Investor Lawyers Blog

Securities Claims Over Morgan Stanley Mutual Funds Dismissed by Appeals Court

Published on: February 5, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Upholding a lower court’s decision, the U.S. Court of Appeals for the Second Circuit affirmed that investors’ securities claims in two Morgan Stanley (MS) mutual funds-the Morgan Stanley Technology Fund and the Morgan Stanley Information Fund-should be dismissed. The claimants had accused the investment firm of failing to disclose conflicts of interest between investment banking arms and its research analysts.

The court ruled that mutual fund offering statements are not necessary to disclose possible conflicts of interest that occur due to the dismantling of the “information barrier” between stock researchers and investment bankers. The appellate panel also found that there are two class actions against the open-ended mutual funds that fail to identify illegal omissions in the funds’ prospectuses or registration statements.

According to investors, they should have been notified that objectivity could be compromised because the managers of the mutual funds heavily depended on broker-dealers for their stock research. Citing the Securities Act of 1933, they filed a securities fraud lawsuit against Morgan Stanley. The plaintiffs contended that the brokerage firm’s offering documents omitted the possible conflict of interest. The plaintiffs claimed that these omissions cost them $500,000 and that the combined losses for the class were over $1 billion.

A federal judge dismissed their broker fraud complaints, citing a failure to prove that the law mandates disclosure of possible conflicts of interest. The second circuit affirmed the lower court’s ruling, saying it agreed with the SEC’s amicus curiae stating that both Form 1-A and the Securities Act do not require defendants to reveal that the information the plaintiffs’ claimed had been left out and that what the plaintiffs considered to be risks specific to the Morgan Stanley funds were in fact ones that every investor faces.

Among the defendants: Morgan Stanley, Morgan Stanley DW Inc. (MSDWI), MS & Co, the Technology Fund, the Information Fund, Morgan Stanley Investment Management Inc. (MSIM), Morgan Stanley Investment Advisors Inc. (MSIA), and Morgan Stanley Distributors Inc.

Related Web Resources:
Second Circuit Rules Morgan Stanley Mutual Funds Not Liable for Failing to Disclose Conflicts of Interest with Stock Analysts, Law.com, February 1, 2010
Court Nixes Class Actions Against Morgan Stanley, Courthouse News, January 29, 2010 Continue Reading ›

SEC Warns that Disclosure of a “Possible Risk” is Misleading When the Event has Already Occurred

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

According to the US Securities and Exchange Commission, the Private Securities Litigation Reform Act’s safe harbor as it applies to certain forward-looking statements isn’t triggered by cautionary remarks made by defendants over the impact of “potential deterioration in the high-yield sector” if, per the plaintiffs’ claim, the defendants knew the deterioration was taking place. The SEC made its comments in an amicus curiae brief to the U.S. Court of Appeals for the Second Circuit.

The case is Slayton v. American Express Co. The class securities fraud action alleges that the defendant engaged in faulty disclosures related to losses in its high-yield investment portfolio. A district court dismissed the complaint over failure to plead scienter. The plaintiffs appealed the case, and the Second Circuit heard oral argument lat October.

The SEC’s statements address the application of the statutory safe harbor to specific statements that Amex made in its May 2001 Form 10-Q’s Management’s Discussion and Analysis section. Amex stated that the $182 million in high-yield losses was a reflection of it high-yield portfolio’s ongoing deterioration. Amex also stated that total investment losses for the rest of 2001 were expected to be significantly lower than losses sustained during the first quarter.

The parties disagreed about whether the cautionary language that Amex used was “meaningful” enough for the purposes of safe harbor.

According to the SEC, forward-looking statements in the MD & A, which isn’t part of a financial statement that abides by generally accepted accounting principals, doesn’t fall within the statutory exclusion for these kinds of statements. It also noted that Amex’s statement about the “potential deterioration in the high-yield sector” wasn’t enough for safe-harbor purposes because the defendants were warning about a possible deterioration that they knew was already happening. The SEC says that “It is misleading and therefore insufficient for a company to warn of a  potentiality that it is aware currently exists.” Also, “If the speaker knows that any of the implied representations is false,  then the speaker knows that the statement is misleading.”

Misstatements and omissions by an investment adviser, a broker, or an investment firm, can be grounds for a securities fraud claim or lawsuit if financial losses were sustained by others.

Related Web Resources:
Read the SEC’amicus curiae brief (PDF)

Private Securities Litigation Reform Act, Lectlaw Continue Reading ›

Texas Class Action Securities Fraud Claim Against Cushing MLP Total Return Fund CEO and CFO Can Go Forward, Says District Court Judge

Published on: February 2, 2010 | by Shepherd Smith Edwards & Kantas, LLP

In Texas, a US district court judge has refused to dismiss a class action securities fraud claim against Cushing MLP Total Return Fund CEO Jerry V. Swank and CFO Mark Fordyce. The Texas securities fraud claim accuses the defendants of misrepresentations and omissionsrelated to the fund’s deferred tax asset. Other claims, including a 1940 Investment Company Act Section 36(b) claim over tax advisory fees, were dismissed.

The defendants named in the Texas securities fraud claim are investment adviser Swank Energy Income Advisers LP, Swank Capital LLC, fund board chairman, trustee, president and CEO Jerry V. Swank, fund CFO and trustee Mark Fordyce, fund audit committee member and lead independent trustee Edward N. McMillan, fund trustee and audit committee chair Brian R Bruce, and fund trustee and committee head Ronald P. Trout.

Lead plaintiff Terri Morse Bachow says that between September 1 and December 19, 2008, individual investors bought Cushing MLP Total Return Fund stock. She says that most of the reported net assets in the fund (which were invested in the energy infrastructure sector) was an accounting accrual owing to time differences in tax payments.

Throughout the class period, the deferred tax asset increased and the possibility that the fund would make money that the deferred tax asset could be used against became practically nonexistent. When the class period was over, the accounting accrual was made up of over 50% of the fund’s stated net assets and the chance the accrual would lead to any benefit was all but nonexistent.

The plaintiff claims that fund shareholders lost tens of millions of dollars when this data was disclosed on December 19, 2008 and the fund’s shares market price went down from $7.40 to $3.81. Bachow then filed a Texas securities class action claim.

In the claim, Swank and Fordyce are accused of making statements that were materially misleading, making it sound as if the fund was likely going to use deferred tax in “fact sheets” distributed to shareholders and in two SEC filings. The fund CFO and CEO are accused of failing to correct these statements even after discovering that they were misleading or untrue.

The court refused to drop the 1934 Securities Exchange Act Section 10(b) claim against the two men, noting that the plaintiff demonstrated that this information was important to any reasonable investor who was deciding on what to invest in. The court, however, did drop the Section 20(a) control person claims since the securities fraud claim name the two men (and not Swank Advisers and the fund), which makes it impossible for the two defendants to be their own “control persons.” The claim as to Trout, Swank Capital, Bruce, and McMillan failed because there was no allegation that the “controlled person” committed securities fraud.

Related Web Resources:
Continue Reading ›

SEC is working on issues related to asset-backed securities, credit ratings, and money market mutual funds, says Schapiro

Published on: January 31, 2010 | by Shepherd Smith Edwards & Kantas, LLP

According to Securities and Exchange Commission Chairman Mary Schapiro, the agency is dealing with a number of credit crisis-related issues associated with money market mutual funds, asset-backed securities, and credit ratings. She also said that the SEC is working on ABS rule proposals that would allow the interests of investors and sellers to align.

The proposals, and other measures, would seek to give investors easier access to loan level data, allow them more time to review products before they invest, create a mechanism to allow for continuous disclosure, and modify “shelf” offerings eligibility standards. Schapiro says that the proposals are meant to be preemptive and would tackle certain areas where issues similar to the ones that surfaced during the current financial crisis might arise in the future.

American and European regulators have been closely examining collateralized debt obligations, mortgage-backed securities, and other ABS because of the large parts they played during the financial collapse. The SEC is reviewing ABS regulations and ABS-related disclosures and reporting. The agency is also seeking to impose more stringent credit quality and maturity requirements for market mutual funds, as well as put into place substantial liquidity standards. Members will be voting on proposed rule amendments meant to strengthen the money market mutual funds’ framework. The SEC is in the process of taking out credit rating references in a number of its regulations and rules.

Judge Gives Lower Sentence to Former Credit Suisse Broker Convicted of Auction-Rate Securities Fraud

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

Eric Butler, a former Credit Suisse Group AG broker, has been sentenced to five years in prison for securities fraud. A jury found the ex-stockbroker guilty of misleading clients into thinking that they were buying student loan-backed, low-risk auction-rate securities when they were actually buying ARS that were high-risk and backed by home mortgage assets. He modified the trade confirmations to conceal this discrepancy. His securities fraud scam collapsed when the ARS market did, but not before investors sustained $1.1 billion in losses.

The government asked that Butler be ordered to serve a 45-year prison sentence pay stiff penalties. However, U.S. District Court Judge Jack Weinstein sentenced him to just five years, imposed a $5 million fine, and ordered that he forfeit $500,000.

Following the guilty verdict, Weinstein expressed concern about placing all of the blame on Butler. He said that he gave the ex-Credit Suisse broker a reduced sentence because the financial services industry has a “pernicious and pervasive” corrupt culture.

Troubled GunnAllen Securities to be Acquired by Progressive Asset Management as Lawyers for Investors Investigate the Sale.

Published on: January 29, 2010 | by Shepherd Smith Edwards & Kantas, LLP

After undergoing major litigation costs, GunnAllen Financial Inc. has agreed to be acquired by Progressive Asset Management Inc., which already controls a smaller broker-dealer. Progressive claims to be a “socially conscious” investment firm.

The combination of the firms would appear to create a broker-dealer with about 1,000 independent advisors and brokers in more than 200 offices nationwide. If so, the resulting firm would be ranked in the 30 largest independent broker-dealers, according to information available from InvestmentNews.

The terms of the acquisition have not been disclosed, according to David Levine, executive vice president of Progressive, who also did not specify whether his firm would be acquiring GunnAllen’s broker-dealer firm or only its advisers and assets. Often buyers of troubled securities firms seek to buy only the assets leaving behind creditors with little or nothing, including former clients of the firm who have ongoing suits and claims.

Former Evergreen Investment Adviser Settles SEC Insider Trading Charges Involving Ultra Short Opportunities Fund

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

Charles Marquardt, Evergreen Investment Management Co. LLC’s former chief administrator, has settled charges filed by the US Securities and Exchange Commission that he sold Evergreen Ultra Short Opportunities Fund shares after obtaining insider information that a number of the MBS holdings were going to drop down in value. Marquardt worked for Evergreen at the time he allegedly engaged in insider trading and served as the Evergreen Ultra Short Opportunities Fund’s investment adviser. The mutual fund mostly invested in mortgage-backed securities.

On June 11, 2008, he allegedly found out about the likely decrease in value of several of its MBS holdings and that there was a possibility that the Ultra Fund could end up shutting down. Marquardt is accused of having redeemed all of his shares the following day. One of his family members also sold Ultra Fund shares. Marquardt and his relative avoided incurring $4,803 and $14,304 in financial losses, respectively. The fund was liquidated on June 19 of that year.

To settle the charges against him, the investment adviser has agreed to a bar from future violations, as well as to a two-year industry bar. He will pay a $19,107 civil penalty, $1,242 in prejudgment interest, and $19,107 in disgorgement. By settling, Marquardt is not admitting to or denying wrongdoing.

Former Southwest Securities Broker’s Lifetime Industry Bar for Texas Securities Fraud is Affirmed, Says Appeals Court

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

The U.S. Court of Appeals for the Fifth Circuit has affirmed the Securities and Exchange Commission’s lifetime bar against a former Southwest Securities Inc. stockbroker. Scott Gann, who allegedly committed Texas securities fraud, is no longer allowed to associate with dealers, investment advisers, and brokers.

The SEC imposed the permanent bar against Gann because of his alleged involvement in a mutual fund market timing scheme. The appeals court says that the SEC’s ruling is not an abuse of discretion and is supported by the record.

Gann and George Fasciano, also a former Southwest Securities broker, are accused of engaging in market timing trades for Haidar Capital Management and Capital Advisor. They allegedly got around the rules of some of the mutual funds that prohibit market timing by using multiple representatives and account numbers. Despite receiving 69 block notices from 34 mutual funds, their strategy allowed them to continue executing market timing trades.

The SEC filed an enforcement action in federal district court accusing the two men of violating the 1934 Securities Exchange Act Section 10(b). Fasciano settled before the case went to trial.

The district court held that Gann was in violation of Section 10(b). An SEC administrative law judge then entered a permanent associational bar against the ex-Southwest Securities broker. The SEC affirmed the bar, as did the appeals court.

The appeals court also noted that as Gann is convinced he did not engage in any wrongdoing even though the SEC and two courts found that Gann acted wrongfully-there is no guarantee he won’t commit future violations.

Related Web Resources:
Gann v. SEC, SEC.gov (PDF)

1934 Securities Exchange Act, Cornell University Law School Continue Reading ›

Securities Class Actions are No Longer the Fad as Investors Hire Their Own Attorney to Recover Far More!

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

According to Advisen Ltd, 910 securities lawsuits were filed in 2009 in the wake of the economic crisis-a 13% increase from the 804 complaints filed in 2008. 239 securities fraud class action lawsuits were filed in 2009-the same number filed in 2008. Advisen reported a 22% increase in the number of regulator-filed securities fraud complaints last year compared to the year before.

The author of Advisen’s report, John W. Molka III, says lawsuits over the Madoff ponzi scam and the credit crisis kept regulators and litigators busy during the first half of last year. Plaintiffs’ lawyers then had a backlog of other complaints to work on during the second half of the year.

Molka says that even though there wasn’t a change in the number of securities class action complaints filed, overall they made up a smaller percentage (about 25%) of the total number of lawsuits submitted. This decline in securities class action lawsuits has been going on since 2005, when they comprised about 50% of all securities complaints.

Advisen says that meantime, regulators continue to increase their enforcement efforts with lawsuits and actions. Securities actions filed in state courts and breach of fiduciary complaints are also growing in number.

To obtain the maximum recovery for your securities case, you should speak with a securities fraud law firm about your legal options. Our securities fraud lawyers represent clients with arbitration claims and securities lawsuits against negligent financial firms and other liable entities.

Related Web Resources:
Advisen, Ltd.

Read the Report, Advisen Continue Reading ›

Court Stops Results One Financial LLC Adviser’s Alleged Investment Fraud Scam

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

Per the Security and Exchange Commission’s request for emergency relief, the U.S. District Court for the Northern District of Illinois has halted an alleged investment fraud scam involving Results One Financial LLC adviser Steve W. Salutric. He is co-founder of the financial firm. Hon. William J. Hibbler ordered that all assets under Salutric’s control be frozen and he issued a temporary restraining order against him. Hibbler is also granting other emergency relief.

The SEC complaint accuses Salutric of making unauthorized withdrawals from clients’ accounts that were located in another financial institution that was the custodian of Results One Financial’s client assets, forging client signatures on withdrawal request forms, and submitting the signed forms to the account custodian.

The SEC is charging the investment advisor with misappropriating several million dollars of his clients’s finds. Beginning in 2007, Salutric allegedly misappropriated more than $2 million from at least 17 clients to support entities and businesses that are linked to him. Funds that were allegedly misdirected include $610,000 to a film distribution company, $259,000 to two restaurants, and $321,000 to the church where he is treasurer. The SEC is accusing Salutric of misappropriating over $400,000 from a 96-year-old nursing home resident who has dementia. He also allegedly made Ponzi-like payments to certain clients.

Courthouse News Service says that Salutric managed over $16 million through Results One. The SEC says that there may be more clients who were defrauded and additional funds may have been misappropriated.

The SEC is seeking penalties, disgorgement, and an injunction.