Investor Lawyers Blog

Ex-Smith Barney Adviser Pleads Guilty to Securities Fraud In $3.25M Scam to Bilk Citibank and Firm Clients

Published on: December 13, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Sanjeev Jayant Kumar Shah, a former Smith Barney financial services adviser, has pleaded guilty to one count of securities fraud and three counts of wire fraud over his involvement in a securities scam to bilk clients of Citibank and his firm. Shah was charged with diverting about $3.25 million from a foreign bank client and fabricating documents that he claimed were from bank representatives.

He is also accused of falsely saying that the transfers were required for bond purchases and that he would send statements showing these purchases. Prosecutors say that he attempted to cover up the scam by telling clients that a computer mistake had kept the bonds from showing up online bank statements and that had had bought the bonds for the bank.

The securities fraud charge comes with a 20 year maximum penalty plus a fine. Each wire fraud charge carries a maximum 30 years in prison penalty and also a fine.

Shah was at Citigroup unit Smith Barney for 3 ½ years. Citigroup says that it was the one that brought the case to the attention of the Department of Justice.

Securities Fraud
Our securities fraud lawyers are committed to helping our clients recover their financial losses. The most common investor claims against brokers and investment advisers can involve issues such as:

• Unsuitability • Registration violations • Margin account abuse • Unauthorized trading • Breach of fiduciary duty • Breach of contract • Failure to execute trades • Overconcentration • Negligence • Churning • Misrepresentation and omissions • Failure to supervise
Read the guilty plea, Justice.gov, November 24, 2010 (PDF)

Former Smith Barney adviser admits $3 million fraud, Reuters, November 24, 2010
Former Smith Barney adviser admits $3 mln fraud, CNBC, November 24, 2010 Continue Reading ›

SEC IG Investigating Whether Examiners Were Told by Regional Official to Ignore “Red Flags” Indicating Massive Fraud

Published on: December 11, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Securities and Exchange Commission Inspector General H. David Kotz says that his office is looking into a complaint that a regional official told examiners to not go after “red flags” that were found in an exam of an investment adviser where a “massive fraud” was discovered. The official in question reportedly played a significant part in an earlier exam of the investment firm, and although the securities fraud was going on then, it was not uncovered at the time.

The anonymous complaint also claims that the regional office had a hostile work environment because management failed to discipline the official even after an earlier OIG investigation found that the person had watched pornography on an SEC computer. In his semiannual report to Congress, Kotz says that the OIG is almost done with its probe and will present its findings.

The OIG also determined that Bank of America Inc.’s Troubled Asset Relief Program fund’s status played a role in the “favorable” $33 million settlement that SEC staffers had initially recommended to resolve charges that the investment bank issued misleading proxy disclosures related to its Merrill Lynch acquisition. U.S. District Judge Jed S. Rakoff, however, refused to approve that settlement, and Bank of America eventually settled the case for $150 million.

Kotz says that the OIG has probed into allegations from an ex-Enforcement attorney that the division was negligent in how it handled an insider trading probe. A report of its findings will be issued during the next semiannual reporting period.

Other pending OIG investigations involve:
• Allegations that attorneys at a regional office did not properly investigate a law firm for alleged obstruction of justice related to an SEC case. Improper preferential treatment may have been a factor.
• Allegations that an SEC official violated ethics rules while providing testimony to a congressional committee.
• Allegations that a staff member acted in an abusive and intimidating manner toward contract staff.
• Complaints that SEC staff leaked information about an investigation of an examination to the media.
• Allegations that at least one contractor worked at the SEC before a background probe had been completed.

Related Web Resources:

Bank of America To Settle SEC Charges Regarding Merrill Lynch Acquisition Proxy-Related Disclosures for $150 Million, Stockbroker Fraud Blog, February 15, 2010

Bank of America Agrees to settle SEC Charges of Merrill Lynch Bonuses for $33 Million But Judge Blocks Settlement, Stockbroker Fraud Blog, August 6, 2009

SEC Report Applauds Internal Reforms While Admitting to Control Problems

Published on: December 10, 2010 | by Shepherd Smith Edwards & Kantas, LLP

In her “Message from the Chairman,” Securities and Exchange Commission head Mary Schapiro celebrated the SEC’s performance related to internal reforms over the past year. Her note was included in the agency’s FY 2010 Performance and Accountability Report. Schapiro applauded the SEC’s changes to its examinations and enforcement programs. She said that revisions will strengthen the agency’s ability to protect investors, encourage capital formation, and promote markets that were fair, efficient, and orderly. Other improvements for the year that Schapiro highlighted:

• The Office of Compliance and Inspections and the Enforcement Division both enhanced their abilities to fulfill their regulatory duties.

• Enhanced technology and an ambitious regulatory agenda.

• OCIE’s risked-focused, national exam program that has been designed in a manner to maximize limited resources.

Schapiro said that the agency’s structural and cultural changes, as well as its investment in human and technological capital would not only create “immediate performance gains,” but also they set up an “infrastructure” supportive of the SEC’s additional duties that the Dodd-Frank Wall Street Reform and Consumer Protection Act has bestowed upon the agency.

In SEC chief financial officer Kenneth Johnson’s message, which was also included in the agency’s report, he said that the commission had identified two material weaknesses in internal controls over financial reporting. The first one is in information systems as a result of issues involving user access controls, patch management, security management, and configuration management. The second one is related to accounting processes and financial reporting and is a result of combined deficiencies involving filing fees, financial reporting, disgorgement, budgetary resources, required supplementary information, and penalty transactions. Johnson said that the SEC is aiming to strengthen its security over its financial data by shifting to a new financial service system by a federal shared service provider.

2010 Performance and Accountability Report, SEC
In Report, SEC Hails Internal Reforms, Acknowledges Internal Control Problems, BNA Securities Law Daily, November 17, 2010

Related Web Resource:
US Securities and Exchange Commission

Institutional Investor Securities Blog
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The “New” SEC is Acting Just Like The “Old” SEC by Protecting the Securities Industry from Responsibility for its Actions

Published on: December 9, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has announced a proposal to temporarily extend a rule that facilitates certain proprietary trading by entities that are registered as both broker-dealers and investment advisers. The proposed extension would move Rule 206(3)-3T’s expiration date by two years, from December 31, 2010 to December 31, 2012. It would also would allow the SEC to complete a study mandated under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Rule 206(3)-3T gives dually registered firms another way to satisfy consent and disclosure requirements that they would otherwise only be able to meet on a transaction-by-transaction basis. Having just the one option would limit the availability that non-discretionary advisory clients would have to certain securities.

The extension would give the SEC the time that it needs to study the regulatory issues related to dual registrants’ principal trading. Dodd-Frank is requiring the SEC to look at any divergent regulations between investment advisers and brokers and use rulemaking to fix gaps so as to better protect investors. The agency has until January 21, 2011 to notify Congress of its findings.

Dodd-Frank’s Section 913 has generated a lot of debate because it could allow for most broker-dealers to be considered fiduciaries under the 1940 Investment Advisers Act. Right now, brokers don’t have to meet the fiduciary standard that investment advisers must satisfy even though both offer similar services. However, instead of holding brokers to the statutory fiduciary standard, the SEC might end up obligating them to fulfill various consent and disclosure requirements at the start of a retail relationship.

Shepherd Smith Edwards & Kantas LTD LLP Founder and Securities Fraud Attorney William Shepherd thinks that it is time to hold brokers responsible to a fiduciary standard: “The only educational requirement to become a licensed securities broker is four months of on-the-job training and the passing of a half-day test. Yet, on average, securities brokers at major firms are paid more than doctors, lawyers and other professionals who must often attain seven or eight years of higher education. Many clients entrust securities brokers with their life savings, retirement assets, and their financial life blood. Why shouldn’t these brokers and the firms required to supervise them be held responsible if the investors are ripped-off? Financial advisers perform the same function but have a fiduciary duty to investors, simply meaning they must put the client’s interest first when advising them. Why should securities brokers be held to a different standard and not be allowed to lull investors into trusting them, while selling their victims the highest commission products that they can find without regard to the client’s best interest? In fact, most state laws currently hold that when a broker is recommending securities to an unsophisticated investor, the broker has a fiduciary duty to that client. What the SEC is trying to do is to pass a rule that makes brokerage firms LESS RESPONSIBLE than they are at present. These endless tactics perpetrated by securities regulators, at the behest of Wall Street, and are yet another type of bail-out move by the Securities Cartel that controls this nation.”

Related Web Resources:
Read the Proposed Rule (PDF)

1940 Investment Advisers Act

Institutional Investor Securities Blog
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Actions of Former Ferris, Baker Watts, Inc. General Counsel Accused of Supervising Rogue Broker to be Reviewed by SEC

Published on: December 9, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission will be taking a closer look at the actions of ex- Ferris, Baker Watts, Inc. General Counsel Theodore Urban. Urban has been accused of failing to reasonably supervise stockbroker Stephen Glantz, who was involved a stock market manipulating scam with Innotrac Corp. stock.

It is rare for the SEC to examine the actions of a general counsel. However, the agency says it is looking at the case because the proceedings bring up key “legal and policy issues,” such as whether Urban acted reasonably in the manner that he oversaw Glantz and chose to respond to signs of broker misconduct. The case also brings up the questions of whether securities professionals such as Urban should be made to “report up” and if his status as a lawyer and his role as “FWB’s general counsel affect is liability for supervisory failure.”

Earlier this year, Securities & Exchange Commission Administrative Law Judge Brenda Murray ruled that Urban did not inadequately supervise Glantz and that the proceedings against him be dropped. Murray said that per the 1934 Securities Exchange Act, a person cannot be held liable for supervisory deficiencies if appropriate procedures for detecting and stopping the violations were applied, She said that Urban had no reasonable grounds to think that procedures had not been followed.

However, Murray’s decision isn’t final until the SEC enters its final order, and on Tuesday the commission declined Urban’s motion requesting that the SEC affirm Murray’s ruling. Division lawyers have said that Murray’s decision was not consistent with previous SEC precedent, lowers the standards that supervisors at dealers, brokers, and investment advisers must meet, and did not protect the investing public by making Urban accountable to sanctions.

SEC to Review Actions of Bank General Counsel Who Supervised Rogue Broker, Law.com, December 9, 2010

Read the SEC order denying motion for summary affirmance (PDF)

Read the administrative law judge’s ruling (PDF)

Ex-Ferris, Baker Watts, Inc. General Counsel Did Not Fail to Properly Supervise Broker Fraudster, Says SEC Judge, Stockbroker Fraud Blog, September 30, 2010

Texas Lawyer Pleads Guilty to Involvement in Alleged $100M Life Settlement Scheme

Published on: December 7, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Texas attorney Russel Mackert has pleaded guilty to charges related to his involvement in an alleged $100 million life settlement fraud scheme that targeted over 800 investors. A number of the investors that Mackert scammed were retirees.

The Department of Justice says that Mackert, who was the attorney for a number of A & O entities, issued material misrepresentations, such as false statements, to investors about A&O Resource Management Ltd. and the related entities. This included making misstatements about the use of and safekeeping of investors’ money and the risks involved with the company’s products. Mackert is accused of marketed over $100 million of fraudulent investments to over 800 victims in the United States and Canada. Investors suffered over $19 million in financial losses.

Mackert has admitted to facilitating the false sale of A & O and making up a fictional person to play the role of the company’s representative. He also has admitted that he failed to let investors know that most of their investments were being used for purposes totally unrelated to the buying and maintaining of life settlement portfolios. He smuggled the cashiers’ checks outside the country in an attempt to open offshore bank accounts for hiding the ill-gotten gains.

The criminal charges against Mackert include smuggling $10 million in undeclared cashier’s checks outside the US and criminal information alleging conspiracy to commit mail fraud. Mackert is facing a maximum 5 years behind bars on the smuggling conviction and 20 years on the conspiracy charge. He also faces a $250,000 fine for each count.

Related Web Resources:
Lawyer in A&O Case Enters Guilty Plea in $100M Scam, The Life Settlements Report, November 24, 2010
Lawyer for A&O Entities Pleads Guilty for His Role in $100 Million Fraud Scheme Involving Life Settlements, US Department of Justice, November 23, 2010
Institutional Investor Securities Blog
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Operation Broken Trust Investment Fraud Sweep Has Ended

Published on: December 7, 2010 | by Shepherd Smith Edwards & Kantas, LLP

According to the Financial Fraud Enforcement Task Force, the largest investment fraud sweep ever conducted by the United States has ended. Called Operation Broken Trust, the probe involved 231 cases and over 120,000 fraud victims who sustained over $8 billion in investment losses.

Operation Broken Trust’s objective was to discover and expose large scale investment fraud schemes in the US and notify the public about bogus financial scams. The probe focused on schemes that directly targeted individual investors as opposed to long-term complex corporate fraud issues. In many case, the criminals involved were trusted members of the victims’ communities, such as a coworker or a fellow church attendee. A number of investors lost their homes and/or life savings as a result of the scams.

Victims were targeted by other individuals who were promoting “investment opportunities” that were either not structured the way they were promoted or totally bogus. Scams include Ponzi schemes, high-yield investment fraud schemes, foreign exchange fraud, commodities fraud, pump-and-dump scams, market manipulation, business opportunity fraud, real estate investment fraud, and affinity fraud.

The FBI says that Los Angeles, Dallas, New York, San Francisco, and Salt Lake City were the leading cities for Ponzi scams. More than 200 Ponzi cases have been opened since the beginning of 2009. Many of these schemes resulted in over $20 million in losses. The FBI says it has been able to shut down many of the scams and many of those responsible have been arrested.

Operation Broken Trust includes civil and criminal enforcement actions that took place between August 16 and December 1, 2010.

Related Web Resources:
Operation Broken Trust, FBI, December 6, 2010

Financial Fraud Enforcement Task Force , US Department of Justice

Stockbroker Fraud Blog

Class Members of Charles Schwab Corporation Securities Litigation Can Still Opt Out to File Individual Securities Claim

Published on: December 6, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The US District Court has approved an amendment to the proposed Charles Schwab Corporation Securities Litigation settlement. The Supplemental Notice of Proposed Settlement of Class Action has been sent to the affected class members, which includes those who may have held Schwab YieldPlus Fund shares on September 1, 2006 and gotten more of them between May 31, 2006 and March 17, 2008. Shares may have been obtained through a dividend reinvestment in the Fund or through purchase. Affected class members cannot have been a resident of California on September 1, 2006.

The Supplemental Notice notes that there has been a clarification in the release claims’ scope that affected class members will be giving Schwab if they decide to take part in the settlement. More claims than those in the federal securities class litigation are now included in the amended release. Class members now have another chance opt out of the class action complaint.

Exclusion Deadline: Your notice of exclusion must be postmarked no later than January 14, 2011 and cannot be received after January 21, 2011.

Federal and State Securities Acts’ Anti-Waiver Provisions Did Not Bar International Forum Selection Clause’s Enforcement, Says Texas Court of Appeals

Published on: December 2, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The Court of Appeals of Texas has held that in a shareholder agreement regarding the purchase of company stock, the federal and state Securities Acts anti-waiver provisions did not bar the enforcement of an international forum selection clause. The parties had consented to the exclusive jurisdiction of courts in Ontario, Canada to adjudicate any disputes stemming from or related to the shareholder agreement or/and the purchase, sale or holding of company common shares. Securities laws were only impacted where parties exercised their rights to voluntarily take part in a contract mandating that lawsuits be brought in courts and under another country’s laws. Also, public policy was in strong favor of enforcing forum selection clauses.

Commenting upon the ruling, Shepherd Smith Edwards and Kantas Founder and Stockbroker Fraud Attorney William Shepherd noted: “The vast majority of securities loss claims filed in the past 20 years have been decided in arbitration. With international arbitration forums becoming more prevalent as economies globalize, this change was inevitable. It is very important for investors to hire attorneys with experience in securities arbitration to seek recovery of securities losses. Over the past 20 years, our firm has represented thousands of investors nationwide – and worldwide – in securities arbitration.”

Related Web Resources:
Young v. Vault.X Holdings, Inc.

Arbitration and Mediation, FINRA Continue Reading ›

Citigroup Seeking to Dismiss $11.6 Million Securities Arbitration Award to “Dallas” TV Star Larry Hagman

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

TV star Larry Hagman, best known for playing the roles of Texas oil tycoon JR Ewing on “Dallas” and Major Anthony Nelson on “I Dream of Jeannie,” recently won an $11.6 million securities fraud arbitration award against Citigroup. The Financial Industry Regulatory Authority says that the award is the largest that has been issued to an individual investor for 2010 and the ninth largest ever. Citi Global Markets is now seeking to dismiss the award.

The investment firm contends that the arbitration panel’s chairman did not disclose a possible conflict of interest. In its petition, Citi cites a FINRA rule obligating arbitrators to reveal such conflicts that could prevent them from issuing an impartial ruling. The financial firm claiming that because the arbitration panel head was once a plaintiff in a lawsuit that dealt with the same type of claims and subject matter, he had an undisclosed potential conflict. Hagman’s legal team have since responded with a memo arguing that the arbitrator’s lawsuit was not related to this complaint and did not involve a securities investment, the same parties, or the same facts.

Hagman and his wife Maj had accused Citigroup of securities fraud, breach of fiduciary duty, and other allegations. They claimed financial losses on bonds and stocks and a life insurance policy. In addition to the arbitration award, which consists of $1.1 million in compensatory damages and $10 million in punitive damages that will go to a charity of Hagman’s choice, Citigroup must also pay a 10% interest on the award.

Related Web Resources:
Messing With J.R., Take Four, NY Times, November 23, 2010
Actor Larry Hagman Wins $12 Million in Finra Case With Citigroup, Bloomberg, October 7, 2010

Citigroup’s petition to dismiss award to Larry Hagman

Citigroup, Stockbroker Fraud Blog Continue Reading ›