Investor Lawyers Blog

LPL Financial Management and Private Equity Backers TPG and Hellman & Friedman Could Make Over $450M from IPO

Published on: November 19, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Investors are jumping on LPL Financial Management’s initial public offering debut. At midafternoon on Wednesday, shares were up 8% at $32 plus change. (This, compared this to the 6% increase in GM’s IPO.) According to CNN, the Boston-based brokerage service and private equity backers TPG and Helllman & Friedman may make than $450 million from the deal.

LPL provides research, technology, and financial services to 12,000 independent financial advisers in small and medium-sized shops. This allows them to provide services, including financial advice that is supposed to be free from conflict or bias, to retail investors. Seeing as there have been so many alleged incidents recently reported of bankers trying to earn fees by pressing clients to take part in certain deals, LPL says in its IPO prospectus that it make sense that today more investors are drawn to independent advisers. The brokerage service company also says that over the last decade, as rich individuals and brokers have started to question the benefits of dealing with the larger banks, its broker clientele as gone up at a 13% compound annual rate.

That said, the investment adviser system-whether involving independent advisers or those with ties to investment banks-is far from perfect. As Shepherd Smith Edwards & Kantas LTD LLP founder and securities fraud lawyer William Shepherd points out, “We have seen a number of complaints regarding LPL which seemed to stem from failure to supervise. Perhaps this is because LPL has so many advisor/agents in one or two person offices having somewhat detached contact with their supervisor(s). It was recently reported that LPL may have sought to hire another firm to handle its supervisory duties.”

LPL CEO Mark Casady and President COO Esther Stearns are expected to make millions from the IPO-almost $58 million for Casady and $35.1 million for Stearns. LPL executive William Dwyer could make $8.24 million, while the shares that General Counsel Stephanie Brown plans to sell could make her $3.77 million.

Related Web Resources:
LPL Financial IPO outpaces GM, CNN Money, November 18, 2010
LPL Executives Likely To Reap Millions In Public Offering, The Wall Street Journal, November 18, 2010
LPL Investment IPO Faces Struggle, The Street, November 15, 2010 Continue Reading ›

Final Regulation for Disclosure in Participant-Directed Individual Account Plans Issued by US Department of Labor

Published on: November 19, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The US Department of Labor has put out a final regulation that establishes the fiduciary requirements for disclosure in 401 (k)’s and other participant-directed individual account plans. The final regulation was issued under the Employee Retirement Income Security Act of 1974. The DOL guidance also comes with a final amendment to the regulation that already exists under ERISA § 404(c), 29 C.F.R. § 2550.404c-1.

The disclosure requirements answer a number of questions, including:
• Who is responsible for disclosing information to beneficiaries and participants in individual account plans that are participant-directed?
What information must be disclosed?
• What are the rules when dealing with target date funds, fixed-return investments, annuities, and employer securities?
• What type of disclosure is required?
• When should disclosure of information be made to participants and beneficiaries?
• Who should disclose the information?

Under the final regulation, the plan administrator of an individual account plan must make sure that beneficiaries and participants are made aware of their responsibilities and rights in regards to their investments. They also must receive enough information about the plan, investment alternatives, and fees and expenses so that they can make informed decisions.

Under the final regulation, participants and beneficiaries of “covered individual account plans” must receive disclosure in four categories of information, including:
• General Operational and Identification Information
• General Plan Administrative Expenses
• Individual Expenses
• Investment-Related Information

Plan administrators also have to automatically disclose certain performance benchmarks and data, including the average annual return of the investment over 1, 5, and 10 calendar year periods, as well as provide a statement noting that past performance does not guarantee that the results in the future will be the same. Designated investment alternatives that have a stated or fixed return for the term of the investment must come with a disclosure that includes the term of the investment and the fixed or stated annual return rate.

For more details, contact Shepherd Smith Edwards and Kantas founder and securities fraud attorney William Shepherd.

Employee Retirement Income Security Act — ERISA, US Department of Labor

Stockbroker Fraud Blog

Business Man Pleads Guilty Plea in Florida Microcap Market Fraud Case

Published on: November 17, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Federal officials say that Jean “Richard” Charbit has pleaded guilty to one count of conspiracy to commit securities fraud in connection with a South Florida stock scam involving the microcap market that was under investigation by an undercover FBI sting. Charbit is facing a maximum 5 years in prison.

He and defendant Tzemach David Netzer Korem are accused of trying to pay kickbacks to a stockbroker so they could use client accounts to buy shares from the defendants’ company. This made it look as if there was a demand for the instruments, which allowed the defendants to dump their holdings at inflated prices.

Charbit and Korem controlled or owned about 5.6 million shares of ZNext Mining Corp. (ZNXT). Charbit offered the “broker,” who was actually an FBI agent, $100,000 to misappropriate $300,000 from discretionary accounts to purchase common stock in ZNXT. Per the criminal complaint, the goal was to raise the individual common share price from 4 cents to 50 cents.

Eight other microcap stock promoters and market insiders have been charged with securities fraud related to this scheme. Some also are facing criminal charges. One of the persons charged in the microcap market fraud case is Larry Wilcox, the former star of the TV show “CHiPs.” As part of his plea agreement, he admitted to conspiring to defraud a pension plan of $40,000.

Related Web Resources:
SEC v. Jean R. Charbit and Tzemach David Netzer Korem, Civil Action No. 1:10-cv-23604-CMA (U.S. District Court for the Southern District of Florida), SEC.gov
Stock scammer pleads guilty, South Florida Business Journal, November 1, 2010
Institutional Investor Securities Blog
Continue Reading ›

Failure of Municipal Swaps Cost Taxpayers $4 Billion

Published on: November 17, 2010 | by Shepherd Smith Edwards & Kantas, LLP

According to Bloomberg.com, taxpayers have had to pay over $4 billion because of insurance companies and banks’ failed promise to nonprofits and governments that financial engineering would bring down interests on bonds sold for public projects. Since 2008, hundreds of borrowers throughout the US have had to pay Wall Street to end their agreements. Citigroup, JP Morgan Chase & Company, Morgan Stanley , and Bank of America are a few of the other firms that have received payments from borrowers.

For example, California’s water resources department paid $305 million to Morgan Stanley-led banks to unwind interest-rate bets that backfired, while the Bay Area Toll Authority gave bond insurer Ambac Financial Group Inc. $105 million to terminate $1.1 in billion interest-rate agreements. In August, The state of North Carolina shelled out $59.8 million.

Interest-Rate Swap
In this type of transaction, two parties exchange payment based on a principal amount that has been agreed upon. Most municipal market swaps require borrowers to put out long-term securities with interest rates that change every month or week. The borrowers are to exchange payments, resulting in a fixed-rate paid to an insurer or bank, while a variable rate in return is received.

The swaps drew a lot of interest because nonprofits and governments could pay lower rate than if they had sold conventional fixed-rate securities. According to the Financial Crisis Inquiry Commission senior researcher Randall Dodd, prior to the credit crisis, there were up to $500 billion of the deals done were in the $2.7 trillion municipal bond market.

Unfortunately, the credit market did collapse and Wall Street’s payments dropped and could no longer cover the municipalities’ debt costs. Still, under the agreements, borrowers had to keep selling adjustable-rate securities.

Bloomberg reports that there aren’t many taxpayers that are familiar with how much it cost to untangle municipal swaps. (Payment disclosures to Wall Street are usually noted somewhere in the documents given to investors by borrowers when the bonds are sold.) In many instances, investment firms that receive payments aren’t clearly identified and government officials usually don’t draw notice to payments made to terminate contracts.

Related Web Resources:
Wall Street Takes $4 Billion From Taxpayers as Swaps Roil Public Financing, Bloomberg, November 10, 2010

Municipal Securities, Stockbroker Fraud Blog

Multimillion Texas Stock Sale Fraud Results in Multiple Indictments

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

Federal court prosecutors have issued new information regarding the securities fraud allegations made against an ex-Tiki Island resident and nine of his accomplices. Harris Dempsey “Butch” Ballow faces charges related to a seven-year multimillion-dollar stock sale scam.

Ballow, 67, was indicted in 2003 for alleged money laundering and fraud. He pleaded guilty to the money laundering charge, agreed to cooperate with the US Securities and Exchange Commission, and was released on $100,000 bond. However, he didn’t show up for his sentencing hearing and left the country. An arrest warrant was issued in 2004.

As a fugitive, Barrow is accused of using numerous aliases, including the names Tom Brown, John Gel, Marty Twinley, and Melvyn John Gelsthorpe. He allegedly used these names to control the following publicly traded companies: Medra, E-SOL International, Aztec Technology Partners (known as Ultimate Lifestyles), and Deep Earth Resources. He was living in Puerto Aventuras, Mexico on 2008 but disappeared the following year after allegedly persuading an investor to transfer $5 million to one of his companies. Mexican federal police finally arrested him at his home in Puerto Vallarta last July.

Also charged with wire fraud are Ballow’s wife Robin Harless Ballow, ex-Houston residents Ruben Garza Perez and Kelly Lyn Boothe, Austin, Texas attorney Patrick Lanier, Jeffrey Janssen Anuth, and five others. According to authorities, the defendants allegedly sold stock shares in the companies that Ballow acquired and controlled while he was a fugitive. They also are accused of concealing Ballow’s real name when they sold the stock to investors, issuing false information to raise and maintain stocks’ value, and not taking away the restrictions that kept investors from selling the stock and land ownership interests in a real estate development that never became a reality.

Related Web Resources:
Harris Dempsey “Butch” Ballow and Nine Others Charged with Allegedly Executing Stock Fraud Scheme While Ballow was a Fugitive from Justice, FBI, November 2, 2010
Indictments detail multimillion stock sale fraud, Galveston Daily News, November 4, 2010
‘Butch’ Ballow: A Wanted Man Click 2 Houston, December 9, 2009
Institutional Investor Securities Blog

Texas Securities Fraud, Stockbroker Fraud Blog Continue Reading ›

Goldman Sachs Ordered by FINRA to Pay $650K Fine For Not Disclosing that Broker Responsible for CDO ABACUS 2007-ACI Was Target of SEC Investigation

Published on: November 12, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority says it is fining Goldman Sachs $650,000 for failing to disclose that the government was investigating two of its brokers. One of the brokers was Goldman vice president Fabrice Tourre. FINRA says Goldman did not have the proper procedures in place to make sure that this disclosure was made.

The SEC had accused Tourre of being “principally responsible” for Abacus 2007-AC1, a synthetic collateralized debt obligation, and selling the bonds to investors, who ended up losing more than $1 billion while Goldman yielded profits and hedge fund manager John A. Paulson made money from bets he placed against specific mortgage bonds. The SEC contends that Goldman failed to notify investors that Paulson had taken a short position against Abacus 2007-AC1. This summer, Goldman settled for $550 million SEC charges that it misled investors about this CDO, just as the housing market was collapsing.

Regarding Goldman’s failure to disclose that the SEC was investigating two of its brokers, even though investment firms are required to file a Form U4 within 30 days of finding out that a representative has received a Wells notice about the probe, FINRA says that Tourre’s U4 wasn’t amended until May 3, 2010. This date is more than 7 months after Goldman learned about his Well Notice and after the SEC filed its complaint against the investment bank and Tourre. FINRA also says that Goldman’s “employee manual” for brokers does not even specifically mention Wells Notices or the need for disclosure after one is received.

By agreeing to settle with FINRA, Goldman is not admitting to or denying the charges.

Goldman Sachs to Pay $650,000 for Failing to Disclose Wells Notices, FINRA, November 9, 2010
Related Web Resources:
Goldman Fined $650,000 for Lack of Disclosure, New York Times, November 9, 2010
Goldman Sachs Settles SEC Subprime Mortgage-CDO Related Charges for $550 Million,
Stockbroker Fraud Blog, July 30, 2010
Goldman Sachs, Institutional Investor Securities Blog Continue Reading ›

Citigroup Global Markets to Pay Back $95.5M Over ARS Sold to LandAmerica Exchange Fund

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

A federal bankruptcy judge has approved a settlement involving Citigroup Global Markets Inc. agreeing to repay $95.5 million to clients who sustained auction-rate securities related-losses. The ARS were told by Citigroup to LandAmerica 1031 Exchange Services Inc. before the latter folded in 2008. The ARS had been valued at about $120 million. The repurchase rate that clients are getting is reportedly better than what the ARS can be sold for now.

Under the approved securities settlement, these creditors should recover a little over 50% of their financial losses. The distribution of the money should begin taking place in December.

LandAmerica 1031 Exchange Services Inc. and parent company LandAmerica Financial Group Inc. filed for Chapter 11 bankruptcy in November 2008. Over 250 clients had placed proceeds from investment property sales in the exchange. Their intention was to defer capital gains taxes while searching for other properties to purchase.

Unfortunately, because the exchange company invested some of the funds in ARS, when the market froze and LandAmerica filed for bankruptcy, the investors became unable to access their money. At the time of the bankruptcy, Landmark held $201.7 million in ARS. $30 million of the securities had sold.

Meantime, the US Securities and Exchange Commission has received complaints claiming that Citigroup engaged in misrepresentation and securities fraud related to the credit worthiness and liquidity of the securities.

Related Web Resources:

Stockbroker Fraud Blog

Investment Manager Accused of Securities Fraud Must Pay Defrauded Clients Over $20 Million

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

In a default judgment, The U.S. District Court for the Western District of Washington is mandating that investment adviser Enrique Villalba and affiliated entities pay investors over $20 million. The 47-year-old has been sentenced to almost 9 years in prison for defrauding clients of over $30 million.

Most of the funds that were taken from investors were lost in unauthorized, high risk investments in futures contracts. Villalba also used some of the funds to run Rico Latte coffee shops and purchase property. Among his victims was one woman who lost almost $12 million. Another man, former ER doctor David Ernst, lost his life savings. Tom Mulgrey, 56, lost $4 million.

Villalba has not been in touch with the plaintiffs of this securities fraud lawsuit since September 2009. His investment fraud victims are located in different US states. In their securities complaint, the plaintiffs are alleging claims under the Washington Securities Act and the 1934 Securities Exchange Act.

In granting the plaintiffs’ motion to obtain a default judgment, the court noted that per the two statutes, rescission is the way to calculate damages. In this case, the court deemed rescission appropriate because it “undoes the transactions” while returning the plaintiffs to their original state had they never invested their funds with the defendants.

Also, under the Washington Securities Act, the court determined that not only are the plaintiffs entitled to interest on the damages amount beginning the date of each deposit, but also they are entitled to recover lawyers’ fees and costs. The Washington Consumer Protection Act also entitles them to legal fees. Per the default judgment, the plaintiffs have been awarded $20,080,637.89, which includes the principal amount of $13,393,650.67, $6,669,053.22 in interest, and $17,934 in lawyers’ fees and costs.

Related Web Resources:
Court Orders Investment Manager To Pay Defrauded Clients Over $20 million, BNA/Alacrastore.com, November 5, 2010
Investment adviser caught in $30 million fraud sent to prison for almost 9 years, Cleveland.com, September 8, 2010
Read the Order

Securities Act of Washington
Continue Reading ›

Court Rejects Defendants’ Challenge to Poptech LP’s Lead Plaintiff Status in Class Securities Fraud Lawsuit

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

The U.S. District Court for the District of Connecticut has rejected defendants Stewardship Investment Advisors LLC and Marlon Quan’s challenge to the appointment of Poptech LP as the lead plaintiff in a class securities fraud lawsuit filed by investors. The plaintiffs are accusing the investment firm and Quan of violating federal securities law antifraud proscriptions by allegedly misrepresenting that the fund would employ certain investment strategies. The fund is also accused of investing the majority of its assets in a Thomas Petters-operated Ponzi scam. Poptech, not long after filing its class securities lawsuit, published notice in Business Wire stating that there wasn’t a dispute that the notice appropriately notified members of the proposed class about the pending action and the purported class period.

In their challenge, the defendants argued that the notice did not satisfy Private Securities Litigation Reform Act requirements, including failing to completely and “adequately” notify proposed class members of all the claims asserted in the complaint, not providing enough details about the defendants’ alleged misrepresentations, and failing to “adequately facilitate” additional action and inquiry by potential members. The court, however, found that the PSLRA requires just a “reasonably detailed summary” of claims made.

Shepherd Smith Edwards & Kantas LTD LLP Founder and Securities Fraud Lawyer William Shepherd had this to say about the ruling: “If this Court’s decision survives appeal, it could be helpful to victims of securities fraud. Some courts have carried ‘pleading securities fraud with particularity’ to extremes before discovery could even begin. Also, while these pleading requirements apply to class action litigation, many judges have been requiring absurd pleading requirements in all types of securities actions. Hopefully, fewer defrauded investors will be thrown out of court in the future based on pleading technicalities.”

“Flash Crash” – Why is This So Hard to Understand?

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

“On May 6, 1010, the New York Stock Exchange was intentionally shut down for 90 seconds by those in charge,” recounts Shepherd Smith Edwards and Kantas Founder and Securities Fraud Lawyer William Shepherd. “When this happened there was no market (bid and ask quotes) for many large cap stocks, except on small exchanges and the ‘third market.’ Meanwhile trading programs continued to submit market orders.” Shepherd continued, “Market orders in a ‘thin’ market are always a recipe for disaster. The question people should be asking is: Who decided to stop trading on the NYSE without warning and why? Imagine how much money could have been made by anyone who knew of this shutdown in advance!”

Shepherd’s observations come in the wake of NYSE Euronext chief executive officer Duncan Niederauer’s address to attendees at a recent National Association of Corporate Directors conference. Niederauer acknowledged that there is more that needs to be done to understand the events leading up to the flash crash. He said that while the Commodity Futures Trading Commission and the Securities and Exchange Commission had put out a “very well done” report that explained why markets dropped 4 or 5% that day, the reason why prices for some individual stocks plummeted by almost 100% remain unclear.

The Dow Jones Industrial Average dropped by over 573 points during five minutes of trading that day before taking 90 seconds to reverse and regain 543 points. Although the CFTC and the SEC have determined that the flash crash was started by a mutual fund complex that used computer algorithms to quickly sell $4 billion in futures contracts, Niederauer has said that there is still both information and misinformation. He contends that to bar high-speed electronic trading is impractical despite the fact that the US market structure is “more vulnerable than we thought.” He said the NYSE stands behind a model that comes with market maker obligations that are clearly outlined and that this can be used to determine whether the market maker is “doing a good job.” More market structure rules are expected in January.

Related Web Resources:
Flash crash’ shows need for price discovery and safeguards, NYSE
CFTC And SEC Release “Flash Crash” Report, FuturesMag.com
Read the SEC and CFTC Report (PDF)
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