Investor Lawyers Blog

Investment Fraud Victims of John Gardner Black May Be Due Tax Refunds

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

John Gardner Black, who spent three years in prison after pleading guilty to 21 counts of securities fraud, two counts of false documents, and three counts of mail fraud in 2001, says he doesn’t think that he should have to pay $61.3 million in restitution.

Prosecutors had accused Black of investing approximately $233 million for about 48 school districts while using a risky investment that Pennsylvania law doesn’t allow for school districts. Black hid from his clients both the transfers to the high risk investments and the $71 million loss when the investments’ value declined.

Black is now contending that he was prosecuted based on a Securities and Exchange Commission determination that he “materially” overstated the assets’ value by providing the school districts’ investments’ security. Last year, however, the SEC and the Financial Accounting Standard Board ended up adopting the same valuation method that he’d applied during the 90’s. Black is arguing that because he was sanctioned for “unethical” business practices that are now sanctioned, the court order that he pay $61.3 million for ill-gotten gains should be set aside.

Black applied a similar argument when he went to the SEC asking that it lift the lifetime ban preventing him from taking part in the investment industry. Although Black is still not allowed to associate with investment companies or investment advisers, he can once again associate with dealers, brokers, and municipal-securities dealers. He has, however, lost his appeals to have the criminal conviction against him overturned.

As a victim of investment fraud, you may be entitled to tax refunds.

Related Web Resources:
Fraud says he shouldn’t have to pay restitution to his victims, Pittsburgh Live, August 18, 2010
Related Court Document (PDF)
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Texas Securities Fraud Incidents on the Rise, Say State Officials

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

According to state authorities, there are more Texas securities schemes happening than ever before. One of the reasons for this is that many investors are looking for opportunities to make money during these tough economic times as they try to rebuild their savings. Securities officials are working hard to combat these investment schemes.

The Texas State Securities Board says that it took about 2,177 law enforcement actions during fiscal year 2009-up significantly from the 949 administrative and criminal actions it took in 2008. Now, after the recent BP oil spill, there have been scammers who have tried to persuade investors to invest in “new technology” that can stop similar disaster from happening. Also, State Securities Commissioner Denise Voigt Crawford says precious metal-related schemes are currently popular because gold prices are at a high. According to the Statesman.com, other leading Texas investors traps include:

• Life settlements • Gas schemes • Oil scams • Exchange-traded funds • Foreign exchange trading schemes • Affinity fraud • Green scams • Undisclosed conflicts of interest • Unsolicited online offers (via email, Twitter, Facebook, other social media)
• Private deals
People who want to retire and need financial security are among those at high risk of becoming victims of Dallas securities fraud. Crawford suggests that investors contact her office to make sure that a financial adviser is properly licensed.

It is important that you do your own due diligence find out more about a particular financial opportunity before investing your own money. For example, not only can you check with the Texas State Securities Board to find out whether a securities dealer or investment adviser is in fact registered, but also you can go onto the Financial Industry Regulatory Authority Web site to find out more about a broker-dealer or broker.

Texas authorities see rising investment scams in a soft economy, Statesman, August 14, 2010
Texas State Securities Board

FINRA

SEC
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Oppenheimer Champion Income Fund Resulted In Significant Financial Losses for Investors from Citigroup, UBS, Merrill Lynch, and Other Large Financial Firms

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

If you are an investor who suffered losses because you invested in the Oppenheimer Champion Income Fund, do not hesitate to contact our securities fraud law firm to request your free case evaluation. Unfortunately, many investors were not apprised of the risks they were taking on when they placed their money in these high risk, very illiquid derivatives. Many of these securities victims were clients of large brokerage firms, such as UBS, Citigroup Smith Barney, Wachovia, Linsco Private Ledger LPL, Merrill Lynch, UBS, ING, Stifel, and Gun Allen.

Thousands of investors were led to believe, via the prospectus, the financial advisers, and the marketing collateral, that the Oppenheimer Champion Income Fund was a high income fund that wasn’t much riskier than a high income fund peer group or a conservative high income fund. Unfortunately, this was not the case at all, and many investors ended up sustaining major losses when the fund lost 79.1 for the 2008 calendar year.

Oppenheimer Champion Income Fund
Hoping that commercial mortgage-backed securities would rally, the fund had placed a large bet in high risk derivatives, such as credit default swaps and mortgage backed securities-not to mention total-return swaps in 2006. Unfortunately, this is not what ended up happening.

In September 2008 alone, credit default swaps declined by $238 million. It was during this time that the fund sold credit default swaps on beleaguered companies, including Tribune Co., Lehman Brothers Holdings Inc., General Motors Corp, and American International Group Inc. The fund also raised its gamble on mortgage-related bonds that, with defaults rising, started to fail.

Hundreds of millions of dollars has reportedly been lost, and the fund’s investors have not been the only ones to suffer financial losses. Over 10% of the fund was held by other OppenheimerFunds offerings, including funds that bundled a number of the firm’s products together.

Related Web Resources:
Oppenheimer Champion Income Fund, MorningStar
FINRA Arbitration and Mediation
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Structured Notes Becoming New “Investment Bubble” on Wall Street, says Institutional Risk Analytics Director

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

Bloomberg recently reported on a report by Institutional Risk Analytics Managing Director Christopher Whalen. According to the former Federal Reserve Bank of New York official, structured notes are about to become the “next investment bubble.” Whalen is the one who predicted a little over three years ago that the mortgage-backed securities market was going to collapse. Now, he says that investment firms are applying the same “loophole” that allowed auction-rate securities and collateralized debt obligations to be sold over-the-counter.

Structured notes are derivatives packaged with bonds. Their value comes in part from bets on interest rates. Accredited buyers purchase them through private deals, while the public can buy them in trades. StructuredRetailProducts.com says that structured note sales to individual investors in this country has gone up 72% to $29.6 billion in the last year.

As with ARS, the firms originating these illiquid structured notes are not obligated to “show clients a low-ball bid” or create markets in these OTC structured assets. Whalen says that even as the larger financial firms are making it appear that they are abiding by the new Dodd-Frank law (which does not allow proprietary trading and limits private-equity fund investments), they are now concentrating on structured assets that are based on Treasury bonds, corporate debt, or nothing at all.

Whalen says that it is the individual investors that will lose money on structured notes when the benchmark interest rates go up. Among the the other reasons why structured notes worry Whalen:

• They come with high risk yields.
• They are not regulated.
• They frequently come with minimal disclosure.

According to Whalen, there are already two hedge funds set up for when the rates start to rise and “distressed” retail investors will want to sell.

Individual and institutional investors that believe their financial losses are a result of broker-dealer misconduct or misleading information should explore their legal options.

Related Web Resources:
Structured Notes Are Wall Street’s `Next Bubble,’ Whalen Says, Bloomberg, August 9, 2010
Chris Whalen Gives 6 Reasons Why The Next Bubble Will Be In Structured Notes, Business Insider, August 10, 2010
Institutional Risk Analytics

Obama Signs Dodd-Frank Reform Bill, Journal of Accountancy, July 21, 2010 Continue Reading ›

UBS Ordered to Pay Auction-Rate Securities Investor Kajeet Inc. $81 Million

Published on: August 10, 2010 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority arbitration panel has ordered UBS Financial Services Inc. to pay investor Kajeet Inc. $80.8 million for failed auction-rate securities. The brokerage firm disagrees with the decision and intends to file a motion to have the claim vacated.

Although Kajeet had only invested $8 million in ARS through UBS, the company, which markets cell phones for kids, contends that because its securities were frozen, a “domino effect” resulted and it ultimately lost $110 million. Also, Kajeet was forced to significantly cut its 60-person work team and it lost a key distribution deal with a national retail chain.

UBS had previously resolved ARS-related charges with an agreement that it would pay a $150 million fine and buy back $18.6 billion of the securities. The brokerage firm was one of a number of broker-dealers that agreed to repurchase over $60 billion in ARS from investors because they had allegedly misrepresented the securities as safe investments. When the $330 million ARS market froze in February 2008, UBS had over $35 billion in ARS that were held by some 40,000 customers.

CIT Group Inc, Prudential Financial Inc., and GMAC Inc. Looked to Retirees for Debt Financing When They Lost Access to Credit Markets

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

As the credit markets started to close for over a dozen companies, including Prudential Financial, CIT Group, and GMAC Inc., the firms began to get their funding for debt financing from retirees-reports Bloomberg in an August 2009 article. For example, between December 2007 and 2008, CIT sold $827 million of debentures created specifically for individuals at a time when the credit market was experiencing “disruptions,” the global economy was falling apart, and the company’s credit ratings were experiencing downgrades. One analyst, David Hendler, says that the financial firms engaged in a “pump-and-dump scheme in a bear market” and that they chose to “offload risk” without having to field too many questions.

Although the retail bond market usually lets companies sell debt at lower yields than what institutional investors call for, the notes can trade at higher relative yields when a company starts to lose its fortune. There is also a lack of liquidity that occurs. This can make it hard for senior investors-especially if their savings are tied into the smaller issues. It didn’t help that late last year CIT, a 101-year-old commercial lender, filed for Chapter 11 bankruptcy after a US bailout and debt exchange offer failed and its funding dried up.

Also, while some debentures-specifically, CTI InterNotes-came with “survivor’s options” that lets an issuer repurchase them at par after the owner passes away, the Internote issuers are entitled to limit how much can be exercised each year through the option to the greater of 2% of the outstanding principal amount or $2 million. Ex-US Securities and Exchange Commission head Arthur Levitt has described this type of financing as an “affinity-type” approach that focuses on the elderly.

The Financial Industry Regulatory Authority has been investigating whether the risks were adequately disclosed to investors or whether securities fraud occurred.

Related Web Resources:
CIT Debt Sold to Widows Has Fine Print Pimco Resists, Bloomberg.com, August 21, 2009
CIT Files Its Bankruptcy Plan, The Wall Street Journal, November 3, 2009 Continue Reading ›

Life Settlements or Viaticals should be Considered “Securities,” Recommends the SEC to Congress 

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

The Securities and Exchange Commission staff report is recommending that the US Congress define life settlements as securities to make sure that investors of these types of transactions receive federal securities law protection. The SEC says there are several benefits to making such an amendment to securities laws:

• This would clarify life settlements’ status under federal securities law, which would allow the federal government and the states to deal with them in a more consistent manner.
• Life settlement market intermediaries would then fall under the regular framework of the Financial Industry Regulatory Authority and the SEC.
• FINRA and the SEC would have clear authority to police the life settlement market, which could help detect securities fraud and discourage financial abuses.

The Life Settlements Task Force prepared the report, which notes “inconsistent regulation of participants” in the life settlements market and that pools of life settlements and individual transactions “would benefit” from “baseline standards of conduct to market participants.” SEC staff is also recommending that the commission:

• Urge Congress and state officials to think about regulating life expectancy underwriters in a more consistent and significant manner.
• Tell staffers to make sure that providers and brokers are meeting legal standards of conduct.
• Have staff members look for the development of a life settlement securitization market.

It was just in early July that US Senator Sen. Herb Kohl released a General Accountability Office report that found that the inconsistent regulation of life settlements create several challenges:

• Some police owners in certain states are not as well-protected.
• Some individual investors may have a hard time getting enough information about their investments and the risks that may be involved.
• Because laws across states are not consistent, this can pose a problem for some providers and brokers.

Related Web Resources:
SEC Releases Report of the Life Settlements Task Force, SEC, July 22, 2010
Sen. Kohl Says GAO Report Supports Tougher Settlement Regs, LexisNexis, August 2, 2010
Read the Life Settlement Task Force Report (PDF)
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Citigroup Settles Subprime Mortgage Securities Fraud Claims for $75 Million

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

For $75 million, Citigroup will settle federal allegations that it failed to disclose that its subprime mortgage investments were failing while the market was collapsing. This is the first securities fraud case centered on whether investment banks fairly disclosed their own financial woes to shareholders.

Unlike the Goldman Sachs case, which resulted in a $550 settlement and involved allegations that the investment bank misled investors, Citigroup is accused of misleading its shareholders. This also marks the first time the SEC has filed securities fraud charges against very senior bank executives for their alleged roles in subprime mortgage bonds.

The SEC contends that Citigroup failed to reveal the true nature of its financial state until November 2007. Just that summer the investment bank told investors that it had about $13 billion of exposure to subprime mortgage related-assets that were declining in worth. However, Citigroup left out about $43 billion of exposure to similar assets that bank officials thought were very safe.

Key evidence against Citigroup centers on an announcement that it prepared for investors that cautioned that the quarter was likely going to be one of lower earnings in the fall of 2007. However, the investment bank did not reveal its full subprime exposure. Former Citigroup investor relations head Arthur Arthur Tildesley Jr., who has agreed to pay an $80,000 fine over allegations he omitted key information in the shareholder disclosures, is accused of preparing the statement. Former chief financial officer Gary L. Crittenden, who has settled the SEC case against him for $100,000, recorded the audio message to investors.

The government was eventually forced to bail out the investment bank. Citigroup is not admitting to or denying the charges by consenting to settle. Now, however, the investment bank has to defend itself from private shareholder complaints.

Related Web Resources:
SEC Charges Citigroup and Two Executives for Misleading Investors About Exposure to Subprime Mortgage Assets, SEC, July 29, 2010
Citigroup Pays $75 Million to Settle Subprime Claims, NY Times, July 29, 2010
Citigroup agrees $75m fraud fine, BBC News, July 29, 2010 Continue Reading ›

Dallas Billionaire Brothers Charged with Texas Securities Fraud

Published on: July 31, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Following a six-month probe, US Securities and Exchange Commission has charged two Dallas billionaires with Texas securities fraud. Brothers Charles and Samuel Wyly are accused of taking part in a financial fraud scheme that garnered them over $550 million in illicit gains.

The two men are accused of trading stock in four companies that they were the directors of and devising a securities scheme involving bogus subsidiaries and trusts in the Cayman Islands and the Isle of Man to cover up over $750 million of stock sales in Sterling Commerce Inc., Michaels Stores Inc, Scottish Annuity & Life Holdings Ltd., and Sterling Software Inc.

The SEC is also accusing the Wylys of making an insider trading gain of $31.7 million when they made a bet in Sterling Software, which they own, that was “massive and bullish” in 1999 after deciding to sell the company. Computer Associates bought the firm for $4 billion in stock in March 2000.

Also charged with Dallas securities fraud is the Wylys’ attorney Michael French and broker Louis Schaufele.The SEC claims that the Wylys and French either should have known or knew that they had disclosure obligations because of their roles as owners and directors of over 5% of company stock. The defendants are accused of issuing hundreds of misleading statements that allowed the brothers to conduct trades without detection, including large block trades involving of over 14 million shares.

The SEC contends the two brothers used the proceeds from the alleged Texas securities fraud to acquire real estate, art, and jewelry. They also are accused of using the money to donate to charitable causes.

The SEC wants to get back ill-gotten gains, impose civil fines, prevent the two men from serving as director or officer of a public company, and other remedies. An attorney for the brothers says that the securities charges are without merit.

“This is a situation in which wealthy investors may find that they can seek tax refunds by characterizing the loss on their investment as a “theft lost” rather than as a capital loss carry-forward. In total, our clients have received millions of dollars in refunds using this technique,” says Dallas Securities Lawyer William Shepherd.

Related Web Resources:
SEC Charges Corporate Insider Brothers With Fraud, SEC, July 29, 2010
SEC Charges Wyly Brothers With $550 Million Fraud, ABC News, July 29, 2010 Continue Reading ›

Goldman Sachs Settles SEC Subprime Mortgage-CDO Related Charges for $550 Million

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

Goldman, Sachs & Co. has agreed to reform its business practices and pay $550M to settle Securities and Exchange Commission charges that it misled investors about a synthetic collateralized debt obligation (CDO) just as the housing market was failing. By agreeing to settle the securities fraud lawsuit, Goldman is admitting that information in the marketing materials for the product was incomplete.

The SEC case involves Abacus 2007-AC1, one of 25 investment vehicles that Goldman created so that certain clients could bet against the housing market. Unfortunately, when the market did fail, investors lost over $1 billion. Meantime, the investment bank yielded profits and John A. Paulson, the hedge fund manager that the SEC says asked Goldman to create the 2007-AC1, made money from bets he made against certain mortgage bonds.

While investors were told that an independent manager was choosing the bonds, the SEC contends that Goldman allowed Paulson to choose mortgage bonds that he thought were likely to drop in value. However, clients were not notified about Paulson & Co. Inc.’s part in the portfolio selection process or that Paulson had taken a short position against the CDO. The investment bank then sold the package to investors that would only turn a profit if the value of the bonds went up.

The $550 million penalty against Goldman is the largest that the SEC has ordered a financial services company. By agreeing to settle, Goldman is not denying or admitting to the allegations. $300 million of the fine will go to the U.S. Treasury, while $250 million will be repaid to investors that suffered losses.

Goldman Sachs to Pay Record $550 Million to Settle SEC Charges Related to Subprime Mortgage CDO, US Securities and Exchange Commission, July 15, 2010
Goldman Settles With S.E.C. for $550 Million, NY TImes, July 15, 2010
Read the SEC Complaint against Goldman Sachs (PDF)
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