Investor Lawyers Blog

Bank of America and Countrywide Financial Sued by Allstate over $700M in Bad Mortgaged-Backed Securities

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

Allstate has filed a securities fraud lawsuit against Bank of America (NYSE: BAC) and its subsidiary Countrywide Financial. The insurer claims that it purchased over $700 million in toxic mortgage-backed securities that quickly lost their value. Also targeted in the securities complaint are former Countrywide CEO Anthony Mozilo and other executives. Allstate is alleging negligent misrepresentation and securities violations.

The insurance company purchased its securities between March 2005 and June 2007. According to the federal lawsuit, as far back as 2003 Countrywide let go of its underwriting standards, concealed material facts from Allstate and other investors, and misrepresented key information about the underlying mortgage loans. The insurer contends that Countrywide was trying to boost its market share and sold fixed income securities backed by loans that were given to borrowers who were at risk of defaulting on payments. Because key information about the underlying loans was not made available, Allstate says the securities ended up appearing safer than they actually were. Allstate says that in 2008, it suffered $1.69 billion in losses due largely in part to investment losses.

It was just this October that bondholders BlackRock and Pimco and the Federal Reserve Bank of New York started pressing Band of America to buy back mortgages that its Countrywide unit had packaged into $47 billion of bonds. The bondholder group accused BofA, which acquired Countrywide in 2008, of failing to properly service the loans.

Meantime, BofA says it is looking at Allstate’s lawsuit, which it says for now appears to be a case of a “sophisticated investor” looking to blame someone for its investment losses and a poor economy.

Related Web Resources:
Countrywide Comes Between Allstate And BofA, Forbes, December 29, 2010
Allstate sues Bank of America over bad mortgage loans, Business Times, December 28, 2010 Continue Reading ›

Ex-Financial Adviser Pleads Guilty to Unauthorized Trading Involving Disabled Children’s Assets

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

Charles Winitch has pleaded guilty to involvement in a securities fraud scam that victimized disabled children. In the U.S. District Court for the Southern District of New York, the ex-financial adviser and “wealth manager” entered a guilty plea to the charge of wire fraud involving unauthorized trading for commissions. While federal prosecutors and United States Attorney for the Southern District of New York Preet Bharara did not name the financial firm that Winitch had been working for at the time, The New York Daily News identified him in 2008 as a stockbroker with Morgan Stanley.

WInitch is accused of taking $198,784 from a trust held by the guardians of disabled children called the Guardian Account. The trust, which is supposed to provide children with long-term income and comes from the youths’ medical malpractice settlements, was only supposed to invest in New York Municipal Bonds or US Treasury Bonds. However, Winitch made unauthorized trades in 11 accounts in the millions of dollars to generate higher commissions even though he lacked the authority or consent to take such actions. According to Bharara, Winitch and co-conspirators made about $198,000 in ill-gotten commissions. Meantime, the fund lost somewhere between $400,000 and $1 million.

Winitch’s criminal defense lawyer says that the former stockbroker did not know that the accounts contained the money of disabled kids. The ex-Morgan Stanley broker is facing up to 63 months behind bars, hefty fines, forfeiture of ill-gotten gains, and restitution. Continue Reading ›

Custodial Firms Get Tougher About Registered Investment Adviser Compliance

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

According to Investment News, in the wake of the Bernie Madoff Ponzi scam and the recent financial meltdown, custodial firms are taking a tougher stance when it comes to the compliance they expect from registered investment advisers. This tighter scrutiny can make it hard for a new RIA with regulatory issues, as well as for investment advisers that are already at established custodial firms.

Trust Company America chief executive Frank Maiorano is quoted in the publication as saying that if “something came up” during a background check or the ADV, his firm would consider whether to let the RIA go. RBC Correspondent and Advisers says that it has had to ask advisers to leave. Schwab advisers are contractually obliged to tell the company about “material changes in status.” Schwab also monitors regulatory actions and may even look into “certain types of activities” occurring in advisers’ client accounts for red flags that could later impact the firm.

RIAs of both smaller and larger custodial firms are apparently feeling the heat from companies that are no longer willing to put up with potentially bad behavior that can lead to investment adviser fraud. This, even as most custodial firms continue to stay quiet about the type of due diligence they conduct on their advisers because they don’t want investors or plaintiffs’ lawyers to think of them as accountable for an adviser’s investment strategy or his/her supervision.

Just as custodial firms, which are service provider to advisers, are not responsible for supervising RIAs, they also cannot discipline them. They can, however, choose whether or not to work with an adviser.

Custodians usually will work with an independent review committee to vet new clients, conduct background and credit checks, and review ADV and U-4 forms. They may also look out for pending complaints, regulatory issues, and criminal actions.

Related Web Resources:
Custodians taking closer look at adviser compliance, Investment News, December 27, 2010

Investment Adviser, What you need to know before choosing one, SEC

Securities Fraud Attorneys

US Supreme Court Declines to Review Finding that Investor is Bound to Arbitration Agreement Over Disputes with Questar Capital Corp.

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

The US Supreme Court says that it won’t review a federal appeals court’s finding that even though an investor’s English was limited, he is still bound by a broker-customer agreement that any disputes over the handling of his account must be resolved through arbitration. The U.S. Court of Appeals for the Seventh Circuit had concluded that the issue isn’t about, per the investor’s contentions, enforceability. Rather, it is about whether a contract was formed, which it was.

Plaintiff Alfred Janiga, who is originally from Poland, had signed an agreement containing an arbitration clause when he started investing with Questar Capital Corp. (STR). Janiga’s brother Weislaw Hessek, a registered Questar representative who runs Hessek Financial Services LLC, arranged the investment relationship.

A year after he started investing with Questar, Janiga sued his brother, Questar, and Hessek Financial. While the defendants moved to have the district court stay proceedings and order arbitration, the court said mandating immediate arbitration was not possible because it was unsure whether Janiga and Questar ever had a contract.

The appeals court found that it was up to the court to first determine whether a contract existed before it could stay the complaint and order arbitration. While the district court expressed concern over whether Janiga understood the agreement he had signed, the appeals court noted that the plaintiff had voluntarily signed the contract, which includes an arbitration clause.

Janiga, in his certiorari petition, argued that his case poses a “question of federal law” of whether an arbitration agreement clause is enforceable when he never received the actual document and the terms included were never conveyed to him and that this is a matter that the US Supreme Court should resolve.

Related Web Resource:
Janiga v. Questar Capital Corp., 7th Circuit
Arbitration, FINRA Continue Reading ›

Wells Fargo & Co. May Have to Pay Another $15M to Minnesota Nonprofits For Securities Fraud

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

A district court judge in Minnesota has ruled that Wells Fargo & Co. must pay four Minnesota nonprofits $15 million or more in costs, fees, and interests for breach of fiduciary and securities fraud. The investment bank has already been slapped with a $29.9 million verdict in this case against plaintiffs the Minnesota Medical Foundation, the Minneapolis Foundation, the Minnesota Workers’ Compensation Reinsurance Association, and the Robins Kaplan Miller & Ciresi Foundation for Children.

Judge M. Michael Monahan, in his order filed on Wednesday, scolded Wells Fargo for its “management complacency, if not hubris” that led to investment losses for clients of its securities-lending investment program. He said that he agreed with the jury’s key findings that the financial firm failed to fully disclose that it was revising the program’s risk profile, impartially favored certain participants, and advanced the interest of borrowing brokers. Monahan said that it was evident that Wells Fargo knew of the increased risks it was adding to the securities lending program and that its line managers did not reasonably manage these, which increased the chances that plaintiffs would suffer financial huge harm.

Monahan noted that because Minneapolis litigator Mike Ciresi provided a “public benefit” by revealing the investment bank’s wrongdoing, Wells Fargo has to pay plaintiffs’ legal fees, which Ciresi’s law firm says is greater than $15 million. Also, the financial firm has to give back to the Minnesota nonprofits an unspecified figure in fees (plus interest) that it charged for managing the investment program, in addition to interest going as far back as 2008 on the $29.9 million verdict.

Monahan also overturned the part of the jury verdict that was in Wells Fargo’s favor and is ordering a new trial regarding allegations that the investment bank improperly seized $1.6 million from a bond account of children’s charity as the lending program was failing. The district judge, however, denied the plaintiffs’ motion for a new trial to determine punitive damages.

Judge unloads on Wells Fargo with order on investment program, Poten.com, December 24, 2010

Wells Fargo ordered to pay $30 million for fraud, Star Tribune, June 2, 2010

Wells Fargo to Pay $30M in Compensatory Damages to Four Nonprofits for Securities Fraud, Stockbroker Fraud Blog, June 3, 2010

Houston Man Indicted in Alleged $17M Texas Securities Fraud

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

A federal grand jury has indicted Adley Husni Abdulwahab on one count of conspiracy and five counts of Texas securities fraud in connection with an alleged $17 million investment scheme involving the sale of investments issued by W Financial Group. The Houston resident, who is also facing federal charges over an alleged $100 million life insurance scheme, is in custody in Virginia.

Abdulwahab is accused of conspiring with two other men, Michael Wallens, Sr., and Michael Wallens, Jr., to defraud investors in connection with the sales of Collateral Secured Debt Obligations (CSDOs). The three men reportedly received over $17 million from the sales of the promissory notes to over 180 investors.

The three men are accused of issuing a number of misstatements to investors, such as claiming that Republic Group and Lloyd’s of London had “reinsured” the CSDOs, which were not in fact insured. Offering materials made it appear as if the investors’ money were held in insured notes, cash, automotive receivables, or corporate or government AAA bonds, when the three men were actually spending the money. For example, investor money was used to buy Wallens Sr.’s used car dealership for over $300,000, invest in a power company and building company, buy residential lots, and compensate the three men. Wallens, Sr. And Wallens, Jr. have each pleaded guilty to one count of securities fraud.

Related Web Resources:
Houston-area man indicted in W. Financial Group securities fraud matter, Justice.gov, December 15, 2010
Texan indicted in alleged $17M securities fraud, Chron/AP, December 15, 2010
The Texas Securities Act

Securities Fraud Attorneys

Institutional Investors Securities Blogs
Continue Reading ›

Ex-Goldman Sachs Employee Found Guilty of Stealing Code for High-Frequency Trading Activity

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

A New York jury has found ex-Goldman Sachs & Co. computer programmer Sergey Aleynikov guilty of one count of transportation of stolen property in interstate and foreign commerce and one count of trade-secret theft. Aleynikov is accused of stealing a specialized computer source code used in high-frequency trading activity from the investment bank.

Aleynikov, who worked for Goldman for two years, allegedly transferred “hundreds of thousands” of source-code lines and took the broker-dealer’s source code with him to Chicago, where he went to work with Teza Technologies LLC, a firm that wanted to compete with Goldman’s high-frequency trading operations. Although Aleynikov admitted to uploading parts of the investment bank’s trading codes, he told the FBI that he hadn’t intend to steal Goldman’s proprietary data.

Per the indictment, Goldman had implemented a number of precautions to protect its proprietary source code, including mandating that workers sign confidentiality agreements and requiring employees to “irrevocably assign to Goldman Sachs” the rights to any discoveries invention, ideas, concepts, or information developed while employed by the brokerage firm.

High-Frequency Trading
High-frequency trading is a trading strategy using sophisticated programs that involve the employment of algorithms that can place a series of sell and buy orders for large blocks of stock at a super fast pace while exploiting tiny price discrepancies. This type of trading has become a key source of revenue for hedge funds and investment firms on Wall Street.

In 2009, high-frequency trading was responsible for about $300 million in revenue for Goldman. This is less than 1% of the broker-dealers $45 billion in revenue.

Related Web Resources:
United States v. Aleynikov, Indictment (PDF)

Former Goldman Programmer Found Guilty of Code Theft, NY Times, December 10, 2010

Former Goldman Sachs Programmer Found Guilty After Stealing Computer Code, Security Week, December 14, 2010

Goldman Sachs, Stockbroker Fraud Blog

Oppenheimer & Co. Ordered to Reveal Documents Related to Employee Dispute

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

Superior Court Judge Frances McIntyre has denied brokerage firm Oppenheimer & Co.‘s request to impound hundreds of records that are key in a dispute with an ex-employee. The ex-employee is James Dever, who used to be a manager at the broker-dealer’s Boston office. Judge McIntyre found that public interest in the records “substantially outweighs” the financial firm’s interest in keep the documents in secret.

Oppenheimer has been especially invested in keeping two documents confidential. One document is ann internal memo about a 2004 audit involving the Boston branch. Dever has contended that he needs the document to prove that Oppenheimer hid facts for its own protection and so that it could blame him for the alleged financial fraud committed by broker Stephen J. Toussaint, who stole $135,000 from a couple of senior investors.

Dever says that Oppenheimer did not act upon his advice when in 2004 he pressed the brokerage firm to let go of Toussaint. The ex-Oppenheimer manager says that Oppenheimer fired him because he wouldn’t lie to regulators about the broker, who ended up in jail over a related case. Dever also says that no real audit took place in 2004, which is a claim that Oppenheimer has said is “baseless and without merit.”

He contends that because his name is linked to the Toussaint securities case, which Oppenheimer and its Albert “Bud” G. Lowenthal settled with Massachusetts for $1 million, he has had a hard time finding clients and work.

The case puts to the test the confidential arbitration system that has been set up to resolve disputes within the investment industry. Whether it is an employee or a customer is in a dispute with a brokerage firm, almost all disagreements with a brokerage firm have to go to arbitration.

Related Web Resources:
Judge tells Oppenheimer to reveal documents, Boston.com, December 21, 2010
Secrecy Order May Go Too Far, December 30, 2009 Continue Reading ›

Merrill Lynch Doesn’t Have to Arbitrate ARS Claims by LSED, Says Appeals Court

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

The U.S. Court of Appeals for the Second Circuit is affirming a district court’s ruling that Merrill Lynch & Co. Inc. does not need to arbitrate a disputes over auction-rate securities losses suffered by the state of Louisiana and the Louisiana Stadium and Exposition District (known collectively as LSED). The court noted that even assuming that LSED was entitled to arbitration, the district court reached the right conclusion when it found that LSED waived its right to arbitrate when it made known that it intended to resolve its ARS dispute through litigation and took numerous steps to make this happen.

Per the court, LSED, which owns the New Orleans Superdome, retained Merrill Lynch as the broker-dealer and underwriter to restructure its bond debt. After Hurricane Katrina damaged the Superdome, LSED also looked to Merrill about financing the repairs.

In 2006, LSED issued $240 million in municipal bonds as ARS. LSED’s auctions failed in 2008.

In 2009, LSED filed ARS lawsuits against three Merrill entities and bond insurer Financial Guaranty Insurance Co. One complaint was submitted to the U.S. District Court for the Eastern District of Louisiana, while another was filed in Louisiana state court. The Judicial Panel on Multidistrict Litigation would go on to centralize the cases, along with other ARS lawsuits, in the Southern District of New York. Meantime, the defendants sent a letter to LSED asserting that the plaintiff could not obtain relief on the basis of the factual allegations it submitted in its lawsuit.

Prior to filing its third amended complaint, LSED suggested that the case be resolved in arbitration. When the defendants did not respond, LSED moved to compel arbitration. It claimed that because Merrill subsidiary Merrill Lynch Pierce Fenner & Smith Inc. is a Financial Industry Regulatory Authority member, the broker-dealer is required to arbitrate customer disputes.

The district court denied LSED’s motion.

Louisiana Stadium and Exposition District

Analyst’s downgrade tanks Skechers’ stock (SKX). Should Wall Street analysts be immune from scrutiny?

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

It is often said that one critical statement to a child offsets 10 positive ones. The same effect can be found in the stock market, where an analyst’s downgrade is worth, in dollars and cents, sometimes ten times that of an upgrade. Take for example the price movement of shares of shoe company Skechers (SKX) which today fell almost 8%, over $70 million in market capitalization, after an analyst downgraded the stock.

For the most part, the law protects opinions from prosecution or law suits. But shouldn’t regulators be allowed to look behind reported opinions to determine whether action is warranted? Huge damages can result from inaccurate opinions. The best example is bond ratings by recognized services, with mega-billions recently lost on investments which had been deemed ultra-high grade. But losses can also result from negative opinions.

There is no proof, evidence or even insinuation that an analyst at Sterne Agee had any nefarious goal to cause holders of Skechers stock to lose $70 million today. Nor is there any information to link this downgrade to the short interest in Skechers’ stock, last reported at one-fourth of the stock’s float. Yet, those short the shares collectively profited by about $10 million today.