Investor Lawyers Blog

Custodial Firms Get Tougher About Registered Investment Adviser Compliance

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

According to Investment News, in the wake of the Bernie Madoff Ponzi scam and the recent financial meltdown, custodial firms are taking a tougher stance when it comes to the compliance they expect from registered investment advisers. This tighter scrutiny can make it hard for a new RIA with regulatory issues, as well as for investment advisers that are already at established custodial firms.

Trust Company America chief executive Frank Maiorano is quoted in the publication as saying that if “something came up” during a background check or the ADV, his firm would consider whether to let the RIA go. RBC Correspondent and Advisers says that it has had to ask advisers to leave. Schwab advisers are contractually obliged to tell the company about “material changes in status.” Schwab also monitors regulatory actions and may even look into “certain types of activities” occurring in advisers’ client accounts for red flags that could later impact the firm.

RIAs of both smaller and larger custodial firms are apparently feeling the heat from companies that are no longer willing to put up with potentially bad behavior that can lead to investment adviser fraud. This, even as most custodial firms continue to stay quiet about the type of due diligence they conduct on their advisers because they don’t want investors or plaintiffs’ lawyers to think of them as accountable for an adviser’s investment strategy or his/her supervision.

Just as custodial firms, which are service provider to advisers, are not responsible for supervising RIAs, they also cannot discipline them. They can, however, choose whether or not to work with an adviser.

Custodians usually will work with an independent review committee to vet new clients, conduct background and credit checks, and review ADV and U-4 forms. They may also look out for pending complaints, regulatory issues, and criminal actions.

Related Web Resources:
Custodians taking closer look at adviser compliance, Investment News, December 27, 2010

Investment Adviser, What you need to know before choosing one, SEC

Securities Fraud Attorneys

US Supreme Court Declines to Review Finding that Investor is Bound to Arbitration Agreement Over Disputes with Questar Capital Corp.

Published on: December 24, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The US Supreme Court says that it won’t review a federal appeals court’s finding that even though an investor’s English was limited, he is still bound by a broker-customer agreement that any disputes over the handling of his account must be resolved through arbitration. The U.S. Court of Appeals for the Seventh Circuit had concluded that the issue isn’t about, per the investor’s contentions, enforceability. Rather, it is about whether a contract was formed, which it was.

Plaintiff Alfred Janiga, who is originally from Poland, had signed an agreement containing an arbitration clause when he started investing with Questar Capital Corp. (STR). Janiga’s brother Weislaw Hessek, a registered Questar representative who runs Hessek Financial Services LLC, arranged the investment relationship.

A year after he started investing with Questar, Janiga sued his brother, Questar, and Hessek Financial. While the defendants moved to have the district court stay proceedings and order arbitration, the court said mandating immediate arbitration was not possible because it was unsure whether Janiga and Questar ever had a contract.

The appeals court found that it was up to the court to first determine whether a contract existed before it could stay the complaint and order arbitration. While the district court expressed concern over whether Janiga understood the agreement he had signed, the appeals court noted that the plaintiff had voluntarily signed the contract, which includes an arbitration clause.

Janiga, in his certiorari petition, argued that his case poses a “question of federal law” of whether an arbitration agreement clause is enforceable when he never received the actual document and the terms included were never conveyed to him and that this is a matter that the US Supreme Court should resolve.

Related Web Resource:
Janiga v. Questar Capital Corp., 7th Circuit
Arbitration, FINRA Continue Reading ›

Wells Fargo & Co. May Have to Pay Another $15M to Minnesota Nonprofits For Securities Fraud

Published on: December 24, 2010 | by Shepherd Smith Edwards & Kantas, LLP

A district court judge in Minnesota has ruled that Wells Fargo & Co. must pay four Minnesota nonprofits $15 million or more in costs, fees, and interests for breach of fiduciary and securities fraud. The investment bank has already been slapped with a $29.9 million verdict in this case against plaintiffs the Minnesota Medical Foundation, the Minneapolis Foundation, the Minnesota Workers’ Compensation Reinsurance Association, and the Robins Kaplan Miller & Ciresi Foundation for Children.

Judge M. Michael Monahan, in his order filed on Wednesday, scolded Wells Fargo for its “management complacency, if not hubris” that led to investment losses for clients of its securities-lending investment program. He said that he agreed with the jury’s key findings that the financial firm failed to fully disclose that it was revising the program’s risk profile, impartially favored certain participants, and advanced the interest of borrowing brokers. Monahan said that it was evident that Wells Fargo knew of the increased risks it was adding to the securities lending program and that its line managers did not reasonably manage these, which increased the chances that plaintiffs would suffer financial huge harm.

Monahan noted that because Minneapolis litigator Mike Ciresi provided a “public benefit” by revealing the investment bank’s wrongdoing, Wells Fargo has to pay plaintiffs’ legal fees, which Ciresi’s law firm says is greater than $15 million. Also, the financial firm has to give back to the Minnesota nonprofits an unspecified figure in fees (plus interest) that it charged for managing the investment program, in addition to interest going as far back as 2008 on the $29.9 million verdict.

Monahan also overturned the part of the jury verdict that was in Wells Fargo’s favor and is ordering a new trial regarding allegations that the investment bank improperly seized $1.6 million from a bond account of children’s charity as the lending program was failing. The district judge, however, denied the plaintiffs’ motion for a new trial to determine punitive damages.

Judge unloads on Wells Fargo with order on investment program, Poten.com, December 24, 2010

Wells Fargo ordered to pay $30 million for fraud, Star Tribune, June 2, 2010

Wells Fargo to Pay $30M in Compensatory Damages to Four Nonprofits for Securities Fraud, Stockbroker Fraud Blog, June 3, 2010

Houston Man Indicted in Alleged $17M Texas Securities Fraud

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

A federal grand jury has indicted Adley Husni Abdulwahab on one count of conspiracy and five counts of Texas securities fraud in connection with an alleged $17 million investment scheme involving the sale of investments issued by W Financial Group. The Houston resident, who is also facing federal charges over an alleged $100 million life insurance scheme, is in custody in Virginia.

Abdulwahab is accused of conspiring with two other men, Michael Wallens, Sr., and Michael Wallens, Jr., to defraud investors in connection with the sales of Collateral Secured Debt Obligations (CSDOs). The three men reportedly received over $17 million from the sales of the promissory notes to over 180 investors.

The three men are accused of issuing a number of misstatements to investors, such as claiming that Republic Group and Lloyd’s of London had “reinsured” the CSDOs, which were not in fact insured. Offering materials made it appear as if the investors’ money were held in insured notes, cash, automotive receivables, or corporate or government AAA bonds, when the three men were actually spending the money. For example, investor money was used to buy Wallens Sr.’s used car dealership for over $300,000, invest in a power company and building company, buy residential lots, and compensate the three men. Wallens, Sr. And Wallens, Jr. have each pleaded guilty to one count of securities fraud.

Related Web Resources:
Houston-area man indicted in W. Financial Group securities fraud matter, Justice.gov, December 15, 2010
Texan indicted in alleged $17M securities fraud, Chron/AP, December 15, 2010
The Texas Securities Act

Securities Fraud Attorneys

Institutional Investors Securities Blogs
Continue Reading ›

Ex-Goldman Sachs Employee Found Guilty of Stealing Code for High-Frequency Trading Activity

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

A New York jury has found ex-Goldman Sachs & Co. computer programmer Sergey Aleynikov guilty of one count of transportation of stolen property in interstate and foreign commerce and one count of trade-secret theft. Aleynikov is accused of stealing a specialized computer source code used in high-frequency trading activity from the investment bank.

Aleynikov, who worked for Goldman for two years, allegedly transferred “hundreds of thousands” of source-code lines and took the broker-dealer’s source code with him to Chicago, where he went to work with Teza Technologies LLC, a firm that wanted to compete with Goldman’s high-frequency trading operations. Although Aleynikov admitted to uploading parts of the investment bank’s trading codes, he told the FBI that he hadn’t intend to steal Goldman’s proprietary data.

Per the indictment, Goldman had implemented a number of precautions to protect its proprietary source code, including mandating that workers sign confidentiality agreements and requiring employees to “irrevocably assign to Goldman Sachs” the rights to any discoveries invention, ideas, concepts, or information developed while employed by the brokerage firm.

High-Frequency Trading
High-frequency trading is a trading strategy using sophisticated programs that involve the employment of algorithms that can place a series of sell and buy orders for large blocks of stock at a super fast pace while exploiting tiny price discrepancies. This type of trading has become a key source of revenue for hedge funds and investment firms on Wall Street.

In 2009, high-frequency trading was responsible for about $300 million in revenue for Goldman. This is less than 1% of the broker-dealers $45 billion in revenue.

Related Web Resources:
United States v. Aleynikov, Indictment (PDF)

Former Goldman Programmer Found Guilty of Code Theft, NY Times, December 10, 2010

Former Goldman Sachs Programmer Found Guilty After Stealing Computer Code, Security Week, December 14, 2010

Goldman Sachs, Stockbroker Fraud Blog

Oppenheimer & Co. Ordered to Reveal Documents Related to Employee Dispute

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

Superior Court Judge Frances McIntyre has denied brokerage firm Oppenheimer & Co.‘s request to impound hundreds of records that are key in a dispute with an ex-employee. The ex-employee is James Dever, who used to be a manager at the broker-dealer’s Boston office. Judge McIntyre found that public interest in the records “substantially outweighs” the financial firm’s interest in keep the documents in secret.

Oppenheimer has been especially invested in keeping two documents confidential. One document is ann internal memo about a 2004 audit involving the Boston branch. Dever has contended that he needs the document to prove that Oppenheimer hid facts for its own protection and so that it could blame him for the alleged financial fraud committed by broker Stephen J. Toussaint, who stole $135,000 from a couple of senior investors.

Dever says that Oppenheimer did not act upon his advice when in 2004 he pressed the brokerage firm to let go of Toussaint. The ex-Oppenheimer manager says that Oppenheimer fired him because he wouldn’t lie to regulators about the broker, who ended up in jail over a related case. Dever also says that no real audit took place in 2004, which is a claim that Oppenheimer has said is “baseless and without merit.”

He contends that because his name is linked to the Toussaint securities case, which Oppenheimer and its Albert “Bud” G. Lowenthal settled with Massachusetts for $1 million, he has had a hard time finding clients and work.

The case puts to the test the confidential arbitration system that has been set up to resolve disputes within the investment industry. Whether it is an employee or a customer is in a dispute with a brokerage firm, almost all disagreements with a brokerage firm have to go to arbitration.

Related Web Resources:
Judge tells Oppenheimer to reveal documents, Boston.com, December 21, 2010
Secrecy Order May Go Too Far, December 30, 2009 Continue Reading ›

Merrill Lynch Doesn’t Have to Arbitrate ARS Claims by LSED, Says Appeals Court

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

The U.S. Court of Appeals for the Second Circuit is affirming a district court’s ruling that Merrill Lynch & Co. Inc. does not need to arbitrate a disputes over auction-rate securities losses suffered by the state of Louisiana and the Louisiana Stadium and Exposition District (known collectively as LSED). The court noted that even assuming that LSED was entitled to arbitration, the district court reached the right conclusion when it found that LSED waived its right to arbitrate when it made known that it intended to resolve its ARS dispute through litigation and took numerous steps to make this happen.

Per the court, LSED, which owns the New Orleans Superdome, retained Merrill Lynch as the broker-dealer and underwriter to restructure its bond debt. After Hurricane Katrina damaged the Superdome, LSED also looked to Merrill about financing the repairs.

In 2006, LSED issued $240 million in municipal bonds as ARS. LSED’s auctions failed in 2008.

In 2009, LSED filed ARS lawsuits against three Merrill entities and bond insurer Financial Guaranty Insurance Co. One complaint was submitted to the U.S. District Court for the Eastern District of Louisiana, while another was filed in Louisiana state court. The Judicial Panel on Multidistrict Litigation would go on to centralize the cases, along with other ARS lawsuits, in the Southern District of New York. Meantime, the defendants sent a letter to LSED asserting that the plaintiff could not obtain relief on the basis of the factual allegations it submitted in its lawsuit.

Prior to filing its third amended complaint, LSED suggested that the case be resolved in arbitration. When the defendants did not respond, LSED moved to compel arbitration. It claimed that because Merrill subsidiary Merrill Lynch Pierce Fenner & Smith Inc. is a Financial Industry Regulatory Authority member, the broker-dealer is required to arbitrate customer disputes.

The district court denied LSED’s motion.

Louisiana Stadium and Exposition District

Analyst’s downgrade tanks Skechers’ stock (SKX). Should Wall Street analysts be immune from scrutiny?

Published on: December 21, 2010 | by Shepherd Smith Edwards & Kantas, LLP

It is often said that one critical statement to a child offsets 10 positive ones. The same effect can be found in the stock market, where an analyst’s downgrade is worth, in dollars and cents, sometimes ten times that of an upgrade. Take for example the price movement of shares of shoe company Skechers (SKX) which today fell almost 8%, over $70 million in market capitalization, after an analyst downgraded the stock.

For the most part, the law protects opinions from prosecution or law suits. But shouldn’t regulators be allowed to look behind reported opinions to determine whether action is warranted? Huge damages can result from inaccurate opinions. The best example is bond ratings by recognized services, with mega-billions recently lost on investments which had been deemed ultra-high grade. But losses can also result from negative opinions.

There is no proof, evidence or even insinuation that an analyst at Sterne Agee had any nefarious goal to cause holders of Skechers stock to lose $70 million today. Nor is there any information to link this downgrade to the short interest in Skechers’ stock, last reported at one-fourth of the stock’s float. Yet, those short the shares collectively profited by about $10 million today.

SEC Charges Two Ex-Wachovia Brokers Over Alleged $8 Million Elder Financial Fraud

Published on: December 20, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Two former Wachovia Securities LLC brokers, Eddie W. Sawyers and William K. Harrison, have been charged by the Securities and Exchange Commission with six counts of securities fraud. The two men, who previously operated Harrison/Sawyers Financial Services, are accused of defrauding at least 42 elderly investors of their retirement savings, which resulted in some $8 million in financial losses. The SEC is seeking a permanent injunction against the two men and their representatives from further violations of securities regulations, as well as the repayment of the funds (with interest) and civil penalties.

Per the SEC, between December 2007 and October 2008, Sawyers and Harrison, who are related by marriage, pitched investments with Harrison/Sawyers Financial Services to Wachovia clients. They claimed the investments were “foolproof,” a “sure thing,” and an opportunity to make a 35% without risking their principal investment. This was not, however, the case. One couple, who Sawyers convinced that they should invest $100,000 later discovered that only $16,000 remained in their account.

The SEC claims that the two men solicited unsophisticated clients who were heavily invested in equities and mutual funds and had a conservative investment approach. Sawyers and Harrison also transferred assets to online options-trading accounts under their control.

While some online optionsXpress accounts were set up in clients’ names, others were in accounts under the name of Harrison’s spouse Deana or under both both their names. Clients did not receive statements from the group.

After getting a client’s signature on a blank-trading authorization form, Deanna Harrison would then be appointed the client’s power of attorney and agent for the accounts. In 2008, Sawyers and Harrison allegedly took out $234,000 from three client accounts as compensation for their services.

The SEC says that in a resignation letter to Wachovia, Harrison confessed to misdirecting about $6.6 million from 17 Wachovia clients to trade online. He also admitted that he ran the online trading without getting the authorization of Wachovia or the investors.

Wachovia says that the minute they discovered the alleged securities fraud, it notified its primarily regulator, cooperated with regulators and law enforcement, and took proactive steps to give clients that were impacted full restitution.

Related Web Resources:
Former Wachovia brokers charged with defrauding elderly customers in Surry, losing $8 million, Winston-Salem Journal, December 17, 2010
SEC accuses 2 NC brokers of defrauding clients, Bloomberg/AP, December 16, 2010
Wachovia, Stockbroker Fraud Blog
Institutional Investor Securities Blog
Continue Reading ›

Why Whistleblowers Should Act Quickly and Consult Competent Legal Counsel

Published on: December 18, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Court of Appeals for the Ninth Circuit has affirmed that an ex-Nordstrom Inc’s (JWN) technology official’s complaint that her firing violated the Sarbanes-Oxley Act’s whistleblower protections is untimely. According to Judge Milan D. Smith Jr., SOX’s 90-day limitations period started running on plaintiff Carole Coppinger-Martin’s last day on the job and not when she discovered that her termination by Nordstrom was in alleged retaliation for reporting potential Securities and Exchange Commission violations. The decision affirms an administrative law judge’s ruling.

Coppinger-Martin was hired as the business information systems strategic planning group chief technical architect for Nordstrom in 1999. Per the court, during the summer of 2005, she told her immediate supervisor that she thought that Nordstrom’s information systems had “security vulnerabilities” that exposed the company to the possible SEC violations. Soon after making her report, Coppinger-Martin was given an unfavorable review. In November of that year, Nordstrom told her that it was eliminating her job responsibilities, there were no other opportunities for her within the company, and that they were terminating her employment in January 2006. Coppinger-Martin worked for the company until April 21, 2006.

On July 19, a Nordstrom employee allegedly told her that other workers were attending to her former job duties. It was then that she realized that she may have been let go for notifying senior management about her SEC concerns.

On October 13, Coppinger-Martin submitted a SOX whistleblower claim to the Occupational Safety and Health Administration, which denied her relief. While asked that an administrative law judge hear case, Nordstrom moved to have the case dropped as untimely on the grounds that the 90-day limitations period started running either in November 2005, when she was told that she was being let go, or on April 21, 2006, which was her last day on the job.

Coppinger-Martin argued that the 90-day limitations period did not start running until July 19 when she first found out that her job duties had not been eliminated. She attributed Nordstrom’s alleged hiding of the facts behind its retaliatory motive to her accrual date of claim.

In affirming the ALJ’s finding, the 9th Circuit noted that it has held in the past that a plaintiff’s claim accrues upon finding out about the actual injury and not when a “legal wrong” is suspected. The court concluded for Coppinger-Martin, this would have been when she found out that she was fired.

Related Web Resources:
Coppinger-Martin v. Solis

Sarbanes-Oxley Act

Institutional Investor Securities Blog
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