Investor Lawyers Blog

Texas Securities Fraud: Commodity Futures & Options Service, Inc. is Permanently Barred from the NFA

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

Commodity Futures & Options Service, Inc., a Houston-based introducing broker, has been permanently barred from the National Futures Association. The ban stems from an NFA complaint filed last year and a settlement offer submitted by the Texas broker and Bryan L. Wright, one of its principal who also was barred from the association (for five years). If he wants to reapply for membership after the ban, he will have to pay a $10,000 fine.

According to the NFA Hearing Panel, which issued the bars, CF & O failed to maintain the mandatory minimum adjusted net capital, did not submit telegraphic notice that it was under the requirement, neglected to keep accurate financial records, as well as records that correctly identified CF & O’s capital sources, did not list specific individuals and entities as CF & O principals, and, along with Wright, inadequately supervised the Houston broker’s operations.

Prior to the Bar, CF & O had been a member of the NFA since April 1988.

Stifel Reports 80% Earnings Increase During 1st Quarter Even After Disengaging From Broker Recruiting Wars

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

Stifel Financial Corp. is reporting an 80% increase of earnings during its first quarter, which ended on March 31, compared to last year. Nearly 57% of its operating profit and 64% of revenue came from its global wealth management group. The profit increase came even as the financial firm slowed down its recruitment of new brokers. On its financial adviser roster, just 45 names were added, as Stifel made the decision not to engage in recruitment wars with larger firms that have enhanced their recruiting packages in an effort to bring in new people who can help the firms rehabilitate their reputations in the wake of the 2008 market collapse. Bank of America’s Merrill Lynch, Morgan Stanley Smith Barney LLC, and other investment banks are reportedly offering leading brokers up to 300% of the revenue they produced in the last 12 months.

While Stifel increased its adviser roster by over 500 in 2009, absorbing over 300 advisers from UBS Financial Services Inc.’s wealth management group and 56 retail branches, this year the financial firm seems to be focusing more energy on creating a more balanced revenue mix. By merging (a $300 M deal), with Thomas Weisel Partners Group Inc. Stifel’s retail and investment-banking/capital revenue will be brought into balance.

According to Investment News, Ron Kruszewski, Stifel chief executive and chairman, as saying that the ex-UBS brokers that are now working for Stifel are working at about 80% of their potential. Seeing as many of them started with the financial firm toward the end of last year, it may take a little longer for them to fully transfer their client assets and achieve complete operational efficiency.

Related Web Resources:
Stifel backs off recruiting wars — and profits soar, Investment News, April 29, 2010
Stifel Financial Corp. Announces First Quarter Results, Marketwatch, April 29, 2010 Continue Reading ›

$1 Billion Goldman Sachs Synthetic CDO Debacle a Reminder that Even Highly Sophisticated Investors Can Be Defrauded

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

Although the Senate hearing over Goldman Sachs, & Co.’s role in structuring a collateralized loan obligation that caused investors to lose about $1 billion in losses has ended, the case against the investment bank is far from over. The SEC’s securities fraud lawsuit filed earlier this month makes numerous disturbing allegations against Goldman Sachs, and now lawmakers are calling on the Justice Department to begin a criminal probe into the CDO transaction that is a focus of the SEC case.

The SEC says Goldman Sachs and one of its vice presidents defrauded investors by structuring and marketing a synthetic collateralized debt obligation that was dependent on the performance of subprime residential mortgage-backed securities (RMBS), while at the same time failing to tell investors about certain key information, such as the role that a major hedge fund played in portfolio selection or that the hedge fund had taken a short position against the CDO.

The hedge fund, Paulson & Co, is one of the largest in the world. The SEC says that Paulson & Co. paid Goldman to allow it to set up a transaction that let it take these short positions. The SEC contends that Goldman acted wrongfully when it let a client that was betting against the mortgage market heavily influence which securities should be part of an investment portfolio, while at the same time telling other investors that ACA Management LLCS (ACA), an objective, independent third party was choosing the securities. Investors, therefore, did not know about Paulson & Co’s role in choosing the RMBS or that the hedge fund would benefit if the RMBS defaulted.

SEC alleges that Paulson & Co. shorted the RMBS portfolio it helped choose by taking part in credit default swaps (CDS) with Goldman Sachs to purchase protection on specific layers of the ABACUS capital structure. Because of its financial short interest, Paulson & Co had reason to choose RMBS that it thought would undergo credit events in the near future. In the term sheet offering memorandum, flip book, or marketing materials that it gave investors, Goldman did not reveal Paulson & Co’s short position or the part the hedge fund played in the collateral selection process.

The SEC is also accusing Goldman Sachs Vice President Fabrice Tourre of being principally responsible for ABACUS. He structured the transaction, prepared the marketing materials, and dealt directly with investors. The SEC claims that Tourre knew about Paulson & Co’s role and misled ACA into thinking that the hedge fund invested about $200 million in the equity of ABACUS, while indicating that Paulson & Co’s interests in the collateralized selection process were closely in line with ACA’s interests.

Six months after the deal closed on April 26, 2007 and Paulson & Co had paid Goldman Sachs about $15 million for structuring and marketing Abacus, 83% of the RMBS in the ABACUS portfolio was downgraded and 17% was on negative watch. By Jan 29, 2008, 99% of the portfolio had been downgraded.

“Synthetic derivative investments are so highly complex that even highly sophisticated investors can be defrauded,” says Shepherd Smith Edwards & Kantas LTD LLP Founder and Stockbroker Fraud Attorney William Shepherd. ” Any other investor being sold these is simply “fair game” for Wall Street. Our securities fraud law firm represents five school districts that lost over $200 million in what they were told were very low-risk investments into bonds. Not only were these not “bonds” but the risk to them was enormous.”

Goldman CEO says has board’s support: report, Reuters, April 27, 2010
Blankfein Says He Was ‘Humbled’ By Senate Hearing, NPR, April 29, 2010
What’s Next for Goldman Sachs?, New York Times, April 29, 2010
SEC Charges Goldman Sachs With Fraud in Structuring and Marketing of CDO Tied to Subprime Mortgages, SEC.gov, April 16, 2010
Read the SEC Complaint (PDF)
Continue Reading ›

UBS Agrees to Settle HealthSouth Corp Accounting Fraud Litigation for $217 M

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

UBS AG will pay $217 million to settle an accounting fraud lawsuit filed by HealthSouth Corp. bondholders and shareholders. Under the settlements, bondholders will receive $100 million and shareholders will get $117 million. UBS is HealthSouth’s investment bank. Meantime, Ernst & Young LLP, the. health-care services provider’s accounting firm, had settled with shareholders for $109 million and will now settle with bondholders for $33.5 million.

The settlements are a result of litigation filed over a $2.7 billion fraud at HealthSouth. The accounting scheme occurred between 1996 and 2002. After the fraud was discovered in March 2003, nearly $6 billion in market value was lost when the company’s share price dropped. 15 executives pleaded guilty over their involvement in the scam.

By agreeing to settle, UBS & Earnst & Young are not admitting to or denying wrongdoing. UBS maintains that HealthSouth lied to UBS bankers numerous times. In 2008, UBS consented to pay $100 million to HealthSouth over claims the investment bank failed to discover the fraud.

Shareholders also settled the accounting fraud with HealthSouth in 2006 for $355 million and received another $20 million from UBS in an Alabama court case. Meantime, bondholders received $90 million in their settlement with HealthSouth and $5 million from UBS in state court case. Bondholders and shareholders will also receive compensation from a $2.88 billion judgment against Richard Scrushy. HealthSouth’s founder was acquitted of criminal charges related to the fraud but in 2006 was convicted over a different bribery case.

Related Web Resources:
UBS to Pay $217 Million to Settle HealthSouth Case, BusinessWeek, April 23, 2010
UBS, Ernst Settle HealthSouth Cases for $250.5 Million, ABC News, April 24, 2010 Continue Reading ›

Extend Fiduciary Duty to All Financial Intermediaries, Securities and Exchange Commissioner Luis Aguilar Tells Congress

Published on: April 24, 2010 | by Shepherd Smith Edwards & Kantas, LLP

At an investment adviser compliance seminar last month, Securities and Exchange Commissioner Luis Aguilar called on Congress to impose the same standard of care that applies to investment advisers to all financial intermediaries. He also wants improvements made to the SEC’s examinations program.

Aguilar objects to an internal policy that does not let examiners question registered firms about unregistered affiliates even if the businesses are related. While the Office of Compliance, Inspections and Examinations had been able to ask these kinds of questions in the past, there was a change of policy in 2007. Now, examiners must get past a number of “hurdles” to ask questions. Aguilar is also recommending that Congress take steps to clarify that examiners can ask for unregistered affiliates’ records.

Aguilar disagrees with the approaches taken with the House and Senate financial regulatory reform bills that harmonize the discrepant standards that govern broker-dealers and investment advisers. While the 1940 Investment Advisers Act places a fiduciary duty on advisers, it exempts brokers from having to comply. He says that this allows for “divided loyalties” that aren’t in the clients’ best interests.

Aguilar is against the harmonization approach found in the Wall Street Reform and Consumer Protection Act. The bill evens out the standard for brokers and advisers that give clients “personalized” investment advice. By limiting the applicability of the standard in this way, Aguilar says that many investors would be left without protections. He also noted that institutional investors need protection too.

Aguilar believes that enforcement is key to protecting investors. He notes that while the number of advisers has grown in the past years, the SEC’s capacity to inspect them has been reduced. He said that allowing self-funding, which the Senate bill proposes, would be the “most transformational act” that Congress could elect to make.

Related Web Resources:
Office of Compliance, Inspections and Examinations

Securities and Exchange Commissioner Luis Aguilar

Wall Street Reform and Consumer Protection Act of 2009

Aguilar Urges Congress to Extend Fiduciary Duty, Clarify OCIE’s Power, BNA – Broker/Dealer Compliance Report/Alacra Store, March 31, 2009 Continue Reading ›

Schwab Must Pay SSEK Client $604,094 Over California Yield Plus Fund Investments, Says FINRA Arbitration Panel

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

Our stockbroker fraud law firm is happy to announce that a Financial Industry Regulatory Authority panel has awarded one of our clients her entire principal loss of $604,094 for her securities fraud claim related to the Schwab California Tax-Free Yield Plus Fund. The award is not part of Schwab’s $200 million class action settlement.

Like Schwab’s Yield Plus fund, SWYCX was marketed as an ultra short-term bond fund and an alterative to money market holdings or cash. In fact, not only were the securities illiquid, hard to value, untested, thinly traded, and highly vulnerable to market changes, but the fund was exposed to variable-rate bonds that were pegged to the London Interbank Offering Rate.

Phone conversations recorded by Schwab with our client confirm the investor’s desire for safety of principal for her assets. During such exchanges, Schwab represented SWYCX as a better investment to Treasuries and Money Market and told the client that instead of holding such a large position in money market or cash for an extended time period it was better to place “cash” investments in the Yield Plus fund. Our securities fraud lawyers have other Schwab clients that were offered similar representations.

National Securities Corp., Independent Financial Group LLC, & Centaurus Financial Inc. among broker-dealers sought by Massachusetts securities regulators over private placements

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

The Massachusetts Securities Division is requesting information from six broker-dealers regarding the sales of two private-placements that were marketed by Provident Royalties, LLC and Medical Capital Holdings Inc. The investment firms that have been subpoenaed are Centaurus Financial Inc., Investors Capital Corp., Independent Financial Group LLC, CapWest Securities Inc., National Securities Corp., and QA3 Financial Corp.

According to a statement issued last month by Secretary of the Commonwealth William Galvin, Provident and Medical Capital put forth billions in securities that were purchased from the brokerage firms. Now, the state’s securities regulators want information from the broker-dealers regarding suitability data, due-diligence efforts, and promotional materials involving the private placement sales.

The six broker-dealers have expressed surprise that they received the subpoenas. Financial Group claims that the brokerage firm never approved the sale of any offerings from Provident Royalties or Medical Corp. Centaurus Financial is also claiming that it never approved any offerings that were bought from either company.

Investors Capital’s president and CEO, Tim Murphy, says the broker-dealer has never had a selling agreement with Medical Capital, while CapWest CEO Dale Hall says that the brokerage firm has just one client in Massachusetts. QA3 says that two of its clients in Massachusetts purchased $175,000 in Provident offerings but that the brokerage firm did not sell any Medical Capital offerings to investors in the state.

The Massachusetts Securities Division has been intensifying its efforts to examine private placement sales made by independent broker-dealers. Earlier this year, regulators in the state filed a securities fraud lawsuit against Securities America accusing the broker-dealer of misleading investors that bought risky private placements, which included $7.2 million in promissory notes.

Related Web Resources:
Broker-dealers dumbfounded by private-placement subpoenas, Investment News, March 23, 2010
Massachusetts Securities Division
Continue Reading ›

The Truth about the Financial Reform Bill Proposed by the Majority Leaders

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

The Restoring American Financial Stability Act, a bill on financial reform, is expected to go to the Senate floor for a vote in a few weeks. Introduced by Senate Banking Committee Chairman Chris Dodd, the bill cleared that panel during a party-line vote.

The bill would set up safeguards against financial system collapses, put into place an independent and new consumer financial protection unit at the Federal Reserve, and consolidate significant regulatory agencies. Certain aspects of the bill, such as funding for system-critical companies and procedures for liquidation, are still under debate.

Yesterday, Senator Dodd spoke on the US Senate Floor. He said the bill “ends bailouts.” He noted that for the first time someone would be tasked with monitoring the financial system and can warn of any risks before a meltdown results. Dodd said that Wall Street companies that create the risks will have to contend with tougher standards.

According to Shepherd Smith Edwards and Kantas founder and stockbroker fraud attorney William Shepherd, “This bill does exactly the opposite of what its critics are saying it does. This bill provides for NO taxpayer bailouts. If a financial institution is failing, no matter how large, it will be taken over by the FDIC, which is that agency’s current role. The FDIC is financed by membership dues from all FDIC insured banks, which will be increased. Similar to the manner in which smaller banks are taken over by the FDIC, almost weekly, this is the process: The mega institution fails, its executives are fired, its shareholders get nothing and its assets are sold to other financial institutions. That is no bailout!”

Related Web Resources:
Financial services regulatory reform bill heads to Senate, Business Insurance, April 14, 2010
Restoring American Financial Stability Act of 2010 (PDF)
Continue Reading ›

Former Delphi Executive’s Motion for Summary Judgment in SEC Securities Fraud Case is Denied

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

A district court judge has denied James Blahnik’s motion for summary judgment in the United States Securities and Exchange Commission’s securities fraud cause against Delphi Corporation, a number of its senior officers, other employees, and an individual who worked for a third party.

The SEC had accused the defendants of misstating its operating results and financial condition in its offering documents and SEC filings. A number of the defendants have already settled with the SEC, leaving Blahnik, Paul Free, Paul Free, Catherine Rozanski, and Milan Belans to request summary judgment.

During a February 3 hearing, Blahnik’s lawyer said his client, who formerly served as a Delphi Treasurer before being promoted to Vice President of Treasury, Mergers and Acquisitions, intended to depend on the argument that he could not be held primarily liable for violating § 10(b) of the Securities and Exchange Act or Rule 10b-5 because he did not directly issue false statements to the investing public. The Court told Blahnik to make his case in a letter. Yet even after letters were exchanged Blahnik and the SEC, his motion for summary judgment was denied.

The SEC has accused the former Delphi executive of being involved in the following schemes: European Factoring, the PGM Transaction with Bank One, and the Cores and Batteries Transaction with BBK. The SEC contends that a number of Blahnik’s activities resulted in false statements made in the company’s 2001 and 2003 offering documents, 2000 Form 10-K, 2002-2004 Forms 8-K, and the incorporation of the 2000 Form 10K.

The Court noted that Blahnik, in his letters, failed to persuade that he can’t be held primarily liable under the law for the theory put forth by the SEC. The matter must therefore be resolved during trial.

Linsco Private Ledger Clients File FINRA Arbitration Claims Accusing Former Financial Adviser Raymond Londo of Running Multi-Million Dollar Ponzi Scam

Published on: April 13, 2010 | by Shepherd Smith Edwards & Kantas, LLP

A number of FINRA arbitration claims have been filed accusing former Linsco Private Ledger (LPL) financial advisor Raymond Londo of running a multi-million dollar Ponzi scheme to defraud investors. The claims allege fraud, conversion, misrepresentation and omissions, and negligence. LPL is accused of failing to supervise, discover, and stop the investment fraud scheme within a reasonable amount of time even though there were numerous signs, such as red flags and customer complaints, to indicate that Londo should have been more closely supervised or even fired.

Per the FINRA statement of claim, for nearly 10 years Londo accepted funds from LPL clients. He told them that he was investing their money in an LPL account where he could help them avail of exclusive investment opportunities. The former LPL financial adviser would then take the money he was supposed to invest and used it to support his lavish lifestyle and gambling addiction.

Linsco finally fired Londo in March 2008, but by then funds belonging to 95% of the victims had been stolen. Londo’s victims, located in different parts of the US, included his own neighbours, family members, and fellow country club members.

Soon after the Ponzi scam was discovered, Londo died.

LPL is one of the largest brokerage firms in the US. The alleged Ponzi scam surrounding Londo is not the first time the broker-dealer has been linked to securities fraud allegedly committed by one of its employees. In 2002, FINRA awarded more than $500,000 to an investor who claimed investment losses because LPL did not properly supervise one of its independent brokers.

In 2008, LPL Financial and Michael McClellan, one of its ex-brokers, lost a $1.8 million arbitration claim accusing them of securities fraud, violation of securities laws, unauthorized tradings, breach of fiduciary duties, and other violations.