Investor Lawyers Blog

J.P.Morgan Securities Ltd. Ordered by UK’s Financial Services Authority to Pay $48.7 M for Breaching Client Money Rules

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

Upon issuing its largest fine ever, the United Kingdom’s Financial Services Authority says it is ordering J.P.Morgan Securities Ltd. to pay $48.7 million for breaching Client Money Rules that are there to make sure that financial organizations properly protect clients’ funds. FSA claims that between November 1, 2002 and July 8, 2009, JPMSL failed to segregate billions of dollars-between $1.96 billion and $23 billion-that belonged to its clients.

PER FSA’s Final Notice on May 25, JPMSL, one of the largest holders of client money in the UK, held its futures and options business’s client in a JPMorgan Chase Bank N.A. unsegregated account. The mistake was a breach of the financial service regulator’s Principle 10 and the Client Money Rules. The rules require that client funds be held in a segregated account overnight.

FSA says that JPMSL’s error would have placed clients at “significant risk” if the investment bank were to ever become insolvent. During the insolvency process, the clients would not have been able to claim from a “pool of protected client money” because they would have been “classed as general unsecured creditors.

FSA says that when determining JMPSL’s penalty, the facts that JMPSL’s misconduct wasn’t intentional and that no clients sustained any financial losses because of the mistake were factored into account.

Related Web Resources:
FSA levies largest ever fine of £33.32m on J.P.Morgan Securities Ltd for client money breaches, FSA.Gov.UK, June 3, 2010
F.S.A. Clamps Down on Client Money Rules, New York Times, June 8, 2010 Continue Reading ›

FINRA Fines Piper Jaffray $700,000 for E-mail Retention Issues and Other Violations

Published on: June 7, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is fining Piper Jaffray & Co. $700,000 for violations related to the investment bank’s alleged failure to maintain about 4.3 million emails from November 2002 through December 2008 and for neglecting to tell FINRA about the issues it was having with email retention and retrieval. FINRA contends that this lack of disclosure not only affected Piper Jaffray’s ability to fully comply with the SRO’s email extraction requests, but it also may have impacted the investment bank’s ability to respond to email requests from other regulators, as well as from parties involved in civil arbitration or litigation.

By not disclosing that “it was not making complete production of its emails,” per FINRA Executive Vice President and Acting Director of Enforcement James S. Shorris, Piper Jaffray was “potentially preventing production of crucial evidence of improper conduct…” Shorris said email retention was a “critical regulatory requirement” for broker-dealers.

The broker-dealer was first sanctioned for email retention failure in 2002. Piper Jaffray settled by agreeing to reevaluate its systems and certify that it had set up systems and procedures that were aimed at preserving email communications. Since making that certification in 2003, Piper Jaffray has never indicated that it was experiencing system failures.

It wasn’t until FINRA investigators asked for emails that a former Piper Jaffray employee suspected of misconduct had sent and received that the investment bank’s ongoing email retention deficiencies were discovered. A CD-ROM sent by Piper Jaffray that reportedly had all of the employee’s emails was missing an email that had led to the internal probe. This investigation resulted in the employee’s firing and in FINRA making an enforcement action against the worker.

By agreeing to settle, Piper Jaffray is not admitting to or denying FINRA’s charges.

Related Web Resources:
FINRA Fines Piper Jaffray $700,000 for Email Retention Violations, Related Disclosure, Supervisory and Reporting Violations, FINRA, May 24, 2010
Retention issue: Finra fines Piper Jaffray over e-mail archiving, Investment News, May 25, 2010
Read the Letter of Acceptance (PDF)
Continue Reading ›

Alleged $800,000 Affinity Fraud Scheme Prompts SEC to Sue GTF Enterprises and Its Money Manager

Published on: June 4, 2010 | by Shepherd Smith Edwards & Kantas, LLP

U.S. Securities and Exchange Commission has filed a securities fraud lawsuit against investment firm GTF Enterprises Inc., money manager Gedrey Thompson, and associates Sezzie Goodluck and Dean Lewis. The SEC claims that GTF and Thompson targeted investors from the African-American and Caribbean communities in Brooklyn, NY. The affinity fraud scam bilked at least 20 investors of over $800,000 between 2004 and 2009.

The SEC claims that Thompson convinced clients to invest the money in GTF in exchange for lucrative investment returns with guaranteed safety of principals and other promises. He then went on to invest a “fraction” of the clients’ funds (losing thousands of dollars in the process), while using hundreds of thousands of their dollars to pay for his own expenses. The affinity fraud scheme cost some investors their life savings.

Among the multiple misrepresentations that the SEC says Thompson made to investors was the claim to one client that her investment was “150% guaranteed.” He allegedly told another investor that he could make him a millionaire. Thompson and GTF allegedly covered up the securities fraud by generating bogus quarterly account statements for clients. Goodluck and Lewis are accused of helping Thompson with his investment scheme.

Wells Fargo to Pay $30M in Compensatory Damages to Four Nonprofits for Securities Fraud

Published on: June 3, 2010 | by Shepherd Smith Edwards & Kantas, LLP

A jury has ordered Wells Fargo to pay four Minnesota nonprofits $30 million in securities fraud damages. The Minnesota Medical Foundation, the Minneapolis Foundation, the Minnesota Workers’ Compensation Reinsurance Association, and the Robins, Kaplan, Miller & Ciresi Foundation for Children had accused the investment bank of investing their funds in high risk securities and then failing to disclose until it was too late that the investments were going down in value. The same jury has yet to decide the issue of punitive damages
The jury found that Wells Fargo violated the Minnesota Consumer Fraud Act and breached its fiduciary duty to the nonprofits. In the investment program that the Minnesota nonprofits participated in, Wells Fargo would hold its clients’ securities in custodial accounts and use the money to issue temporary loans to brokerage firms for their trading activities. Each brokerage firm posted collateral of at least 102% the worth of the borrowed securities’ value.

While the investment bank had promised that the nonprofits money would be placed in liquid, safe investments, the plaintiffs contend that Wells Fargo put their money in high-risk securities, including asset-backed and mortgage-backed securities. They say that even as the collateral investments’ value became less stable in 2007, the investment bank continued to place more of the nonprofits’ securities out on loan. The nonprofits also claim that when two of the SIV’s went into receivership and they asked Wells Fargo to either redeem their interests or return the securities, the investment bank refused to do so until the collateral investments were sold and the nonprofits made up a shortfall in value.

While the nonprofits are asking for over $400 million in damages, Wells Fargo’s lawyers argue that the actual damages to the plaintiffs was just $14.3 million. According to the bank, “the investments made by Wells Fargo on behalf of our clients in the securities lending program were in accordance with investment guidelines and were prudent and suitable at the time of purchase.” Apparently ignoring the claim or puntive damages, the investment bank says it is pleased that the plaintiffs were denied the full amount of damages they had sought. Wells Fargo continues to maintain that it didn’t invest in high-risk securities and that the nonprofits had the choice to get out of the investments if they were willing to pay 102% of the collateral.

Related Web Resources:
Wells Fargo ordered to pay $30 million for fraud, MRNewsQ, June 3, 2010
Continue Reading ›

Texas Securities Fraud Charges Filed Against Wadell & Reed and Brookstreet Securities Broker-Dealers Over Microcap Stock Scheme

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

Assistant Attorney General Lanny A. Breuer of the Criminal Division says that broker-dealers Blake Williams and Derek Lopez are charged with Texas securities fraud involving a number of publicly traded companies. A federal grand jury indictment charged both men with seven counts of securities fraud and one count of conspiracy to commit securities fraud. The two men were arrested on May 27. Also that day, the US Securities and Exchange Commission filed its securities fraud complaint against the two broker-dealers.

Per the criminal indictment, Williams, who worked for TBeck Capital Inc. and was registered with Wadell & Reed, and Lopez, who provided services to TBeck Capital Inc. was registered with Brookstreet Securities, worked with others to manipulate the volume and prices of stocks that were traded in the over-the-counter market. While companies run and owned by a co-conspirator would take charge of large positions of free-trading stock in a number of publicly-traded companies, Lopez, Williams, and their other-co-conspirators would allegedly coordinate trades with each other to make it seem as if there were a lot of investors interested in the stock.

Lopez and Williams allegedly traded the stock through TBeck Capital, other companies, and also in their own names, so that the price would stay artificially inflated. They, along with the other participants in the Texas securities scheme, could then sell their stock at these prices.

If convicted of conspiracy, the broker-dealers could be sentenced to a 5-year maximum prison sentence and whichever is greater between a $250,000 fine and two times the gross gain or loss. Each securities fraud count comes with a 20-year maximum and a $5 million fine.

Meantime, the SEC is seeking penny stock bars, injunctions, penalties, and disgorgement against the two men, as well as a director and officer bar against Williams, who also was an officer for a number of microcap issuers.

Related Web Resources:
Two Securities Broker-Dealers Indicted for Securities Fraud Scheme in Texas, Justice.gov, May 27, 2010
Read the SEC Complaint (PDF)
Continue Reading ›

Citigroup to Pay $1.5 M for Supervisory Violations Related to Broker’s Handling of Trust Funds

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

According to the Financial Industry Regulatory Authority, Citigroup Global Markets Inc. has consented to pay $1.5 million in disgorgement and fines for failing to properly supervise broker Mark Singer and his handling of trust funds belonging to two cemeteries. By agreeing to settle, Citigroup is not denying or admitting to the charges. Also, the disgorgement amount of $750,000 will be given back to the cemetery trusts as partial restitution.

FINRA says that from September 2004 and October 2006, Singer and his clients Craig Bush and Clayton Smith were engaged in securities fraud. Their scheme involved misappropriating some $60 million from cemetery trust funds. Bush and Smart were the successive owners of the group of cemeteries in Michigan that the funds are believed to have been stolen from. Smart bought the cemeteries from Bush in August 2004 using trust funds that were improperly transferred from the cemeteries to a company that Smart owned.

When Singer went to work for Citigroup as a branch manager in September 2004, he brought Bush’s cemetery trust accounts with him. FINRA says that Singer then helped Smart and Bush open a number of Citigroup accounts in their names and in the names of corporate entities that the two men controlled or owned. The broker also helped them deposit cemetery trust funds into some of the accounts, as well as effect improper transfers to third parties. Some of the fund transfers were disguised as fictitious investments made for the cemeteries.

FINRA says that Citigroup failed to properly supervise Singer when it did not respond to “red flags” and that this lack of action allowed the investment scheme to continue until October 2006. As early as September 2004, Singer’s previous employer warned Citigroup of irregular fund movements involving the Michigan cemetery trusts. Within a few months, Citigroup management also noticed the unusual activity.

Citigroup failed to “conduct an adequate inquiry” even after finding out in February 2005 that Smart may have been making misrepresentations about his acquisition of hedge fund investments that belonged to the Michigan cemetery trusts and had used the hedge funds as collateral for a $24 million credit line. Although the investment bank had received a whistleblower letter in May 2006 accusing Singer of broker misconduct related to his handling of the cemetery trusts, it still failed to restrict Singer’s activities or more strictly supervise him.

Related Web Resources:
Citi Sanctioned $1.5M By Finra In Supervisory Lapse, The Wall Street Journal, May 26, 2010
Stealing from the dead, CNN Money, August 13, 2007 Continue Reading ›

Republican Senator Seeks to Water Down Fiduciary Standards in Pending Investor Rights Bill and Exempt Insurance Companies from Liability

Published on: May 27, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The North American Securities Administrators Association is criticizing an amendment introduced by Sen. Susan Collins (R-Maine). SA 4009, an amendment to the Senate financial regulatory reform bill (S. 3217), would protect variable annuities sellers from the fiduciary standard. While her amendment imposes a fiduciary standard on broker-dealers that offer investment advice to retail customers, variable contract products and representative-investment companies would not have to adhere to this standard.

The NASAA and other critics say that the amendment proposes a weaker version of the standard that would leave the very victims the standard is supposed to protect in a vulnerable position. NASAA also says that Collins’ proposed standard falls short of the standard in the way that 1940 Investment Advisers Act defines it. In a release issued earlier this month, NASAA says that with seniors and other small investors often having to contend with abusive practices from agents and brokers who end up recommending certain products because they come with higher commissions or revenue sharing payments, NASAA stressed the need for Congress to require that investment advisers and brokers abide by “the fiduciary duty of the Investment Advisers Act.” The Consumer Federation of America agrees with NASAA’s position on the Collins amendment.

NASAA is placing its support behind amendment (SA 3889). Referred to as the “Honest Broker” amendment, the legislation proposes that the Securities and Exchange Commission adopt a rule that would extend the fiduciary duty under the Advisers Act to brokers who offer investment advice. SA 3889 was introduced by Senators Daniel Akaka (D-Hawaii) and Robert Menendez (D-N.J.).

Other proposed amendments include SA 3806, by Senator Ted Kaufman (D-Del.) and Sens. Arlen Specter (D-Pa.). Their amendment extends the fiduciary duty under the Advisers Act to broker-dealers. Their amendment also proposes criminal liability for willful violations of the duty. SA 3792, introduced by Sen. Barbara Boxer (D-Calif.), would make each financial services provider subject to a fiduciary duty. The amendment gives Commodity Futures Trading Commission and the SEC the authority to define, enforce, and clarify the duty for regulated enitites under their jurisdictions.

Related Web Resources:
Joint Letter Opposing Collins Amendment (PDF)

S.3217 – Restoring American Financial Stability Act of 2010
Continue Reading ›

Leahy Amendment Would Provide Whistleblower Protection While Holding SEC and CFTC Accountable If They Don’t Follow Up on Tips

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

A number of watchdog groups want Senate Banking Committee Chairman Chris Dodd (D-Conn.) to support an amendment to the financial regulatory reform bill that he is sponsoring. The bill lets the Securities and Exchange Commission and the Commodity Futures Trading Commission set up bounty programs for whistleblowers that approach them with information about financial fraud. However, if the government doesn’t act on these tips, the bill has two key provisions that prevent whistleblowers and the public from ever finding out. Leahy’s amendment would eliminate the provisions while protecting the identities of whistleblowers.

In a letter to Senator Dodd, the groups said that such limits on public access are “poison pill secrecy measures” that would not only prevent the public and whistleblowers from ever knowing whether the tips were pursued, but also would keep the latter from proving they are whistleblowers if they were ever retaliated against. The groups said that such secrecy would allow regulators to avoid being held accountable if they failed to act on any whistleblower tips.

The watchdog groups that support the amendment include Public Citizen, OMB Watch, the Project on Government Oversight, Citizens for Responsibility and Ethics in Washington, OpenTheGovernment.org, Government Accountability Project, Common Cause, Progressive States Network, Consumer Action, National Community Reinvestment Coalition, Americans for Financial Reform, and the National Fair Housing Alliance.

Related Web Resources:
S.3217 – Restoring American Financial Stability Act of 2010, OpenCongress.com
Read the groups’ letter to Senator Dodd (PDF)
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Deutsche Bank Securities & National Financial Services Fined $925,000 for Regulation SHO Short Sale Restrictions & Supervisory Violations

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

The Financial Industry Regulatory Authority says that Deutsche Bank Securities and National Financial Services LLC have consented to be fined $925,000 in total for supervisory violations, as well as Regulation SHO short sale restrictions violations. By agreeing to settle, the broker-dealers are not denying or admitting to the charges.

FINRA claims that the two investment firms used Direct Market Access order sytems to facilitate client execution of short sales and that they violated the Reg SHO “locate” requirement, which the Securities and Exchange Commission adopted in 2004 to discourage “naked” short selling. FINRA says that while the two broker-dealers put into effect DMA trading systems that were supposed to block short sale order executions unless a locate was documented, the two investment banks submitted short sale orders that lacked evidence of these locates.

FINRA says that during the occasional outages in Deutsche Bank’s systems, short sale orders were automatically rejected even though a valid documented locate had been obtained. This is when the the investment bank would disable the automatic block in its system, which allowed client short sales to automatically go through without first confirming that there were associated locates.

As for NFS, FINRA contends that the investment bank set up a separate locate request and approval process for 12 prime clients that preferred to get locates in multiple securities prior to the start of trading day. With this separate system, the requests and approvals for the numerous locates did not have to be submitted through the firm’s stock loan system at approval time. Instead, the clients could enter and execute orders through automated platforms that lacked the capacity to automatically block short sale order executions that didn’t have proper, documented locates.

JP Morgan Chase & Co. Accused of Securities Violations Involving Guaranteed Investment Contracts and Derivatives

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

In a May 10 Securities and Exchange Commission filing, JP Morgan Chase & Co. says that an SEC regional office intends to recommend that the agency file charges against the investment bank for securities violations involving the selling or bidding of derivatives and guaranteed investment contracts (GICs). JP Morgan says the Office of the Comptroller of the Currency and a group of state attorneys general are looking into the allegations. The investment bank is cooperating with investigators.

JP Morgan’s Form 10-Q details the bank’s activities during the first quarter of 2010. The investment bank says that Bear Stearns is also under investigation for possible securities and antirust violations involving the sale or bidding of GICs and derivatives. JP Morgan acquired Bear Stearns in 2008.

Guaranteed Investment Contract
GICs are sold by insurance companies. Other names for GIC include stable value fund, capital-preservation fund, fixed-income fund, and guaranteed fund. GICs are considered safe investments with a value that remains stable. They usually pay interest from one to five years and when a GIC term ends, it can be renewed at current interest rates.

Related Web Resources:
US Securities and Exchange Commission

Guaranteed Investment Contracts, Financial Web Continue Reading ›