Investor Lawyers Blog

Oregon Files Securities Fraud Lawsuit Against University of Phoenix Parent Company Apollo Group Inc. of Arizona

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

This week, Oregon Attorney General John Groger and Treasurer Ted Wheeler announced that the state is suing University of Phoenix’s parent company, Apollo Group Inc. of Arizona, and several of its executives for securities fraud. The state officials claim that the plaintiffs misled investors in the firm’s financial statements about the for-profit college’s revenue.

The alleged misconduct is said to involve the school’s revenue between 2007 and 2010. Because of the misrepresentation, the Oregon Public Employee Retirement Fund lost approximately $10 million. Oregon’s securities lawsuit, which joins a class action case while seeking lead plaintiff status, accuses the defendants of violating securities law with materially false and misleading statements that misrepresented or did not disclose information that could have helped investors determine their investments’ risk levels.

The state contends that Oregonians seeking higher education were also injured by the Apollo Group’s financial practices. For example, the company is accused of not taking the proper steps when handling federal student loans. The firm also is accused of improperly dealing with canceled loans, causing students to be held financially responsible for classes that they didn’t take.

After the company’s alleged misconduct was disclosed in an October 2009 filing and the SEC investigation became publicly known, shares of Apollo dropped 17.7% in one day. With the pre-disclosure price sinking from $72.97/share to $60.06/share, almost $2 billion in market capitalization was wiped out.

Apollo’s stock price continued to drop this year, following calls for greater oversight over the for-profit college industry. Apollo’s improper business practices were also brought to light during Congressional hearings. Recently, a Senate probe and a Government Accountability Office report revealed that Apollo also committed fraud when marketing its services to prospective students. Apollo shares were trading at $38.94 on August 13, 2010.

Related Web Resources:

Oregon Public Employee Retirement Fund

Wall Street Complains Financial Reform Will Mean More Lawsuits. Is This Bad?

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

Public companies and employers may have to contend with an unlimited number of expensive securities lawsuits under the whistleblower provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which not only includes provisions for an expanded statute of limitations under which employees can sue employers for discriminatory action but also sets up a new Securities and Exchange Commission bounty program. Labor and Employment Attorney Goldsmith recently spoke about this possibility while participating in a Practicing Law Institute panel. Goldsmith also noted that Dodd-Frank extends the whistleblower protections of the 2002 Sarbanes-Oxley Act to companies’ affiliates or subsidiaries and nationally recognized statistical rating organizations’ employees.

Goldsmith contends that by enacting Dodd-Frank, Congress was showing “overt hostility” toward predispute arbitration agreements by not having them apply to whistleblower issues. He notes that while the Dodd-Frank provisions are supposed to make up for the limitations and loopholes of SOX, certain questions have arisen that have yet to be addressed.

Under section 922 of Dodd-Frank, the SEC is allowed to award whistleblowers between 10% and 30% of any penalty that above $1 million. Cases may include those brought by the Justice Department, the SEC, other federal agencies, and state attorneys general. The SEC started getting tips and complaints even before the statute was enacted.

With its new bounty program, the SEC is expected to increase its enforcement efforts. This could result in huge payments to whistleblowers, who can also receive cooperation credit if they were violators. However, former Chief Litigation Counsel Luis Mejia, who recently spoke at a DC bar event, said that he believes that Dodd-Frank’s whistleblower provision is “the most dangerous” of issues and could undermine corporate compliance programs. Rather than reporting problems internally, giving the company a chance to self-remediate or weed out old or unfounded claims, an individual might be more likely to “blow the whistle” because of the financial rewards.

Shepherd Smith Edwards & Kantas LTD LLP Founder and Stockbroker Fraud Lawyer William Shepherd had a different perspective to offer: “Regulation of Wall Street and business – or the lack of it – has obviously been a disaster over the last decade. Meanwhile the business community clamors for privatization to cure government waste and ineptness. From the birth of this nation lawsuits have been a form of privatization of government power. Why hire more police when lawyers can handle the job much more efficiently and at no cost to the taxpayers? The same is true of whistleblowers. Why use taxpayer dollars to investigate when those on the inside already understand the problem? Believe me, white collar criminals are more afraid of lawyers and whistleblowers than they are of regulators, many of whom they own! That is why they are afraid of the proposed reforms.”

According to a recent Senate report, whistleblowers can take credit for exposing 54.1% of fraud scams in public companies. Meantime, the SEC and auditors reportedly have uncovered just 4.1% of the schemes.

Related Web Resources:
Dodd-Frank Wall Street Reform and Consumer Protection Act (PDF)

SEC Charges Investment Adviser With Allegedly Making Unsuitable Hedge Fund Recommendations to Elderly Clients

Published on: October 15, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has charged investment adviser Neal Greenberg with securities fraud and breach of fiduciary duty related to the making of recommendations and marketing of hedge funds to investors. According to the SEC, Greenberg, who was the CEO of Tactical Allocation Services LLP and also the portfolio manager of Agile Group LLC, made unsuitable recommendations to clients, many of whom were elderly and/or retired or close to retirement, when he suggested that they invest in the hedge funds run by his firms.

The SEC contends that the investment adviser issued misstatements when he said that the hedge funds were suitable for older and conservative clients, many of whom were seeking low-risk investments that came with significant capital protection. For example, Greenberg allegedly “falsely stated that the Agile hedge funds” were low risk, highly diversified, and offered liquidity when in fact, the funds, which held approximately $174 million from over 100 clients, were non-diversified in their holdings and used leverage. Greenberg also is accused of claiming that the Agile funds “used leverage” in a manner that did not “significantly increase” their risk profile. Yet, says the SEC, for 2007 and 2008 the risk disclosures in private placement memoranda for the hedge funds from Agile contradicted the “false and misleading” misrepresentations made by Greenberg.

The SEC is also accusing Greenberg of failing to make sure that adequate compliance procedures and policies were put in place for determining whether certain investments were suitable for clients’ specific needs. The commission says Greenberg failed to tell clients that they were going to have to pay management and performance fees on the leveraged part of their investments. Between 2003 and 2006, investors paid about $2 million in these undisclosed fees.

Related Web Resource:
Read the SEC Order Against Greenberg (PDF)
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SEC Examines Proxy Advisory Firms

Published on: October 14, 2010 | by Shepherd Smith Edwards & Kantas, LLP

According to Securities and Exchange Commission Chairman Mary Schapiro, the agency is reviewing the proxy process to determine how information is transmitted to shareholders and the public. They are also studying how shareholder votes are counted.

She says the exam will focus on the role of proxy advisory firms, the types of conflicts they deal with, the way these issues affect their business and the voting process, and the role that the agency should play when it comes to regulate proxy advisory firms. She expressed commitment to a “top-to-bottom review of proxy infrastructure” and the role that proxy advisory firms face.

Schapiro made her remarks in front of the Economic Club of New York last month. At the event, she also noted that although the Obama Administration has increased the SEC’s budget—the Dodd-Frank Wall Street Reform and Consumer Protection Act did not give the agency the ability to oversee its own budget—she said that she still would like the SEC to be self-funded.

The financial regulatory reform legislation did provide the SEC with reserve funds to go toward hiring and technology upgrades. Schapiro says that the agency has been successful in its efforts to recruit from hedge funds, trading desks, institutional and retail investment firms, and credit ratings agency analysts.

Related Web Resources:
Chairman Mary L. Schapiro, SEC.gov

UBS AG Motion to Dismiss Class Securities Case Test’s US Supreme Court’s Ruling Regarding Extraterritorial Transactions

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

UBS AG has filed a motion to dismiss a class securities case against it. The move is putting the US Supreme Court’s recent ruling in Morrison v. National Australia Bank Ltd. to the test.

In this securities fraud case, four institutional investors—three of them foreign—are charging UBS and a number of individual defendants with violating Section 10(b) of the 1934 Securities Exchange Act. This is based on misstatements that were allegedly made regarding its auction rate securities-related and mortgage-related activities. They are seeking relief for all purchasers of UBS stock on all worldwide exchanges. Most of the statements in question were issued from the bank’s headquarters in Switzerland.

In 2008, the defendants asked the court to dismiss the allegations due to lack of subject matter jurisdiction. They cited the decision made in Morrison by the U.S. Court of Appeals for the Second Circuit, which had dismissed the action.

Now that the US Supreme Court issued its ruling in Morrison, with the justices concluding that Section 10(b) only applies to securities transactions on domestic exchanges and in other securities, the defendants are attempting to also have the securities case against them dismissed per Morrison’s “bright-line, location-of-the transaction rule.”

The defendants say that the plaintiffs have advised them that they will use the Supreme Court’s use of the word “listed” to end-run Morrison. Per the justices’ decision, Section 10(b) applies to transactions involving securities that are “listed on an American stock exchange.” UBS shares can be found on the NYSE.

However, the defendants are contending that there isn’t any support in the “the test of Section 10(B), its legislative history, or Morrison” for this type of unprecedented interpretation. They say that the word “listed,” as it is used in Morrison is only applicable to two kinds of securities that can be purchased in the US—an unlisted security that trades over the counter in this country and a listed one that trades on a US exchange. The defendants claim that the plaintiffs are misreading the word “listed” in order to authorize international class action lawsuits based on securities purchases on a foreign market and that this “flies in the face of Morrison’s statements that Section 10 (b) doesn’t “regulate foreign securities exchanges.”

Related Web Resources:
Morrison v. National Australia Bank Ltd., Supreme Court (PDF)

1934 Securities Exchange Act

Most Investors Want Fiduciary Standard for Investment Advisers and Broker-Dealers, Say Trade Groups to SEC

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

The North American Securities Administrators Association, the Consumer Federation of America, the Investment Adviser Association, the Financial Planning Association, AARP, and the National Association of Personal Financial Advisors have sent a letter to Securities and Exchange Commission Chairman Mary Schapiro asking that the agency examine a recent national survey that shows that the majority of investors don’t know the differences between investment advisers, brokers, and financial planners. ORC/Infogroup conducted the survey for the trade groups.

1,319 investors were polled. Per the survey, investors appear to “overwhelmingly believe” that representatives who provide investment advice should disclose conflicts of interest and act in clients’ best interests. Many of them are wrong in their belief that investment advisers, broker-dealers, and insurance agents are currently held to a fiduciary standard.

Among the Survey’s Other Findings:
• More than three out of five investors are under the wrong impression that there is no difference between an investment adviser and a stockbroker.

• About 1/3rd of investors are not clear about the role that stockbrokers play or what services that they offer.

The group told Schapiro that per the survey’s findings, a common standard should apply to investment advice that is given, regardless of whether the recommendation is made by an investment adviser or a broker-dealer. They say that the “principles-based fiduciary duty that applies under the [1940 Investment] Advisers Act” should be the standard. Per the survey, many investors feel that a fiduciary standard should also apply to insurance agents that sell investments.

Related Web Resources:
Investment Adviser Association

SEC Chairman Mary L. Schapiro

North American Securities Administrators Association

The Consumer Federation of America

Financial Planning Association

AARP

National Association of Personal Financial Advisor

ORC/Infogroup
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Broker-Dealers Press Clients to Settle Arbitration Claims, Says Illinois Securities Regulator

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

According to Illinois securities regulator Tanya Solov, brokerage firms are driving investors with securities arbitration claims against them to settle their cases. Solov says that they are doing this by barraging investors with discovery information requests. Solov was quoted at the yearly North American Securities Administrators Association Inc. meeting.

Solov said that broker-dealers’ discovery practices end up making the FINRA arbitration process more costly for investors. Such tactics, says Solov, are compelling investors to settle their securities cases rather than go into litigation. She also noted that while broker-dealers keep pressing investors into coming up with discovery material, many investment firms, when faced with a discovery request by an investor, have been known not to provide the information.

William Shepherd, a securities fraud attorney and the founder of Shepherd Smith Edwards & Kantas LTD LLP, represents many clients with securities cases against brokerage firms. He noted the challenges his investment fraud firm has had when trying to obtain discovery information for his clients: “Our firm responds in kind, fighting hard for discovery from the firms as well. We have invested in the latest technology to be able to process millions of documents and search these for clues. We do not let abusive requests thwart our goal and we protect our clients from such abuses. We refuse to be bullied by large financial firms who think they can run over investors and their attorneys. These firms now know we are ready, willing and able to fight them and most have abandoned such tactics against us.”

Municipal Securities Investors Need More Information About Bond Purchases, Says SEC

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

According to US Securities and Exchange Commissioner Elisse Walter, municipal securities market investors with securities fraud cases are entitled to clear information about the bonds they are purchasing. Walters spoke at an SEC-sponsored hearing last month. Other panelists also echoed the need for accuracy, transparency, and timeliness of disclosure for bond buyers so that they are given the proper information at the right time.

Walter said that about 51,000 local and state entities issue bonds for maintaining and constructing infrastructure projects. She also noted that even though retail investors hold 36% of outstanding municipal securities directly and another 34% own them indirectly through close-end funds, mutual funds, and retail-sized trade accounts for up to 81% of trading, volume, the municipal securities market is missing a number of the protections that exist in other sectors of the US capital markets. Walter said that municipal securities investors have the right to these same protections, as well as the right to information that doesn’t have material omissions or is materially misleading. She classified the treatment of municipal securities investors as “second class.”

Walter said that even though municipal securities are reputedly safe, they can and have been known to default. Between 1999 and 2009, out of $3.4 trillion dollars issued, issuers defaulted on more than $24 billion in municipal bonds. Last year alone, 194 municipal bonds that had an overall dollar amount of nearly $7 billion in bonds defaulted.

The hearing is the first of several that gives participants the forum to examine the $2.8 trillion municipal securities markets. Topics include financial reporting and accounting, investor protection and education, market liquidity and stability, municipalities as conduit borrowers, the Municipal Securities Rulemaking Board, professionals and market intermediaries, offering participants, 529 plans, and Build America Bonds. The commission is going to issue a staff report that will include recommendations for industry “best practices,” regulatory changes, and legislative changes.

Related Web Resources:
SEC’s Walter takes aim at ‘second-class treatment’ of muni investors, Investment News, September 21, 2010

Speech by SEC Commissioner: Statement at SEC Field Hearing on the State of the Municipal Securities Market, SEC, September 21, 2010

Lincoln Financial Advisors Corp. Ordered by FINRA to Pay $4.43M Over Alleged “Selling Away” Scheme to Investors

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

A Financial Industry Regulatory Authority panel has ordered Lincoln Financial Advisors Corp. to pay $4.43 million in damages and interest to about 22 investors that had accused brokerage manager Scott B. Gordon of “selling away.” The panel wrote in its decision that the brokerage firm was “negligent” in failing to prevent Gordon from using an outside business to raise money from investors. The alleged misconduct took place for almost a year.

“Selling away” involves a broker soliciting clients to purchase securities not offered by his/her broker-dealer and without the brokerage firm’s approval. Regulators consider “selling away” to be a violation of securities laws.

Gordon became software-development company Healthright Inc.’s chief executive in 2005 and ran the company from his Lincoln Financial office. Two Healthright investors sent a written complaint to Lincoln the following year.

A request by Gordon to the brokerage firm that he be able to conduct outside business activity was not approved or denied. In 2006, Grant Gifford, who is a Healthright investor and a claimant in the securities fraud case, discovered alleged misstatements and omissions that Gordon had made. In 2008, FINRA barred Gordon from the securities industry.

Except for Gifford, who lent money to Healthright in his personal capacity, all the other investors in the securities case against Lincoln were part of Healthright Partners, LP.

Related Web Resources:
Finra Panel Orders Lincoln to Pay $4.3 Million to Investors, The Wall Street Journal, October 7, 2010
Lincoln Financial hit with hefty arbitration award over selling away, Investment News, October 5, 2010
Activity Away From Associated Person’s Member Firm, FINRA Continue Reading ›

FINRA Wants to Make All-Public Arbitration Panel for Investors Permanent

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

The Financial Industry Regulatory Authority says it wants investors with securities claims against broker-dealers to have the right to an arbitration panel that doesn’t include industry representatives. FINRA will file its proposal with the Securities and Exchange Commission for approval.

Under the new rule, investors would have the option of choosing between a panel comprised of one industry arbitrator and two public arbitrators and a panel made up of three public arbitrators. FINRA is hoping this will create a greater perception of fairness in the mandatory arbitration system, which it oversees.

During the last two years, FINRA has run a pilot program that gave investors the option between the two types of panels. The program was created to test whether all-public panels gave investors a fairer shake in their disputes with broker-dealers. 14 investment firms took part in the program. According to FINRA, investors chose to have their securities case heard by an all-public panel 60% of the time. 50% of the time they chose the panel that included one industry member. The pilot has been extended for another year. As of September 28, nearly 560 cases have been part of this program.

Now that the Dodd-Frank Wall Street Reform and Consumer Protection Act has been enacted, the SEC can limit or ban mandatory arbitration clauses, which can be found in contracts between broker-dealers and their clients. Investor advocates are hoping for this.

Related Web Resources:
Finra asks SEC to OK all-public panels for arbitration disputes, Investment News, September 28, 2010
FINRA Proposes to Permanently Give Investors the Option of All-Public Arbitration Panels, September 28, 2010
Number of FINRA Arbitration Claims Rose in 2009 Following Market Crisis, Stockbroker Fraud Blog, January 13, 2010 Continue Reading ›