Investor Lawyers Blog

The “New” SEC is Acting Just Like The “Old” SEC by Protecting the Securities Industry from Responsibility for its Actions

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

The Securities and Exchange Commission has announced a proposal to temporarily extend a rule that facilitates certain proprietary trading by entities that are registered as both broker-dealers and investment advisers. The proposed extension would move Rule 206(3)-3T’s expiration date by two years, from December 31, 2010 to December 31, 2012. It would also would allow the SEC to complete a study mandated under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Rule 206(3)-3T gives dually registered firms another way to satisfy consent and disclosure requirements that they would otherwise only be able to meet on a transaction-by-transaction basis. Having just the one option would limit the availability that non-discretionary advisory clients would have to certain securities.

The extension would give the SEC the time that it needs to study the regulatory issues related to dual registrants’ principal trading. Dodd-Frank is requiring the SEC to look at any divergent regulations between investment advisers and brokers and use rulemaking to fix gaps so as to better protect investors. The agency has until January 21, 2011 to notify Congress of its findings.

Dodd-Frank’s Section 913 has generated a lot of debate because it could allow for most broker-dealers to be considered fiduciaries under the 1940 Investment Advisers Act. Right now, brokers don’t have to meet the fiduciary standard that investment advisers must satisfy even though both offer similar services. However, instead of holding brokers to the statutory fiduciary standard, the SEC might end up obligating them to fulfill various consent and disclosure requirements at the start of a retail relationship.

Shepherd Smith Edwards & Kantas LTD LLP Founder and Securities Fraud Attorney William Shepherd thinks that it is time to hold brokers responsible to a fiduciary standard: “The only educational requirement to become a licensed securities broker is four months of on-the-job training and the passing of a half-day test. Yet, on average, securities brokers at major firms are paid more than doctors, lawyers and other professionals who must often attain seven or eight years of higher education. Many clients entrust securities brokers with their life savings, retirement assets, and their financial life blood. Why shouldn’t these brokers and the firms required to supervise them be held responsible if the investors are ripped-off? Financial advisers perform the same function but have a fiduciary duty to investors, simply meaning they must put the client’s interest first when advising them. Why should securities brokers be held to a different standard and not be allowed to lull investors into trusting them, while selling their victims the highest commission products that they can find without regard to the client’s best interest? In fact, most state laws currently hold that when a broker is recommending securities to an unsophisticated investor, the broker has a fiduciary duty to that client. What the SEC is trying to do is to pass a rule that makes brokerage firms LESS RESPONSIBLE than they are at present. These endless tactics perpetrated by securities regulators, at the behest of Wall Street, and are yet another type of bail-out move by the Securities Cartel that controls this nation.”

Related Web Resources:
Read the Proposed Rule (PDF)

1940 Investment Advisers Act

Institutional Investor Securities Blog
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Actions of Former Ferris, Baker Watts, Inc. General Counsel Accused of Supervising Rogue Broker to be Reviewed by SEC

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

The Securities and Exchange Commission will be taking a closer look at the actions of ex- Ferris, Baker Watts, Inc. General Counsel Theodore Urban. Urban has been accused of failing to reasonably supervise stockbroker Stephen Glantz, who was involved a stock market manipulating scam with Innotrac Corp. stock.

It is rare for the SEC to examine the actions of a general counsel. However, the agency says it is looking at the case because the proceedings bring up key “legal and policy issues,” such as whether Urban acted reasonably in the manner that he oversaw Glantz and chose to respond to signs of broker misconduct. The case also brings up the questions of whether securities professionals such as Urban should be made to “report up” and if his status as a lawyer and his role as “FWB’s general counsel affect is liability for supervisory failure.”

Earlier this year, Securities & Exchange Commission Administrative Law Judge Brenda Murray ruled that Urban did not inadequately supervise Glantz and that the proceedings against him be dropped. Murray said that per the 1934 Securities Exchange Act, a person cannot be held liable for supervisory deficiencies if appropriate procedures for detecting and stopping the violations were applied, She said that Urban had no reasonable grounds to think that procedures had not been followed.

However, Murray’s decision isn’t final until the SEC enters its final order, and on Tuesday the commission declined Urban’s motion requesting that the SEC affirm Murray’s ruling. Division lawyers have said that Murray’s decision was not consistent with previous SEC precedent, lowers the standards that supervisors at dealers, brokers, and investment advisers must meet, and did not protect the investing public by making Urban accountable to sanctions.

SEC to Review Actions of Bank General Counsel Who Supervised Rogue Broker, Law.com, December 9, 2010

Read the SEC order denying motion for summary affirmance (PDF)

Read the administrative law judge’s ruling (PDF)

Ex-Ferris, Baker Watts, Inc. General Counsel Did Not Fail to Properly Supervise Broker Fraudster, Says SEC Judge, Stockbroker Fraud Blog, September 30, 2010

Texas Lawyer Pleads Guilty to Involvement in Alleged $100M Life Settlement Scheme

Published on: December 7, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Texas attorney Russel Mackert has pleaded guilty to charges related to his involvement in an alleged $100 million life settlement fraud scheme that targeted over 800 investors. A number of the investors that Mackert scammed were retirees.

The Department of Justice says that Mackert, who was the attorney for a number of A & O entities, issued material misrepresentations, such as false statements, to investors about A&O Resource Management Ltd. and the related entities. This included making misstatements about the use of and safekeeping of investors’ money and the risks involved with the company’s products. Mackert is accused of marketed over $100 million of fraudulent investments to over 800 victims in the United States and Canada. Investors suffered over $19 million in financial losses.

Mackert has admitted to facilitating the false sale of A & O and making up a fictional person to play the role of the company’s representative. He also has admitted that he failed to let investors know that most of their investments were being used for purposes totally unrelated to the buying and maintaining of life settlement portfolios. He smuggled the cashiers’ checks outside the country in an attempt to open offshore bank accounts for hiding the ill-gotten gains.

The criminal charges against Mackert include smuggling $10 million in undeclared cashier’s checks outside the US and criminal information alleging conspiracy to commit mail fraud. Mackert is facing a maximum 5 years behind bars on the smuggling conviction and 20 years on the conspiracy charge. He also faces a $250,000 fine for each count.

Related Web Resources:
Lawyer in A&O Case Enters Guilty Plea in $100M Scam, The Life Settlements Report, November 24, 2010
Lawyer for A&O Entities Pleads Guilty for His Role in $100 Million Fraud Scheme Involving Life Settlements, US Department of Justice, November 23, 2010
Institutional Investor Securities Blog
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Operation Broken Trust Investment Fraud Sweep Has Ended

Published on: December 7, 2010 | by Shepherd Smith Edwards & Kantas, LLP

According to the Financial Fraud Enforcement Task Force, the largest investment fraud sweep ever conducted by the United States has ended. Called Operation Broken Trust, the probe involved 231 cases and over 120,000 fraud victims who sustained over $8 billion in investment losses.

Operation Broken Trust’s objective was to discover and expose large scale investment fraud schemes in the US and notify the public about bogus financial scams. The probe focused on schemes that directly targeted individual investors as opposed to long-term complex corporate fraud issues. In many case, the criminals involved were trusted members of the victims’ communities, such as a coworker or a fellow church attendee. A number of investors lost their homes and/or life savings as a result of the scams.

Victims were targeted by other individuals who were promoting “investment opportunities” that were either not structured the way they were promoted or totally bogus. Scams include Ponzi schemes, high-yield investment fraud schemes, foreign exchange fraud, commodities fraud, pump-and-dump scams, market manipulation, business opportunity fraud, real estate investment fraud, and affinity fraud.

The FBI says that Los Angeles, Dallas, New York, San Francisco, and Salt Lake City were the leading cities for Ponzi scams. More than 200 Ponzi cases have been opened since the beginning of 2009. Many of these schemes resulted in over $20 million in losses. The FBI says it has been able to shut down many of the scams and many of those responsible have been arrested.

Operation Broken Trust includes civil and criminal enforcement actions that took place between August 16 and December 1, 2010.

Related Web Resources:
Operation Broken Trust, FBI, December 6, 2010

Financial Fraud Enforcement Task Force , US Department of Justice

Stockbroker Fraud Blog

Class Members of Charles Schwab Corporation Securities Litigation Can Still Opt Out to File Individual Securities Claim

Published on: December 6, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The US District Court has approved an amendment to the proposed Charles Schwab Corporation Securities Litigation settlement. The Supplemental Notice of Proposed Settlement of Class Action has been sent to the affected class members, which includes those who may have held Schwab YieldPlus Fund shares on September 1, 2006 and gotten more of them between May 31, 2006 and March 17, 2008. Shares may have been obtained through a dividend reinvestment in the Fund or through purchase. Affected class members cannot have been a resident of California on September 1, 2006.

The Supplemental Notice notes that there has been a clarification in the release claims’ scope that affected class members will be giving Schwab if they decide to take part in the settlement. More claims than those in the federal securities class litigation are now included in the amended release. Class members now have another chance opt out of the class action complaint.

Exclusion Deadline: Your notice of exclusion must be postmarked no later than January 14, 2011 and cannot be received after January 21, 2011.

Federal and State Securities Acts’ Anti-Waiver Provisions Did Not Bar International Forum Selection Clause’s Enforcement, Says Texas Court of Appeals

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

The Court of Appeals of Texas has held that in a shareholder agreement regarding the purchase of company stock, the federal and state Securities Acts anti-waiver provisions did not bar the enforcement of an international forum selection clause. The parties had consented to the exclusive jurisdiction of courts in Ontario, Canada to adjudicate any disputes stemming from or related to the shareholder agreement or/and the purchase, sale or holding of company common shares. Securities laws were only impacted where parties exercised their rights to voluntarily take part in a contract mandating that lawsuits be brought in courts and under another country’s laws. Also, public policy was in strong favor of enforcing forum selection clauses.

Commenting upon the ruling, Shepherd Smith Edwards and Kantas Founder and Stockbroker Fraud Attorney William Shepherd noted: “The vast majority of securities loss claims filed in the past 20 years have been decided in arbitration. With international arbitration forums becoming more prevalent as economies globalize, this change was inevitable. It is very important for investors to hire attorneys with experience in securities arbitration to seek recovery of securities losses. Over the past 20 years, our firm has represented thousands of investors nationwide – and worldwide – in securities arbitration.”

Related Web Resources:
Young v. Vault.X Holdings, Inc.

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Citigroup Seeking to Dismiss $11.6 Million Securities Arbitration Award to “Dallas” TV Star Larry Hagman

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

TV star Larry Hagman, best known for playing the roles of Texas oil tycoon JR Ewing on “Dallas” and Major Anthony Nelson on “I Dream of Jeannie,” recently won an $11.6 million securities fraud arbitration award against Citigroup. The Financial Industry Regulatory Authority says that the award is the largest that has been issued to an individual investor for 2010 and the ninth largest ever. Citi Global Markets is now seeking to dismiss the award.

The investment firm contends that the arbitration panel’s chairman did not disclose a possible conflict of interest. In its petition, Citi cites a FINRA rule obligating arbitrators to reveal such conflicts that could prevent them from issuing an impartial ruling. The financial firm claiming that because the arbitration panel head was once a plaintiff in a lawsuit that dealt with the same type of claims and subject matter, he had an undisclosed potential conflict. Hagman’s legal team have since responded with a memo arguing that the arbitrator’s lawsuit was not related to this complaint and did not involve a securities investment, the same parties, or the same facts.

Hagman and his wife Maj had accused Citigroup of securities fraud, breach of fiduciary duty, and other allegations. They claimed financial losses on bonds and stocks and a life insurance policy. In addition to the arbitration award, which consists of $1.1 million in compensatory damages and $10 million in punitive damages that will go to a charity of Hagman’s choice, Citigroup must also pay a 10% interest on the award.

Related Web Resources:
Messing With J.R., Take Four, NY Times, November 23, 2010
Actor Larry Hagman Wins $12 Million in Finra Case With Citigroup, Bloomberg, October 7, 2010

Citigroup’s petition to dismiss award to Larry Hagman

Citigroup, Stockbroker Fraud Blog Continue Reading ›

Securities Fraud Lawsuit Against Citigroup Involving Mortgage-Related Risk Results in Mixed Ruling

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

According to a district court ruling, investors can proceed with certain securities fraud charges against Citigroup and a number of its directors over the alleged misrepresenting of the risks involved in mortgage-related investments (including auction-rate securities, collateralized debt obligations, Alt-A residential mortgage-backed securities, and structured investment vehicles). However, the majority of claims involving pleading inadequacies have been dismissed. The securities lawsuit seeks to represent persons that bought Citigroup common stock between January 2004 and January 15, 2009.

Current and ex-Citigroup shareholders have said that as a result of the securities fraud, which involved the misrepresentation of the risks involved via exposure to collateralized debt obligations, they ended up paying an inflated stock price. The plaintiffs are accusing several of the defendants of selling significant amounts of Citigroup stock during the class period. They also say that seven of the individual defendants certified the accuracy of certain Securities and Exchange Commission filings that were allegedly fraudulent. They plaintiffs are claiming that there were SEC filings that violated accounting rules because of the failure to report CDO exposure and value such holdings with accuracy.

The plaintiffs claim that the defendants intentionally hid the fact that billions of dollars in CDOs hadn’t been bought. They also said that defendants made misleading statements that did not properly make clear the subprime risks linked to the Citigroup CDO portfolio.

The defendants submitted a dismissal motion, which the court granted for the most part. Although the court is letting certain CDO-related claims to move forward, it agrees with the defense that because the plaintiffs failed to raise an inference of scienter before February 2007 (when the investment bank started buying insurance for its most high risk CDO holdings), the claims for that period cannot be maintained. The court also held that the plaintiffs failed to plead that seven of the individual defendants had been aware of Citigroup’s CDO operations. As a result, the court determined that there can be no finding of scienter in regards to the individuals.

The court, however, did that the plaintiffs adequately pleaded securities fraud claims against Citigroup, Gary Crittenden, Charles Prince, Thomas Maheras, Robert Druskin, David C. Bushnell, Michael Stuart Klein, and Robert Rubin for misstatements made about the bank’s CDO exposure between February and November 3, 2007. The plaintiffs also adequately pleaded securities fraud claims against Citigroup and Crittenden for Nov. 4, 2007, to April 2008 period.

Compliance with 1934 Securities Exchange Act Reporting Requirements During Annual Broker-Dealer Audits is Key, Say SEC Officials

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

Securities and Exchange Commission Division of Trading and Markets Robert Cook and Chief Accountant James Kroeker are reminding auditors that it is important that they comply with specific 1934 Securities Exchange Act reporting requirements when performing annual broker-dealer audits. Earlier this month, the two SEC officials sent a letter to American Institute of Certified Public Accountants Stock Brokerage and Investment Banking Expert Panel Chair Stephen Zammitti.

Per Kroeker and Cook, under the 1934 Securities Exchange Act’s Rule 17a-5, broker-dealers must file yearly reports, supplemental reports, and supporting schedules. They also noted that Under Rule 15c3-1, a supporting schedule must include required and actual net capital and, when applicable, computation of the customer reserve requirement, as well as information about possession or control requirements.

The two SEC officials issued the reminder that brokerage firms have to submit an accountant’s report about the supporting schedule from a registered public accounting firm and that the yearly financial report audits must meet accepted auditing standards. Cook and Kroeker also said that even though the Dodd-Frank Act gave the Public Company Accounting Oversight Board the authority to put forth an auditing and attestation standard for broker dealers’ PCAOB-registered auditors, per recent SEC interpretive guideline auditors should keep adhering to AICPA standards until further rulemaking. The two SEC officials emphasized the need for accounting firms to review internal accounting records, the accounting system, and procedures for safeguarding securities and that, per Rule 17a-5, the audit and review’s scope must be enough to provide enough assurance that any “material inadequacies… would be disclosed.”

Related Web Resources:
View the Letter (PDF)

Read the SEC Guidance (PDF)

The 1934 Securities and Exchange Act
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Financial Firms File Securities Fraud Lawsuits Against Each Other Over 2008 Credit and Subprime Crisis

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

In what one investment banking official is calling a “second wave” of securities litigation stemming from the credit and subprime crisis of 2008, financial firms are now suing other financial institutions for damages. While speaking on a Practising Law Institute panel, Morgan Stanley managing director D. Scott Tucker noted that this “second wave” is the “exact opposite of the first wave,” which was primarily brought by smaller pension funds or states claiming violations of the 1933 Securities Act and the 1934 Securities Exchange Act.

Tucker said that with this new wave, most of the plaintiffs are financial institutions, including investment managers and hedge funds, that are asserting common law fraud and making other state law claims. Also, these latest lawsuits are primarily individual cases, rather than class actions. The securities at the center of this latest wave of litigation are complex structured products, such as credit default swaps, collateralized debt obligations, and mortgage-backed securities, as well as complaints involving private placements and derivatives or securities that don’t trade on liquid markets.

Our securities fraud lawyers at Shepherd Smith Edwards & Kantas LTD LLP represent institutional investors who suffered financial losses because of their dealings with investment companies. Unlike other law firms, our stockbroker fraud lawyers will never represent brokerage firms.