Investor Lawyers Blog

UBS to Pay $2.2M to CNA Financial Head for Lehman Brothers Structured Product Losses

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

A Financial Industry Regulatory Authority arbitration panel says that UBS Financial Services Inc. must pay $2.2 million to CNA Financial Corp. Chief Executive and Chairman Thomas F. Motamed for losses that he and his wife Christine B. Motamed sustained from investing in Lehman Brothers structured products. The Motameds, who filed their claim against the UBS AG (UBS, UBSN.VX) unit and ex-UBS brokers Judith Sierko and Robert Ashley early in 2009, are alleging misrepresentation, breach of fiduciary duty, and other charges.

This is the largest award involving UBS-sold Lehman structured products. However, the Motameds’ securities fraud case is just one of many against UBS over its sale of about $1 billion in Lehman-related structured investment products to US clients. Many of the claimants contend that the broker-dealer failed to properly represent the investments. As part of this arbitration case, UBS must also pay 6% yearly interest on the $2.2 million to the Motameds from April 4, 2008 until payment of the award is complete. The ruling is supposed to represent rescission of the Motameds’ structured products purchase.

UBS reportedly has not won even one case over the Lehman structured products where the claimant had legal representation. Just a few months ago, UBS AG was ordered to pay $529,688 to another couple over their Lehman structured notes purchase. Steven and Ellen Edelson bought the notes while under the impression that they were “principal protected” when in fact the securities did not have such protection.

The award is the largest involving Lehman structured products purchased through UBS, which has expressed disappointment over the panel’s ruling. The broker-dealer maintains that the losses sustained by the Motameds are a result of Lehman Brothers’s failure and not UBS’s handling of the products.

To Pay $2.2 Mln To CNA Chief for Lehman-Related Losses, The Wall Street Journal, December 23, 2010
UBS Must Pay Couple $530,000 for Lehman Brothers-Backed Structured Notes, Institutional Investors Securities Blog, November 5, 2010 Continue Reading ›

Quadrangle Cofounder and CalPERS Partner Steven Rattner Settles NY Pension Fund Corruption Probe for $10M

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

Quadrangle investment group founding partner Steven Rattner has settled for $10 million allegations that he bribed officials to obtain a substantial investment from New York State’s pension fund. The financier, who is a California Public Employees’ Retirement System (CalPERS) outside investment partner and previously served as President Barack Obama’s “car czar,” is accused of being involved in a “pay-to-play” scam involving Quadrangle. Pension officials were allegedly given kickbacks for directing state pension money to the fund.

It was just last April that Quadrangle settled charges over the pension fund scheme with then-New York Attorney General Andrew Cuomo and the US Securities and Exchange Commission. Rattner, who is no longer with Quadrangle, was not part of that agreement. He had left the investment group to help President Obama restructure the auto industry. Rattner was forced to step down last summer because of the allegations related to the pension scam.

The probe has resulted in eight guilty pleas. Cuomo, who was just sworn in as New York’s governor, has called the state pension fund a “valuable asset held in trust for retirees.”

The NY pension fund case is not related to Rattner’s work with the $218.8 billion CalPERS, which is also dealing with its own bribery scandal. The allegations involve Alfred Villalobos, a businessman who made millions from representing firms that wanted investment money from the California pension fund. Governor Jerry Brown, who was at the time the state’s attorney general, sued ex- CalPERS Chief Executive Fred Buenrostro and Villalobos last May. The $95 million securities complaint accused Villalobos of bribing Buenrostro and two others. Villalobos, who has denied any wrongdoing, has since filed for bankruptcy. An independent examiner has recommended that stricter ethics rules for CalPERS managers be put in place.

Related Web Resources:
Former auto czar pays $10 million fine, CNN.com, December 30, 2010

CalPERS

Financial Services Institute Wants FINRA to Serve as SRO for RIAs

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

The Financial Services Institute wants the Financial Industry Regulatory Authority to be the main watchdog over registered investment advisers. FSI, which represents 126 broker-dealers’ interests, endorsed FINRA in a letter to the Securities and Exchange Commission. Many of the broker-dealers that FSI represents are also RIAs.

FSI believes that not only has FINRA shown the ability to “equitably” distribute enforcement, examination, technology, and surveillance resources, but also, that the latter is knowledgeable about “the overlapping nature” of the services and financial products that both investment advisers and broker-dealers may offer. Coordinated Capital Securities, Inc. and 2010 FSI chair and president Mari Buechner believes that having a regulatory structure that puts the same emphasis on examining broker-dealers, investment advisers, and their affiliated financial advisers will improve investor protection.

Currently, pursuant to Section 914 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC is analyzing the need for improved oversight of investment advisers. Already, FINRA closely scrutinizes broker-dealers, while the SEC has acknowledged that insufficient resources prevents it from regularly inspecting over 11,000 registered advisers.

SEC’s Proposal on Implementing Whistleblower Rule Draws Mixed Reactions

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

Comments to the Securities and Exchange Commission’s proposal to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act’s whistleblower protections have drawn mixed reactions. While some commenters think that employees of publicly traded companies should have to report alleged wrongdoing to internal compliance programs before they can be eligible to a monetary award, others believes that this requirement would make whistleblowers less willing to come forward. Still others have said that whistleblowers shouldn’t be allowed to hire lawyers on a contingency basis. Commenters also were in disagreement over the proposed rule’s overall impact.

Per new Section 21F of the Securities Exchange Act of 1934, a whistleblower program has been established that requires the SEC to monetarily award eligible whistleblowers that voluntarily give the agency original information about a federal securities laws violation if the tip results in successful enforcement of an administration or judicial action that leads to sanctions of over $1 million. The SEC proposed rule has the agency’s Whistleblower Office administering the program, prohibits whistleblowers that engaged in wrongdoing from being eligible for the financial award, and includes anti-retaliatory provisions protecting whistleblowers.

One theme touched upon in many of the comment letters is the desire for the SEC to make the final rule more “user friendly,” which is a term found in the statute. Critics believe that the SEC’s proposal doesn’t meet that standard. Still others expressed concern about what the SEC would consider “original” information presented by a whistleblower. Also, while some commenters wanted firms’ internal compliance programs to have the opportunity to initiate its own meaningful investigation first before the whistleblower gives the SEC a similar submission, the National Whistleblowers Center submitted a comment letter arguing that employees shouldn’t have to report alleged wrongdoing internally first to qualify for the SEC whistleblower program.

Claims over failed tax-avoidance scheme brought under Texas Securities and Federal Racketeering Laws Against Prominent Law Firm is Dismissed by Fifth Circuit

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

According to the U.S. Court of Appeals for the Fifth Circuit, the entities and individuals that took part in a disallowed tax avoidance scheme did not prove the reliance necessary under securities laws to hold Proskauer Rose LLP liable as a secondary actor. In Affco Investments 2001 LLC v. Proskauer Rose L.L.P, Affco LLC, Affco Investments 2001 LLC, Lewis W. Powers, Kenneth Keeling, John H. Powers, Lewis W. Powers, Shannon Ellis, Albert Gunther III, Heidi Gunther, Gretchen Linquest, and Eric Linquest claimed that they decided to take part in a tax avoidance scam solicited them by accounting firm KPMG LLP under the alleged guise that national law firms had approved the strategy.

Soon after, the IRS began giving out notices of transactions that it considered prohibited. The plaintiffs then looked to Proskauer Rose for legal advice. The law firm allegedly told them that they did not have to disclose that they were taking part in the scheme, which involved the sale and purchase of options that were roughly identical, and that the transactions were not substantially too much like the ones that were prohibited.

In 2001, the plaintiffs reported their losses from the scam on their 2001 returns without disclosing that they were taking part in the scheme. After an IRS probe, however, they ended up paying millions in back taxes, penalties, and interests. They also did not get the amnesty that was awarded to those who revealed that they had taken part in the scam.

The plaintiffs filed a securities lawsuit that made claims under Texas law, the 1934 Securities Exchange Act, and the Racketeer Influenced and Corrupt Organizations Act against the 17 entities (including Proskauer) purportedly involved in the schemes. While the other defendants have settled, Proskauer filed a motion to dismiss.

The district court dismissed the case against Proskauer and said that the Private Securities Litigation Reform Act of 1995 does not allow “civil RICO actions based on predicate acts of securities fraud.” Now the appeals court has determined that the district court acted correctly when it dismissed the securities case. The court noted that “[w]ithout direct attribution to Proskauer of its role in the tax scheme, reliance on Proskauer’s participation in the scheme is too indirect for liability.”

Related Web Resources:
Read the 5th Circuit’s Opinion (PDF)

Racketeer Influenced and Corrupt Organizations Act

1934 Securities Exchange Act (PDF)
Continue Reading ›

Class Action Plaintiffs Dispute Bank of America’s $137M Settlement with State Attorney Generals Over Municipal Derivatives

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

The plaintiffs in a class action case against Bank of America Corp. (BAC) are asking a court to intervene in the securities settlement reached between the investment bank and 20 state attorneys generals over the alleged manipulation of municipal derivatives bids. As part of the global settlement, BofA agreed to pay approximately $137 million: $9.2 million to the Office of the Comptroller of Currency, $36.1 million to the Securities and Exchange Commission, $25 million in restitution to the Internal Revenue Service, and $66.9 million to the states. The plaintiffs claim that the settlement purports to settle the charges of their case without consulting with or notifying the class counsel.

Fairfax County, Va., the state of Mississippi, and other plaintiffs filed the securities class action against 37 banks. They claimed that the alleged bidding manipulation practices involving municipal derivatives had been occurring as far back as 1992.

Now, the plaintiffs want permission to file a motion to request an enjoinment of the BoA global settlement. Meantime, BoA is arguing that the plaintiffs’ motion is “baseless” and they want the court to not allow it. The investment bank says that it disagrees that the states’ settlement resolves the class claims. BoA also contends that it kept Judge Weinstein and the interim class counsel abreast of settlement negotiations with the state.

Wall Street and its Friends in Washington Want Congress to “Crawfish” on Financial Industry Regulatory Reforms

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

The Committee on Capital Markets Regulation, a nonpartisan research group, is urging lawmakers to conduct oversight hearings on the way that financial reform legislation is being implemented. CCMR claims that the rulemaking process of the Commodity Futures Trading Commission, the Securities and Exchange Commission, and other regulators is “seriously flawed,” while “sacrificing quality and fairness for apparent speed, risking lengthy court challenges and poor rules.”

CCMR made its allegations in a letter to outgoing Senate Banking Committee chair Christopher Dodd (D-Conn), ranking member Sen. Richard Shelby (R-Ala.), outgoing House Financial Services Committee head Rep. Barney Frank, and ranking member Rep. Spencer Bachus (R-Ala.). CCMR says it is concerned that the Dodd-Frank Wall Street Reform and Consumer Protection Act requires a virtual full “rewrite” of current regulations for the country’s financial markets and that the specific deadlines are “overly ambitious.”

Now, the SEC has until July 2011 to write about 60 new rules-it wrote less than 10 a year in 2005 and 2006-and the CFTC has to issue almost 40 new rules-it made about 11 rules in the couple of years leading up to the economic meltdown. Also, per Dodd-Frank, the SEC has about 200 days to make a rule final. Before the financial crisis the agency would take 524 days for rule adoption from proposal to finalization. The CFTC has 238 to adopt a new rule. Previously the agency would take about 109 days. Also, whereas before, the public was given approximately over 60 days to comment on new rules, agencies on overage are now allowing about 30 days for comments.

CCMR claims that there are now conflicting rules in the asset-backed securities area and regarding over-the-counter derivatives. Recently, Bachus and House Agriculture Committee chairman-elect Rep. Frank Lucas (R-Okla.) wrote CFTC Chairman Gary Gensler and SEC Chairman Mary Schapiro about the direction and pace that swaps rulemaking was taking.

Per Shepherd Smith Edwards and Kantas Founder and Securities Fraud Lawyer William Shepherd, “No one wants to be told what to do, it is human nature, and government regulations should only occur as a ‘necessary evil.’ The test should be whether the evil regulation is better than the evil non-regulation. This one should be easy to answer! Look back at what just happened after Congress deregulated the financial industry over the past decade: Debacle! With taxpayers having to bail out the perpetrators. A little pain on Wall Street can be endured to prevent this from happening in the future. Perhaps these regulations are not perfect, but the de-regulation now in place has proven disastrous.”

Related Web Resources:
Committee on Capital Markets Regulation

Commodity Futures Trading Commission

Securities and Exchange Commission

US Senate Banking Committee

House Agriculture Committee

Dodd-Frank Wall Street Reform and Consumer Protection Act (PDF)

Institutional Investors Securities Blog
Continue Reading ›

Moody’s, Fitch, and Standard and Poor’s Were Exercising Their 1st Amendment Rights When They Gave Inaccurate Subprime Ratings to SIVs, Says Court

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

According to California Superior Court Judge Richard Kramer Fitch Inc., Standard and Poor’s parent (MHP) McGraw-Hill Companies Inc., Fitch, Inc., and Moody’s Corp. (MCO), were merely exercising their First Amendment right to free speech when they gave their highest rating to three structured investment vehicles (SIVs) that collapsed when the mortgage market failed in 2008 and 2007. The ruling, in California Public Employees’ Retirement System v. Moody’s Corp. now leaves the plaintiffs with a steep burden of proof. The plaintiff, the largest pension fund in the US, is seeking more than $1 billion in securities fraud damages stemming from the inaccurate subprime ratings.

Per the securities complaint, CAlPERS is accusing the defendants of publishing ratings that were “unreasonably high” and “wildly inaccurate” and applying “seriously flawed” methods in an “incompetent” manner. The plaintiff contends that the high ratings that were given to the SIVs contributed to their collapse during the economic crisis.

BNA was able to get court transcripts that indicate that the ruling came on a motion under California’s anti- Strategic Lawsuit Against Public Participation (SLAPP) statute, which offers a special procedure to strike a complaint involving the rights of free speech and petition. If a defendant persuades the court that the cause of action came from a protected activity, the plaintiff must prove that the claims deserve additional consideration. Now CalPERS must show a “probability of prevailing.”

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, there is no longer any protection from private litigation for ratings agency misstatements. Now, an investor only has to prove gross negligence to win the case. However, per Wayne State University Law School Peter Henning, in BNA Securities Daily, Dodd-Frank’s provision may not carry much weight if a ratings agency’s First Amendment rights are widely interpreted.

Shepherd Smith Edwards & Kantas LTD LLP Founder and Stockbroker fraud lawyer William Shepherd had this to say: “There have long been many restrictions on ‘speech,’ including life threats, trademarks, defamation, conspiracy, treason and threats of blackmail. But the age-old standard restriction is ‘you can’t shout fire in a crowded theater.’ The reason is that strangers might rely on the words and be injured by your ‘speech.’ How is this different than shouting ‘AAA- rated,’ knowing that strangers will rely on the words and be harmed by this ‘speech?’ The difference is that Wall Street can say anything it wants, while the rest of us have to just sit down and shut up.”

CalPERS has until March 18, 2011 to respond to the court.

Related Web Resources:
Ratings by Moody’s, Fitch, S&P Ruled to Be Protected Speech, BusinessWeek, December 11, 2010

Calpers Sues Rating Companies Over $1 Billion Loss, Bloomberg, July 15, 2010

CalPERS

California Public Employees’ Retirement System v. Moody’s Corp., Justia Dockets

Credit Ratings Agencies, Stockbroker Fraud Blog

Bank of America and Countrywide Financial Sued by Allstate over $700M in Bad Mortgaged-Backed Securities

Published on: December 29, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Allstate has filed a securities fraud lawsuit against Bank of America (NYSE: BAC) and its subsidiary Countrywide Financial. The insurer claims that it purchased over $700 million in toxic mortgage-backed securities that quickly lost their value. Also targeted in the securities complaint are former Countrywide CEO Anthony Mozilo and other executives. Allstate is alleging negligent misrepresentation and securities violations.

The insurance company purchased its securities between March 2005 and June 2007. According to the federal lawsuit, as far back as 2003 Countrywide let go of its underwriting standards, concealed material facts from Allstate and other investors, and misrepresented key information about the underlying mortgage loans. The insurer contends that Countrywide was trying to boost its market share and sold fixed income securities backed by loans that were given to borrowers who were at risk of defaulting on payments. Because key information about the underlying loans was not made available, Allstate says the securities ended up appearing safer than they actually were. Allstate says that in 2008, it suffered $1.69 billion in losses due largely in part to investment losses.

It was just this October that bondholders BlackRock and Pimco and the Federal Reserve Bank of New York started pressing Band of America to buy back mortgages that its Countrywide unit had packaged into $47 billion of bonds. The bondholder group accused BofA, which acquired Countrywide in 2008, of failing to properly service the loans.

Meantime, BofA says it is looking at Allstate’s lawsuit, which it says for now appears to be a case of a “sophisticated investor” looking to blame someone for its investment losses and a poor economy.

Related Web Resources:
Countrywide Comes Between Allstate And BofA, Forbes, December 29, 2010
Allstate sues Bank of America over bad mortgage loans, Business Times, December 28, 2010 Continue Reading ›

Ex-Financial Adviser Pleads Guilty to Unauthorized Trading Involving Disabled Children’s Assets

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

Charles Winitch has pleaded guilty to involvement in a securities fraud scam that victimized disabled children. In the U.S. District Court for the Southern District of New York, the ex-financial adviser and “wealth manager” entered a guilty plea to the charge of wire fraud involving unauthorized trading for commissions. While federal prosecutors and United States Attorney for the Southern District of New York Preet Bharara did not name the financial firm that Winitch had been working for at the time, The New York Daily News identified him in 2008 as a stockbroker with Morgan Stanley.

WInitch is accused of taking $198,784 from a trust held by the guardians of disabled children called the Guardian Account. The trust, which is supposed to provide children with long-term income and comes from the youths’ medical malpractice settlements, was only supposed to invest in New York Municipal Bonds or US Treasury Bonds. However, Winitch made unauthorized trades in 11 accounts in the millions of dollars to generate higher commissions even though he lacked the authority or consent to take such actions. According to Bharara, Winitch and co-conspirators made about $198,000 in ill-gotten commissions. Meantime, the fund lost somewhere between $400,000 and $1 million.

Winitch’s criminal defense lawyer says that the former stockbroker did not know that the accounts contained the money of disabled kids. The ex-Morgan Stanley broker is facing up to 63 months behind bars, hefty fines, forfeiture of ill-gotten gains, and restitution. Continue Reading ›