Investor Lawyers Blog

UBS Loses Lehman Arbitration Note Claim by Small Investor

Published on: December 9, 2009 | by Shepherd Smith Edwards & Kantas, LLP

In an arbitration case that could affect numerous cases that are still pending, a Financial Industry Regulation Authority panel awarded a small investor $200,000 after finding that a UBS Financial Services broker acted inappropriately when he sold high-risk Lehman Brothers Holdings Inc. principal-protected notes to the claimant.

The case involving Lehman notes is one of the first to be decided by a FINRA panel. While the ruling won’t establish a precedent, it could be an indication of how similar rulings may go in the future. “There are many cases pending against UBS and other firms that sold Lehman notes shortly before Lehman failed,” said stockbroker fraud attorney William Shepherd, whose firm, securities fraud firm Shepherd Smith Edwards & Kantas LTD LLP, is handling a number of such cases. “These cases often involve misrepresentations and omissions as well as unsuitability, since the investments were sold to clients who sought safety and income,” he added.

The claimant filed the arbitration claim accusing UBS of recommending structured products that are not suitable for “unsophisticated investors.” The broker purchased for the client a $75,000 return optimization note and a $225,000 guaranteed principal protection note. The FINRA panel determined that the claimant should be compensated for the principal protected note, in addition to legal fees and interest.

Although the amount awarded is less than what the investor hoped to recover, a UBS spokesman said the securities firm was disappointed that the claimant was awarded any damages and maintains the investor’s financial losses were a result of the collapse of Lehman Brothers.

Investor Wins Lehman Note Arbitration, Wall Street Journal, December 5, 2009
FINRA awards US investor in Lehman notes $200,000, Reuters, December 5, 2009 Continue Reading ›

Even as FINRA Lost $696.3 Million in 2008, its Executives Made Millions

Published on: December 7, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Last year, 13 current and ex- Financial Industry Regulatory executives made over $1 million each, even as the regulatory organization posted a $696.3 million loss ($439 million in investment losses). Compensation included salary, retirement plan awards, and bonuses. This data, reported in Investment News, is found in FINRA’s latest tax reforms and annual report. Among the executives who received such hefty compensation in 2008:

• Michael D. Jones, former FINRA chief administrative officer: $4.43 million
• Mary Schapiro, now Former FINRA chief executive officer and now SEC Chairman: $3.3 million and $7.2 million for accumulated retirement benefits
• Elisse Walter, SEC commissioner: $3.8 million
• Douglas Shulman, who left the SEC in March 2008 to become Internal Revenue Service Commissioner: $2.7 million
• Susan Merrill, FINRA enforcement chief: Over $1 million

• Grace Vogel, FINRA member regulation’s executive vice president: Over $ 1 million
All employee compensation packages over $1 million was approved by FINRA’s management compensation committee.

FINRA’s compensation and benefits costs for its 2,800 employees went up 21.4% ($541.7 million) in (2008 from 2007) due to $30.3 million in benefit costs (including severance) from a larger retiree medical and savings plan and a voluntary retirement savings program. Also in 2008, another 400 employees joined FINRA’s payroll because of the company’s merger with NYSE Regulation.

Robert Ketchum, FINRA’s new chief executive , says that like everyone else, the SRO took a serious financial hit because of the credit crisis.

However, according to Shepherd Smith Edwards & Kantas LTD LLP founder and securities fraud lawyer William Shepherd: “This is yet another chapter in the saga of ‘Who regulates the regulators?’ But first, you should know that FINRA is no ‘authority’ at all. Instead it is a non-profit corporation owned by each and every securities firm that it regulates! How many of us are regulated by an ‘authority’ that we literally own? This also means that just before she became Chairman of the SEC, Mary Schapiro received $10 million that was mostly tax deferred as a parting gift from all the securities dealers! Now there’s a real incentive to be tough on Wall Street! Oh, and did I mention that FINRA runs its own ‘court system’ for anyone that wants to sue a broker or securities firm? Sometimes I feel like I live in Oz.”

Related Web Resources:
Finra execs pocketed millions in ’08, while SRO was in the red, Investment News, December 3, 2009
FINRA
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Texas Securities Commissioner Not Convinced SEC Has Reformed Itself Since Madoff Ponzi Scam

Published on: December 5, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Denise Voigt Crawford, the Texas securities commissioner and current North American Securities Administrators Association president, says it isn’t evident that the US Securities and Exchange Commission has implemented key reforms to the issues that allowed the agency to fail to detect Bernard Madoff’s $50 billion ponzi scheme for almost 20 years. Speaking at the National Press Club on Friday, she accused the SEC of not doing enough to support legislation intended to increase investor protection.

Crawford claims staffers that work for the SEC hardly interact with investment fraud victims. Because many SEC employees would like to work on Wall Street, she contends that this makes it difficult for agency members to properly oversee a securities firm that could potentially become a future employer.

Seeking to make a number of changes to the financial-overhaul bill currently moving through Congress, NASAA wants states securities regulators to have jurisdiction over securities firms that manage up to $100 million in assets. It also wants broker/dealers, and not just investment advisers, to be subject to a fiduciary standard when giving investment advice. NASAA wants to terminate mandatory pre-dispute arbitration clauses that make investors to pursue their securities fraud claims in arbitration proceedings run by Financial Industry Regulatory Authority.

Responding to Crawford’s comments, SEC spokesperson John Nestor called her statements “uninformed” and cited the agency’s proposal of the Investor Protection Act, its hiring of senior management, reforms made to internal operations, new rulemaking that is focused on investors, and an increase in investigations and penalties as among the numerous “dramatic” changes that the SEC has implemented since Madoff’s massive ponzi scam was discovered.

Related Web Resources:
State regulator: Jury still out on SEC post-Madoff, AP/Yahoo! News, December 4, 2009
2nd UPDATE:Texas Securities Regulator:’Jury Is Still Out’ On SEC Reform, Wall Street Journal, December 4, 2009
Texas State Securities Board

North American Securities Administrators Association
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SEC Submits Amended Complaint Against Bank of America Over Merrill Lynch Merger and Executive Bonuses

Published on: December 3, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission’s amended complaint regarding the acquisition of Merrill Lynch by Bank of America Corp. last January includes one new assertion. In addition to the SEC’s original allegations against Bank of America, the agency now says that the investment bank was in violation of proxy regulations when it did not provide a merger agreement schedule, as well as a list identifying what would have been included in the schedule.

At the center of the SEC lawsuit is Bank of America’s proxy disclosure to shareholders that it wouldn’t pay year-end bonuses to Merrill executives. Yet, even as Merrill posted a record $27.8 billion loss last year, its executives were paid $3.6 billion.

BofA and the SEC initially attempted to settle the allegations for $33 million. Federal Judge Rakoff, however, wouldn’t sign off on what he considered both a swift resolution to an embarrassing situation for the bank and an attempt to make it appear as if the SEC was engaged in enforcement.

Rakoff accused SEC of not being hard enough on Bank of America, which it is supposed to regulate, even as shareholders suffered. He also accused the defendant of neglecting to take responsibility for its actions, which forced taxpayers to bail out the investment bank. A trial is scheduled to begin on March 1.

The US Congress and New York Attorney General Andrew Cuomo are also investigating the merger between Bank of America and Merrill Lynch.

Throughout the US, our securities fraud law firm represents investors who have suffered financial losses because of broker-dealer misconduct.

Related Web Resources:
SEC’s Amended BofA Complaint: New Claims, but No New Defendants, Law.com, October 23, 2009
Judge Rejects Settlement Over Merrill Bonuses, NY Times, September 15, 2009
SEC Fines Bank Of America $33 Million Over Bonuses, Consumer Affairs, August 3, 2009 Continue Reading ›

The Investor Protection Act is Approved by House Financial Services Committee

Published on: December 2, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The US House Financial Services Committee has voted to pass the Investor Protection Act, which is part of a package of bills focused on widening financial industry oversight and investor protection. The bill increases the US Security and Exchange Commission’s authority and doubles the agency’s funding, giving it another $1.115 billion for the 2010 fiscal year.

HR 3817 has a clause that would exempt businesses with a $75 million or lower value from a Sarbanes-Oxley requirement that auditors must verify management’s declaration regarding a concern’s internal controls over financial reporting. The SEC had exempted small businesses from SOX”s Section 404(b) attestation requirement, and the exception was to be lifted in 2011. Another amendment added to the bill would confirm the SEC’s authority to rule on shareowners’ right to vote on corporate board directors.

The Investor Protection Act also terminates the inclusion of mandatory arbitration in contracts in the event that investors wish to file securities fraud claims. It also enforces the fiduciary obligation that investment advisers and broker dealers have to make client’s interests their priority.

Whistleblowers would be given incentives for cases leading to sanctions of over $1 million. The SEC would be able to pay a reward of up to 30% of sanctions to the informants involved. The agency could also issue fines for cease-and-desist cases. It would also have greater subpoena powers.

The House Financial Services Committee has recommended other bills compelling a number of derivatives that are privately traded “over the counter” to pass through regulated exchanges and clearing houses. The bill also calls for dealers to be subject to more extensive transparency, business conduct, and capital requirements. It lets investors file lawsuits against investment firms that recklessly or knowingly publish ratings that are inaccurate and compels private equity and hedge fund advisers to register with the SEC.

Financial Services Committee Approves Investor Protection Act, House.gov, November 4, 2009
House Committee Approves Investor Protection Act, SocialFunds.com
House Financial Services Committee

Sarbanes-Oxley Act 2002
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Braintree Appeals to Keep Auction-Rate Securities Lawsuit Against Citigroup in Court

Published on: November 28, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Braintree Laboratories Inc. is asking the U.S. Court of Appeals for the First Circuit to keep its auction-rate securities lawsuit against the brokerage division of Citigroup Inc. in court. A federal court had ordered the proceedings into arbitration.

Last April, the pharmaceutical company sued Citigroup for securities fraud, accusing the investment bank of misrepresenting $33.2 million in ARS as “liquid,” government-supported “money market” investments that could be sold following seven days notice when Citigroup allegedly knew that the investments were auction-rate securities that were illiquid, subject to failed auctions, and not redeemable until 2030.

Braintree also contends that Citigroup used misleading and false descriptions to prevent clients and regulators from finding out that it was still selling these “toxic instruments.” The pharmaceutical company is accusing Citigroup of destroying key evidence related to the alleged fraud.

Braintree purchased the ARS from Citigroup between June and August ’08. The ARS market froze in early 2008.

Citigroup has agreed to give back $7.5 billion to individual clients, charities, and small businesses that suffered ARS losses when the market collapsed. The broker-dealer is also promising to put its best efforts toward liquidating some $12 million in ARS that were purchased by institutional investors, including retirement plans, by the end of 2009.

As Shepherd Smith Edwards and Kantas Founder and Stockbroker Fraud Lawyer William Shepherd points out, “Most securities firms have agreed to repurchase Auction Rate Securities from smaller investors, but our firm is representing many large investors who remain in ‘ARS limbo.’ It is very important for these investors to hire skilled attorneys to protect their rights before time limits expire to take action! We have found many firms are dragging out discussions with investors but only paying those who take legal action.”

Related Web Resources:
ARS Investor Fights To Keep Citigroup In Court, Law 360, November 11, 2009
Citi sued over auction-rate securities, Reuters, April 17, 2009 Continue Reading ›

FINRA Bars Former Piper Jaffray & Co. Broker from Industry for Insider Trading

Published on: November 25, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is barring a former Piper Jaffray & Co. broker from the securities industry. The broker was accused of insider trading. He has agreed to the ban and has settled the FINRA charges without denying or admitting wrongdoing.

From 2007 until this July, the broker worked in Piper Jaffray & Co.’s investment banking department. Piper Jaffray was the confidential adviser of SoftBrands while the company considered potential buyers. Those at the advisory firm with access to information about the acquision were not allowed to buy SoftBrands shares. Yet on June 4 and 5, this broker bought 27,161 SoftBrands shares. On June 12, when SoftBrands announced its acquisition by Golden Gate Capital and Infor Global Solutions-an $80 million transaction. SoftBrands’s stock price almost doubled.

The shares at issue, previously bought at $.42 and.$.45 per share, were then sold at $.89 per share resulting in a profit of $11,955 on the transactions.

Fighting Senior Investment Fraud: Panel Calls for SEC, Labor Department, and Treasury Department to Work Together

Published on: November 23, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Participants at an AARP/National Consumer League panel called on federal regulators from the US Labor Department, Treasury Department, and the Securities and Exchange Commission to work together when combating elder financial fraud.

North Carolina deputy securities administrator David Massey said not only must federal regulators from the different departments identify common interests and ways to work together, but also they must examine all regulatory gaps. He cited the fact that the 1996 National Securities Markets Improvement Act limits state regulatory authority over certain private offerings (Rule 506 offerings under Regulation D of the 1933 Securities Act).

Meantime, senior policy advisor Jeff Cruz encouraged the different federal arms to work together to combat fraud related to 401K retirement plans. He says that the recent change from benefit pension plans that were professionally managed to defined contribution plans is making retirees and seniors more vulnerable to financial fraud. He also recommended that the Department of Labor audit 401K plans.

Number of Securities Lawsuits Increased During 3rd Quarter

Published on: November 20, 2009 | by Shepherd Smith Edwards & Kantas, LLP

According to commercial insurance consulting firm Advisen, 169 securities lawsuits were filed during 2009’s third quarter-an 11% increase from the 152 complaints that were filed during the previous quarter. 249 securities lawsuits were filed in the 1st quarter.

The most common kind of securities lawsuit filed this past quarter was securities fraud lawsuits that were brought by law enforcement agencies and regulators. 70 securities fraud complaints and 55 securities class actions were filed during 3Q. 50 securities fraud complaints and 38 cases were filed in the 2Q.

Advisen Executive Vice president Dave Bradford says the percentage of securities fraud lawsuits is expected to grow now that the Securities and Exchange Commission appears to be increasing its securities fraud enforcement initiatives under President Barack Obama. The SEC has been attempting to recoup from its failure to detect the $50 billion Ponzi scam that Bernard Madoff ran for years.

Obama Administration Supports Investors’ Securities Fraud Lawsuits Against Merck

Published on: November 18, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Taking the side of investors who are suing Merck for securities fraud, the Obama Administration filed an amicus brief last month arguing that the plaintiffs did not wait too long to file their complaints against the drug manufacturer. use. The painkiller drug was taken off the market in 2004. However, investors are accusing the company of misrepresenting how safe Vioxx was for use.

Investors are suing Merck for billions. They claim that they ended up paying inflated prices for Merck stock because the drug maker downplayed clinical trial test results that appeared to link Vioxx with a greater risk of heart attack. The investors filed one of several securities fraud lawsuits in 2003. At issue in the US Supreme Court case is whether investors should have realized sooner that fraud might have occurred.

Merck claims that investors should have filed their complaints earlier since by late 2001 there was already a lot of information out there alluding to possible misstatements by Merck about Vioxx. Merck has said it acted properly and in a timely manner when it did tell the scientific community and the US Food and Drug Administration about the Vioxx-related info.

The amicus brief, filed by U.S. Solicitor General Elena Kagan, is another indicator that the Obama administration may be more supportive than the Bush Administration of investor lawsuits. According to Shepherd Smith Edwards and Kantas Founder and Stockbroker Fraud Attorney William Shepherd, “It is an oddity to see our government take a legal position on behalf of investors! This may be the first time in a decade that I have seen an official legal position that is contrary to the vested position of Wall Street.”

Kagan says that the investment fraud lawsuits were filed in a timely manner because the plaintiffs did not know and could not have known about Merck’s alleged Securities Exchange Act Section 10(b) violations more than two year before they filed the complaints. She wants the Supreme Court to affirm the appeals court’s ruling that the shareholder complaint was timely. Per federal law, plaintiffs must file their securities fraud complaint within two years after finding out about the violation.

Related Web Resources:
Obama Sides With Investors in Merck Lawsuit, SmartMoney, October 26, 2009
U.S. Supreme Court to Hear Merck Appeal on Reinstated Investor Lawsuit, Insurance Journal, May 27, 2009
Merck & Co.
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