus” considered among the main causes of the economic crisis. There were also concerns that the proxy access rule would let hedge funds, union-connected pension funds, corporate raiders, and hedge funds elect directors who would do as they directed.

The Chamber of Commerce and Business Roundtable also accused the SEC of disregarding studies and evidence that revealed the” adverse consequences of proxy access,” attempting to restrict the ability of shareholders to stop special interest groups from starting up expensive election contests, and not giving full consideration to state laws about access to principles about and related to proxy that already exist.