Investor Lawyers Blog

Texas Securities Fraud: M25 Investments Inc., M37 Investments LLC, and Two Individuals Must Pay $16.2M Over Alleged Forex and Ponzi Scams

Published on: November 8, 2010 | by Shepherd Smith Edwards & Kantas, LLP

M37 Investments LLC, M25 Investments Inc., Jeffery Lyon, and Scott Kear Sr. have settled for $16.2 million Commodity Futures Trading Commission charges involving the alleged defrauding of over 200 individuals in a foreign currency scheme. Many of the investment fraud victims were senior investors. The Texas securities fraud agreement was reached between the parties in district court.

The CFTC contends that the defendants solicited about $8 million from approximately 213 individuals to trade off-exchange leveraged foreign currency,
commodity futures contracts, and forex options. The commission says that between December 2007 and September 2009, investors in Texas, West Virginia, Maryland, and Mississippi, and other states were solicited for the trades. Many of the seniors who were targeted were solicited through their churches.

The defendants are accused of guaranteeing investors renewal bonuses, if they reinvested, in addition to guaranteed interest payments on investments. The investors were also allegedly told that “profitable trading” would garner returns. Unfortunately, what ended up happening is that most of the investors’ funds didn’t go toward trading and what was traded resulted in substantial losses.

CFTC says that the few funds that M35 and M25 paid to investors was money that had come from other clients. Because of this, CFTC contends, the two firms ended up running Ponzi scams. The agency also is accusing the defendants of covering up the securities fraud with monthly statement accounts that gave clients the false impression that they were making the 2% monthly interest that they had been promised.

Jointly and severally the defendants will pay $7.404 million in restitution. The two companies will jointly and severally pay a fine of $7.1 million. Lyon’s fine is $375,00 and Kear will pay $1.4 million.

Related Web Resources:
Federal Court Orders More than $16.2 Million in Customer Restitution and Monetary Penalties against Texas Defendants Scott P. Kear, Sr., Jeffery L. Lyon and their Firms in CFTC Anti-Fraud Action, CFTC, October 27, 2010
Read the Complaint (PDF)

Texas Securities Fraud, Stockbroker Fraud Blog
Institutional Investor Securities Blog
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Insider Trading: Likely on the Rise and Harder to Detect

Published on: November 8, 2010 | by Shepherd Smith Edwards & Kantas, LLP

At a recent New York City Bar gathering, U.S. Attorney for the Southern District of New York Preet Bharara said that not only is insider trading “rampant” and likely “on the rise,” but also, that identifying, probing, and prosecuting this securities fraud crime has become much harder. Bharara’s speech was titled “The Future of White Collar Enforcement: A Prosecutor’s View.”

Bharara noted that because of the “sheer volume” and “complexity” of stock trading, it is harder to identify when a specific transaction occurs because inside information was obtained. Also, such illicit trades, he said, are “subject to plausible deniability.”

Bharara said that similar reasons make it easy for “pre-textual trading,” which is used to foil enforcement efforts, to occur. Also, the high volume of information that is now available through tweets, Web sites, blogs, and feeds can make it easier for someone to claim that trades were based on information obtained from “reports somewhere” rather than from an insider. Bharara pointed out that blurred lines have developed between white-collar crimes and street crimes and that the globalization of crime has made it easier for offenders to hide their illegal gains. Meantime, it has become easier for fugitives to seek refuge abroad.

Bharara vowed that probing and prosecuting insider trading remains a priority for the Federal Bureau of Investigation, the Department of Justice, and the US Securities and Exchange Commission. He said his office will use every legal tool of investigation at its disposal even if it means obtaining the court’s authority to use wiretaps.

The Future of White Collar Enforcement: A Prosecutor’s View, New York City Bar, October 20, 2010 (PDF)

Insider Trading, Stockbroker Fraud Blog

Investment Adviser Southridge Capital Management and Its Hedge Fund Manager Face SEC Securities Fraud Charges for Allegedly Overvaluing Portfolio Assets

Published on: November 5, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Along with Connecticut regulators, the Securities and Exchange Commission is charging Southridge Capital Management and its hedge fund investment manager Stephen M. Hicks with financial fraud. The two are accused of fraudulently overvaluing portfolio assets.

According to the SEC, Hicks fraudulently misstated the assets’ acquisition price when he overvalued the largest position that the funds held. Hicks also allegedly arranged a transaction involved the sale of a Southridge fund-acquired telecommunications company (when the company defaulted on a $769,000 note) to Fonix Corporation, which made the purchase in exchange for securities that were valued at $33 million in 2004.

The SEC claims that the asset sold and the securities obtained were not accurately valued, Fonix’s position was wrongfully valued at its acquisition cost, and since 2004 the funds have accrued or paid hundreds of thousands of dollars in management fees. The SEC also contends that Hicks fraudulently solicited clients to place their money in new funds and told them that most of their money would be placed in free trading shares that were unrestricted, near cash, or cash. However, by 2007 many of the investors were having a difficult time redeeming their money from what were significantly illiquid securities. The SEC is seeking disgorgement of profits, injunctive relief, financial penalties, and prejudgment interest.

Meantime, in Connecticut, Banking Commissioner Howard F. Pitkin is charging Southridge and Hicks with overvaluing assets that they managed and lying to investors. The state is accusing the investment firm of purposely using bogus financial statements to overvalue the assets of five funds so that clients could be charged larger fees. State regulators contend that the alleged securities misconduct allowed Hicks and Southridge to collect over $26 million in fees.

Related Web Resources:
SEC Charges Connecticut-Based Hedge Fund Manager with Fraud in Valuing Portfolio Assets, Making Misrepresentations to Investors, and Misuse of Investor Assets, SEC.gov, October 25, 2010
Southridge Capital Management Founder Charged With Fraud Though He May Not Know It Yet, Dealbreaker, October 25, 2010
Institutional Investor Securities Blog
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UBS Must Pay Couple $530,000 for Lehman Brothers-Backed Structured Notes

Published on: November 5, 2010 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority arbitration panel has ordered UBS AG to pay two clients $529,688 over their purchase of Lehman Brothers Holdings notes. The investors, Steven and Ellen Edelson, were told that they were buying “structured products, some of which were “principal protected.”

Between 2006 and 2008, the Edelsons, who used to own a plumbing supply company, purchased some $3.5 million in structured products—$529,688 of which came from Lehman. They even purchased the Lehman notes as late as August 2008, just a month before the bank failed.

Some of the Lehman notes that they bought were called “Return Optimization Securities with Partial Protection,” and “100% Principal Protection Notes” (PPN). According to the couple’s securities fraud lawyer, the Lehman notes are now valued at pennies on the dollar). Their attorney contends that by calling the notes “principal protected,” UBS misrepresented the risks involved in investing in the structured notes.

According to Forbes.com, Lehman’s structured notes were supposed to perform like an S&P 500 index or a basket of securities. However, the PPN should be different from either in that the investments—in return for the financial security—would be capped. Unfortunately, as investors found out in September 2008, there were “principal protected” investments that did not live up to their name because they lacked that inferred protection.

UBS maintains that it followed “regulatory requirements” when it sold Lehman notes and that it could not have foreseen the latter’s financial collapse. Meantime, FINRA has ordered the investment bank to repurchase the notes from the retired couple.

Securities Fraud Against UBS Over Lehman Products
UBS has reportedly sold $1 billion of Lehman products to US investors. In six of the seven cases alleging securities fraud that were decided through FINRA, UBS must now repay some or all of the losses sustained by the investors.

Related Web Resources:

UBS Having Hard Time With Lehman Structured Products Arbitration, Forbes, April 26, 2010

UBS Loses Lehman Arbitration Note Claim by Small Investor, Stockbroker Fraud Blog, December 9, 2010

Brokers Renew Push for Investors to Buy Structured Products, Stockbroker Fraud Blog, June 12, 2009

San Diego Officials Settle SEC Municipal Bond Charges for $80,000

Published on: November 3, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Four ex- San Diego officials will pay $80,000 in fines to resolve municipal bond charges by the US Securities and Exchange Commission for allegedly misleading investors. Never before has the SEC obtained financial penalties against a city’s officials for municipal securities fraud. By agreeing to settle, ex-San Diego City Manager Michael Uberuaga, ex-Deputy City Manager for Finance Patricia Frazier, ex-Auditor and Comptroller Edward Ryan, and ex-City Treasurer Mary Vattimo are not denying or admitting to the charges. There are still charges pending against San Diego’s ex-Assistant Auditor and Comptroller Teresa Webster.

The SEC filed its securities fraud charges against the former city officials in 2008. The officials are accused of knowing that the city of San Diego had purposely underfunded its pension obligations to increase benefits will deferring costs. The SEC also contends that the ex- officials understood that without cuts to city services, employee benefits, or new revenues, it would be difficult to fund future retirement obligations. Yet the former officials allegedly did not let investors know about the serious funding problems and made false and misleading statements in 2002 and 2003.

Regulators contend that when San Diego sold over $260 million in bonds, city officials did not disclose that the pension deficit was expected to hit $2 billion in 2009. According to Rosalind Tyson, the director of the SEC’s Los Angeles Regional Office, municipal officials are obligated to make sure that investors get accurate and full information about the financial condition of an issuer.

Related Web Resources:

Former San Diego officials settle with SEC, The San Diego Union Tribune, October 26, 2010.

Former San Diego Officials to Pay Penalties in SEC Municipal Bond Fraud Case, Asset International October 29, 2010
More Municipal Bond Blog Posts Continue Reading ›

Should Global Securities Fraud Lawsuits By Private Litigants Be Allowed? The SEC Wants To Know

Published on: November 3, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is seeking comments on whether amendments should be made to federal securities laws so that private litigants can file transnational securities fraud lawsuits. Comments are welcomed until February 18, 2011. The SEC says to refer to File No. 4-617.

In its request, the SEC points to the US Supreme Court’s ruling in Morrison v. National Australia Bank. The decision placed significant limits on Section 10(b) antifraud proscriptions’s extraterritorial reach. That said, Congress, through Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 929Y, gave back to the government its ability to file transnational securities fraud charges. It is under the new financial reform law that Congress has ordered the SEC to determine whether a private remedy should apply to just institutional investors or all private actors and/or others.

Included in what the study will analyze are how this right of action could impact international comity, the economic benefits and costs of extending such a private right of action, and whether there should be a narrow extraterritorial standard. The SEC also wants to know if it makes a difference whether:

• The security was issued by a non-US company or a US firm.
• A firm’s securities are traded only outside the country.
• The security was sold or bought on a foreign stock exchange or a non-exchange trading platform or another alternating trading system based abroad.

Related Web Resources:
Morrison v. National Australia Bank (PDF)

US Securities and Exchange Commission

Dodd-Frank Wall Street Reform and Consumer Protection Act, SEC (PDF)

Texas Securities Fraud: Man Admits to $1.7 Million Investment Scam Involving Therapeutic Horseshoes

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

Samuel Serritella, 66, has pleaded guilty to securities fraud. He reportedly received some $1.7 million from 300 investors.

Serritella has admitted that he convinced investors to purchase unregistered shares in International Surfacing Inc. the New Jersey-based company he was chairman, chief financial officer, and president of that was supposedly going to make therapeutic horseshoes to help horses get ready for the Olympics.

Serritella, who was not authorized to sell securities in the state, is accused of making the share sales between February 2004 and May 2006, placing investors’ funds into several bank accounts that were under his control, and using the money to pay for personal expenses (including travel, hotel bills, tavern expenses, and medical bills) and lend $84,000 to three friends.

While Serritella did use some of the money for startup expenses and payments to the company contracted to help make the horseshoes, prosecutors say he never actually purchased the equipment for manufacturing them. He had also charged Serritella with theft by deception, money laundering, misapplication of entrusted property, and misconduct by a corporate official,

As Texas Securities Fraud Lawyer William Shepherd, noted, “100 years ago it was legal in Texas to shoot a horse thief; but getting scammed into investing in “orthopedic shoes” for horses? The “buyer-beware” principle may apply.

Serritella will have to pay back his investor. If convicted, he could end up behind bars for up to a decade.

Related Web Resources:
NJ man admits $1.7M fraud involving horseshoes, Washington Post, October 25, 2010
Garfield man charged with bilking investors of $1.7M, NJ Newsroom, July 21, 2009 Continue Reading ›

Securities Claims Against Goldman Sachs Over Mortgage-Backed Certificates are Partially Dismissed by Court Due to Lack of Injury

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

The U.S. District Court for the Southern District of New York has ruled that without an injury, a mortgage-backed certificates holder cannot maintain a securities claim against MBS underwriter Goldman Sachs & Co. (GS) and related entities for allegedly misstating the risks involved in the certificates in their registration statement. Judge Miriam Goldman Cedarbaum says that plaintiff NECA-IBEW Health & Welfare Fund knew that the investment it made could be illiquid and, therefore, cannot allege injury based on the certificates hypothetical price on the secondary market at the time of the complaint. The court, however, did deny Goldman’s motion to dismiss the plaintiff’s claims brought under the 1933 Securities Act’s Section 12(a)(2) and Section 15.

The Fund had purchased from Goldman a series of MBS certificates with a face value of $390,000 in the initial public offering on Oct. 15, 2007. The fund then bought another series of MBS certificates with a $49,827.56 face value from Goldman, which served as underwriter, creator of the mortgage loan pools, sponsor of the offerings, and issuer of the certificates after securitizing the loans and placing them in trusts.

Per the 1933 Act’s Section 11, the Fund alleged that in the resale market the certificates were valued at somewhere between “‘between 35 and 45 cents on the dollar.” However, instead of alleging that it did not get the distributions it was entitled to, the plaintiff contended that it was exposed to a significantly higher risk than what the Offering Documents represented. The court said that NECA failed to state any allegation of an injury in fact. The court granted the defendants’ motion to dismiss.

Following the court’s decision, Shepherd Smith Edwards and Kantas Founder and Securities Fraud Attorney William Shepherd said, “It is sad that large and small investors have little clout in the processes of selecting judges. Thus, Wall Street continues to gain advantages in court—especially federal court.”

Related Web Resources:

NECA-IBEW

Ex-Employee Accuses Bank of America of Securities Fraud Involving Complex Derivatives Products

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

A former Bank of America employee is accusing the investment bank of aggressively recommending complex derivatives products to investors while at the same time failing to tell them of the risks involved. In a letter to Securities and Exchange Commission Chairman Mary Schapiro, the whistleblower said that the sales of these structured notes were so important to the BofA’s brokerage unit during the economic collapse that workers were threatened with termination if they warned clients against investing in the products or did not meet their quotas.

The ex-employee writes that another employee’s job was threatened after he told clients to liquidate their notes because of the possibility that BofA might become “nationalized,” which would make the notes worthless. The whistleblower claims to have been notified that aggressive sale of the notes was the only way the brokerage unit could fulfill its revenue goals at that time.

Bill Halldin, a Bank of America spokesperson, says that the investment firm has not heard about any such complaint regarding these allegations. He maintains that the investment bank has a policy abiding by “applicable laws and industry practices” when conducting business.

Broker Misconduct
Broker-dealers are obligated to notify investors of risks involved in an investment. They must also make sure that any investment that they recommend is appropriate for a client. Failure to fulfill these duties of care can be grounds for a securities fraud case.

Structured Notes
These derivative-like contracts allow investors to bet on bonds, stocks, or other securities. While some notes are “guaranteed” and promise a return on principal upon expiration, there are still those, such has Lehman Brothers’ notes, that fail to meet that guarantee. This can leave the holders to deal with the financial consequences. Banks may also stop trading the notes at any time.

Related Web Resources:
Informer: BofA hawked risky deals to customers, NY Post, October 29, 2010
Informer: Bofa Hawked Risky Deals to Customers, iStockAnalyst
Bank of America Blog Posts, Stockbroker Fraud Blog
Whistleblower Lawsuits, Stockbroker Fraud Blog Continue Reading ›

Imperia Invest IBC’s Assets are Frozen Following SEC Allegations of British Viatical Settlements Scam That Targeted Deaf Investors

Published on: October 28, 2010 | by Shepherd Smith Edwards & Kantas, LLP

A district court issued an emergency order this month to freeze the assets of Imperia Invest IBC. The order came after the Securities and Exchange Commission accused the internet-based investment company of operating a securities scam involving the British version of viatical settlements.

According to the SEC, Imperia Invest IBC had raised over $7 million from more than 14,000 investors located in different parts of the world with the promise that they would earn returns of just above 1% a day. More than half of the money raised came from deaf investors in the US. The agency is seeking disgorgement of fraudulent gains, penalties, an injunction from future violations, and emergency relief for investors.

The SEC claims that the investment company solicited investors through its Web site, which stated that returns could only be accessed through a Visa credit card and purchased from Imperia for a few hundreds dollars. The company, however, did not have a business tie with the credit card company. Imperia also listed bogus addresses in Vanuatu and the Bahamas.