Investor Lawyers Blog

QA3 Financial Corp. Notifies Its Brokers It is Closing Its Doors

Published on: February 7, 2011 | by Shepherd Smith Edwards & Kantas, LLP

QA3 Financial Corp. has announced that it will be closing down its business. In an email sent to its 400 brokers after the market closed on Friday, QA3 owner and CEO Steve Wild says the decision was made following the securities arbitration award that was issued against the independent brokerage firm last month and the fact that its errors and omissions carrier has yet to provide coverage.

Catlin Specialty Insurance Co. is QA3’s insurer. The broker-dealer sued the insurer last year alleging failure to uphold the insurance contract, which QA3 claims is supposed to provide $7.5 million in coverage for legal claims, expenses, and damages related to private placement. Catlin then sued QA3, contending that there was a $1 million cap on QA3 private-placement claims.

Once a leading seller of high-risk private placements, QA3 has been dealing with dozens of arbitration cases and securities lawsuits from clients that purchased private placements, such as Medical Capital Holdings Inc, DBSI Inc., and Provident Royalties LLC.

Recently, a Financial Industry Regulatory Authority Inc. panel ordered QA3 to pay $1.6 million after losing an arbitration claim filed by an elderly couple. The panel found that the brokerage firm failed to adequately supervise broker James R. Files or provide sufficient training regarding the sale of tenant-in-common exchanges (TIC’s). The plaintiffs, Mary-Ann and Arthur Cargill, are in their 70’s, possess limited financial resources, and don’t have a great deal of investment experience. The FINRA panel also says that the brokerage firm appears to have routinely disregarded sales and marketing approval practices.

Related Web Resources:
B-D down: QA3 to close up shop next week, Investment News, February 7, 2011
Arbitrator awards Wilton couple nearly $1.6 million for investment, American Chronicle, January 19, 2011
Catlin Specialty Insurance Company v. QA3 Financial Corp., Justia Dockets and Filings, November 23, 2010
Private Placements, Stockbroker Fraud Lawyers Continue Reading ›

The 2008 Financial Crisis was Avoidable, Says FCIC

Published on: February 7, 2011 | by Shepherd Smith Edwards & Kantas, LLP

According to the Financial Crisis Inquiry Commission, the 2008 financial crisis could have been avoided, but, instead it was caused by Wall Street’s thoughtless risk-taking, corporate mismanagement, and government regulation-related failures. The New York Times says that the FCIC blames the Federal Reserve, two administrations, and other regulators for allowing the excessive packaging and sale of loans, poor mortgage lending, and risky bets on securities backed by loans. The FCIC reached its conclusions after 19 days of interviews and hearings. Over 700 witnesses were involved. The findings can be found in a 576-page book and transcripts and raw material are to be placed online.

However, not all 10 commission members are endorsing the final report. The three Republican members have put together their dissent that concentrates on a narrower set of causes. A fourth Republican panel member, Peter J. Wallison, has his own reason for dissent. The six Democrat members have endorsed the report.

The majority report places some blame on former Fed chair Alan Greenspan and his successor Ben S. Bernanke. While Greenspan was in charge of the central bank when the housing bubble was expanding, Bernanke was instrumental in responding to the financial crisis when it happened. The report describes the Bush Administration’s response as “inconsistent,” such as when it let Lehman Brothers collapse even after bailing out Bear Stearns. The decision by the Clinton Administration to shield over-the-counter derivates from regulation in 2000 is considered a “key turning point” leading to the economic collapse.

Also receiving some of the blame is current Treasury Secretary Timothy F. Geithner, who once served as Federal Reserve Bank of New York head. The report says that the New York Fed failed to detect signs that there were problems at Lehman and Citigroup. Regulators were blamed for not having the “political will” to scrutinize and hold responsible the institutions they were tasked with overseeing. Meantime, the FCIC says that the Securities and Exchange Commission failed to stop risky practices and make banks hold greater capital so that there would be a cushion for possible losses. It also accuses the Office of Thrift Supervision and the Office of the Comptroller of the Currency of stopping states from curtailing abuses.

Related Web Resources:
Financial Crisis Was Avoidable, Inquiry Finds, The New York Times, January 25, 2011

The FCIC Report

FCIC Report Misses Central Issue: Why Was There Demand for Bad Mortgage Loans?, Huffington Post, January 31, 2011

Commodities Industry Fears being held to Regulatory Standards of Securities Industry

Published on: February 4, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Securities Industry and Financial Markets Association, the International Swaps and Derivatives Association, and the Futures Industry Association have told the Commodity Futures Trading Commission that the 1934 Securities Exchange Act’s Rule 10b-5 not be the model for how it polices market manipulation under the Dodd-Frank Wall Street Reform and Consumer Protection Law. In a comment letter, SIFMA, FIA, and ISDA told the CFTC not to impose additional duties of inquiry, disclosure, or diligence during bilateral transactions on sophisticated parties.

The groups were responding to a rule proposal involving the CFTC expanding its authority over manipulative and fraudulent conduct. CFTC says the proposal was patterned on Rule 10b-5 and Section 10(b). They contend that securities law standards, such as Rule 10b-5, are hard to adapt and “largely inapplicable” to the derivatives and future arena because the two market frameworks have key structural differences. They want the CFTC to “adopt an antifraud rule” that takes “into account the nature of material information in these markets and the types of duties that may exist.”

The associations also want the CFTC to give guidance that offers market participants clear principals on how to distinguish between “prohibited manipulative conduct” and “legitimate competitive trading practices.” In addition, they want “extreme recklessness” as the scienter standard and any anti-manipulation rule’s scope clarified in regards to the CFTC’s current anti-manipulation authority. ISDA, FIA, and SIFMA want commercial traders to be allowed to trade using their own, nonpublic data about company-specific assets and liabilities.

Shepherd Smith Edwards and Kantas Founder and Securities Fraud Lawyer William Shepherd has this to say: “Our country has just experienced the worst securities debacle in nearly 90 years, which many experts claim was largely caused by deregulation of the securities industry. Despite the ineffectiveness of watered-down securities regulation, the Commodities Industry fears being held to even this weak standard. First among these fears is that those who market commodities contracts to the public may be held to a similar duty as those selling securities. When smooth-talking phone jockeys call dangling profits and little or no risk they should be held responsible for their actions. In other words ‘there ought to be a law.'”

Commodities Future Trading Association

Financial Markets Association

Securities Industry and Financial Markets Association
Continue Reading ›

Insurer Claims that JP Morgan and Bear Stearns Bilked Clients Of Billions of Dollars with Handling of Mortgage Repurchases

Published on: February 3, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Ambac Assurance Corp., a mortgage insurance company, claims that not only did JP Morgan Chase & Co. resist repurchasing loans from Bear Stears-created bonds, but also, it demanded that a lender buy back the bad mortgages. Ambac made the claim in a proposed amended securities lawsuit against Bear Stear’s EMC Mortgage unit. JP Morgan now owns Bear Stearns.

Ambac filed its securities lawsuit in 2008, claiming that ex-Bear Stearns mortgage executives that currently head mortgage divisions at Bank of America, Goldman Sachs, and Ally Financial defrauded and cheated investors, while hiding their actions from the public. Its complaint lists more than $600 million in claims with $1.2 billion in damages from the bad mortgage securities that it insured against and invested in. The insurer is now adding the claim of fraud to its case.

According to the complaint, on March 11, 2008, Bear Stearns, who had bought loans and packaged them into bonds for investors to buy, sought to have a lender repurchase mortgages in bonds that Syncora Guarantee Inc. had insured because it claimed that they did not meet promised standards of quality. This, at the same time that Bear Stearns refused, per Syncora’s demands, that it buy back the loans over the same flaws.

Bear traders allegedly sold the toxic mortgage securities to investors and then resold the bad loans with early payment defaults to banks that originated them. Because investors were not notified that the time allowed for early default payments had been cut, this allowed the investment bank to swiftly securitize defective loans without giving investors time conduct due diligence.

Former EMC analysts have stepped forward admitting that they were ordered to falsify loan-level performance data and that the information was passed on to ratings agencies, who would then approve Bear’s billion-dollar deals. They also claim that senior traders were taking money that should have gone to the security holders that bought the bonds and loans from Bear. Due diligence standards were allegedly ignored. Executives allegedly made tens of millions of dollars in compensation.

Ambac claims that Bear knew that what traders were doing in its mortgage trading division yet chose to conceal the defective loans and ignore contractual obligations. The insurer is now holding JP Morgan accountable for the accounting fraud that began at Bear. Ambac also contends that JP Morgan has continued to ignore the vast off-balance sheet exposure linked to its contractual repurchase agreements.

Related Web Resources:
E-mails Suggest Bear Stearns Cheated Clients Out of Billions, The Atlantic, January 25, 2011

Ambac Says JPMorgan Refused Mortgage Repurchases It Also Sought, Bloomberg Businessweek, January 25, 2011

JP Morgan and Chase, Institutional Investors Securities Blog, February 3, 2011

Fontana Capital LLC Founder Violated Short-Selling Rule, Says SEC

Published on: February 2, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Securities and Exchange Commission has charged Forrest Fontana with violating Rule 105 of Regulation M and illegally making more than $1 million. The rule prohibits investors from taking part in public offerings when they have shorted the same securities. Fontana, who allegedly violated the rule three times, helped investors make the unlawful profits.

The SEC contends that in 2008, the ex-hedge fund manager and founder of Fontana Capital LLC, allegedly shorted 60,000 shares of XL Capital (now XL Group) and then shorted 40,000 shares of Bank of America‘s Merrill Lynch (BAC). On July 29, 2008, regulators claim that Fontana bought 50,000 shares of XL Capital and 200,000 shares of Merrill Lynch in secondary offerings. He made $149,000 off his XL capital bets and $792,000 from Merrill Lynch. Later that year, he allegedly shorted 100,000 Wells Fargo (WFC) shares. Fontana bought the same amount the next day and made a profit of about $160,000.

Under the 1933 Securities Act, Rule 105 of Regulation M is there to prevent short selling that can decrease proceeds for shareholders and companies by artificially depressing a stock’s market price right before a company prices its public offering. Rule 105 of Regulation is there to make sure that offering prices are established through the natural forces of supply and demand. Traders must wait five days after shorting a stock before they can take part in that company’s public offering. This prevents investors from using shorting to lower the price that they will pay later in the offering.

There will be a hearing to determine the veracity of the allegations against Fontana and whether sanctions should be issued.

Related Web Resources:
Hedge fund manager faces SEC allegations, Boston.com, January 8, 2011
Read the SEC’s administrative order (PDF)
Continue Reading ›

Financial Fraud Verdict: Jury Orders BDO Seidman to Pay Aviation Pioneer George Batchelor’s Estate and Foundation $91M

Published on: February 2, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Nine years after the death of aviation pioneer and philanthropist George Batchelor, a circuit court verdict has issued a jury awarding his estate and foundation $91 million in its financial fraud case against BDO Seidman. The lawsuit, which was filed in 2002, accused BDO Seidman of covering up inaccurate financial statements when Grand Court Lifestyles, a company that Batchelor had invested tens of millions of dollars in, was audited.

Of the $91 million verdict, $36 million is compensatory damages, $55 million is punitive damages. All of the award will go to the Foundation, which means that the dozens of organizations that it supports may get more funds. Prior to his death, Batchelor, who founded Batch Air and Arrow Air, gave about $100 million to causes related animals, kids, medical facilities, and the environment.

The law firm that represents Batchelor’s estate says that until the end, BDO “denied it had a public duty” and “was willing to look the other way” for Grand Court, which let go of another accounting firm that wanted to know how the manager/owner of “senior” communities valued certain properties. Deloitte & Touche, which was the original accounting firm for Grand Court, has settled its securities case with the Batchelor Foundation.

Financial fraud and its concealment are against the law. If you are a victim of financial fraud you may have grounds for a civil case.

Related Web Resources:

Jury Rules Against BDO, The Wall Street Journal, February 1, 2011

SEC Staff Wants an SRO to Oversee Investment Advisers

Published on: January 31, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Earlier this month, the members of the Securities and Exchange Commission’s Division of Investment Management recommended that Congress either set up at least one self-regulatory organization that oversees investment advisers, impose “user fees” to fund examinations by the Office of Compliance Inspections and Examinations, or make investment adviser oversight the Financial Industry Regulatory Authority’s responsibility. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 914, the SEC is supposed to assess itself and make recommendations for improvement.

Per the SEC’s report, there is at this time inadequate resources for examining the over 11,000 registered investment advisers-a number that will likely go down by 3,350 in July when Dodd Frank’s Section 410 goes into effect and advisers with assets under management valued at $100 million or less will have to register with the state where their main place of business is located. That said, the growth in the industry is such that by fiscal year 2021 there may be up to 13,908 registered advisors with a collective worth greater than $70 trillion.

However, while industry groups will likely endorse a more influential FINRA or a new SRO, investment advisers believe that self-regulation’s rules-based nature is not compatible with their business model and government oversight and regulation would be better for them. FINRA believes that an SRO will be able to “augment” government oversight. In the past, FINRA has expressed willingness to take on this role.

Documents in Case of Ex-Oppenheimer Manager Who Was Fired for Cooperating with Elder Financial Fraud Probe Shed Some Light on What Goes on in Private Arbitration

Published on: January 31, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Even though former Oppenheimer manager James F. Dever won a $74,000 award over his dismissal at the brokerage firm in private arbitration, he has pushed to have the records from the case made public. Dever contends that he was fired because he cooperated with the state in its probe of an Oppenheimer broker who stole money from an elderly couple. In December, a judge granted his request, and over 1,600 documents were made public, creating a rare opportunity for seeing what goes on in private arbitration within the financial industry.

The Boston Globe reports that according to the documents, a banker contacted Oppenheimer’s general counsel in 2004 to let the firm know that Stephen J. Toussaint was depositing checks from an elderly couple’s Oppenheimer account and putting the funds in his own account. Dever was told to investigate the matter—even though the authorities or an Oppenheimer attorney should have been contact.

After discovering that Toussaint had stolen at $350,000 from the elderly couple, Dever pushed to get the broker fired, but the latter stayed at Oppenheimer for another year.

The FBI would later indict Toussaint with an 11-count fraud indictment in February 2007. Meantime, Dever cooperated with the Massachusetts Securities Division’s probe. The state would go on to charge Oppenheimer with unethical and dishonest conduct and failing to supervise the broker. Its CEO, and Dever’s boss, Albert “Bud’’ G. Lowenthal, was also charged in the securities fraud case. Oppenheimer settled with the state over the Toussaint case for $1 million. Lowenthal also settled.

Dever, who had launched Oppenheimer’s Boston office, says his reputation in the financial industry has been damaged because of his firing and his career has experienced severe setbacks as a result. He also says that he sustained financial losses because of the legal costs he has incurred during the last few years because from case. Meantime, Oppenheimer maintains that it wasn’t getting back at Dever when he was at first demoted in the summer of 2007 and then given six months to leave the brokerage firm.

Related Web Resources:
Oppenheimer fight proves costly for ex-manager, Boston.com, January 18, 2011

Massachusetts Securities Division

Yet Another Securities Case Against a Financial Firm Alleged to Have Aided Enron in its Scams is Dismissed Without Liability in Texas!

Published on: January 29, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Many financial firms settled claims filed by those defrauded in the Enron debacle. Meanwhile, many more Enron securities fraud cases have been dismissed by a court system riddled with special interest influence. No financial firm has been held liable and certain individuals at those firms were held liable only to have their convictions reversed. Thus, perhaps the largest, most notorious and most brazen fraud ever perpetuated by a publicly traded firm against its own shareholders will end not with a bang, but with a whimper.

Earlier this month, securities charges against Deutsche Bank Securities Inc. were dropped in the U.S. District Court for the Southern District of Texas. The financial firm was accused of fraudulently getting two entities to buy beneficial ownership interests in Osprey Trust. The special purpose entity was allegedly secured using worthless investments bought from Enron. The plaintiffs contend that the assets were “dumped” into Osprey as part of a bigger scheme to defraud investors and manipulate Enron’s financial statements.

The court said that because the plaintiffs did not specify any affirmative misrepresentation made by a Deutsche Bank official, they did not and “cannot plead with particularity either scienter on the part of a Deutsche Bank speaker or writer or reasonable reliance … on a claimed misrepresentation.” The court also said that the financial firm’s stated motive for alleged defraud, which allegedly was for tax benefits and high fees, is a common incentive among financial firms and their officers and therefore is not enough for stating “a claim for fraud” under the laws of Texas and New York.

Related Web Resources:
Newby, et al v. Enron Corporation, et al., U.S. District Court for the Southern District of Texas
The Fall of Enron, Chron.com Continue Reading ›

SEC Adopts New Rules Regarding Shareholder Say-On-Pay

Published on: January 29, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Us Securities and Exchange Commission has adopted a “say-on-pay” rules that will allow the shareholders of publicly listed companies to weigh in on executive compensation via advisory votes. The new rules, which implements a Dodd-Frank Wall Street Reform and Consumer Protection Act, gives shareholders more input regarding executive compensation. This should hopefully help curb the practice of paying financial firm executives lavish compensation packages. The SEC approved the vote by 3-2 on Tuesday.

Shareholders would get a vote on “golden parachute” pay packages related to an acquisition or merger and companies would have to offer up more disclosures. Although the vote on say-on-pay is non-binding, companies will likely want to avoid being associated with a “no” vote. Some companies, including Apple Inc. and Microsoft Corp, have already adopted say-on-pay proposals on their own.

Also that day, the SEC proposed new reporting requirements for private fund advisers, with advisers to private funds valued at more than $1 billion upheld to more frequent and rigorous reporting. Reporting requirements would vary depending on the type of fund. Meantime, advisers to funds valued at under $1 billion would only have to report once a year on leverage, credit providers, fund strategy, and credit risk related to trading partners.

In addition, advisers of large hedge funds would also be required to disclose more information than private equity fund managers because hedge funds are considered more high risk and use leverage more often than private equity funds. Per SEC Chairman Mary Schapiro, the toughest reporting requirements under the rule would affect approximately 200 large hedge fund advisers in the US who represent over 80% of assets under management, as well as some 250 large private equity fund advisers.

The rule requires that the Financial Stability Oversight Council be given better information about hedge funds, liquidity funds, and private equity funds. This is for making sure that trading activities do not endanger the wider marketplace.

The SEC is also proposing to make it tougher for individuals to qualify as “high net-worth” when it comes to certain high risk investments.

Related Web Resources:

SEC, in Split Vote, Adopts ‘Say on Pay’ Rule, Wall Street Journal, January 25, 2011

Say-on-pay rule proposal, SEC, January 25, 2011

Financial Stability Oversight Council, US Department of the Treasury