Investor Lawyers Blog

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 ›

Securities Fraud Lawsuit Against Citigroup Involving Mortgage-Related Risk Results in Mixed Ruling

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

According to a district court ruling, investors can proceed with certain securities fraud charges against Citigroup and a number of its directors over the alleged misrepresenting of the risks involved in mortgage-related investments (including auction-rate securities, collateralized debt obligations, Alt-A residential mortgage-backed securities, and structured investment vehicles). However, the majority of claims involving pleading inadequacies have been dismissed. The securities lawsuit seeks to represent persons that bought Citigroup common stock between January 2004 and January 15, 2009.

Current and ex-Citigroup shareholders have said that as a result of the securities fraud, which involved the misrepresentation of the risks involved via exposure to collateralized debt obligations, they ended up paying an inflated stock price. The plaintiffs are accusing several of the defendants of selling significant amounts of Citigroup stock during the class period. They also say that seven of the individual defendants certified the accuracy of certain Securities and Exchange Commission filings that were allegedly fraudulent. They plaintiffs are claiming that there were SEC filings that violated accounting rules because of the failure to report CDO exposure and value such holdings with accuracy.

The plaintiffs claim that the defendants intentionally hid the fact that billions of dollars in CDOs hadn’t been bought. They also said that defendants made misleading statements that did not properly make clear the subprime risks linked to the Citigroup CDO portfolio.

The defendants submitted a dismissal motion, which the court granted for the most part. Although the court is letting certain CDO-related claims to move forward, it agrees with the defense that because the plaintiffs failed to raise an inference of scienter before February 2007 (when the investment bank started buying insurance for its most high risk CDO holdings), the claims for that period cannot be maintained. The court also held that the plaintiffs failed to plead that seven of the individual defendants had been aware of Citigroup’s CDO operations. As a result, the court determined that there can be no finding of scienter in regards to the individuals.

The court, however, did that the plaintiffs adequately pleaded securities fraud claims against Citigroup, Gary Crittenden, Charles Prince, Thomas Maheras, Robert Druskin, David C. Bushnell, Michael Stuart Klein, and Robert Rubin for misstatements made about the bank’s CDO exposure between February and November 3, 2007. The plaintiffs also adequately pleaded securities fraud claims against Citigroup and Crittenden for Nov. 4, 2007, to April 2008 period.

Compliance with 1934 Securities Exchange Act Reporting Requirements During Annual Broker-Dealer Audits is Key, Say SEC Officials

Published on: November 29, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Securities and Exchange Commission Division of Trading and Markets Robert Cook and Chief Accountant James Kroeker are reminding auditors that it is important that they comply with specific 1934 Securities Exchange Act reporting requirements when performing annual broker-dealer audits. Earlier this month, the two SEC officials sent a letter to American Institute of Certified Public Accountants Stock Brokerage and Investment Banking Expert Panel Chair Stephen Zammitti.

Per Kroeker and Cook, under the 1934 Securities Exchange Act’s Rule 17a-5, broker-dealers must file yearly reports, supplemental reports, and supporting schedules. They also noted that Under Rule 15c3-1, a supporting schedule must include required and actual net capital and, when applicable, computation of the customer reserve requirement, as well as information about possession or control requirements.

The two SEC officials issued the reminder that brokerage firms have to submit an accountant’s report about the supporting schedule from a registered public accounting firm and that the yearly financial report audits must meet accepted auditing standards. Cook and Kroeker also said that even though the Dodd-Frank Act gave the Public Company Accounting Oversight Board the authority to put forth an auditing and attestation standard for broker dealers’ PCAOB-registered auditors, per recent SEC interpretive guideline auditors should keep adhering to AICPA standards until further rulemaking. The two SEC officials emphasized the need for accounting firms to review internal accounting records, the accounting system, and procedures for safeguarding securities and that, per Rule 17a-5, the audit and review’s scope must be enough to provide enough assurance that any “material inadequacies… would be disclosed.”

Related Web Resources:
View the Letter (PDF)

Read the SEC Guidance (PDF)

The 1934 Securities and Exchange Act
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Financial Firms File Securities Fraud Lawsuits Against Each Other Over 2008 Credit and Subprime Crisis

Published on: November 29, 2010 | by Shepherd Smith Edwards & Kantas, LLP

In what one investment banking official is calling a “second wave” of securities litigation stemming from the credit and subprime crisis of 2008, financial firms are now suing other financial institutions for damages. While speaking on a Practising Law Institute panel, Morgan Stanley managing director D. Scott Tucker noted that this “second wave” is the “exact opposite of the first wave,” which was primarily brought by smaller pension funds or states claiming violations of the 1933 Securities Act and the 1934 Securities Exchange Act.

Tucker said that with this new wave, most of the plaintiffs are financial institutions, including investment managers and hedge funds, that are asserting common law fraud and making other state law claims. Also, these latest lawsuits are primarily individual cases, rather than class actions. The securities at the center of this latest wave of litigation are complex structured products, such as credit default swaps, collateralized debt obligations, and mortgage-backed securities, as well as complaints involving private placements and derivatives or securities that don’t trade on liquid markets.

Our securities fraud lawyers at Shepherd Smith Edwards & Kantas LTD LLP represent institutional investors who suffered financial losses because of their dealings with investment companies. Unlike other law firms, our stockbroker fraud lawyers will never represent brokerage firms.

Fiduciary Standard in Securities Industry Doesn’t Need New Definition

Published on: November 26, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Financial Industry Regulatory Authority Chairman and Chief Executive Officer Richard Ketchum says that there should be just one flexible, fiduciary standard for investment advisers and broker-dealers who offer personalized investment advice. Ketchum spoke at a conference earlier this month.

Ketchum noted that seeing as investment advisers and broker-dealers essentially work in the same business, it “doesn’t make sense” to act as if they work in different ones. He supports a flexible fiduciary standard that comes with a “few basic, simple rules.”

As to whether FINRA could play a part in supervising the imposition of a future fiduciary standard on broker-dealers, Ketchum said that if FINRA were to play this role it would do so with a discreet board that would include a minority of investment adviser professionals, as well as members of the public. While investment advisers currently have to comply with a fiduciary standard and are regulated under the 1940 Investment Advisers Act, broker-dealers must be in compliance with other standards, including an obligation to make sure that their recommendations to clients are “suitable” ones.

Securities and Exchange Commission Chairman Mary L. Schapiro has also shown a preference for a uniform fiduciary standard between the two groups. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC has until January 21, 2011 to turn in a report to the House Financial Services Committee about this matter. After completing its study, the SEC can write rules to establish a uniform standard of conduct for professionals who give retail clients personalized investment advice. However, the rule cannot be “less stringent” than current investment adviser standards.

Shepherd Smith Edwards & Kantas LTD LLP Founder and Stockbroker Fraud Attorney William Shepherd had this to say about a fiduciary duty: “There is no need for disagreement over what kind of language should be use to define fiduciary duty in the securities industry. The term ‘fiduciary’ comes from the Latin word fides, which means faith, and fiducia, which means trust. English Common law, upon which our legal system was founded, long ago defined a fiduciary duty as a duty of loyalty and care, in which the fiduciary must put the interest of his client before that of himself. Courts all across our nation today recognize this same duty in a variety of relationships. The meaning of ‘fiduciary duty’ has been established for hundreds of years, so why would Wall Street need to have its own special definition? If it ain’t broke, why fix it?”

Related Web Resources:
Fiduciary Standard, More Adviser Oversight Likely -Finra Chief, The Wall Street Journal, November 16, 2010
Investment Advisers Act of 1940
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3 Hedge Funds Raided by FBI in Insider Trading Case

Published on: November 23, 2010 | by Shepherd Smith Edwards & Kantas, LLP

As part of its growing investigation into possible inside trading in the $1.7 trillion hedge fund industry, the FBI has raided hedge funds Diamondback Capital Management LLC, Level Global Investors LP, and Loch Capital Management LLC, which has a close link to a witness who pleaded guilty in the insider trading probe involving hedge fund Galleon Group. (That investigation is one that prosecutors are calling the largest U.S. hedge fund insider trading case to date. Of the 23 people charged in civil or criminal court, 14 people, including ex- hedge fund S2 Capital LLC manager Steven Fortuna have pleaded guilty). Level Global Investors and Diamondback Capital Management are owned by ex-managers of Steven Cohen’s SAC Capital Advisors, which is also a hedge fund. Per public filings, Diamondback manages about $4.71 billion while Level Global manages about $3.09 billion.

The raids come just as federal prosecutors are getting ready to reveal a number of insider trading cases against hedge fund traders, Wall Street bankers, and consultants. In addition to trying to determine whether investment bankers and other parties let traders know about pharmaceutical company buyouts (companies have allegedly earned tens of millions of dollars in illegal profits because of secret information about mergers), officials are also looking at “expert network” firms that garner big fees from hedge funds for matching them with industry specialists.

Meantime, shares of Goldman Sachs Group Inc. dropped by 3.4% after The Wall Street Journal reported that the Justice Department is looking into possible leaks by Goldman employees about mergers.

Related Web Resources:
FBI raids 3 hedge funds in insider trading case, Reuters/Yahoo, November 22, 2010
Feds turn up heat on Wall St., raid 3 hedge funds, AP/Google, November 23, 2010 Continue Reading ›

Class Action Securities Fraud Lawsuit Accuses SEC of Gross Negligence Related to Bernard Madoff Ponzi Scam

Published on: November 23, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Three individuals, Judith Welling, Robert Mick, and Charles Mederrick, have filed a purported securities class action against the Securities and Exchange Commission over financial losses related to investments they made in Bernard L. Madoff Investment Securities LLC. In their amended complaint, the plaintiffs are seeking damages sustained because of the “grossly negligent acts of the Defendant in connection with the SEC’s deficient review of complaints and information” that Madoff was running a Ponzi scheme. Mick, Welling, and Mederrick contend that their investments, which they made over a 16-year period, caused them to suffer “catastrophic” consequences.

In their complaint, the plaintiffs accuse the SEC of “repeatedly and grossly failing to adequately apprise itself” of the facts related to the Madoff Ponzi scam allegations despite the fact that for years there had been numerous complaints. Last year, the SEC’s Inspector General put out a 457-page report detailing the agency’s failure to detect Madoff’s fraud scheme despite the signs.

The class action lawsuit is on behalf of those who invested in Madoff Investment Securities between November 1992 and December 2008 and have filed administrative damage claims seeking to recover damages for the SEC’s alleged negligence. The class could be comprised of more than 100 victims. The plaintiffs’ securities fraud lawyer says that to his firm’s knowledge, this is the first class action filed against the SEC over its handling of Madoff.

Madoff’s $50 billion Ponzi scam defrauded many institutional and individual investors. Some of these investors lost everything.

Related Web Resources:
SEC Hit With Class Action Alleging Gross Negligence in Oversight of Madoff, BNA Securities Law Daily

Madoff Investors Sue SEC for Incompetence, Daily FInance, November 12, 2010

Bernie Madoff’s $50 Billion Ponzi Scheme, Forbes, December 12, 2008

Texas Securities Fraud: National Futures Association Takes Emergency Enforcement Action Against International Commodity Advisors and Its Principals

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

The National Futures Association says it has taken an emergency enforcement action against International Commodity Advisors and its principals Gustave O. Woehr and Gregory W. Seitz. ICA, a Commodity Trading Advisor, has offices in Dallas, Texas and Marietta, Georgia.

NFA claims that ICA is soliciting or operating funds as a Commodity Pool Operator even though the CTA isn’t registered as a CPO. Because ICA and its principals have been unable to produce records, books, and other required information, NFA says that it is not able to identify the pool’s participants or determine the investments’ value or assets’ location.

The Associate Responsibility Action (ARA) and the Member Responsibility Action (MRA) prohibit ICA and its two principals from accepting or soliciting funds from customers, pools, or investors. The three parties are also not allowed to transfer or disburse the funds of pools, customers, or investors without the approval of the NFA. Also, ICA and its principals must either show that CPO registration is not required or register as one with the Commodity Futures Trading Commission and give NFA an approved disclosure document.

The ARA and MRA will stay in effect until ICA and its principals show to the NFA’s satisfaction that they are in full compliance with all NFA Requirements. NFA members that have accounts that are controlled by ICA, Woehr, Seitz, or any entity or person acting for any of them and who receive notice of the MRA and ARA are not allowed to transfer or disburse funds to ICA and the two principals or any entity controlled by any of them without NFA approval.

NFA takes emergency enforcement action against International Commodity Advisors and its principals, NFA, November 17, 2010
Commodity Pool Operator
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SEC Proposes Antifraud Derivatives Rule Related to Securities-Based Swaps

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

The Securities and Commission has agreed to propose an antifraud rule that deals with the issue of security-based swaps-related fraud, manipulation, and deception. The proposed Rule 9j-1 would bar fraud and manipulation in the offer, sale, and purchase of the swaps. Unlike regular securities transactions, securities-based swaps involve ongoing payments and deliveries between when they are bought and sold. The issues of payments, deliveries, and other rights and obligations are also tackled.

SEC Chairman Mary Schapiro says that the proposed rule would be an important way to make sure that the swap market is run with integrity while allowing the Commission the chance to target potential fraud or other misconduct through enforcement. The relevant change with this proposed rule from current antifraud provisions Section 17(a) of the 1933 Securities Act and Section 10(b) of the 1934 Act is that the proposed rule is applicable to ongoing rights and activities.

The Dodd-Frank Wall Street Reform and Consumer Protection Act has given oversight of security-based swaps to the SEC, while the Commodity Futures Trading Commission is charged with overseeing non-security-based swaps. The CFTC had already proposed its anti-manipulation rule amendments dealing with manipulative and fraudulent conduct of swaps under its jurisdiction.

The SEC has also agreed to propose rules to effect a whistleblower bounty program.

Related Web Resources:

Securities and Exchange Commission