Investor Lawyers Blog

Class Action Securities Fraud Lawsuit Accuses SEC of Gross Negligence Related to Bernard Madoff Ponzi Scam

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

Three individuals, Judith Welling, Robert Mick, and Charles Mederrick, have filed a purported securities class action against the Securities and Exchange Commission over financial losses related to investments they made in Bernard L. Madoff Investment Securities LLC. In their amended complaint, the plaintiffs are seeking damages sustained because of the “grossly negligent acts of the Defendant in connection with the SEC’s deficient review of complaints and information” that Madoff was running a Ponzi scheme. Mick, Welling, and Mederrick contend that their investments, which they made over a 16-year period, caused them to suffer “catastrophic” consequences.

In their complaint, the plaintiffs accuse the SEC of “repeatedly and grossly failing to adequately apprise itself” of the facts related to the Madoff Ponzi scam allegations despite the fact that for years there had been numerous complaints. Last year, the SEC’s Inspector General put out a 457-page report detailing the agency’s failure to detect Madoff’s fraud scheme despite the signs.

The class action lawsuit is on behalf of those who invested in Madoff Investment Securities between November 1992 and December 2008 and have filed administrative damage claims seeking to recover damages for the SEC’s alleged negligence. The class could be comprised of more than 100 victims. The plaintiffs’ securities fraud lawyer says that to his firm’s knowledge, this is the first class action filed against the SEC over its handling of Madoff.

Madoff’s $50 billion Ponzi scam defrauded many institutional and individual investors. Some of these investors lost everything.

Related Web Resources:
SEC Hit With Class Action Alleging Gross Negligence in Oversight of Madoff, BNA Securities Law Daily

Madoff Investors Sue SEC for Incompetence, Daily FInance, November 12, 2010

Bernie Madoff’s $50 Billion Ponzi Scheme, Forbes, December 12, 2008

Texas Securities Fraud: National Futures Association Takes Emergency Enforcement Action Against International Commodity Advisors and Its Principals

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

The National Futures Association says it has taken an emergency enforcement action against International Commodity Advisors and its principals Gustave O. Woehr and Gregory W. Seitz. ICA, a Commodity Trading Advisor, has offices in Dallas, Texas and Marietta, Georgia.

NFA claims that ICA is soliciting or operating funds as a Commodity Pool Operator even though the CTA isn’t registered as a CPO. Because ICA and its principals have been unable to produce records, books, and other required information, NFA says that it is not able to identify the pool’s participants or determine the investments’ value or assets’ location.

The Associate Responsibility Action (ARA) and the Member Responsibility Action (MRA) prohibit ICA and its two principals from accepting or soliciting funds from customers, pools, or investors. The three parties are also not allowed to transfer or disburse the funds of pools, customers, or investors without the approval of the NFA. Also, ICA and its principals must either show that CPO registration is not required or register as one with the Commodity Futures Trading Commission and give NFA an approved disclosure document.

The ARA and MRA will stay in effect until ICA and its principals show to the NFA’s satisfaction that they are in full compliance with all NFA Requirements. NFA members that have accounts that are controlled by ICA, Woehr, Seitz, or any entity or person acting for any of them and who receive notice of the MRA and ARA are not allowed to transfer or disburse funds to ICA and the two principals or any entity controlled by any of them without NFA approval.

NFA takes emergency enforcement action against International Commodity Advisors and its principals, NFA, November 17, 2010
Commodity Pool Operator
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SEC Proposes Antifraud Derivatives Rule Related to Securities-Based Swaps

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

The Securities and Commission has agreed to propose an antifraud rule that deals with the issue of security-based swaps-related fraud, manipulation, and deception. The proposed Rule 9j-1 would bar fraud and manipulation in the offer, sale, and purchase of the swaps. Unlike regular securities transactions, securities-based swaps involve ongoing payments and deliveries between when they are bought and sold. The issues of payments, deliveries, and other rights and obligations are also tackled.

SEC Chairman Mary Schapiro says that the proposed rule would be an important way to make sure that the swap market is run with integrity while allowing the Commission the chance to target potential fraud or other misconduct through enforcement. The relevant change with this proposed rule from current antifraud provisions Section 17(a) of the 1933 Securities Act and Section 10(b) of the 1934 Act is that the proposed rule is applicable to ongoing rights and activities.

The Dodd-Frank Wall Street Reform and Consumer Protection Act has given oversight of security-based swaps to the SEC, while the Commodity Futures Trading Commission is charged with overseeing non-security-based swaps. The CFTC had already proposed its anti-manipulation rule amendments dealing with manipulative and fraudulent conduct of swaps under its jurisdiction.

The SEC has also agreed to propose rules to effect a whistleblower bounty program.

Related Web Resources:

Securities and Exchange Commission

Non-Customers of Wachovia Cannot Bring Stock Loan Related Claim to FINRA, Says Court

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

The U.S. District Court for the Northern District of California has ruled that a married couple and their investment vehicles are not Wachovia “customers” and, therefore, they are not entitled to bring their stock loan related claims against Wachovia Securities Financial Network LLC and financial adviser George Gordon III to Financial Industry Regulatory Authority arbitration. Judge Saundra Brown Armstrong granted Wachovia and Gordon’s request for a preliminary injunction.

Per the statement of claim submitted to FINRA, Gregory and Susan Raifman initiated arbitration as trustees of a family trust, as Gekko Holdings Inc. members, and as the beneficial owners and assignees in interest of Helicon Investments Ltd. The Raifmans accused Wachovia and Gordon of committing securities fraud, breach of fiduciary duties, and violations of the California Securities Act and the rules of both the New York Stock Exchange and National Association of Securities Dealers.

The Raifmans contended that Gekko and Helicon each went into three separate stock loan transactions that Derivium Capital LLC, a third party, had promoted so they could borrow up to 90% of their stock holdings’ value without triggering capital gain on the stock sale. After the three-year loan term ended, the Raifmans were to pay the loan balance and get back or surrender their collateral or renew their loan.

To execute their plan, the Raifmans opened a Wachovia account for the trust in 2003 and transferred nearly $3 million in ValueClick (VLCK) shares into an account owned by a Derivium affiliate. Almost 12 months later, Helicon placed 300,000 ValueClick shares into another Derivium affiliate’s Wachovia account under a 90 percent stock loan agreement. Gekko later deposited 200,000 ValueClick shares in the same account (and also under a 90 percent stock loan agreement).

It wasn’t until 2007 that the Raifmans found out that their Value Click shares had been sold as soon as they were placed in the Derivium affiliates’ accounts. They also had not known that the sales proceeds had been loaned back to them while Wachovia and Derivium kept 10 – 14% of the sales proceeds.

The Raifmans attempted to start the arbitration process in July but Gordon and Wachovia filed their complaint seeking enjoinment against the couple, Helicon, and Gekko. They also requested a stay of the arbitration proceedings. The financial firm and investment adviser contended that they did not have an agreement with the defendants, who were not their customers and therefore not entitled to FINRA arbitration. The district court agreed.

Related Web Resources:
Wachovia Securities LLC v. Raifman

Arbitration and Mediation, FINRA Continue Reading ›

SEC Adopts Direct Access Rule Prohibiting “Naked” Access to ATSs or Exchanges

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

The Securities and Commission has adopted a rule that prohibits brokers from having “naked” access to alternative trading systems (ATS) or exchanges while requiring brokers with market access to put into place supervisory procedures and risk management controls to prevent market errors and other problems. Under the 1934 Securities Exchange Act’s new Rule 15c3-5, both broker-dealers that belong to an ATS or an exchange and ATS broker-dealer operators that allow direct trading by persons who aren’t dealers or brokers must put into place certain supervisory procedures and controls to effectively get rid of “naked” access arrangements (also known as “unfiltered” access arrangement) that have allowed customers to bypass broker-dealers and their risk management controls completely while giving them direct electronic access to an ATS or an exchange.

Also per the new rule, new risk management controls must be put into place to stop orders that exceed capital thresholds or pre-set credit, do not comply with regulatory requirements, or appear erroneous in another way. Brokers-dealers also must implement certain controls before the orders are sent to ATSs or exchanges, set up, document, and maintain procedures to regularly evaluate the risk management controls, and tackle any problems as soon as possible.

The SEC believes that to put into place these new systems will initially cost broker-dealers some $100 million. Maintenance of the systems is expected to cost about $100 million a year.

Related Web Resources:
SEC Adopts New Rule Preventing Unfiltered Market Access, SEC.gov, November 3, 2010

SEC rule to clamp down on ‘naked access,’ Financial Times, November 4, 2010

LPL Financial Management and Private Equity Backers TPG and Hellman & Friedman Could Make Over $450M from IPO

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

Investors are jumping on LPL Financial Management’s initial public offering debut. At midafternoon on Wednesday, shares were up 8% at $32 plus change. (This, compared this to the 6% increase in GM’s IPO.) According to CNN, the Boston-based brokerage service and private equity backers TPG and Helllman & Friedman may make than $450 million from the deal.

LPL provides research, technology, and financial services to 12,000 independent financial advisers in small and medium-sized shops. This allows them to provide services, including financial advice that is supposed to be free from conflict or bias, to retail investors. Seeing as there have been so many alleged incidents recently reported of bankers trying to earn fees by pressing clients to take part in certain deals, LPL says in its IPO prospectus that it make sense that today more investors are drawn to independent advisers. The brokerage service company also says that over the last decade, as rich individuals and brokers have started to question the benefits of dealing with the larger banks, its broker clientele as gone up at a 13% compound annual rate.

That said, the investment adviser system-whether involving independent advisers or those with ties to investment banks-is far from perfect. As Shepherd Smith Edwards & Kantas LTD LLP founder and securities fraud lawyer William Shepherd points out, “We have seen a number of complaints regarding LPL which seemed to stem from failure to supervise. Perhaps this is because LPL has so many advisor/agents in one or two person offices having somewhat detached contact with their supervisor(s). It was recently reported that LPL may have sought to hire another firm to handle its supervisory duties.”

LPL CEO Mark Casady and President COO Esther Stearns are expected to make millions from the IPO-almost $58 million for Casady and $35.1 million for Stearns. LPL executive William Dwyer could make $8.24 million, while the shares that General Counsel Stephanie Brown plans to sell could make her $3.77 million.

Related Web Resources:
LPL Financial IPO outpaces GM, CNN Money, November 18, 2010
LPL Executives Likely To Reap Millions In Public Offering, The Wall Street Journal, November 18, 2010
LPL Investment IPO Faces Struggle, The Street, November 15, 2010 Continue Reading ›

Final Regulation for Disclosure in Participant-Directed Individual Account Plans Issued by US Department of Labor

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

The US Department of Labor has put out a final regulation that establishes the fiduciary requirements for disclosure in 401 (k)’s and other participant-directed individual account plans. The final regulation was issued under the Employee Retirement Income Security Act of 1974. The DOL guidance also comes with a final amendment to the regulation that already exists under ERISA § 404(c), 29 C.F.R. § 2550.404c-1.

The disclosure requirements answer a number of questions, including:
• Who is responsible for disclosing information to beneficiaries and participants in individual account plans that are participant-directed?
What information must be disclosed?
• What are the rules when dealing with target date funds, fixed-return investments, annuities, and employer securities?
• What type of disclosure is required?
• When should disclosure of information be made to participants and beneficiaries?
• Who should disclose the information?

Under the final regulation, the plan administrator of an individual account plan must make sure that beneficiaries and participants are made aware of their responsibilities and rights in regards to their investments. They also must receive enough information about the plan, investment alternatives, and fees and expenses so that they can make informed decisions.

Under the final regulation, participants and beneficiaries of “covered individual account plans” must receive disclosure in four categories of information, including:
• General Operational and Identification Information
• General Plan Administrative Expenses
• Individual Expenses
• Investment-Related Information

Plan administrators also have to automatically disclose certain performance benchmarks and data, including the average annual return of the investment over 1, 5, and 10 calendar year periods, as well as provide a statement noting that past performance does not guarantee that the results in the future will be the same. Designated investment alternatives that have a stated or fixed return for the term of the investment must come with a disclosure that includes the term of the investment and the fixed or stated annual return rate.

For more details, contact Shepherd Smith Edwards and Kantas founder and securities fraud attorney William Shepherd.

Employee Retirement Income Security Act — ERISA, US Department of Labor

Stockbroker Fraud Blog

Business Man Pleads Guilty Plea in Florida Microcap Market Fraud Case

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

Federal officials say that Jean “Richard” Charbit has pleaded guilty to one count of conspiracy to commit securities fraud in connection with a South Florida stock scam involving the microcap market that was under investigation by an undercover FBI sting. Charbit is facing a maximum 5 years in prison.

He and defendant Tzemach David Netzer Korem are accused of trying to pay kickbacks to a stockbroker so they could use client accounts to buy shares from the defendants’ company. This made it look as if there was a demand for the instruments, which allowed the defendants to dump their holdings at inflated prices.

Charbit and Korem controlled or owned about 5.6 million shares of ZNext Mining Corp. (ZNXT). Charbit offered the “broker,” who was actually an FBI agent, $100,000 to misappropriate $300,000 from discretionary accounts to purchase common stock in ZNXT. Per the criminal complaint, the goal was to raise the individual common share price from 4 cents to 50 cents.

Eight other microcap stock promoters and market insiders have been charged with securities fraud related to this scheme. Some also are facing criminal charges. One of the persons charged in the microcap market fraud case is Larry Wilcox, the former star of the TV show “CHiPs.” As part of his plea agreement, he admitted to conspiring to defraud a pension plan of $40,000.

Related Web Resources:
SEC v. Jean R. Charbit and Tzemach David Netzer Korem, Civil Action No. 1:10-cv-23604-CMA (U.S. District Court for the Southern District of Florida), SEC.gov
Stock scammer pleads guilty, South Florida Business Journal, November 1, 2010
Institutional Investor Securities Blog
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Failure of Municipal Swaps Cost Taxpayers $4 Billion

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

According to Bloomberg.com, taxpayers have had to pay over $4 billion because of insurance companies and banks’ failed promise to nonprofits and governments that financial engineering would bring down interests on bonds sold for public projects. Since 2008, hundreds of borrowers throughout the US have had to pay Wall Street to end their agreements. Citigroup, JP Morgan Chase & Company, Morgan Stanley , and Bank of America are a few of the other firms that have received payments from borrowers.

For example, California’s water resources department paid $305 million to Morgan Stanley-led banks to unwind interest-rate bets that backfired, while the Bay Area Toll Authority gave bond insurer Ambac Financial Group Inc. $105 million to terminate $1.1 in billion interest-rate agreements. In August, The state of North Carolina shelled out $59.8 million.

Interest-Rate Swap
In this type of transaction, two parties exchange payment based on a principal amount that has been agreed upon. Most municipal market swaps require borrowers to put out long-term securities with interest rates that change every month or week. The borrowers are to exchange payments, resulting in a fixed-rate paid to an insurer or bank, while a variable rate in return is received.

The swaps drew a lot of interest because nonprofits and governments could pay lower rate than if they had sold conventional fixed-rate securities. According to the Financial Crisis Inquiry Commission senior researcher Randall Dodd, prior to the credit crisis, there were up to $500 billion of the deals done were in the $2.7 trillion municipal bond market.

Unfortunately, the credit market did collapse and Wall Street’s payments dropped and could no longer cover the municipalities’ debt costs. Still, under the agreements, borrowers had to keep selling adjustable-rate securities.

Bloomberg reports that there aren’t many taxpayers that are familiar with how much it cost to untangle municipal swaps. (Payment disclosures to Wall Street are usually noted somewhere in the documents given to investors by borrowers when the bonds are sold.) In many instances, investment firms that receive payments aren’t clearly identified and government officials usually don’t draw notice to payments made to terminate contracts.

Related Web Resources:
Wall Street Takes $4 Billion From Taxpayers as Swaps Roil Public Financing, Bloomberg, November 10, 2010

Municipal Securities, Stockbroker Fraud Blog

Multimillion Texas Stock Sale Fraud Results in Multiple Indictments

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

Federal court prosecutors have issued new information regarding the securities fraud allegations made against an ex-Tiki Island resident and nine of his accomplices. Harris Dempsey “Butch” Ballow faces charges related to a seven-year multimillion-dollar stock sale scam.

Ballow, 67, was indicted in 2003 for alleged money laundering and fraud. He pleaded guilty to the money laundering charge, agreed to cooperate with the US Securities and Exchange Commission, and was released on $100,000 bond. However, he didn’t show up for his sentencing hearing and left the country. An arrest warrant was issued in 2004.

As a fugitive, Barrow is accused of using numerous aliases, including the names Tom Brown, John Gel, Marty Twinley, and Melvyn John Gelsthorpe. He allegedly used these names to control the following publicly traded companies: Medra, E-SOL International, Aztec Technology Partners (known as Ultimate Lifestyles), and Deep Earth Resources. He was living in Puerto Aventuras, Mexico on 2008 but disappeared the following year after allegedly persuading an investor to transfer $5 million to one of his companies. Mexican federal police finally arrested him at his home in Puerto Vallarta last July.

Also charged with wire fraud are Ballow’s wife Robin Harless Ballow, ex-Houston residents Ruben Garza Perez and Kelly Lyn Boothe, Austin, Texas attorney Patrick Lanier, Jeffrey Janssen Anuth, and five others. According to authorities, the defendants allegedly sold stock shares in the companies that Ballow acquired and controlled while he was a fugitive. They also are accused of concealing Ballow’s real name when they sold the stock to investors, issuing false information to raise and maintain stocks’ value, and not taking away the restrictions that kept investors from selling the stock and land ownership interests in a real estate development that never became a reality.

Related Web Resources:
Harris Dempsey “Butch” Ballow and Nine Others Charged with Allegedly Executing Stock Fraud Scheme While Ballow was a Fugitive from Justice, FBI, November 2, 2010
Indictments detail multimillion stock sale fraud, Galveston Daily News, November 4, 2010
‘Butch’ Ballow: A Wanted Man Click 2 Houston, December 9, 2009
Institutional Investor Securities Blog

Texas Securities Fraud, Stockbroker Fraud Blog Continue Reading ›