Investor Lawyers Blog

SEC Says It Has Jurisdiction to Go After Ex-JP Morgan Executives For Securities Fraud

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

The US Securities and Exchange Commission has countered the motion to dismiss its securities fraud case against two former JP Morgan Chase (JPM) executives. The SEC had charged defendants Douglas MacFaddin and Charles LeCroy with paying the friends of Jefferson County, Alabama commissioners $8.2 million to garner $5 billion in business for JP Morgan Chase. The two men filed motions to dismiss on the grounds that swap agreements are not “securities-based swap agreements,” which means they aren’t under the SEC’s jurisdiction and therefore not subject to its enforcement.

However, the SEC’s brief argues that the defendants’ challenge is based on the question of whether the Bond Market Association’s Municipal Swap Index is an index of securities. The SEC argued that regardless of what you call the Municipal Swap Index, this “linguistic exercise” doesn’t make a difference to what the Index actually is, the manner in which it is calculated, and the connection between the bonds and interest rates that comprise the Index. The SEC notes that interest rates are securities.

The SEC asked the court to not dismiss the case over lack of subject matter jurisdiction and pointed to the ruling made in SEC v. Rorech. In that enforcement case, the U.S. District Court for the Southern District of New York refused to decide during the pleading phase whether credit default swaps are security-based swap agreements.

Related Web Resources:
Read the SEC Complaint (PDF)

Swap Transactions, All Business Continue Reading ›

Court Reinstates Texas Securities Arbitration Award

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

Claimant Leonard Claus was awarded $25,000 by a National Association of Securities Dealers’ arbitration panel for his Texas securities arbitration claim. Claus had made a verbal agreement with Jerry Short, who worked for Institutional Capital Management Inc. over the sale and purchase of bonds.

Clause, who bought the bonds, was planning to sell them to Sterling Financial Investment Group Inc. The resale plan didn’t work out, and he sold them to another buyer at cost.

Clause then sued ICM and Sterling for breach of contract, violations of federal and state securities laws, and negligence.

In addition to the $25,000 compensatory damages award, NASD charged Clause $22,000 in arbitration fees. They awarded his lawyer $70,000 in legal fees.

ICM and Sterling asked that the Texas securities fraud award be vacated by the district court. A magistrate judge vacated, claiming that the NASD panel went beyond its authority when it violated Texas law and directly issued an award to Clause’s lawyer.

Clause and IMS appealed, claiming that the judge made a mistake when vacating the entire award on the basis of the awarded attorney’s fee. Meantime, Sterling and ICM contended that the attorney’s fee violated Texas law and that it conflicted with the contingency fee arrangement between clause and his attorney, which the NASD panel is not allowed to override. ICM and Sterling said the legal fee award was unreasonable.

Court of Appeals ruled that even though Texas statute must directly authorize any fee awards, the party that is told to pay the fee cannot challenge the payment’s propriety. The court called the award error harmless and “immaterial to the party” that is ordered to pay it. The court also noted that ICM/Sterling did not challenge the evidence that supported the fee award.

Related Web Resources:

National Association Of Securities Dealers – NASD
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Ex-UBS AG Executive to Settle ARS Insider Trading Allegations Made by NY Attorney General Cuomo with $2.75 Million Penalty

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

As part of a deal to settle ARS insider trading allegations by New York Attorney General Attorney Cuomo, former UBS AG executive David Shulman has agreed to pay $2.75 million. Shulman is accused of finding out through nonpublic, material information that the investment bank’s student loan auction rate securities program was in trouble and that there was a possibility that future auctions involving the student ARS would fail. Yet he allegedly violated New York securities regulations when he proceeded to sell more ARS.

On December 13, 2007, two days after finding out about the ARS risks, Shulman, who supervised the ARS trading desk, sold $1.45 million in personal holdings of student loan ARS to the desk. He was suspended in July 2008.

Shulman has not denied or admitted to the document’s findings. However, as part of the agreement with Cuomo, he is subject to a retroactive 30-month suspension from working as a registered broker-dealer.

In the wake of the ARS market collapse in February 2008 that left so many investors, who were misled into believing their investments were as liquid as cash, with frozen securities, Cuomo remains committed to investigating broker-dealers’ auction-rate securities marketing and sales practices. Many of the investment firms that sold the ARS did so despite allegedly knowing that the securities were in danger of failing.

Since August 2008, Cuomo has gotten 12 financial service firms to agree to repurchase $61 billion of ARS at par. As part of their securities fraud settlements, the broker-dealers are paying $597.3 million in penalties.

Related Web Resources:
Former UBS Muni Chief Settles Probe for $2.75 Million, BusinessWeek, February 18, 2010
Attorney General Cuomo Announces $2.75 Million Insider Trading Settlement with Former UBS Top Executive David Shulman, Office of the NY Attorney General, February 18, 2010 Continue Reading ›

Morgan Keegan Ordered by FINRA Panel to Pay Investor $2.5 Million for Bond Fund Losses

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

A Financial Industry Regulatory Authority panel has ordered Morgan Keegan & Co. to pay investor Andrew Stein $2.5 million because the bond funds that he invested in had bet poorly on mortgage-related holdings. Panel members found Morgan Keegan liable for failure to supervise, negligence, and for selling investments that were unsuitable for Stein and his companies. The claimants, who sustained financial losses, had initially sought $12 million.

Stein’s arbitration claim is just one of over 400 securities claims that have been filed against Morgan Keegan over its bond funds that had invested in subprime-related securities, such as CDO’s (collateralized debt obligations). When the US housing market collapsed, the funds went down in value by up to 82%.

Stein contends that Morgan Keegan did not reveal the kinds of risks involved in investing in the bond funds. He and his companies claim that Morgan Keegan artificially increased the fund assets’ value so that the funds would appear more stable and investors wouldn’t be able to see the actual risks involved.

Frontline Advisors LLC and Frontline Financial, Inc. Propose Texas Securities Fraud Settlement that Includes Permanent NFA Bar

Published on: February 20, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The National Futures Association has accepted Frontline Advisors LLC and Frontline Financial, Inc.’s proposal to permanently remove themselves as a member of the group. The Texas-based Commodity Trading Advisors and Commodity Pool Operators offered the settlement after the NFA filed a complaint against them in 2009 accusing FFI and principal Charles G. Rice of failing to disclose key information to participants in a pool they were running. Among the material information withheld:

• In exchange for promissory notes, the pool would lend money to third parties • When issuers of the promissory notes defaulted, the pool sustained losses • Even after one note went into default, FFI charged a monthly management fee to participants • FFI redeemed its interest in the pool • FFI wrote off notes but did not give participants specifics about the write-offs

The NFA also accused FFI of not filing an annual financial statement, disclosure document, or exemption notice for the fund. Meantime, Rice has also agreed to a withdraw himself as an NFA member for five years. If he decides to reapply for membership, he has to pay a $10,000 fine.

H & R Block Financial Adviser Claims: Securities Fraud Law Firm Shepherd Smith Edwards & Kantas LTD LLP Investigating Inadequately Supervised Reverse Convertible Notes for Investors

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

Our securities fraud lawyers are looking into claims by investors regarding their purchase of reverse convertible notes from H&R Block Financial Advisors. Just this week, the Financial Industry Regulatory Authority imposed a $200,000 fine on the broker-dealer for failing to set up proper supervisory systems over RCN sales. H & R Block was also ordered to pay $75,000 to an elderly couple that sustained financial losses from their RCN investments.

FINRA found that not only did H & R Block fail to properly monitor customer accounts for possible RCN over-concentrations, but they also failed to detect and respond to these possible over-concentrations. This is FINRA’s first enforcement action over RCN sales.

Reverse Convertible Notes

FINRA Fines H & R Block Financial Advisors (Now Ameriprise Advisor Services) over Sales of Reverse Convertible Notes (RCN)

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

The Financial Industry Regulatory Authority (FINRA) has fined H&R Block Financial Advisors (now Ameriprise Advisor Services) $200,000 for failing to put in place the proper system to supervise its reverse convertible notes (RCN) sales to retail clients. FINRA also suspended H & R broker Andrew MacGill for 15 days while ordering him to pay a $10,000 fine and $2,023 in disgorgement for making unsuitable RNC sales to a retired couple. MacGill recommended that they invest close to 40% of their total liquid net worth in RCNs. Meantime, H & R Block has been ordered to pay the couple $75,000 in restitution for their financial losses. Without denying or admitting to the charges, the brokerage firm and MacGill consented to the finding’s entry.

According to FINRA, between January 2004 and December 2007, H&R Block sold RCNs without a system of procedures in place to properly monitor whether possible over-concentrations in RCNs were taking place in customer accounts. FINRA says that the brokerage firm relied on an automated surveillance system to monitor client accounts and review securities transactions for unsuitability but that the system was not set up to monitor RCN placement in customer accounts or RCN transactions. This caused H & R Block to miss signs of when there were potentially unsuitable levels of RCN in client accounts. Furthermore, FINRA says that the firm failed to provide guidance to its supervisors regarding the assessment of suitability standards related to their agents’ recommendation of RCNs to the firm’s clients.

This is FINRA’s first enforcement action over RCN sales.

Bank of America To Settle SEC Charges Regarding Merrill Lynch Acquisition Proxy-Related Disclosures for $150 Million

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

Bank of America Corp. (BAC) has agreed to pay $150 million, in addition to $1 million in disgorgement, to settle the Securities and Exchange Commission’s charges over the investment bank’s proxy-related disclosures regarding the Merrill Lynch acquisition. U.S. District Judge Jed S. Rakoff said he hopes to decide by February 19 on whether to approve the settlement. He also said he has more questions regarding the deal.

If approved, the settlement would conclude two SEC securities lawsuits against Bank of America over the Merrill Lynch merger. One complaint involves the investment bank’s alleged failure to reveal, prior to a 2008 shareholder meeting to vote on the acquisition, that financial losses were in the billions and rising at Merrill. The second lawsuit is over what the bank did and did not disclose about the billions of dollars in bonuses paid to Merrill Lynch employees right before the $50 billion merger was completed.

Under the proposed SEC settlement, the $150 million would go to Bank of America shareholders who suffered financial losses because of the investment bank’s alleged disclosure violations. Also, for three years BofA would have to maintain and implement a number of remedial measures, including hiring an independent auditor to look at its internal disclosure controls, hiring a disclosure counsel to work on bank disclosures, making sure that BofA’s chief financial officers and chief executive certify yearly and merger proxy statements, and allowing shareholders to have an advisory say-on-pay vote regarding executive compensation.

Earlier this month, New York Attorney General Andrew Cuomo filed a separate securities fraud lawsuit against Kenneth D. Lewis, who formerly served as BofA’s chief executive, Joe Price, the bank’s former chief financial officer, and Bank of America for allegedly concealing Merrill Lynch’s losses. The complaint alleges that BofA general counsel Timothy Mayopoulos was let go because he wanted to disclose the losses at Merrill Lynch before the deal was finalized.

Related Web Resources:
Bank of America Still Dealing With Fallout From Merrill Deal, Fox Business, February 5, 2010
Cuomo Sues Bank of America, Even as It Settles With S.E.C., NY Times, February 4, 2010
US judge has questions on $150 mln SEC-BofA accord, Reuters, February 16, 2010 Continue Reading ›

Dallas Securities Attorney and Former SEC Litigator Convicted of Fraud in Pump and Dump Stock Scam

Published on: February 11, 2010 | by Shepherd Smith Edwards & Kantas, LLP

A jury has convicted Phillip Windom Offill Jr. of Texas securities fraud. The Dallas lawyer and former SEC trial attorney was found guilty of nine counts of wire fraud and one count of conspiracy for his involvement in a “pump and dump” scam that sold nine companies’ unregistered securities to investors in order to make a profit.

Court filings had accused the Texas securities attorney of using bogus press releases and “blast” emails to get investors to buy certain companies’ shares. When stock prices would go up, those involved in the scam would dump stock to make money. 10 other defendants have pleaded guilty for their part in the securities fraud scheme.

The SEC’s civil complaint against Offill accused him of conspiring with others to create bogus investment firms that obtained an offering of millions of unregistered AVL shares. Offill was one of the people who allegedly would transfer the shares to the company’s founder and associates, who would then promote the company’s potential as stock was being dumped.

According to U.S. Attorney Neil H. MacBride, Offill purposely broke the law, so that he and others could make millions off of innocent investors who ended up with worthless stock.

Prosecutors want $15 million in forfeiture. Offill’s sentencing is scheduled for April. He faces up to 20 years in prison for each wire fraud conviction and a maximum of five years in prison for conspiracy.

Related Web Resources:
Jury Convicts Former SEC Lawyer, The Wall Street Journal, January 28, 2010
Lawyer indicted in alleged pump-and-dump stock scheme, ITWorld, March 13, 2009 Continue Reading ›

FINRA to Assess Amerivet Securities Inc. Allegations that Certain SRO Executives Received Excessive Pay in 2008

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

At a closed-door meeting scheduled for February 10, the Financial Industry Regulatory Authority board of governors will preside over a closed-door meeting to assess allegations made by Amerivet Securities Inc. that certain FINRA executives, including chief executive Mary Schapiro, received excessive pay. The brokerage firm submitted a letter to the board last year demanding that action be taken to recover this compensation, as well as the SRO’s unprecedented portfolio losses” in 2008.

A release, filed by Amerivet’s securities litigation lawyers, alleged that in 2008, under Shapiro’s leadership, FINRA failed to warn investors about auction-rate securities risks, paid senior FINRA executives close to $30 million, failed to discover that R. Allen Stanford and Bernard Madoff were engaged in Ponzi scams, and sustained close to $700 million in losses.

FINRA Executives’ Pay

Schapiro was paid $3.3 million in bonuses and salaries in 2008. Per her accumulated retirement plan benefits, She also received approximately $7.2 million.

Another 12 current and ex-FINRA executives made over $1 million in 2008, including ex-chief administrative officer Michael D. Jones, who received $4.3 million in severance, compensation, and accumulated benefits after over 10 years at the SRO. Elisse Walters, now with the SEC, was paid $3.8 million ($2.4 million was supplemental retirement benefits), and Douglas Schulman, now with the IRS, was paid $2.7 million in salary, retirement benefits, and bonuses after over eight years of service.

FINRA has called Amerivet’s statements “part of an ongoing publicity campaign” involving a counsel and a party who have been in “litigation with FINRA.”

Related Web Resources:
Finra execs overpaid? The board wants to know, Investment News, February 20, 2010
FINRA

FINRA Board of Governors
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