Investor Lawyers Blog

Texas Securities Fraud Alleged in SEC Lawsuit Against Former Advanced Materials Group Inc. CFO

Published on: July 1, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission is suing William G. Mortenson with Texas securities fraud related to an alleged revenue scheme that allowed him to maintain an expensive lifestyle. According to the SEC, the former chief financial officer of Advanced Materials Group Inc. fraudulently inflating the company’s financial results in 2008 and 2009. AMG is now in bankruptcy protection fired Mortenson in 2009.

In addition to the charges of Texas financial fraud charge and misappropriating hundreds of thousands of dollars from AMG, The SEC is accusing Mortenson of falsifying records, lying to accountants, circumventing internal controls, and aiding and abetting violations involving reporting, internal control, and record-keeping. The SEC claims that Mortenson instructed employee Feng “Eric” Zheng to document bogus sales to two of the company’s biggest customers. The entries materially overstated AMG’s sales, accounts receivable, and earnings as they were then reported in quarterly and annual reports.

Mortenson allegedly used the inflated accounts receivable to borrow money under the company’s bank line of credit. He is accused of misappropriating the money, as well as other funds, to cover up to $380,000 in personal expenses, including property tax, country club membership, private jet flights to Europe, family vacations, and home remodeling. The SEC is asking the U.S. District Court for the Northern District of Texas to order civil penalties, an officer/director bar, disgorgement, and permanent injunctive relief against Mortenson.

Meantime, Zheng has settled charges regarding his alleged involvement in the Texas securities scam for $25,000. He was accused of falsifying records, lying to accountants, circumventing internal controls, and aiding and abetting violations of recordkeeping, reporting, and internal controls.

Related Web Resources:
SEC sues ex-president of Garland-based Advanced Materials Group, Dallas News, June 10, 2010
SEC Charges Former Advanced Materials Group, Inc. CFO with Securities Fraud and Misappropriation of Hundreds of Thousands of Dollars, SEC.gov, June 9, 2010 Continue Reading ›

No Criminal Cases Yet Against Wall Street Banks Despite Obama Administration’s Vow To Go After Those Responsible for Financial Crisis

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

According to the Washington Post, even though the President Obama had vowed to hold Wall Street accountable for the economic collapse, his administration has yet to bring any charges against the large investment banks that took out loans from mortgage companies, turned them into toxic securities, and sent them into the world’s financial markets. Now, some are wondering whether government officials went too far in their promise to pursue charges that can’t really be filed because they could criminalize an “entire business model in the financial industry.”

Tim Coleman, a former senior Justice Department staff member,says that one of the problems is that not all of the people on Wall Street that contributed to the economic meltdown necessarily committed crimes. Rather, some of them made bad calls and took risks that fared poorly.

It was just last November that US Attorney General Eric H. Holder reinforced the vow to prosecute Wall Street executives and others. When launching the Financial Fraud Enforcement Task Force, he said the Justice Department would be “relentless” in pursuing financial and corporate wrongdoing. Now, officials and Holder himself are defending this promise against critics.

At a recent news conference, Holder stated that the Justice Department’s efforts should not be assessed only in relation to Wall Street cases. Also, James M. Cole, Obama’s nominee for deputy attorney general, has said that it is essential to go after the individual executives whose actions led to the economic collapse.

The Justice Department has charged 1,215 people with mortgage fraud since the beginning of March. Also, earlier this month, the Justice Department arrested Lee Bentley Farkas, the former chairman of Taylor, Bean & Whitaker. The government is accusing Farkas of committing a $1.9 billion securities fraud against the government and investors, destroying evidence, falsifying documents, covering up the mortgage firm’s losses with money from Colonial Bank, and then tapping into the emergency bailout program for the banking system to help Colonial.

With 48 ongoing FBI investigations into financial institutions and businesses, officials say to expect more indictments. UBS, Deutsche Bank, Morgan Stanley, Goldman Sachs, the former Lehman Brothers, Citigroup, and JP Morgan Chase are among the firms being probed. Also, the Justice Department obtained a 12% budget increase to combat financial fraud this year and is asking for an additional 23% for next year.

Related Web Resources:
Cases against Wall Street lag despite Holder’s vows to target financial fraud, Washington Post, June 18, 2010
Mortgage Scams Targeted in Sweep, The Wall Street Journal, June 18, 2010
CEO of mortgage giant, Lee Bentley Farkas, indicted in $1.9B massive fraud scheme, NY Daily News, June 16, 2010
Financial Fraud Enforcement Task Force

Eric H. Holder, US Department of Justice Continue Reading ›

Texas Attorney General Candidate Barbara Ann Radnofsky Says State Should File Securities Fraud Lawsuit Against Wall Street Firms

Published on: June 26, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Barbara Ann Radnofsky, the Democratic candidate for Texas attorney general, says that the state should sue Wall Street firms for securities fraud. Earlier this week, she published a legal brief accusing investment banks of being responsible for the financial crisis. Her Texas securities fraud briefing, which is modeled on the multibillion-dollar tobacco settlements from the 1990’s, is seeking approximately $18 billion in securities fraud damages and other reparations for Texas. She targets Morgan Stanley, Goldman Sachs Group, AIG insurance, and other leading financial firms, banks, and bond-rating agencies.

Radnofsky’s brief is not a securities fraud lawsuit, but it is a framework for one. She hopes that it will push incumbent Texas Attorney General Greg Abbott to take action. She contends that if Abbott fails to sue the firms by September, “he is committing legal malpractice.” She is accusing him of failing to act despite the “clear evidence.”

Radnofsky has noted that the financial meltdown has forced Texas to make cuts to social programs, environmental enforcement, and child protective services. She says the “Great Recession” has lead to child illness, hunger, death, and abuse. She also contends that foreclosures and abandoned homes have severely affected neighborhoods.

Freddie Mac and Fannie May Drop After They Delist Their Shares from New York Stock Exchange

Published on: June 25, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Fannie Mae dropped 39% to 56 cents and Freddie Mac went down 38% to 75 cents when the mortgage firm delisted their preferred and common shares from the New York Stock Exchange at the request of the Federal Housing Finance Agency. The moves were ordered after the NYSE told Fannie Mae that its shares did not meet listing standards any longer because over the last 30 days its closing price had dropped under $1. The voluntary delistings will go into effect in early July. The companies are expected to trade on the Over-the-Counter Bulletin Board.

The two mortgage companies, which are 80% owned by US taxpayers, guarantee or own nearly half of the US’s $11 trillion mortgage market. Shareholders include Blackrock Inc., Vanguard Group, California’s state pension fund, and Kinetics Asset Management.

The two firms have been at risk of delisting since September 2008 when they were seized by regulators and their share prices dropped. The US Treasury has infused about $145 billion ($61.3 billion into Freddie Mac and $83.6 billion into Fannie Mae) into the companies since then to keep them afloat despite defaults of mortgages and foreclosures. Taxpayer aid could end up reaching the hundreds of billions of dollars. The US government has promised to keep financially supporting the mortgage firms while Congress deliberates over overhauling the country’s mortgage finance system. The two firms are still a key source of funding for mortgage lenders and banks.

“This is more insult to the injury sustained by those who were sold shares, especially preferred shares, of Fannie Mae and Freddie Mac,” says Securities Fraud Attorney William Shepherd. “Most investors were told that these were very safe investments. Many were told that these were as safe as government bonds. It is not too late to seek damages for such misrepresentations.”

Related Web Resources:
Fannie, Freddie Plunge After Moving to Delist Shares, Bloomberg, June 16, 2010
Fannie Mae, Freddie Mac to delist from NYSE, CNN, June 16, 2010 Continue Reading ›

As BP Oil Spill Reaches Crisis Mode, A Number of Wall Street Analysts Placed “Buy” Rating On the Company’s Plunging Shares

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

When BP oil spill in the Gulf Coast first became news, the company’s shares started to drop. According to the Huffington Post, the unfolding crisis incited a mad dash on Wall Street, with dozens of securities analysts encouraging investors to “buy, buy, buy” BP (BP.L: Quote, Profile, Research, Stock Buzz) (BP.N: Quote, Profile, Research, Stock Buzz).

Among those to jump into the fray were Credit Suisse, Citigroup, and Morgan Stanley. Thomson Reuters says that of 34 analysts that rated the BP shares as recently as May 11, 27 gave “buy” or “outperform” ratings. 7 rated the shares with a “hold.” None of the analysts gave the shares an “underperform” or “sell” rating.

As estimates of how much oil was being spilt grew and was coupled with news of BP’s unsuccessful efforts to stop the leak, BP stock kept dropping, destroying some $100 billion in shareholder wealth. Unfortunately, when Wall Street makes mistakes, it is the investors that end up losing money.

Some experts saying that with so many analysts making the wrong call, the BP crisis has exposed the problems that continue to plague the sell-side analyst community despite all the reform that has been implemented in the last 10 years. Some investment firms are afraid to be left out, which can contribute to what appears to be an existing “group think” mentality. Analysts may also be unwilling to challenge companies for fear of jeopardizing their relationship with leading executives-a classic case of conflict of interest.

Meantime, the analysts are coming to their own defense. They say that the Deepwater Horizon oil spill was unprecedented and therefore it was hard to predict its outcome and related financial ramifications. Granted, as the risks became more obvious, many on Wall Street downgraded their buy ratings to more cautious notes. Natixis and Goldman were among those that lowered their ratings from “buy” to “hold” or neutral.” There were also a small group of analysts that did accurately call the effects the oil spill would have on BP’s stock prices.

Related Web Resources:
Wall Street Said ‘Buy, Buy, Buy’ BP Stock As Gulf Crisis Unfolded, The Huffington Post, June 18, 2010
BP Stock Sinks Back Near Oil-Spill Low, The Street, June 22, 2010
A Timeline of the BP Oil Spill Crisis, WallStCheatSheet.com, May 6, 2010 Continue Reading ›

LPL Investment Holdings, Inc. IPO Registration Gives Evidence of Disparities Between Wirehouse Broker-Dealers and Independent Brokerage Firms

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

According to InvestmentNews, LPL Investment Holding Inc’s recent IPO registration is clear evidence that the 4 wirehouse brokerage firms still dwarf the approximately 1,200 independent contractor broker-dealers when it comes to controlling client assets. LPL is an independent broker-dealer.

Currently, there are approximately 114,000 independent reps and about 55,000 wirehouse reps. Yet even though there are so many less wirehouse reps, they still are in charge of a larger pool of client assets than their independent counterparts. While wirehouse reps manage $3.95 trillion in client assets, independent reps handle about $1.8 trillion. This means that a wirehouse broker, on average, manages $71.8 million in assets, and independent reps manage about $16 million in assets.

Also, while both wirehouse and independent reps make about 1% in commissions and fees on client assets, wirehouse reps get a 40% average payout of the fees and commissions, while independent reps get about 85%. While the average independent rep makes under $134,000 annually, the average wirehouse rep makes about $287,000 a year.

LPL rep’s earn an average payout of about $155,360. Acquired by two private equity firms in 2005, LLP states in its IPO registration that due to its efficient operating model and scale, its payout to independent contractors far exceeds that of wirehouse firms. InvestmentNews says it is unclear how many of the $1 million plus-producing brokers joined LPL because they wanted the higher payout.

LPL is owned by private equity firms Hellman & Friedman LLC and TPG Capital. The brokerage firm has filed to raise up to $600 million in its IPO.

Related Web Resources:

Does LPL’s filing reveal an unspoken truth about indie B-Ds?, Investment News, June 21, 2010
TPG-Backed LPL Investment Holdings Files for $600 Million IPO, Bloomberg Businessweek, June 4, 2010 Continue Reading ›

FINRA Suspends License of Dallas Broker-Dealer Linked to Failed Medical Capital Notes

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

Dallas-based securities firm Cullum & Burks Securities Inc. has had its license suspended by the Financial Industry Regulatory Authority Inc. The broker-dealer, which had 1,300 client accounts, 100 affiliated reps, and $150 million in assets, reportedly failed to files its mandatory, quarterly Focus report.

Last November, FINRA said the Texas broker-dealer had violated its net capital requirement because it didn’t have enough capital to stay in business. It was then that Cullum & Burkes raised more capital.

The securities firm was one of three broker-dealers listed as sellers of Medical Provider Funding Corp. V, which is a series of private placements that were created by Medical Capital. Other sellers on the list included Securities America Inc. and First Montauk Securities Corp., which is now defunct.

A Reg D filing with the SEC in 2007 reported that the offering was for $400 million. Medical Capital raised about $2.2 billion in investor funds. Now, over half of the investors’ money has been lost.

Cullum & Burks Securities Inc. is the subject of a class action lawsuit filed over the Medical Capital notes sale. The complaint contends that the notes should have been registered with the Securities and Exchange Commission. However, the securities firm denies that it engaged in broker-misconduct in relation to the sale and sees itself as a victim of any wrongdoing committed by Medical Capital. In 2009, the SEC charged Medical Capital Holdings Inc. with securities fraud related to private placement sales.

Related Web Resources:

Another broker-dealer down: Dallas B-D capsized by MedCap, Investment News, June 16, 2010
FINRA
Continue Reading ›

House and Senate Negotiators Can’t Seem to Agree on Fiduciary Standard in Financial Regulatory Reform Bill

Published on: June 17, 2010 | by Shepherd Smith Edwards & Kantas, LLP

According to InvestmentNews, negotiators in the Senate and the House have reached an impasse regarding the fiduciary standard provision found in the financial regulatory reform bill. While the House wants the US Securities and Exchange Commission to impose a universal standard of care that would be applicable to anyone offering personalized investment advice to retail clients, such as investment advisers, insurance agents, and broker-dealers, to reveal conflicts of interests and act in clients’ best interests-the Senate only wants the SEC to examine the issue for a year before proceeding to rulemaking.

According to Securities Fraud Lawyer William Shepherd, “Virtually all advisory professionals have a fiduciary duty to their clients, and brokerage firms claim to be professionals. Having a ‘fiduciary duty’ means professionals cannot put their own interests ahead of their clients. All types of ‘financial advisors’ were considered fiduciaries, until some Wall Street-friendly judges said otherwise. Congress needs to pass a law restating that brokers are fiduciaries. If not, rest assured that Wall Street will use lack of clarification as proof they do not owe an affirmative duty to their own clients.”

While speaking before the Financial Industry Regulatory Authority on May 27, US Deputy Treasury Secretary Neal Wolin says that the White House is strongly in favor of making retail brokers subject to the toughest possible consumer protection while also having them abide by a fiduciary duty. Wolin also says that the Obama Administration wants heightened regulation of credit rating agencies, Volcker rule limits on banks’ proprietary trading activities, and effective resolution authority against failed companies.

Stockbroker Fraud Attorney Shepherd says “It is preposterous to even say that stockbrokers are not fiduciaries. The law (Investment Advisors Act of 1940) says that those who advise clients regarding securities are held to a fiduciary standard. Meanwhile, stockbrokers insist they are not just order takers – which people pay $8.00 to get online – but are instead ‘advisors,’ ‘financial consultants,’ etc. who can charge 10 to 100 times what online trades cost. Wall Street wants to make the big bucks, but not have any duties to their clients. It’s simple as that.”

Related Web Resources:
House-Senate negotiators hit impasse on fiduciary standard, InvestmentNews, June 17, 2010
Treasury’s Wolin Vows Fight for Broker Fiduciary Duty in Reform Law, Investment Advisor, May 27, 2010
Financial Regulatory Reform, New York Times, June 15, 2010 Continue Reading ›

Lehman Brothers Lawsuit Claims Its Bankruptcy Was In Part Due to JP Morgan Chase’s Seizure of $8.6 Billion in Cash Reserves

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

The estate of Lehman Brothers Holdings is claiming that JP Morgan Chase abused its position as a clearing firm when it forced Lehman to give up $8.6 billion in cash reserve as collateral. In its securities fraud lawsuit, Lehman contends that if it hadn’t had to give up the money, it could have stayed afloat, or, at the very least, shut down its operations in an orderly manner. Instead, Lehman filed for bankruptcy in September 2008.

JP Morgan was the intermediary between Lehman and its trading partners. Per Lehman’s investment fraud lawsuit, JP Morgan used its insider information to obtain billions of dollars from Lehman through a number of “one sided agreements.” The complaint contends that JP Morgan threatened to stop serving as Lehman’s clearing house unless it offered up more collateral as protection. Lehman says it had to put up the cash because clearing services were the “lifeblood” of its “broker-dealer business.”

JP Morgan’s responsibilities, in relation to Lehman, included providing unsecured and secured intra-day credit advances for the broker-dealer’s clearing activities, acting as Lehman’s primary depositary bank for deposit accounts, and serving in the role of administrative agent and lead arranger of LBHI’s $2 billion unsecured revolving credit facility.

SEC Inquiring About Wisconsin School Districts Failed $200 Million CDO Investments Made Through Stifel Nicolaus and Royal Bank of Canada Subsidiaries

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

According to local new services, the US Securities and Exchange Commission is asking five Wisconsin school districts for additional information about the $200+ million in synthetic collateralized debt obligations that they purchased through Stifel Nicolaus and Royal Bank of Canada subsidiaries in 2006. The CDO’s are now reportedlyworthless.

The districts collectively bought the CDOs with $35 million of their own money and more than $165 million borrowed from Depfa bank. Since then, the entire investment has failed. In March, Depfa noticed default on the district trusts which had been established for the investments and took the $5.6 million in interest that had been earned since the purchase was made.

In their 2008 securities fraud lawsuit against the investment firms, the districts accused the defendants of deceptive practices and fraud. School officials contend that they were misled into investing in CDO’s because of a Stifel product that was supposed to build trusts for post-retirement teacher benefits. They say that they weren’t told that that they could lose their entire investment because of the 4 – 5% default rate among companies within the CDO. They also contend that they were never advised that their investments included sub-prime mortgage debt, credit card receivables, home equity loans, and other risky investments.