Investor Lawyers Blog

Citigroup to Pay $1.5 M for Supervisory Violations Related to Broker’s Handling of Trust Funds

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

According to the Financial Industry Regulatory Authority, Citigroup Global Markets Inc. has consented to pay $1.5 million in disgorgement and fines for failing to properly supervise broker Mark Singer and his handling of trust funds belonging to two cemeteries. By agreeing to settle, Citigroup is not denying or admitting to the charges. Also, the disgorgement amount of $750,000 will be given back to the cemetery trusts as partial restitution.

FINRA says that from September 2004 and October 2006, Singer and his clients Craig Bush and Clayton Smith were engaged in securities fraud. Their scheme involved misappropriating some $60 million from cemetery trust funds. Bush and Smart were the successive owners of the group of cemeteries in Michigan that the funds are believed to have been stolen from. Smart bought the cemeteries from Bush in August 2004 using trust funds that were improperly transferred from the cemeteries to a company that Smart owned.

When Singer went to work for Citigroup as a branch manager in September 2004, he brought Bush’s cemetery trust accounts with him. FINRA says that Singer then helped Smart and Bush open a number of Citigroup accounts in their names and in the names of corporate entities that the two men controlled or owned. The broker also helped them deposit cemetery trust funds into some of the accounts, as well as effect improper transfers to third parties. Some of the fund transfers were disguised as fictitious investments made for the cemeteries.

FINRA says that Citigroup failed to properly supervise Singer when it did not respond to “red flags” and that this lack of action allowed the investment scheme to continue until October 2006. As early as September 2004, Singer’s previous employer warned Citigroup of irregular fund movements involving the Michigan cemetery trusts. Within a few months, Citigroup management also noticed the unusual activity.

Citigroup failed to “conduct an adequate inquiry” even after finding out in February 2005 that Smart may have been making misrepresentations about his acquisition of hedge fund investments that belonged to the Michigan cemetery trusts and had used the hedge funds as collateral for a $24 million credit line. Although the investment bank had received a whistleblower letter in May 2006 accusing Singer of broker misconduct related to his handling of the cemetery trusts, it still failed to restrict Singer’s activities or more strictly supervise him.

Related Web Resources:
Citi Sanctioned $1.5M By Finra In Supervisory Lapse, The Wall Street Journal, May 26, 2010
Stealing from the dead, CNN Money, August 13, 2007 Continue Reading ›

Republican Senator Seeks to Water Down Fiduciary Standards in Pending Investor Rights Bill and Exempt Insurance Companies from Liability

Published on: May 27, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The North American Securities Administrators Association is criticizing an amendment introduced by Sen. Susan Collins (R-Maine). SA 4009, an amendment to the Senate financial regulatory reform bill (S. 3217), would protect variable annuities sellers from the fiduciary standard. While her amendment imposes a fiduciary standard on broker-dealers that offer investment advice to retail customers, variable contract products and representative-investment companies would not have to adhere to this standard.

The NASAA and other critics say that the amendment proposes a weaker version of the standard that would leave the very victims the standard is supposed to protect in a vulnerable position. NASAA also says that Collins’ proposed standard falls short of the standard in the way that 1940 Investment Advisers Act defines it. In a release issued earlier this month, NASAA says that with seniors and other small investors often having to contend with abusive practices from agents and brokers who end up recommending certain products because they come with higher commissions or revenue sharing payments, NASAA stressed the need for Congress to require that investment advisers and brokers abide by “the fiduciary duty of the Investment Advisers Act.” The Consumer Federation of America agrees with NASAA’s position on the Collins amendment.

NASAA is placing its support behind amendment (SA 3889). Referred to as the “Honest Broker” amendment, the legislation proposes that the Securities and Exchange Commission adopt a rule that would extend the fiduciary duty under the Advisers Act to brokers who offer investment advice. SA 3889 was introduced by Senators Daniel Akaka (D-Hawaii) and Robert Menendez (D-N.J.).

Other proposed amendments include SA 3806, by Senator Ted Kaufman (D-Del.) and Sens. Arlen Specter (D-Pa.). Their amendment extends the fiduciary duty under the Advisers Act to broker-dealers. Their amendment also proposes criminal liability for willful violations of the duty. SA 3792, introduced by Sen. Barbara Boxer (D-Calif.), would make each financial services provider subject to a fiduciary duty. The amendment gives Commodity Futures Trading Commission and the SEC the authority to define, enforce, and clarify the duty for regulated enitites under their jurisdictions.

Related Web Resources:
Joint Letter Opposing Collins Amendment (PDF)

S.3217 – Restoring American Financial Stability Act of 2010
Continue Reading ›

Leahy Amendment Would Provide Whistleblower Protection While Holding SEC and CFTC Accountable If They Don’t Follow Up on Tips

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

A number of watchdog groups want Senate Banking Committee Chairman Chris Dodd (D-Conn.) to support an amendment to the financial regulatory reform bill that he is sponsoring. The bill lets the Securities and Exchange Commission and the Commodity Futures Trading Commission set up bounty programs for whistleblowers that approach them with information about financial fraud. However, if the government doesn’t act on these tips, the bill has two key provisions that prevent whistleblowers and the public from ever finding out. Leahy’s amendment would eliminate the provisions while protecting the identities of whistleblowers.

In a letter to Senator Dodd, the groups said that such limits on public access are “poison pill secrecy measures” that would not only prevent the public and whistleblowers from ever knowing whether the tips were pursued, but also would keep the latter from proving they are whistleblowers if they were ever retaliated against. The groups said that such secrecy would allow regulators to avoid being held accountable if they failed to act on any whistleblower tips.

The watchdog groups that support the amendment include Public Citizen, OMB Watch, the Project on Government Oversight, Citizens for Responsibility and Ethics in Washington, OpenTheGovernment.org, Government Accountability Project, Common Cause, Progressive States Network, Consumer Action, National Community Reinvestment Coalition, Americans for Financial Reform, and the National Fair Housing Alliance.

Related Web Resources:
S.3217 – Restoring American Financial Stability Act of 2010, OpenCongress.com
Read the groups’ letter to Senator Dodd (PDF)
Continue Reading ›

Deutsche Bank Securities & National Financial Services Fined $925,000 for Regulation SHO Short Sale Restrictions & Supervisory Violations

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

The Financial Industry Regulatory Authority says that Deutsche Bank Securities and National Financial Services LLC have consented to be fined $925,000 in total for supervisory violations, as well as Regulation SHO short sale restrictions violations. By agreeing to settle, the broker-dealers are not denying or admitting to the charges.

FINRA claims that the two investment firms used Direct Market Access order sytems to facilitate client execution of short sales and that they violated the Reg SHO “locate” requirement, which the Securities and Exchange Commission adopted in 2004 to discourage “naked” short selling. FINRA says that while the two broker-dealers put into effect DMA trading systems that were supposed to block short sale order executions unless a locate was documented, the two investment banks submitted short sale orders that lacked evidence of these locates.

FINRA says that during the occasional outages in Deutsche Bank’s systems, short sale orders were automatically rejected even though a valid documented locate had been obtained. This is when the the investment bank would disable the automatic block in its system, which allowed client short sales to automatically go through without first confirming that there were associated locates.

As for NFS, FINRA contends that the investment bank set up a separate locate request and approval process for 12 prime clients that preferred to get locates in multiple securities prior to the start of trading day. With this separate system, the requests and approvals for the numerous locates did not have to be submitted through the firm’s stock loan system at approval time. Instead, the clients could enter and execute orders through automated platforms that lacked the capacity to automatically block short sale order executions that didn’t have proper, documented locates.

JP Morgan Chase & Co. Accused of Securities Violations Involving Guaranteed Investment Contracts and Derivatives

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

In a May 10 Securities and Exchange Commission filing, JP Morgan Chase & Co. says that an SEC regional office intends to recommend that the agency file charges against the investment bank for securities violations involving the selling or bidding of derivatives and guaranteed investment contracts (GICs). JP Morgan says the Office of the Comptroller of the Currency and a group of state attorneys general are looking into the allegations. The investment bank is cooperating with investigators.

JP Morgan’s Form 10-Q details the bank’s activities during the first quarter of 2010. The investment bank says that Bear Stearns is also under investigation for possible securities and antirust violations involving the sale or bidding of GICs and derivatives. JP Morgan acquired Bear Stearns in 2008.

Guaranteed Investment Contract
GICs are sold by insurance companies. Other names for GIC include stable value fund, capital-preservation fund, fixed-income fund, and guaranteed fund. GICs are considered safe investments with a value that remains stable. They usually pay interest from one to five years and when a GIC term ends, it can be renewed at current interest rates.

Related Web Resources:
US Securities and Exchange Commission

Guaranteed Investment Contracts, Financial Web Continue Reading ›

State of Connecticut Retirement and Trust Funds to Get Back $795,000 Lost in Securities Fraud Carried by Former Connecticut State Senate Fresident

Published on: May 18, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission says that the U.S. District Court for the District of Connecticut has approved a Fair Fund distribution that will give back $795,000 to the State of Connecticut Retirement and Trust Funds, which suffered financial losses because of an investment scam involving William A. DiBella, the former president of the Connecticut State Senate. The SEC’s 2004 complaint had accused DiBella and his consulting firm North Cove of taking part in an investment scheme with former Treasurer of the State of Connecticut Paul Silvester, who had invested $75 million in state pension funds with private equity firm Thayer Capital Partners.

The SEC claims that Silvester arranged for DiBella to receive a percentage of the investment from Thayer. Silvester is also accused of increasing the pension fund’s investment with Thayer by at least $25 million so that DiBella could receive a larger fee. In total, Thayer paid $374,500 to DiBella through North Cove.

A jury found DiBella liable for abetting and aiding in the securities fraud, and the trial court ordered him to pay $374,500 in disgorgement, $307,127 in prejudgment interest, and $110,000 in penalties. The SEC had to instigate contempt proceedings with the federal court because of DiBella’s continued nonpayment. He finally completed payment of over $795,000 in March 2010, and the SEC fair fund was then set up.

SEC’s Division of Investment Management to Make 12b-1 Fee and Form ADV Recommendations Soon

Published on: May 16, 2010 | by Shepherd Smith Edwards & Kantas, LLP

According to the director of the Securities and Exchange Commission’s Division of Investment Management Andrew Donohue, its staff is close to recommending that the SEC adopt a proposed rule mandating that mutual funds give clients better information about the uses of Rule 12b-1 distribution fees and their amounts. The fees are automatically taken out of investor mutual fund balances and used as compensation for financial professionals’ expenses, including broker commissions, promotions, and distributions. More than $13 billion in Rule 12b-1 fees were collected in 2008.

Reform of Rule 12b-1 is likely to steer up a lot of controversy between industry participants and consumer interest groups. Adopted under the 1940 Investment Company Act in 1980, 12-b 1 fees’ use has changed significantly since then. At an American Bar Association function last month, Donohue said that the division hopes to recommend a reform proposal that is more investor-oriented, allows clients to have additional knowledge about how much the fees are and how they will be used, and better reflects today’s market environment.

The division is also close to recommending to the SEC that it adopt revisions to Part 2 of Form ADV, which is the main disclosure document that clients get from investment advisors. Under the proposal, registered investment advisers would have to give current and prospective clients a brochure written in plain English that provides important information about the services they are getting and who is representing them.

Donohue noted that the division is also working on a proposal regarding summary prospectus for variable annuities that would also give investors key information in English that is easy to understand, as well access to more information via the Internet. He also noted that because of the increased use of “derivatives (including collateralized debt obligations and credit default swaps) and sophisticated financial products” and the ability of a fund’s manager to put together a portfolio in so many different ways that are not necessary related to how much has been invested or the kinds of instruments in the fund, the division is compelled to examine investment companies derivative activities and what they mean for the “regulatory framework.”

Private Equity Firm Onyx Capital Advisors LLC Charged with Securities Fraud by SEC

Published on: May 13, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The SEC has filed securities fraud charges against the private equity firm, Onyx Capital Advisors LLC, its founder Roy Dixon Jr., and his friend Michael Farr. The agency is accusing the defendants of stealing over $3 million from three area public pension funds.

According to the SEC, Onyx Capital Advisors and Dixon raised $23.8 million from the pension funds for a start-up private equity fund that was to invest in private companies. Dixon and Farr, who controlled three of the companies that the Onyx fund had invested in, then illegally took out money that the pension funds had invested and used the cash to cover their own expenses.

While Onyx Capital and Dixon allegedly took more than $2.06 million under the guise of management fees, Farr allegedly helped divert approximately $1.05 million through the companies under his control. He is also accused of diverting part of the over $15 million that Onyx capital invested in SCM Credit LLC, Second Chance Motors, and SCM Finance LLC to 1097 Sea Jay LLC, which is another company that he controls. Farr then allegedly took money from Sea Jay, gave most of it to Dixon, and kept some for himself.

The SEC is accusing Onyx Capital and Dixon of making misleading and false statements to pension fund clients about the private equity fund and the investments they were making. The agency claims that the private equity firm and its founder violated Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 thereunder, Section 17(a) of the Securities Act of 1933, and Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act, and Rule 206(4)-8 thereunder. The SEC claims that Farr aided and abetted in the other two defendants’ violations of Sections 206(1) and 206(2) of the Investment Advisers Act.

Related Web Resources:
SEC charges private equity firm and money manager for defrauding Detroit-area public pension funds, SEC, April 23, 2010
Read the SEC Complaint, SEC (PDF)
Continue Reading ›

Supreme Court Nominee Elana Kagan Took Investors Side on Two Significant Securities Cases

Published on: May 12, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The Wall Street Journal reports that as Solicitor General of the United States, US Supreme Court nominee Elana Kagan has sided with investor interests in two high profile lawsuits. In one securities fraud complaint that looked at when shareholders can sue mutual–fund mangers that had allegedly charged fees that were excessive, her office submitted a legal brief supporting investors. Kagan contended that a lower-court ruling make sure that there was enough of a check on potentially exorbitant fees. In another securities case, the Solicitor General’s office argued that Merck & Co. Inc. shareholders did not wait too long to file lawsuits accusing the pharmaceutical company of misrepresenting the safety of VIoxx. This spring, the US Supreme Court unanimously agreed with Kagan’s position in both cases.

However, The solicitor general’s office is siding with the business side in another investor lawsuit that awaiting resolution by the Supreme Court. She is contending that foreign investors shouldn’t be able to file a US securities lawsuit against National Australia Bank Ltd, which is a foreign company.

The Wall Street Journal says that by choosing Kagan as the latest Supreme Court nominee, the Obama administration is taking “a friendlier approach” when it comes to investor cases.

Related Web Resources:
Kagan Sided With Investors in Two Notable Securities Cases, The Wall Street Journal, May 10, 2010
Does Elena Kagan Support Shareholder Rights?, The Big Money, May 11, 2010
A Climb Marked by Confidence and Canniness, NY TImes, May 10, 2010
Office of the Solicitor General
Continue Reading ›

New Braunfels Firm Accused of Texas Securities Fraud In Sales of Viatical (Insurance) Investments

Published on: May 10, 2010 | by Shepherd Smith Edwards & Kantas, LLP

State District Court Judge Stephen Yelenosky has frozen the assets of Retirement Value LLC and appointed a receiver to take control of the New Braunfels company, which faces allegations of Texas securities fraud related to the sale of investments linked to death benefits from life insurance policies. The Texas State Securities Board, which has been conducting an undercover investigation into the company, requested the court order against the investment firm.

Retirement Value, its President Richard “Dick” Gray, and Chief Operating Officer Bruce Collins are defendants in the court action. According to the securities board, between April 2009 and February 2010 the company allegedly collected $65 million from more than 800 investors. The securities board also claims that investment firm told investors that the expected rate of return would be 16.5% payable upon maturity.

The claim contends that from the $65 million that the Retirement Value received from investors, $9.3 million was paid in commissions to unregistered sales agents. Meantime, Retirement Value, Gray and other principals in the company retained $8.4 million. Only $20.2 million was used to acquire the interests in the life insurance policies, while another third was set aside to acquire additional policies.