Investor Lawyers Blog

RBC Wealth Management Unit Ferris Baker Watts to Pay Investors Restitution Over Reverse Convertible Notes Allegations, Says FINRA

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

The Financial Industry Regulatory Authority and the RBC Wealth Management-acquired Ferris, Baker Watts LLC have agreed to settle charges that the latter engaged in the unsuitable sales of reverse convertibles to elderly clients in the 85 and over group, well as in the inadequate supervision of such notes to retail customers. By agreeing to settle, the investment firm is not agreeing with or denying the allegations.

The alleged misconduct took place prior to RBC acquiring Ferris, Baker Watts. As part of the settlement, the brokerage firm will pay close to $190,000 in restitution to 57 account holders for financial losses related to their purchase of reverse convertibles.

FINRA says that between January 2006 and July 2008, Ferris, Baker Watts allegedly sold reverse convertible notes to about 2,000 retail investors while failing to properly supervise and guide its supervising managers and brokers on how to determine whether their recommendations of the notes were suitable for clients. The investment firm is also accused of not having a system in place that could effectively monitor, detect, and handle possible reverse convertible over-concentrations.

In its release announcing the settlement, FINRA cites one example involving Ferris, Baker Watts selling five reverse convertibles in the amount of $10,000 each to an 86-year-old retired social worker. These notes represented between 15% to 25% of her investment portfolio at different times. FINRA says that for another client, the investment firm sold five notes to a 20-year-old who was making under $25,000 a year. This investment was 51% of the client’s retirement account.

Related Web Resources:
FINRA Orders Ferris, Baker Watts to Pay Nearly $700,000 for Inappropriate Sales of Reverse Convertible Notes, FINRA, October 20, 2010

Finra fines RBC Wealth unit over brokers’ sales of ‘unsuitable’ investments, Investment News, October 20, 2010 Continue Reading ›

Amendments to Russian Securities Law Aim to Enhance Transparency and Corporate Disclosure

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

This month, Russian President Dmitry Medvedev signed into law amendments to his country’s securities legislation. He signed the Federal Law No. 264-FZ to amend provisions of Federal Law No. 39-FZ “On Securities Market.” The State Duma, the Parliament’s lower house, and the Federation Council have all adopted the new amendments, which went into effect on October 7. However, the new amendments, however, are not applicable to non-publicly traded companies that have less than 500 shareholders.

The amendments are geared towards improving corporate disclosure and transparency. The list of who can receive relevant information and those that must disclose data are specified. For example, Russian securities issuers must now disclose financial reports, including those filed in accordance with International Financial Reporting Standard, as well as accounting reports. They must also reveal the identities of primary beneficiaries of controlled entities and controlling shareholders’ identities. Signs of insolvency should be included in disclosed information about beneficiaries and shareholders. Companies must also provide information about board meetings and not just annual general meetings.

Securities Fraud and Institutional Investors
Our stockbroker fraud lawyers work with institutional investors throughout the US to recoup their financial losses sustained because of broker-misconduct, investment adviser errors, or securities fraud. We also represent clients outside the US with securities fraud claims against companies that are based in this country.

BP Oil Spill Payouts Recipients May Be Targeted by Investment Scam Fraudsters, Says SEC

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

The Securities and Exchange Commission is warning small businesses and individuals to watch out for fraudsters out there that may be targeting the recipients of BP oil spill payments with investment opportunities that promise high returns at little or no risk or involve complex or secretive strategies. Because of their tendency to share information with each other and the high level of trust that exists among its members, professional organizations, ethnic communities, religious groups, and other close-knit affinity groups may be likely targets.

The SEC says that one way to avoid becoming involved in this type of investment fraud is to ask lots of questions and then double check the with the agency or an unbiased source. Also. it is important to make sure that the investment is registered and the seller is licensed.

According to SEC Chairman Mary Schapiro, “We are on the lookout for any securities scams in the Gulf area.” Following Hurricane Katrina, the SEC discovered a number of scams targeting individuals that were compensated by their insurance companies. Fraud schemes included promoters claiming that their companies were taking part in clean-up efforts, trading programs that made false promises of high returns, and Ponzi scams.

SEC Warns of Potential Investment Scams Targeting Recipients of BP Oil Spill Payouts, SEC, October 13, 2010
Investor Alert – BP Payout Recipients: Be on the Lookout for Investment Scams
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CFTC Judge Says Colleague Biased Against Investors with Complaints

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

According to Commodities Future Trading Commission Judge George H. Painter, his colleague, Judge Bruce Levine, is biased against investors that file complaints. Painter, 83, claims that Levine has a secret deal with former CFTC Chairwoman Wendy Gramm that he would never issue a ruling that favored a complainant.

Painter made these allegations as he was preparing to retire. He is one of two administrative law judges that preside over investor complaints at the CFTC. He requested that his pending cases not be assigned to Levine.

Painter says that Levine makes pro se complainants endure a “hostile procedural gauntlet” until eventually, they are willing to withdraw their case or “settle for a pittance.” Levine has not commented on the allegations. However, according to a Wall Street Journal story that was published 10 years ago, Levine has never ruled in favor of an investor.

Painter is recommending that the CFTC bring in another administrative judge. He has six cases pending before him. Their total claims exceed $1 million.

Stockbroker Fraud Lawyer William Shepherd said, “We have been suspect of commodities reparations proceedings for some time, but WOW!” Shepherd noted. “Other avenues are available, including commodities arbitration and court in Chicago. Some cases may also be decided in securities arbitration when the participants are dually licensed. It is essential that an aggrieved investor hire a law firm with experience, including the knowledge of how to choose the most appropriate forum.”

Meantime, the WSJ is reporting that Painter issued rulings at the CFTC while his wife was battling alcoholism and mental illness and that he did so as recently as February. In August, a psychiatrist wrote that the judge was suffering from a “profound” disability that has rendered him unable to make responsible decisions. His wife, CFTC lawyer Elizabeth Ritter, is seeking guardianship over him. The couple are in the middle of a divorce. The judge’s attorney denies that his client is suffering from Alzheimer’s.

Case Sheds Light on Judge, The Wall Street Journal, October 21, 2010
Commodity Futures Trading Commission judge says colleague biased against complainants, The Washington Post, October 19, 2010
Commodities Future Trading Commission
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$35.2 Million Shareholder Settlement Against DHB Industries Overturned by Circuit Court

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

The U.S. Court of Appeals for the Second Circuit overturned the $32.5 million Shareholder settlement against DHB Industries because the agreement improperly released, under the Sarbanes-Oxley Act, the body-armor maker’s former CEO and CFO from liability. The case involves a shareholder complaint that was filed against DHB and a number of executives in 2005.

Company officers agreed to settle but only on the condition that CFO Dawn M. Schlegel and ex-CEO CEO David H. Brooks be released from liability. A district judge approved the settlement, but then the government objected on the grounds that only the Securities and Exchange Commission can “exempt” executives from requirements under Sarbanes-Oxley. The three-judge panel agreed.

Judge Peter Hall wrote that allowing the settlement to move forward would be “flying in the face of” lawmakers and their efforts to hold senior corporate officers of public companies directly liable for their actions that have “caused material noncompliance with financial reporting requirements.”

Last month, a jury found Brooks and former DHB Industries COO Sandra Hatfield guilty of insider trading, obstruction of justice, and fraud. Brooks was also found guilty of lying to auditors. The two defendants were accused of conspiring to loot DHB for personal gain, falsely inflating inventory at a subsidiary so that reported profits could be artificially boosted, lying to auditors, concealing Brooks’ control of a related company that would then funnel funds toward his thoroughbred horse-racing business, and accounting fraud. The Justice Department say the defendants reaped close to $200 million.

Related Web Resources:
Court Tosses $35.2 Million Body-Armor Settlement, Courthouse News Service, September 30, 2010

David H. Brooks, Founder and Former Chief Executive Officer of DHB Industries, Inc. and Sandra Hatfield, Former Chief Operating Officer, Convicted of Insider Trading, Fraud, and Obstruction of Justice, FBI, September 14, 2010

Oregon Files Securities Fraud Lawsuit Against University of Phoenix Parent Company Apollo Group Inc. of Arizona

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

This week, Oregon Attorney General John Groger and Treasurer Ted Wheeler announced that the state is suing University of Phoenix’s parent company, Apollo Group Inc. of Arizona, and several of its executives for securities fraud. The state officials claim that the plaintiffs misled investors in the firm’s financial statements about the for-profit college’s revenue.

The alleged misconduct is said to involve the school’s revenue between 2007 and 2010. Because of the misrepresentation, the Oregon Public Employee Retirement Fund lost approximately $10 million. Oregon’s securities lawsuit, which joins a class action case while seeking lead plaintiff status, accuses the defendants of violating securities law with materially false and misleading statements that misrepresented or did not disclose information that could have helped investors determine their investments’ risk levels.

The state contends that Oregonians seeking higher education were also injured by the Apollo Group’s financial practices. For example, the company is accused of not taking the proper steps when handling federal student loans. The firm also is accused of improperly dealing with canceled loans, causing students to be held financially responsible for classes that they didn’t take.

After the company’s alleged misconduct was disclosed in an October 2009 filing and the SEC investigation became publicly known, shares of Apollo dropped 17.7% in one day. With the pre-disclosure price sinking from $72.97/share to $60.06/share, almost $2 billion in market capitalization was wiped out.

Apollo’s stock price continued to drop this year, following calls for greater oversight over the for-profit college industry. Apollo’s improper business practices were also brought to light during Congressional hearings. Recently, a Senate probe and a Government Accountability Office report revealed that Apollo also committed fraud when marketing its services to prospective students. Apollo shares were trading at $38.94 on August 13, 2010.

Related Web Resources:

Oregon Public Employee Retirement Fund

Wall Street Complains Financial Reform Will Mean More Lawsuits. Is This Bad?

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

Public companies and employers may have to contend with an unlimited number of expensive securities lawsuits under the whistleblower provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which not only includes provisions for an expanded statute of limitations under which employees can sue employers for discriminatory action but also sets up a new Securities and Exchange Commission bounty program. Labor and Employment Attorney Goldsmith recently spoke about this possibility while participating in a Practicing Law Institute panel. Goldsmith also noted that Dodd-Frank extends the whistleblower protections of the 2002 Sarbanes-Oxley Act to companies’ affiliates or subsidiaries and nationally recognized statistical rating organizations’ employees.

Goldsmith contends that by enacting Dodd-Frank, Congress was showing “overt hostility” toward predispute arbitration agreements by not having them apply to whistleblower issues. He notes that while the Dodd-Frank provisions are supposed to make up for the limitations and loopholes of SOX, certain questions have arisen that have yet to be addressed.

Under section 922 of Dodd-Frank, the SEC is allowed to award whistleblowers between 10% and 30% of any penalty that above $1 million. Cases may include those brought by the Justice Department, the SEC, other federal agencies, and state attorneys general. The SEC started getting tips and complaints even before the statute was enacted.

With its new bounty program, the SEC is expected to increase its enforcement efforts. This could result in huge payments to whistleblowers, who can also receive cooperation credit if they were violators. However, former Chief Litigation Counsel Luis Mejia, who recently spoke at a DC bar event, said that he believes that Dodd-Frank’s whistleblower provision is “the most dangerous” of issues and could undermine corporate compliance programs. Rather than reporting problems internally, giving the company a chance to self-remediate or weed out old or unfounded claims, an individual might be more likely to “blow the whistle” because of the financial rewards.

Shepherd Smith Edwards & Kantas LTD LLP Founder and Stockbroker Fraud Lawyer William Shepherd had a different perspective to offer: “Regulation of Wall Street and business – or the lack of it – has obviously been a disaster over the last decade. Meanwhile the business community clamors for privatization to cure government waste and ineptness. From the birth of this nation lawsuits have been a form of privatization of government power. Why hire more police when lawyers can handle the job much more efficiently and at no cost to the taxpayers? The same is true of whistleblowers. Why use taxpayer dollars to investigate when those on the inside already understand the problem? Believe me, white collar criminals are more afraid of lawyers and whistleblowers than they are of regulators, many of whom they own! That is why they are afraid of the proposed reforms.”

According to a recent Senate report, whistleblowers can take credit for exposing 54.1% of fraud scams in public companies. Meantime, the SEC and auditors reportedly have uncovered just 4.1% of the schemes.

Related Web Resources:
Dodd-Frank Wall Street Reform and Consumer Protection Act (PDF)

SEC Charges Investment Adviser With Allegedly Making Unsuitable Hedge Fund Recommendations to Elderly Clients

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

The Securities and Exchange Commission has charged investment adviser Neal Greenberg with securities fraud and breach of fiduciary duty related to the making of recommendations and marketing of hedge funds to investors. According to the SEC, Greenberg, who was the CEO of Tactical Allocation Services LLP and also the portfolio manager of Agile Group LLC, made unsuitable recommendations to clients, many of whom were elderly and/or retired or close to retirement, when he suggested that they invest in the hedge funds run by his firms.

The SEC contends that the investment adviser issued misstatements when he said that the hedge funds were suitable for older and conservative clients, many of whom were seeking low-risk investments that came with significant capital protection. For example, Greenberg allegedly “falsely stated that the Agile hedge funds” were low risk, highly diversified, and offered liquidity when in fact, the funds, which held approximately $174 million from over 100 clients, were non-diversified in their holdings and used leverage. Greenberg also is accused of claiming that the Agile funds “used leverage” in a manner that did not “significantly increase” their risk profile. Yet, says the SEC, for 2007 and 2008 the risk disclosures in private placement memoranda for the hedge funds from Agile contradicted the “false and misleading” misrepresentations made by Greenberg.

The SEC is also accusing Greenberg of failing to make sure that adequate compliance procedures and policies were put in place for determining whether certain investments were suitable for clients’ specific needs. The commission says Greenberg failed to tell clients that they were going to have to pay management and performance fees on the leveraged part of their investments. Between 2003 and 2006, investors paid about $2 million in these undisclosed fees.

Related Web Resource:
Read the SEC Order Against Greenberg (PDF)
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SEC Examines Proxy Advisory Firms

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

According to Securities and Exchange Commission Chairman Mary Schapiro, the agency is reviewing the proxy process to determine how information is transmitted to shareholders and the public. They are also studying how shareholder votes are counted.

She says the exam will focus on the role of proxy advisory firms, the types of conflicts they deal with, the way these issues affect their business and the voting process, and the role that the agency should play when it comes to regulate proxy advisory firms. She expressed commitment to a “top-to-bottom review of proxy infrastructure” and the role that proxy advisory firms face.

Schapiro made her remarks in front of the Economic Club of New York last month. At the event, she also noted that although the Obama Administration has increased the SEC’s budget—the Dodd-Frank Wall Street Reform and Consumer Protection Act did not give the agency the ability to oversee its own budget—she said that she still would like the SEC to be self-funded.

The financial regulatory reform legislation did provide the SEC with reserve funds to go toward hiring and technology upgrades. Schapiro says that the agency has been successful in its efforts to recruit from hedge funds, trading desks, institutional and retail investment firms, and credit ratings agency analysts.

Related Web Resources:
Chairman Mary L. Schapiro, SEC.gov

UBS AG Motion to Dismiss Class Securities Case Test’s US Supreme Court’s Ruling Regarding Extraterritorial Transactions

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

UBS AG has filed a motion to dismiss a class securities case against it. The move is putting the US Supreme Court’s recent ruling in Morrison v. National Australia Bank Ltd. to the test.

In this securities fraud case, four institutional investors—three of them foreign—are charging UBS and a number of individual defendants with violating Section 10(b) of the 1934 Securities Exchange Act. This is based on misstatements that were allegedly made regarding its auction rate securities-related and mortgage-related activities. They are seeking relief for all purchasers of UBS stock on all worldwide exchanges. Most of the statements in question were issued from the bank’s headquarters in Switzerland.

In 2008, the defendants asked the court to dismiss the allegations due to lack of subject matter jurisdiction. They cited the decision made in Morrison by the U.S. Court of Appeals for the Second Circuit, which had dismissed the action.

Now that the US Supreme Court issued its ruling in Morrison, with the justices concluding that Section 10(b) only applies to securities transactions on domestic exchanges and in other securities, the defendants are attempting to also have the securities case against them dismissed per Morrison’s “bright-line, location-of-the transaction rule.”

The defendants say that the plaintiffs have advised them that they will use the Supreme Court’s use of the word “listed” to end-run Morrison. Per the justices’ decision, Section 10(b) applies to transactions involving securities that are “listed on an American stock exchange.” UBS shares can be found on the NYSE.

However, the defendants are contending that there isn’t any support in the “the test of Section 10(B), its legislative history, or Morrison” for this type of unprecedented interpretation. They say that the word “listed,” as it is used in Morrison is only applicable to two kinds of securities that can be purchased in the US—an unlisted security that trades over the counter in this country and a listed one that trades on a US exchange. The defendants claim that the plaintiffs are misreading the word “listed” in order to authorize international class action lawsuits based on securities purchases on a foreign market and that this “flies in the face of Morrison’s statements that Section 10 (b) doesn’t “regulate foreign securities exchanges.”

Related Web Resources:
Morrison v. National Australia Bank Ltd., Supreme Court (PDF)

1934 Securities Exchange Act