Investor Lawyers Blog

Wall Street Whistleblowers May Be Eligible to Collect 10 – 30% of Money that the Government Recovers

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

Under the Dodd-Frank Wall Street reform law, Wall Street insiders who become whistleblowers may be eligible to receive 10 – 30% of the money that the government gets back. According to National Whistleblowers Center executive director Stephen Kohn, the prospect of collecting millions could provide potential tipsters with the incentive to act, while saving investors billions.

Under the new law, whistleblowers that provide the Commodity Futures Trading Commission or the Securities and Exchange Commission with “original information” will be allowed to stay anonymous. A securities attorney will then act as an intermediary between the whistleblower and the government. This helps maintain the tipster’s anonymity while allowing the securities fraud allegations to be made.

Already, the SEC has been taking more aggressive measures to award whistleblowers. Just last week, the SEC awarded $1 million to Karen and Glen Kaiser-the largest amount that the SEC has paid for insider information (this was administered under an earlier authority)-after they gave the agency key documents and information for its insider trading case against Pequot Capital.

Karen used to be married to former Microsoft employee David Zilkha. According to the SEC, in 2001, Zilkha tipped Pequot about an upcoming earnings report form his then-employer. Pequot Capital Management Chief Executive Arthur Samberg is accused of trading on the insider information and illegally making $14.8 million. Samberg eventually agreed to settle the SEC’s insider trading allegations against him for $28 million.

Under the Dodd-Frank provisions, whistleblowers that provide key information regarding securities fraud, insider trading, and commodities fraud cases are likely to get a lot more than $1 million.

Related Web Resources:
Connecticut couple gets $1 million SEC award for Pequot, Reuters, July 23, 2010
New Wave of Whistleblowers Could Become Millionaires, CNBC, July 26, 2010
SEC Charges Pequot Capital Management and CEO Arthur Samberg With Insider Trading, SEC, May 27, 2010
Dodd-Frank Wall Street reform law, Open Congress’

SEC

Commodity Futures Trading Commission
Continue Reading ›

Raymond James Ordered to Buy Back $2.5M in ARS by FINRA

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

A Financial Industry Regulatory Authority arbitration panel is ordering Raymond James & Associates Inc. and Raymond James Financial Services Inc. to buy back $2.5M in auction-rate securities from an investor. Greg Merdinger has accused Raymond James Financial Inc. of failing to warn him about the risks associated with ARS. In 2009, he filed a claim accusing the broker-dealer of breach of both contract and fiduciary duty.

Merdinger claims that from October 2006 to February 2008, Raymond James & Associates Inc. recommended that he purchase the securities while claiming that they were more liquid than money market funds, which Merdinger wanted to invest in until he was persuaded otherwise. He contends that Raymond James never told him that the ARS could become illiquid and that even into February 2008, when the market froze, Raymond James continued to advise him to buy the securities. One more purchase was even made.

Raymond James Financial’s General Counsel, Paul Matecki, has been quick to note that the broker-dealer has provided evidence that it did not know that the ARS market was at risk of failing before February 2008 when it did collapse. He also claims that there is no evidence indicating that any of its employees knew that the securities would fail.

However, Merdinger’s securities lawyer says there are copies of emails showing that Raymond James Financial managers knew the ARS market was experiencing difficulties way before it collapsed. Early last year, Raymond James chief executive and chairman issued a letter, filed with the Securities and Exchange Commission, apologizing to clients for the role the investment bank played in their ARS buys.

In addition to the $2.5M ARS repurchase, Merdinger has been awarded 5% interest on the amount until Raymond James buys back the securities. He is also to receive an additional $86,000.

Related Web Resources:
Raymond James faces $2.5 million payback ruling, BizJournals, July 27, 2010
Raymond James Ordered To Buy Back $2.5M in Auction-Rates, WSJ, July 26, 2010
Tom James apologizes for auction rate security purchases, BizJournals, January 5, 20009 Continue Reading ›

Motion for Class Certification in Lawsuit Against J.P. Morgan Securities Inc. Over Alleged Market Manipulation Scam Granted in Part by Court

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

A district court has granted in part the motion for class certification in the securities fraud lawsuit against J.P. Morgan Clearing Corp. and J.P. Morgan Securities Inc. involving an alleged investment scam with Sterling Foster & Co. The alleged scheme involves the manipulation of the the market for ML Direct Inc. securities during and after an IPO. The JPM entities are named in their capacity as Bear Stearns & Co. Inc. and Bear Stearns Securities Corp. successors.

The court says that one day after the IPO’s start, ML Direct stock’s price more than doubled because Sterling Foster had bought most of it. The firm then sold over 3.375 million ML Direct at about $14 to $15 a share. Because only 1.1 million shares in the IPO were for sale, the court says that Sterling Foster sold 2.3 million more shares than it owned. The other available ML Direct shares were held by insiders, who had a lock-up agreement barring them from selling their shares within the first year of the IPO unless they obtained underwriter Patterson Travis Inc.’s consent.

Sterling Foster and the insiders allegedly became involved in an undisclosed agreement that allowed the brokerage firm to buy the insiders’ stock at the $3.25/share offering. Sterling Foster then bought their securities, which were delivered to Bear Stearns. The court says that as a result, the brokerage firm made a $24 million profit.

The plaintiffs are saying that the offering documents misled the investing public into thinking that significantly less ML Direct shares were being offered and that the market had set the $13 to $15/share price when Sterling Foster had artificially created it and then bought shares from insiders at the lower share price. The plaintiffs claim that Bear Stearns, as Sterling Foster’s clearing house, knowingly took part in the investment scam.

The plaintiffs moved to certify a class so they could pursue their Section 10(b) and Section 20(a) claims. The court granted the motion as to the Section 10(b) antifraud claims but denied the latter, which involves claims for control person liability.

Related Web Resource:
Levitt v. JP Morgan Securities Inc, Law.com Continue Reading ›

Securities Class Action Against Morgan Stanley by Xerox and Kodak Retirees Dismissed by Appeals Court

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

The U.S. Second Circuit Court of Appeals in New York has upheld a lower court’s ruling to dismiss that the securities class action filed by Eastman Kodak Co. and Xerox Corp. against Morgan Stanley. The plaintiffs, retirees from both companies, are accusing the broker-dealer of advising them that if they retired early their investments would be enough to support them during retirement. They also claim that the investment bank persuaded them to open accounts that cost them the bulk of their wealth. According to the plaintiffs’ attorney, the retirees gave up job security and employment rights after they were told that if they retired early they could avail of a 10% withdrawal rate from their individual retirement accounts.

However, upon retiring, the retirees that invested lump-sum retirement benefits with Morgan Stanley experienced “disastrous” value declines. Also, they had invested with two Morgan Stanley broker, Michael Kazacos and David Isabella, that were later barred from the securities industry. Last year the broker-dealer settled FINRA charges over the two men’s activities by paying over $7.2 million.

The appeals court says that because of the 1998 Securities Litigation Uniform Standards Act, the plaintiffs are precluded from pursuing class state law claims, including misrepresentation claims. While the statute lets plaintiffs file lawsuits in state court to get around 1995 Private Securities Litigation Reform Act’s securities fraud pleading requirements, federal preemption of class actions claiming “misrepresentations in connection with the purchase or sale of a covered security” are allowed. The three-judge panel also said that because the retirees waited too long to file their securities fraud lawsuit, they cannot raise other federal securities law claims.

Related Web Resources:
Xerox, Kodak retirees lose Morgan Stanley appeal, Reuters, June 29, 2010
Morgan Stanley to Pay More than $7 Million to Resolve FINRA Charges Relating to Misconduct in Early Retirement Investment Promotion, FINRA, March 25, 2009
1998 Securities Litigation Uniform Standards Act, The Library of Congress Continue Reading ›

SEC Settles Wrongful Termination Lawsuit with Whistleblower Gary Aguirre for $755,000

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

The US Securities and Exchange Commission and former SEC attorney Gary Aguirre have settled his wrongful termination lawsuit for $755,000. Aguirre has contended that he was fired in 2005 after accusing his supervisors of mishandling an insider trading probe against hedge fund Pequot Capital Management and trying, without success, to interview John Mack, Morgan Stanley‘s then chief executive officer, as part of the probe.

Aguirre claimed that the SEC tried to overlook signs that Pequot had used insider information to trade in Microsoft shares. He also accused the agency of not wanting to interview Mack because of his “political” influence. The SEC had accused Aguirre of insubordination and fired him.

His allegations, however, led to the SEC’s inspector general conducting two internal probes that eventually found that the SEC not only botched its probe of Pequot, but also that it improperly terminated Aguirre from his job. The agency was even accused of strategizing to discredit Aguirre. As for the Pequot investigation, last month the hedge fund and its chief executive Arthur Samberg agreed to settle the SEC’s insider trading case for $28 million.

A Merit Systems Protection Board administrative law judge has finalized the wrongful termination settlement and says it is possibly the largest “of its kind.” Government Accountability Project Legal Director Tom Devine has said that “[u]nfortunately, this large settlement is the exception that proves the rule.” He is calling on Congress to offer “real protections” for regulatory employees. In the meantime, he contends that the existing law will continue to allow “government regulators to turn a blind eye.”

Related Web Resources:
Pequot to pay $28 million to settle insider trading case, Reuters, May 27, 2010 Continue Reading ›

Goldman Sachs COO Says Investment Firm Shorted 1% of CDOs Mortgage Bonds But Didn’t Bet Against Clients

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

According to Goldman Sachs Group Inc. Chief Operating Operator and President Gary Cohn, the investment firm adamant that the bank did not bet against its own clients. He says that Goldman Sachs purchased protection against a decline in just 1% of mortgage-backed securities it underwrote since late 2006. Former clients, regulators, and members of Congress are accusing Goldman Sachs of designing mortgage-backed securities that would fail and then betting on their failure to purchase credit-default swaps, which pay out when a default occurs.

Cohn testified last month before the Financial Crisis Inquiry Commission. He says that in the wake of the serious allegations, the investment firm has examined the $47 billion in residential mortgage-backed securities (RMBS) and $14.5 billion in collateralized debt obligations (CDOs) that the firm underwrote since firm executives began to feel the need to treat the subprime mortgage market with caution in December 2006. He claims that by the end of June 2007, Goldman Sachs held $2.4 billion of bonds from CDOs and $2.4 billion of bonds from RMBS trusts. The investment bank had protection for approximately 1% of the total underwritten. Nearly 60% of the derivatives and bonds in the CDOs were from other institutions.

The hearing was called to probe the relationship between Goldman and American International Group Inc (AIG). The investment bank had purchased CDO protection from the insurer. Billions of dollars in federal funds had allowed AIG to stay in business even though it was facing bankruptcy and a number of the insurer’s counterparties, including Goldman, are believed to have benefited. Cohn has argued that all market participants benefited from the government’s assistance.

Related Web Resources:
Goldman Sachs Shorted 1% of its Mortgage Bonds, CDOs, Cohn Says, Business Week, June 30, 2010
Goldman’s Cohn: Firm Didn’t Drive Down Mortgage-Asset Marks, Bloomberg.com, June 30, 2010
Financial Crisis Inquiry Commission
Continue Reading ›

Morgan Stanley Settles Massachusetts Lending Case for $102 Million

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

According to Massachusetts Attorney General Martha Coakley, Morgan Stanley has agreed to pay $102 million to settle allegations that it offered predatory subprime mortgage loan funding in the state. The investment firm filed its assurance of discontinuance in Massachusetts state court, agreeing to pay $19.5 million to the state, $58 million in relief to approximately 1,000 Massachusetts homeowners, $2 million to nonprofit groups that help subprime foreclosure victims, and $23.4 million to a state pension plan and a state trust for investment losses. By agreeing to settle, Morgan Stanley is not admitting to or denying the attorney general’s allegations.

Coakley contends that the investment bank provided subprime lender New Century billions of dollars. The funds were used to target lower-income borrowers to get them into loans they would not be able to pay back. Coakley contends that even though Morgan Stanley “uncovered signals pretty early on” that New Century’s practices “were not sound” and the “bad loans were causing the lender to collapse” the investment bank went forward with funding and securitizing the loans. Coakley also says that Morgan Stanley was aware that New Century repeatedly violated Massachusetts banking standards between 2005 and 2007, used inaccurate and inflated appraisals, and improperly calculate debt-to-ratio from initial “teaser rates.”

The state says that Morgan Stanley packaged the loans and sold them to big investors. The investment bank has been ordered to revise some of its lending practices.

Bank of America/Countrywide, Goldman Sachs, Fremont Investment and Loan, and others have reached similar settlements with the state. The approximately $440 million in settlement money will provide borrowers, investors, homeowners, and the state with relief and recovery.

Related Web Resources:
Morgan Stanley Settles Massachusetts Subprime Loan Probe, ABC News, June 24, 2010
Morgan Stanley to Pay $102 Million in Subprime Accord, Bloomberg Businessweek, June 24, 2010
Massachusetts Attorney General Martha Coakley
Continue Reading ›

Refusal to Grant Prevailing Party of Securities Fraud Case Attorneys’ Fees and Costs is Affirmed by Appeals Court

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

In Kelter v. Associated Financial Group Inc., The U.S. Court of Appeals for the Ninth Circuit affirmed a lower court’s decision to refuse to grant attorney fees and costs under the Private Securities Litigation Reform Act to the prevailing parties, which in this case are the defendants. In its unpublished ruling, the court determined that the plaintiff did not take part in any “egregious conduct” that would warrant that the district court’s denial be reversed.

The securities fraud case was filed by Richard Kelter and involved his failed APEX Equity Options Fund LP investments. The plaintiff accused Jeffrey Forrest of fraudulent misrepresentation regarding the risks and nature of the equity fund. He claimed that as Forrest’s principals, Associated Securities Corp., Associated Financial Group Inc., and Associated Planners Investment Advisory Inc. should be held liable.

On January 14, The district court granted the Associated defendants’ summary judgment. Two weeks later, the defendants moved for attorneys’ fees and costs under PSLRA. They claimed that Kelter did not have enough legal basis and factual evidence when he named them as defendants in his first amended complaint. The district court denied their motion.

The appeals court says that the district court had found that the Associated Defendants did not timely serve its motion for fees on Respondent before filing and, as a result, did not give the Respondent twenty-one days to withdraw the challenged paper. The lower court also said that it did not see any indication that the plaintiff’s actions were unreasonable, frivolous, filed for improper purpose, or objectively baseless.

The appeals court not only affirmed the district court’s decision, noting that it did not find Kelter’s arguments of the objectively baseless nature that have in past cases resulted in such fee awards, but also it declined to “reach the question of whether the district court improperly applied Rule 11’s safe harbor provision.”

Related Web Resources:
Kelter v. Associated Financial Group Inc., 9th Circuit

Private Securities Litigation Reform Act
Continue Reading ›

France and Germany Press EU to Ban Naked Short Selling of Stocks and Limit Credit Default Swaps

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

Germany and France are calling on the European Union to accelerate its plans for proposals to put restrictions on credit default swaps and ban naked short selling of bonds and some stock. French President Nicolas Sarkozy and German Chancellor Angela Merkel wrote a joint letter to the European Commission last month.

The two leaders noted that strong market volatility was making it necessary to question certain financial methods and that improving the transparency of short-selling positions on shares and bonds was important. Just this May, the German government unilaterally decided to ban the naked short selling of certain stocks and bonds. Sarkozy and Merkel are also pressing for swift resolution of the differences between the European Parliament and EU member states over a new banking supervision scheme. Disputes regarding the amount of power new agencies will have to oversee banking, securities, and insurance industries have yet to be resolved.

The EC welcomed the letter, saying that the German and French leaders were voicing support for its work, and noted that the “final phase of completing our proposals” is under way. Commission spokeswoman Pia Arenkilde-Hansen also noted that the EC is working with key stakeholders to tackle the issue of derivatives. She did however, point out that member states have “divergent positions” when it comes to short selling. The EC has not yet found a consensus.

The EC acknowledged the need for urgency but insisted that rushing the proposals would be a mistake.

Related Web Resources:
Merkel And Sarkozy Want EU To Ban High-Risk Trading, World News, June 11, 2010
EU leaders ask for short selling, CDS rules, Business Week, June 17, 2010
European Commission
Continue Reading ›

Court Orders Southridge Partners Limited Partnership Dispute to Arbitration

Published on: July 6, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The Delaware Chancery Court is dismissing Aris Multi-Strategy Fund LP’s action to obtain access to Southridge Partners LP books and records and sending the case to arbitration. Aris is a Southridge limited partner. According to Chancellor William Chandler III, arbitration for this case is contractually mandated.

Aris is seeking access to Southridge’s records and books. Aris claims that Southridge has not responded to requests for information.

According to the court, because this dispute is one regarding “the partnership,” it is subject to the LP Agreement terms that mandate arbitration. The court also noted that the arbitration provision doesn’t limit the arbitrator from resolving disputes other than those involving the LP Agreement. Also, while parties may ask that an arbitrator limit its authority only to disputes involving the agreement, the arbitrator can say no. This means that the arbitrator is allowed to determine whether to resolve the books and records dispute.

Judge Chandler determined that the Delaware Revised Uniform Limited Partnership Act lets partners contractually agree to enter books and records actions to arbitration. The court also says that Aris’s contention that inspection rights cannot be determined by an arbitrator because the Chancery Court has exclusive jurisdiction is incorrect. It stated that 6 Del. C. §17-109(d) lets a limited partner wave its right to bring actions involving a limited partnership’s internal affairs or organization to the Delaware Courts as long as it agrees to arbitrate its actions.

Related Web Resources:
Aris Multi-Strategy Fund LP v. Southridge Partners LP, Del Court Opinion (PDF)

Delaware Revised Uniform Limited Partnership Act
Continue Reading ›