Investor Lawyers Blog

Hedge Fund Owner of Trueblue Strategies LLC Settles SEC Charges that He Hid Investor Trading Losses

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

Hedge fund manager and investment adviser Trueblue Strategies LLC owner Neil Godbole has agreed to settle for $40,000 Securities and Exchange Commission charges that he hid his investors’ trading losses. Godbole also agreed to an advisory industry bar for a minimum of five years and to cease and desist from future 1940 Investment Advisers Act violations. By settling, he is not denying or agreeing that he committed any wrongdoing.

Per the securities fraud charges, Godbole started to manage the Opulent Lite LP, a now failed hedge fund, in 2005. At its height, the hedge fund managed about $30 million in assets and had about 70 investors. Until 2008, Godbole invested mainly in S&P index options and short term Treasury bonds.

In February 2008, he lost about $8.3 million as a result of a number of unprofitable deals, which he did not disclose. Also, the SEC claims that Godbole told investors that the fund was valued at $28.7 million when it was actually worth $18.5 million.

In attempt to make up the financial losses, Godbole started to use what he called a “rollover strategy” that involved the opening of options positions when each monthly trading period ended. The SEC says that throughout that year, the hedge fund manager misrepresented the fund’s trading results and asset value. When he told investors in December 2008 that the fund’s asset value was more than $26 million, the asset value had actually dropped to under $14.4 million.

The SEC says that any losses for that year that Godbole did disclose were “paper losses” related to the rollover strategy and in 2008, he had the hedge fund pay his management fees based on the inflated fund value. Investors were harmed when he had the fund redeem units at an inflated value.

It wasn’t until 2009 that Godbole notified investors of the funds’ losses and actual financial state. Many investors sought to pull out. The hedge fund was liquidated by March of that year.

Related Web Resources:

Saratoga fund manager settles with SEC, Business Journal, December 2, 2010

1940 Investment Advisers Act, SEC

A Texan is Among Those Arrested in Insider Trading Crackdown Involving Apple Inc., Dell, and Advanced Micro Devices’ Confidential Data

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

Federal prosecutors have arrested four people on insider trading charges related to the alleged revealing of secrets about Apple Inc.’s iPhone and other technology products to hedge funds looking for a trading advantage. Those arrested included Primary Global Research executive James Fleishman and “expert consultants” Mark Anthony Longoria from Texas, Walter Shimoon from California, and Manosha Karunatilaka of Massachusetts. All of the defendants are charged with wire fraud. The three “expert consultants” are also charged with conspiracy to commit securities fraud and wire fraud.

According to prosecutors, Fleishman arranged it so that Primary Global Research clients, such as hedge funds, could talk to the consultants, who gave them highly confidential information about Apple sales forecasts, new iPhone product features, and a secret project that was to become the iPod. Primary Gold Research allegedly paid consultants over $400,000 to engage in these phone conversations.

The case is an offshoot of an investigation into Galleon Funds founder Raj Rajaratnam and more than 20 others. Rajaratnam has pleaded not guilty to securities fraud. He claims that he only traded information to which the public also had access. Wiretaps were used to build the Galleon Funds case and this insider trading case.

According to the complaint, Flextronics International Limited business development senior director Shimoon illegally gave out insider information about the iPhone that had been given to Flextronics employees. The company and Apple had worked together on charger and camera components for both the iPod and iPhone. Shimoin was also caught on wiretaps saying he would obtain secrets about sales involving Research In Motion Ltd., which is the company that manufacturers Blackberries.

Texan Longoria is accused of giving out confidential information about Advanced Micro Devices, where he used to work as a supply chain manager. Another Primary Global Research consultant, ex- Dell global supply manager Daniel Devore, has pleaded guilty to conspiracy and wire fraud charges. Devore has said that Primary Gold Research paid him approximately $145,000 to provide insider information to company employees and clients about Dell.

Related Web Resources:
Insider trading case focuses on Apple’s secrets, Victoria Advocate/AP, December 16, 2010
Four more arrests in insider trading case involving Primary Global Research, SFGate, December 16, 2010
Texas Securities Fraud, Stockbroker Fraud Blog
Insider Trading, Stockbroker Fraud Blog Continue Reading ›

Bank of America to Pay $137M Over Alleged Investment Scam To Pay Municipalities Low Interest Rates on Investments and $9M Over Alleged Bid-Rigging Scheme to Nonprofits

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

Bank of America has agreed to pay $137 million to settle charges that it was involved in a financial scheme that allowed it to pay cities, states, and school districts low interest rates on their investments. The financial firm allegedly conspired with rivals to share municipalities’ investment business without having to pay market rates. As a result, government bodies in “virtually every state, district, and territory” in this country were paid artificially suppressed yields or rates on municipal bond offerings’ invested proceeds.

Bank of America has agreed to pay $36 million to the Securities and Exchange Commission and $101 million to federal and state agencies. The Los Angeles Times is reporting that $67 million will go to 20 US states. BofA will also make payments to the Office of the Comptroller of the Currency and the Internal Revenue Service. The SEC contends that from 1998 to 2002 the investment bank broke the law in 88 separate deals.

In its Formal Agreement with the Office of the Comptroller of the Currency, Bank of America agreed to strengthen its procedures, policies, and internal controls over competitive bidding in the department where the alleged illegal conduct took place, as well as take action to make sure that sufficient procedures, policies, and controls exist related to competitive bidding on an enterprise wide basis. The OCC is accusing the investment bank of taking part in a bid-ridding scheme involving the sale and marketing of financial products to non-profit organizations, including municipalities.

Per their Formal Agreement, the bank must pay profits and prejudgment interest from 38 collateralized certificate of deposit transactions to the non-profits that suffered financial harm in the scam. Total payment is $9,217,218.

Related Web Resources:

Bank of America to Pay $137 Million in Muni Cases, Bloomberg, December 7, 2010

OCC, Bank of America Enter Agreement Requiring Payment of Profits Plus Interest to Municipalities Harmed by Bid-Rigging on Financial Products, Office of the Comptroller of the Currency, December 7, 2010

Securities Fraud Lawsuit Seeks to Recover $49M From 96 Independent Broker-Dealers Liable Over Sales of Tenant-In-Common Exchanges

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

The trustee for the DBSI Inc. bankruptcy is suing 96 independent broker-dealers for securities fraud related to suspect tenant-in-common exchanges that were sold to investors. James Zazzali is seeking about $49 million in commissions earned.

In his securities fraud complaint, Zazzali, who is a retired Supreme Court of New Jersey justice, claims that DBSI’s TIC deals were part of a $600 million Ponzi scam. The lawsuit contends that the following companies made the most commissions from selling DBSI:

• Berthel Fisher & Company Financial Services Inc.
• QA3 Financial Corp.
• DeWaay Financial Network LLC,
• The Private Consulting Group • Questar Capital Corp.

22 of the broker-dealers named as defendants are no longer in business. Zazzali contends that the commissions were fraudulent transfers by DBSI and that due to the Ponzi nature of the enterprise, old investors benefited from funds put in by new investors. The trustee believes that the broker-dealers should return investor payments and commissions, which should be distributed to DBSI creditors.

The Securities and Exchange Commission has not filed securities fraud charges against DBSI. Other private placement issuers, such as Provident Royalties and Medical Capital Holdings, were charged by the regulator last year. Provident Royalties’ receiver sued over 40 broker-dealers this year in an effort to obtain claw-back in principal and commissions from firms that sold private placements.

TICs are a form of real estate ownership involving two or more parties with fractional interests in a property. DBSI Inc. was one of the biggest distributors and creators of the product until it defaulted on investor payments and filed for Chapter 11 bankruptcy protection in November 2008. Before then, independent broker-dealers actively sold DBSI TICs. The financial product grew in popularity in 2002 after the Internal Revenue Service issued a ruling that let investors defer capital gains on commercial real estate transaction involving property exchanges.

Related Web Resources:
Sour real estate deals land B-Ds in hot water, Investment News, December 12, 2010
Something in common: Firms that sold TICs from DBSI, Investment News, December 15, 2010
Iowa brokerages included in lawsuit, DesMoines Register, December 14, 2010
Institutional Investors Securities Blog
Continue Reading ›

Goldman Sachs & Co. Clearing Unit Must Pay Unsecured Creditors of Bayou Hedge Funds $20.5M FINRA Arbitration Award, Says District Court

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

A district court has rejected Goldman Sachs & Co.’s (GS ) challenge to a $20.5 million securities fraud award for unsecured creditors of the failed Bayou hedge funds. The unsecured creditors are blaming the investment bank of failing to look at certain red flags and, as a result, facilitating the massive scam. The U.S. District Court for the Southern District of New York said it was sustaining the award issued by the Financial Industry Regulatory Authority arbitration panel.

The court said that contrary to Goldman’s argument, the FINRA panel “did not ‘manifestly disregard the law’ when reaching its conclusion. Also, the court noted that the panel had found that Goldman Sachs Execution and Clearing unit was not innocent of wrongdoing in that it failed to take part in a “diligent investigation” that could have uncovered the fraud.

The Bayou Hedge Funds group collapsed in 2005. According to regulators, investors lost over $450 million as a result of the false performance data and audit opinions that were issued. The Securities and Exchange Commission and the Justice Department sued the group’s founders, Daniel Marino and Samuel Israel III over the investors’ financial losses and the firm’s collapse. Both men have pleaded guilty to criminal charges and are behind bars.

The court not only disagreed with the Goldman Sachs clearing unit that the panel was not in manifest disregard of the law, but also, it found that as Goldman’s client agreements with the Bayou funds provided it with “broad discretion” over the use of securities and money in the funds’ accounts, it was not unusual for a “reasonable arbitrator” to find that Goldman’s rights in relation to the accounts provided it with “sufficient dominion and control to create transferee liability.”

Related Web Resources:

Court Rebuffs Goldman ChallengeTo $20.5M Bayou Arbitration Award, BNA, December 9, 2010

Goldman Sachs, Stockbroker Fraud Blog

Ex-Smith Barney Adviser Pleads Guilty to Securities Fraud In $3.25M Scam to Bilk Citibank and Firm Clients

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

Sanjeev Jayant Kumar Shah, a former Smith Barney financial services adviser, has pleaded guilty to one count of securities fraud and three counts of wire fraud over his involvement in a securities scam to bilk clients of Citibank and his firm. Shah was charged with diverting about $3.25 million from a foreign bank client and fabricating documents that he claimed were from bank representatives.

He is also accused of falsely saying that the transfers were required for bond purchases and that he would send statements showing these purchases. Prosecutors say that he attempted to cover up the scam by telling clients that a computer mistake had kept the bonds from showing up online bank statements and that had had bought the bonds for the bank.

The securities fraud charge comes with a 20 year maximum penalty plus a fine. Each wire fraud charge carries a maximum 30 years in prison penalty and also a fine.

Shah was at Citigroup unit Smith Barney for 3 ½ years. Citigroup says that it was the one that brought the case to the attention of the Department of Justice.

Securities Fraud
Our securities fraud lawyers are committed to helping our clients recover their financial losses. The most common investor claims against brokers and investment advisers can involve issues such as:

• Unsuitability • Registration violations • Margin account abuse • Unauthorized trading • Breach of fiduciary duty • Breach of contract • Failure to execute trades • Overconcentration • Negligence • Churning • Misrepresentation and omissions • Failure to supervise
Read the guilty plea, Justice.gov, November 24, 2010 (PDF)

Former Smith Barney adviser admits $3 million fraud, Reuters, November 24, 2010
Former Smith Barney adviser admits $3 mln fraud, CNBC, November 24, 2010 Continue Reading ›

SEC IG Investigating Whether Examiners Were Told by Regional Official to Ignore “Red Flags” Indicating Massive Fraud

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

Securities and Exchange Commission Inspector General H. David Kotz says that his office is looking into a complaint that a regional official told examiners to not go after “red flags” that were found in an exam of an investment adviser where a “massive fraud” was discovered. The official in question reportedly played a significant part in an earlier exam of the investment firm, and although the securities fraud was going on then, it was not uncovered at the time.

The anonymous complaint also claims that the regional office had a hostile work environment because management failed to discipline the official even after an earlier OIG investigation found that the person had watched pornography on an SEC computer. In his semiannual report to Congress, Kotz says that the OIG is almost done with its probe and will present its findings.

The OIG also determined that Bank of America Inc.’s Troubled Asset Relief Program fund’s status played a role in the “favorable” $33 million settlement that SEC staffers had initially recommended to resolve charges that the investment bank issued misleading proxy disclosures related to its Merrill Lynch acquisition. U.S. District Judge Jed S. Rakoff, however, refused to approve that settlement, and Bank of America eventually settled the case for $150 million.

Kotz says that the OIG has probed into allegations from an ex-Enforcement attorney that the division was negligent in how it handled an insider trading probe. A report of its findings will be issued during the next semiannual reporting period.

Other pending OIG investigations involve:
• Allegations that attorneys at a regional office did not properly investigate a law firm for alleged obstruction of justice related to an SEC case. Improper preferential treatment may have been a factor.
• Allegations that an SEC official violated ethics rules while providing testimony to a congressional committee.
• Allegations that a staff member acted in an abusive and intimidating manner toward contract staff.
• Complaints that SEC staff leaked information about an investigation of an examination to the media.
• Allegations that at least one contractor worked at the SEC before a background probe had been completed.

Related Web Resources:

Bank of America To Settle SEC Charges Regarding Merrill Lynch Acquisition Proxy-Related Disclosures for $150 Million, Stockbroker Fraud Blog, February 15, 2010

Bank of America Agrees to settle SEC Charges of Merrill Lynch Bonuses for $33 Million But Judge Blocks Settlement, Stockbroker Fraud Blog, August 6, 2009

SEC Report Applauds Internal Reforms While Admitting to Control Problems

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

In her “Message from the Chairman,” Securities and Exchange Commission head Mary Schapiro celebrated the SEC’s performance related to internal reforms over the past year. Her note was included in the agency’s FY 2010 Performance and Accountability Report. Schapiro applauded the SEC’s changes to its examinations and enforcement programs. She said that revisions will strengthen the agency’s ability to protect investors, encourage capital formation, and promote markets that were fair, efficient, and orderly. Other improvements for the year that Schapiro highlighted:

• The Office of Compliance and Inspections and the Enforcement Division both enhanced their abilities to fulfill their regulatory duties.

• Enhanced technology and an ambitious regulatory agenda.

• OCIE’s risked-focused, national exam program that has been designed in a manner to maximize limited resources.

Schapiro said that the agency’s structural and cultural changes, as well as its investment in human and technological capital would not only create “immediate performance gains,” but also they set up an “infrastructure” supportive of the SEC’s additional duties that the Dodd-Frank Wall Street Reform and Consumer Protection Act has bestowed upon the agency.

In SEC chief financial officer Kenneth Johnson’s message, which was also included in the agency’s report, he said that the commission had identified two material weaknesses in internal controls over financial reporting. The first one is in information systems as a result of issues involving user access controls, patch management, security management, and configuration management. The second one is related to accounting processes and financial reporting and is a result of combined deficiencies involving filing fees, financial reporting, disgorgement, budgetary resources, required supplementary information, and penalty transactions. Johnson said that the SEC is aiming to strengthen its security over its financial data by shifting to a new financial service system by a federal shared service provider.

2010 Performance and Accountability Report, SEC
In Report, SEC Hails Internal Reforms, Acknowledges Internal Control Problems, BNA Securities Law Daily, November 17, 2010

Related Web Resource:
US Securities and Exchange Commission

Institutional Investor Securities Blog
Continue Reading ›

The “New” SEC is Acting Just Like The “Old” SEC by Protecting the Securities Industry from Responsibility for its Actions

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

The Securities and Exchange Commission has announced a proposal to temporarily extend a rule that facilitates certain proprietary trading by entities that are registered as both broker-dealers and investment advisers. The proposed extension would move Rule 206(3)-3T’s expiration date by two years, from December 31, 2010 to December 31, 2012. It would also would allow the SEC to complete a study mandated under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Rule 206(3)-3T gives dually registered firms another way to satisfy consent and disclosure requirements that they would otherwise only be able to meet on a transaction-by-transaction basis. Having just the one option would limit the availability that non-discretionary advisory clients would have to certain securities.

The extension would give the SEC the time that it needs to study the regulatory issues related to dual registrants’ principal trading. Dodd-Frank is requiring the SEC to look at any divergent regulations between investment advisers and brokers and use rulemaking to fix gaps so as to better protect investors. The agency has until January 21, 2011 to notify Congress of its findings.

Dodd-Frank’s Section 913 has generated a lot of debate because it could allow for most broker-dealers to be considered fiduciaries under the 1940 Investment Advisers Act. Right now, brokers don’t have to meet the fiduciary standard that investment advisers must satisfy even though both offer similar services. However, instead of holding brokers to the statutory fiduciary standard, the SEC might end up obligating them to fulfill various consent and disclosure requirements at the start of a retail relationship.

Shepherd Smith Edwards & Kantas LTD LLP Founder and Securities Fraud Attorney William Shepherd thinks that it is time to hold brokers responsible to a fiduciary standard: “The only educational requirement to become a licensed securities broker is four months of on-the-job training and the passing of a half-day test. Yet, on average, securities brokers at major firms are paid more than doctors, lawyers and other professionals who must often attain seven or eight years of higher education. Many clients entrust securities brokers with their life savings, retirement assets, and their financial life blood. Why shouldn’t these brokers and the firms required to supervise them be held responsible if the investors are ripped-off? Financial advisers perform the same function but have a fiduciary duty to investors, simply meaning they must put the client’s interest first when advising them. Why should securities brokers be held to a different standard and not be allowed to lull investors into trusting them, while selling their victims the highest commission products that they can find without regard to the client’s best interest? In fact, most state laws currently hold that when a broker is recommending securities to an unsophisticated investor, the broker has a fiduciary duty to that client. What the SEC is trying to do is to pass a rule that makes brokerage firms LESS RESPONSIBLE than they are at present. These endless tactics perpetrated by securities regulators, at the behest of Wall Street, and are yet another type of bail-out move by the Securities Cartel that controls this nation.”

Related Web Resources:
Read the Proposed Rule (PDF)

1940 Investment Advisers Act

Institutional Investor Securities Blog
Continue Reading ›

Actions of Former Ferris, Baker Watts, Inc. General Counsel Accused of Supervising Rogue Broker to be Reviewed by SEC

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

The Securities and Exchange Commission will be taking a closer look at the actions of ex- Ferris, Baker Watts, Inc. General Counsel Theodore Urban. Urban has been accused of failing to reasonably supervise stockbroker Stephen Glantz, who was involved a stock market manipulating scam with Innotrac Corp. stock.

It is rare for the SEC to examine the actions of a general counsel. However, the agency says it is looking at the case because the proceedings bring up key “legal and policy issues,” such as whether Urban acted reasonably in the manner that he oversaw Glantz and chose to respond to signs of broker misconduct. The case also brings up the questions of whether securities professionals such as Urban should be made to “report up” and if his status as a lawyer and his role as “FWB’s general counsel affect is liability for supervisory failure.”

Earlier this year, Securities & Exchange Commission Administrative Law Judge Brenda Murray ruled that Urban did not inadequately supervise Glantz and that the proceedings against him be dropped. Murray said that per the 1934 Securities Exchange Act, a person cannot be held liable for supervisory deficiencies if appropriate procedures for detecting and stopping the violations were applied, She said that Urban had no reasonable grounds to think that procedures had not been followed.

However, Murray’s decision isn’t final until the SEC enters its final order, and on Tuesday the commission declined Urban’s motion requesting that the SEC affirm Murray’s ruling. Division lawyers have said that Murray’s decision was not consistent with previous SEC precedent, lowers the standards that supervisors at dealers, brokers, and investment advisers must meet, and did not protect the investing public by making Urban accountable to sanctions.

SEC to Review Actions of Bank General Counsel Who Supervised Rogue Broker, Law.com, December 9, 2010

Read the SEC order denying motion for summary affirmance (PDF)

Read the administrative law judge’s ruling (PDF)

Ex-Ferris, Baker Watts, Inc. General Counsel Did Not Fail to Properly Supervise Broker Fraudster, Says SEC Judge, Stockbroker Fraud Blog, September 30, 2010