Investor Lawyers Blog

CIT Group Inc, Prudential Financial Inc., and GMAC Inc. Looked to Retirees for Debt Financing When They Lost Access to Credit Markets

Published on: August 8, 2010 | by Shepherd Smith Edwards & Kantas, LLP

As the credit markets started to close for over a dozen companies, including Prudential Financial, CIT Group, and GMAC Inc., the firms began to get their funding for debt financing from retirees-reports Bloomberg in an August 2009 article. For example, between December 2007 and 2008, CIT sold $827 million of debentures created specifically for individuals at a time when the credit market was experiencing “disruptions,” the global economy was falling apart, and the company’s credit ratings were experiencing downgrades. One analyst, David Hendler, says that the financial firms engaged in a “pump-and-dump scheme in a bear market” and that they chose to “offload risk” without having to field too many questions.

Although the retail bond market usually lets companies sell debt at lower yields than what institutional investors call for, the notes can trade at higher relative yields when a company starts to lose its fortune. There is also a lack of liquidity that occurs. This can make it hard for senior investors-especially if their savings are tied into the smaller issues. It didn’t help that late last year CIT, a 101-year-old commercial lender, filed for Chapter 11 bankruptcy after a US bailout and debt exchange offer failed and its funding dried up.

Also, while some debentures-specifically, CTI InterNotes-came with “survivor’s options” that lets an issuer repurchase them at par after the owner passes away, the Internote issuers are entitled to limit how much can be exercised each year through the option to the greater of 2% of the outstanding principal amount or $2 million. Ex-US Securities and Exchange Commission head Arthur Levitt has described this type of financing as an “affinity-type” approach that focuses on the elderly.

The Financial Industry Regulatory Authority has been investigating whether the risks were adequately disclosed to investors or whether securities fraud occurred.

Related Web Resources:
CIT Debt Sold to Widows Has Fine Print Pimco Resists, Bloomberg.com, August 21, 2009
CIT Files Its Bankruptcy Plan, The Wall Street Journal, November 3, 2009 Continue Reading ›

Life Settlements or Viaticals should be Considered “Securities,” Recommends the SEC to Congress 

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

The Securities and Exchange Commission staff report is recommending that the US Congress define life settlements as securities to make sure that investors of these types of transactions receive federal securities law protection. The SEC says there are several benefits to making such an amendment to securities laws:

• This would clarify life settlements’ status under federal securities law, which would allow the federal government and the states to deal with them in a more consistent manner.
• Life settlement market intermediaries would then fall under the regular framework of the Financial Industry Regulatory Authority and the SEC.
• FINRA and the SEC would have clear authority to police the life settlement market, which could help detect securities fraud and discourage financial abuses.

The Life Settlements Task Force prepared the report, which notes “inconsistent regulation of participants” in the life settlements market and that pools of life settlements and individual transactions “would benefit” from “baseline standards of conduct to market participants.” SEC staff is also recommending that the commission:

• Urge Congress and state officials to think about regulating life expectancy underwriters in a more consistent and significant manner.
• Tell staffers to make sure that providers and brokers are meeting legal standards of conduct.
• Have staff members look for the development of a life settlement securitization market.

It was just in early July that US Senator Sen. Herb Kohl released a General Accountability Office report that found that the inconsistent regulation of life settlements create several challenges:

• Some police owners in certain states are not as well-protected.
• Some individual investors may have a hard time getting enough information about their investments and the risks that may be involved.
• Because laws across states are not consistent, this can pose a problem for some providers and brokers.

Related Web Resources:
SEC Releases Report of the Life Settlements Task Force, SEC, July 22, 2010
Sen. Kohl Says GAO Report Supports Tougher Settlement Regs, LexisNexis, August 2, 2010
Read the Life Settlement Task Force Report (PDF)
Continue Reading ›

Citigroup Settles Subprime Mortgage Securities Fraud Claims for $75 Million

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

For $75 million, Citigroup will settle federal allegations that it failed to disclose that its subprime mortgage investments were failing while the market was collapsing. This is the first securities fraud case centered on whether investment banks fairly disclosed their own financial woes to shareholders.

Unlike the Goldman Sachs case, which resulted in a $550 settlement and involved allegations that the investment bank misled investors, Citigroup is accused of misleading its shareholders. This also marks the first time the SEC has filed securities fraud charges against very senior bank executives for their alleged roles in subprime mortgage bonds.

The SEC contends that Citigroup failed to reveal the true nature of its financial state until November 2007. Just that summer the investment bank told investors that it had about $13 billion of exposure to subprime mortgage related-assets that were declining in worth. However, Citigroup left out about $43 billion of exposure to similar assets that bank officials thought were very safe.

Key evidence against Citigroup centers on an announcement that it prepared for investors that cautioned that the quarter was likely going to be one of lower earnings in the fall of 2007. However, the investment bank did not reveal its full subprime exposure. Former Citigroup investor relations head Arthur Arthur Tildesley Jr., who has agreed to pay an $80,000 fine over allegations he omitted key information in the shareholder disclosures, is accused of preparing the statement. Former chief financial officer Gary L. Crittenden, who has settled the SEC case against him for $100,000, recorded the audio message to investors.

The government was eventually forced to bail out the investment bank. Citigroup is not admitting to or denying the charges by consenting to settle. Now, however, the investment bank has to defend itself from private shareholder complaints.

Related Web Resources:
SEC Charges Citigroup and Two Executives for Misleading Investors About Exposure to Subprime Mortgage Assets, SEC, July 29, 2010
Citigroup Pays $75 Million to Settle Subprime Claims, NY Times, July 29, 2010
Citigroup agrees $75m fraud fine, BBC News, July 29, 2010 Continue Reading ›

Dallas Billionaire Brothers Charged with Texas Securities Fraud

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

Following a six-month probe, US Securities and Exchange Commission has charged two Dallas billionaires with Texas securities fraud. Brothers Charles and Samuel Wyly are accused of taking part in a financial fraud scheme that garnered them over $550 million in illicit gains.

The two men are accused of trading stock in four companies that they were the directors of and devising a securities scheme involving bogus subsidiaries and trusts in the Cayman Islands and the Isle of Man to cover up over $750 million of stock sales in Sterling Commerce Inc., Michaels Stores Inc, Scottish Annuity & Life Holdings Ltd., and Sterling Software Inc.

The SEC is also accusing the Wylys of making an insider trading gain of $31.7 million when they made a bet in Sterling Software, which they own, that was “massive and bullish” in 1999 after deciding to sell the company. Computer Associates bought the firm for $4 billion in stock in March 2000.

Also charged with Dallas securities fraud is the Wylys’ attorney Michael French and broker Louis Schaufele.The SEC claims that the Wylys and French either should have known or knew that they had disclosure obligations because of their roles as owners and directors of over 5% of company stock. The defendants are accused of issuing hundreds of misleading statements that allowed the brothers to conduct trades without detection, including large block trades involving of over 14 million shares.

The SEC contends the two brothers used the proceeds from the alleged Texas securities fraud to acquire real estate, art, and jewelry. They also are accused of using the money to donate to charitable causes.

The SEC wants to get back ill-gotten gains, impose civil fines, prevent the two men from serving as director or officer of a public company, and other remedies. An attorney for the brothers says that the securities charges are without merit.

“This is a situation in which wealthy investors may find that they can seek tax refunds by characterizing the loss on their investment as a “theft lost” rather than as a capital loss carry-forward. In total, our clients have received millions of dollars in refunds using this technique,” says Dallas Securities Lawyer William Shepherd.

Related Web Resources:
SEC Charges Corporate Insider Brothers With Fraud, SEC, July 29, 2010
SEC Charges Wyly Brothers With $550 Million Fraud, ABC News, July 29, 2010 Continue Reading ›

Goldman Sachs Settles SEC Subprime Mortgage-CDO Related Charges for $550 Million

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

Goldman, Sachs & Co. has agreed to reform its business practices and pay $550M to settle Securities and Exchange Commission charges that it misled investors about a synthetic collateralized debt obligation (CDO) just as the housing market was failing. By agreeing to settle the securities fraud lawsuit, Goldman is admitting that information in the marketing materials for the product was incomplete.

The SEC case involves Abacus 2007-AC1, one of 25 investment vehicles that Goldman created so that certain clients could bet against the housing market. Unfortunately, when the market did fail, investors lost over $1 billion. Meantime, the investment bank yielded profits and John A. Paulson, the hedge fund manager that the SEC says asked Goldman to create the 2007-AC1, made money from bets he made against certain mortgage bonds.

While investors were told that an independent manager was choosing the bonds, the SEC contends that Goldman allowed Paulson to choose mortgage bonds that he thought were likely to drop in value. However, clients were not notified about Paulson & Co. Inc.’s part in the portfolio selection process or that Paulson had taken a short position against the CDO. The investment bank then sold the package to investors that would only turn a profit if the value of the bonds went up.

The $550 million penalty against Goldman is the largest that the SEC has ordered a financial services company. By agreeing to settle, Goldman is not denying or admitting to the allegations. $300 million of the fine will go to the U.S. Treasury, while $250 million will be repaid to investors that suffered losses.

Goldman Sachs to Pay Record $550 Million to Settle SEC Charges Related to Subprime Mortgage CDO, US Securities and Exchange Commission, July 15, 2010
Goldman Settles With S.E.C. for $550 Million, NY TImes, July 15, 2010
Read the SEC Complaint against Goldman Sachs (PDF)
Continue Reading ›

Wall Street Whistleblowers May Be Eligible to Collect 10 – 30% of Money that the Government Recovers

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

Under the Dodd-Frank Wall Street reform law, Wall Street insiders who become whistleblowers may be eligible to receive 10 – 30% of the money that the government gets back. According to National Whistleblowers Center executive director Stephen Kohn, the prospect of collecting millions could provide potential tipsters with the incentive to act, while saving investors billions.

Under the new law, whistleblowers that provide the Commodity Futures Trading Commission or the Securities and Exchange Commission with “original information” will be allowed to stay anonymous. A securities attorney will then act as an intermediary between the whistleblower and the government. This helps maintain the tipster’s anonymity while allowing the securities fraud allegations to be made.

Already, the SEC has been taking more aggressive measures to award whistleblowers. Just last week, the SEC awarded $1 million to Karen and Glen Kaiser-the largest amount that the SEC has paid for insider information (this was administered under an earlier authority)-after they gave the agency key documents and information for its insider trading case against Pequot Capital.

Karen used to be married to former Microsoft employee David Zilkha. According to the SEC, in 2001, Zilkha tipped Pequot about an upcoming earnings report form his then-employer. Pequot Capital Management Chief Executive Arthur Samberg is accused of trading on the insider information and illegally making $14.8 million. Samberg eventually agreed to settle the SEC’s insider trading allegations against him for $28 million.

Under the Dodd-Frank provisions, whistleblowers that provide key information regarding securities fraud, insider trading, and commodities fraud cases are likely to get a lot more than $1 million.

Related Web Resources:
Connecticut couple gets $1 million SEC award for Pequot, Reuters, July 23, 2010
New Wave of Whistleblowers Could Become Millionaires, CNBC, July 26, 2010
SEC Charges Pequot Capital Management and CEO Arthur Samberg With Insider Trading, SEC, May 27, 2010
Dodd-Frank Wall Street reform law, Open Congress’

SEC

Commodity Futures Trading Commission
Continue Reading ›

Raymond James Ordered to Buy Back $2.5M in ARS by FINRA

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

A Financial Industry Regulatory Authority arbitration panel is ordering Raymond James & Associates Inc. and Raymond James Financial Services Inc. to buy back $2.5M in auction-rate securities from an investor. Greg Merdinger has accused Raymond James Financial Inc. of failing to warn him about the risks associated with ARS. In 2009, he filed a claim accusing the broker-dealer of breach of both contract and fiduciary duty.

Merdinger claims that from October 2006 to February 2008, Raymond James & Associates Inc. recommended that he purchase the securities while claiming that they were more liquid than money market funds, which Merdinger wanted to invest in until he was persuaded otherwise. He contends that Raymond James never told him that the ARS could become illiquid and that even into February 2008, when the market froze, Raymond James continued to advise him to buy the securities. One more purchase was even made.

Raymond James Financial’s General Counsel, Paul Matecki, has been quick to note that the broker-dealer has provided evidence that it did not know that the ARS market was at risk of failing before February 2008 when it did collapse. He also claims that there is no evidence indicating that any of its employees knew that the securities would fail.

However, Merdinger’s securities lawyer says there are copies of emails showing that Raymond James Financial managers knew the ARS market was experiencing difficulties way before it collapsed. Early last year, Raymond James chief executive and chairman issued a letter, filed with the Securities and Exchange Commission, apologizing to clients for the role the investment bank played in their ARS buys.

In addition to the $2.5M ARS repurchase, Merdinger has been awarded 5% interest on the amount until Raymond James buys back the securities. He is also to receive an additional $86,000.

Related Web Resources:
Raymond James faces $2.5 million payback ruling, BizJournals, July 27, 2010
Raymond James Ordered To Buy Back $2.5M in Auction-Rates, WSJ, July 26, 2010
Tom James apologizes for auction rate security purchases, BizJournals, January 5, 20009 Continue Reading ›

Motion for Class Certification in Lawsuit Against J.P. Morgan Securities Inc. Over Alleged Market Manipulation Scam Granted in Part by Court

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

A district court has granted in part the motion for class certification in the securities fraud lawsuit against J.P. Morgan Clearing Corp. and J.P. Morgan Securities Inc. involving an alleged investment scam with Sterling Foster & Co. The alleged scheme involves the manipulation of the the market for ML Direct Inc. securities during and after an IPO. The JPM entities are named in their capacity as Bear Stearns & Co. Inc. and Bear Stearns Securities Corp. successors.

The court says that one day after the IPO’s start, ML Direct stock’s price more than doubled because Sterling Foster had bought most of it. The firm then sold over 3.375 million ML Direct at about $14 to $15 a share. Because only 1.1 million shares in the IPO were for sale, the court says that Sterling Foster sold 2.3 million more shares than it owned. The other available ML Direct shares were held by insiders, who had a lock-up agreement barring them from selling their shares within the first year of the IPO unless they obtained underwriter Patterson Travis Inc.’s consent.

Sterling Foster and the insiders allegedly became involved in an undisclosed agreement that allowed the brokerage firm to buy the insiders’ stock at the $3.25/share offering. Sterling Foster then bought their securities, which were delivered to Bear Stearns. The court says that as a result, the brokerage firm made a $24 million profit.

The plaintiffs are saying that the offering documents misled the investing public into thinking that significantly less ML Direct shares were being offered and that the market had set the $13 to $15/share price when Sterling Foster had artificially created it and then bought shares from insiders at the lower share price. The plaintiffs claim that Bear Stearns, as Sterling Foster’s clearing house, knowingly took part in the investment scam.

The plaintiffs moved to certify a class so they could pursue their Section 10(b) and Section 20(a) claims. The court granted the motion as to the Section 10(b) antifraud claims but denied the latter, which involves claims for control person liability.

Related Web Resource:
Levitt v. JP Morgan Securities Inc, Law.com Continue Reading ›

Securities Class Action Against Morgan Stanley by Xerox and Kodak Retirees Dismissed by Appeals Court

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

The U.S. Second Circuit Court of Appeals in New York has upheld a lower court’s ruling to dismiss that the securities class action filed by Eastman Kodak Co. and Xerox Corp. against Morgan Stanley. The plaintiffs, retirees from both companies, are accusing the broker-dealer of advising them that if they retired early their investments would be enough to support them during retirement. They also claim that the investment bank persuaded them to open accounts that cost them the bulk of their wealth. According to the plaintiffs’ attorney, the retirees gave up job security and employment rights after they were told that if they retired early they could avail of a 10% withdrawal rate from their individual retirement accounts.

However, upon retiring, the retirees that invested lump-sum retirement benefits with Morgan Stanley experienced “disastrous” value declines. Also, they had invested with two Morgan Stanley broker, Michael Kazacos and David Isabella, that were later barred from the securities industry. Last year the broker-dealer settled FINRA charges over the two men’s activities by paying over $7.2 million.

The appeals court says that because of the 1998 Securities Litigation Uniform Standards Act, the plaintiffs are precluded from pursuing class state law claims, including misrepresentation claims. While the statute lets plaintiffs file lawsuits in state court to get around 1995 Private Securities Litigation Reform Act’s securities fraud pleading requirements, federal preemption of class actions claiming “misrepresentations in connection with the purchase or sale of a covered security” are allowed. The three-judge panel also said that because the retirees waited too long to file their securities fraud lawsuit, they cannot raise other federal securities law claims.

Related Web Resources:
Xerox, Kodak retirees lose Morgan Stanley appeal, Reuters, June 29, 2010
Morgan Stanley to Pay More than $7 Million to Resolve FINRA Charges Relating to Misconduct in Early Retirement Investment Promotion, FINRA, March 25, 2009
1998 Securities Litigation Uniform Standards Act, The Library of Congress Continue Reading ›

SEC Settles Wrongful Termination Lawsuit with Whistleblower Gary Aguirre for $755,000

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

The US Securities and Exchange Commission and former SEC attorney Gary Aguirre have settled his wrongful termination lawsuit for $755,000. Aguirre has contended that he was fired in 2005 after accusing his supervisors of mishandling an insider trading probe against hedge fund Pequot Capital Management and trying, without success, to interview John Mack, Morgan Stanley‘s then chief executive officer, as part of the probe.

Aguirre claimed that the SEC tried to overlook signs that Pequot had used insider information to trade in Microsoft shares. He also accused the agency of not wanting to interview Mack because of his “political” influence. The SEC had accused Aguirre of insubordination and fired him.

His allegations, however, led to the SEC’s inspector general conducting two internal probes that eventually found that the SEC not only botched its probe of Pequot, but also that it improperly terminated Aguirre from his job. The agency was even accused of strategizing to discredit Aguirre. As for the Pequot investigation, last month the hedge fund and its chief executive Arthur Samberg agreed to settle the SEC’s insider trading case for $28 million.

A Merit Systems Protection Board administrative law judge has finalized the wrongful termination settlement and says it is possibly the largest “of its kind.” Government Accountability Project Legal Director Tom Devine has said that “[u]nfortunately, this large settlement is the exception that proves the rule.” He is calling on Congress to offer “real protections” for regulatory employees. In the meantime, he contends that the existing law will continue to allow “government regulators to turn a blind eye.”

Related Web Resources:
Pequot to pay $28 million to settle insider trading case, Reuters, May 27, 2010 Continue Reading ›