Investor Lawyers Blog

UBS Must Pay Couple $530,000 for Lehman Brothers-Backed Structured Notes

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

A Financial Industry Regulatory Authority arbitration panel has ordered UBS AG to pay two clients $529,688 over their purchase of Lehman Brothers Holdings notes. The investors, Steven and Ellen Edelson, were told that they were buying “structured products, some of which were “principal protected.”

Between 2006 and 2008, the Edelsons, who used to own a plumbing supply company, purchased some $3.5 million in structured products—$529,688 of which came from Lehman. They even purchased the Lehman notes as late as August 2008, just a month before the bank failed.

Some of the Lehman notes that they bought were called “Return Optimization Securities with Partial Protection,” and “100% Principal Protection Notes” (PPN). According to the couple’s securities fraud lawyer, the Lehman notes are now valued at pennies on the dollar). Their attorney contends that by calling the notes “principal protected,” UBS misrepresented the risks involved in investing in the structured notes.

According to Forbes.com, Lehman’s structured notes were supposed to perform like an S&P 500 index or a basket of securities. However, the PPN should be different from either in that the investments—in return for the financial security—would be capped. Unfortunately, as investors found out in September 2008, there were “principal protected” investments that did not live up to their name because they lacked that inferred protection.

UBS maintains that it followed “regulatory requirements” when it sold Lehman notes and that it could not have foreseen the latter’s financial collapse. Meantime, FINRA has ordered the investment bank to repurchase the notes from the retired couple.

Securities Fraud Against UBS Over Lehman Products
UBS has reportedly sold $1 billion of Lehman products to US investors. In six of the seven cases alleging securities fraud that were decided through FINRA, UBS must now repay some or all of the losses sustained by the investors.

Related Web Resources:

UBS Having Hard Time With Lehman Structured Products Arbitration, Forbes, April 26, 2010

UBS Loses Lehman Arbitration Note Claim by Small Investor, Stockbroker Fraud Blog, December 9, 2010

Brokers Renew Push for Investors to Buy Structured Products, Stockbroker Fraud Blog, June 12, 2009

San Diego Officials Settle SEC Municipal Bond Charges for $80,000

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

Four ex- San Diego officials will pay $80,000 in fines to resolve municipal bond charges by the US Securities and Exchange Commission for allegedly misleading investors. Never before has the SEC obtained financial penalties against a city’s officials for municipal securities fraud. By agreeing to settle, ex-San Diego City Manager Michael Uberuaga, ex-Deputy City Manager for Finance Patricia Frazier, ex-Auditor and Comptroller Edward Ryan, and ex-City Treasurer Mary Vattimo are not denying or admitting to the charges. There are still charges pending against San Diego’s ex-Assistant Auditor and Comptroller Teresa Webster.

The SEC filed its securities fraud charges against the former city officials in 2008. The officials are accused of knowing that the city of San Diego had purposely underfunded its pension obligations to increase benefits will deferring costs. The SEC also contends that the ex- officials understood that without cuts to city services, employee benefits, or new revenues, it would be difficult to fund future retirement obligations. Yet the former officials allegedly did not let investors know about the serious funding problems and made false and misleading statements in 2002 and 2003.

Regulators contend that when San Diego sold over $260 million in bonds, city officials did not disclose that the pension deficit was expected to hit $2 billion in 2009. According to Rosalind Tyson, the director of the SEC’s Los Angeles Regional Office, municipal officials are obligated to make sure that investors get accurate and full information about the financial condition of an issuer.

Related Web Resources:

Former San Diego officials settle with SEC, The San Diego Union Tribune, October 26, 2010.

Former San Diego Officials to Pay Penalties in SEC Municipal Bond Fraud Case, Asset International October 29, 2010
More Municipal Bond Blog Posts Continue Reading ›

Should Global Securities Fraud Lawsuits By Private Litigants Be Allowed? The SEC Wants To Know

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

The Securities and Exchange Commission is seeking comments on whether amendments should be made to federal securities laws so that private litigants can file transnational securities fraud lawsuits. Comments are welcomed until February 18, 2011. The SEC says to refer to File No. 4-617.

In its request, the SEC points to the US Supreme Court’s ruling in Morrison v. National Australia Bank. The decision placed significant limits on Section 10(b) antifraud proscriptions’s extraterritorial reach. That said, Congress, through Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 929Y, gave back to the government its ability to file transnational securities fraud charges. It is under the new financial reform law that Congress has ordered the SEC to determine whether a private remedy should apply to just institutional investors or all private actors and/or others.

Included in what the study will analyze are how this right of action could impact international comity, the economic benefits and costs of extending such a private right of action, and whether there should be a narrow extraterritorial standard. The SEC also wants to know if it makes a difference whether:

• The security was issued by a non-US company or a US firm.
• A firm’s securities are traded only outside the country.
• The security was sold or bought on a foreign stock exchange or a non-exchange trading platform or another alternating trading system based abroad.

Related Web Resources:
Morrison v. National Australia Bank (PDF)

US Securities and Exchange Commission

Dodd-Frank Wall Street Reform and Consumer Protection Act, SEC (PDF)

Texas Securities Fraud: Man Admits to $1.7 Million Investment Scam Involving Therapeutic Horseshoes

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

Samuel Serritella, 66, has pleaded guilty to securities fraud. He reportedly received some $1.7 million from 300 investors.

Serritella has admitted that he convinced investors to purchase unregistered shares in International Surfacing Inc. the New Jersey-based company he was chairman, chief financial officer, and president of that was supposedly going to make therapeutic horseshoes to help horses get ready for the Olympics.

Serritella, who was not authorized to sell securities in the state, is accused of making the share sales between February 2004 and May 2006, placing investors’ funds into several bank accounts that were under his control, and using the money to pay for personal expenses (including travel, hotel bills, tavern expenses, and medical bills) and lend $84,000 to three friends.

While Serritella did use some of the money for startup expenses and payments to the company contracted to help make the horseshoes, prosecutors say he never actually purchased the equipment for manufacturing them. He had also charged Serritella with theft by deception, money laundering, misapplication of entrusted property, and misconduct by a corporate official,

As Texas Securities Fraud Lawyer William Shepherd, noted, “100 years ago it was legal in Texas to shoot a horse thief; but getting scammed into investing in “orthopedic shoes” for horses? The “buyer-beware” principle may apply.

Serritella will have to pay back his investor. If convicted, he could end up behind bars for up to a decade.

Related Web Resources:
NJ man admits $1.7M fraud involving horseshoes, Washington Post, October 25, 2010
Garfield man charged with bilking investors of $1.7M, NJ Newsroom, July 21, 2009 Continue Reading ›

Securities Claims Against Goldman Sachs Over Mortgage-Backed Certificates are Partially Dismissed by Court Due to Lack of Injury

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

The U.S. District Court for the Southern District of New York has ruled that without an injury, a mortgage-backed certificates holder cannot maintain a securities claim against MBS underwriter Goldman Sachs & Co. (GS) and related entities for allegedly misstating the risks involved in the certificates in their registration statement. Judge Miriam Goldman Cedarbaum says that plaintiff NECA-IBEW Health & Welfare Fund knew that the investment it made could be illiquid and, therefore, cannot allege injury based on the certificates hypothetical price on the secondary market at the time of the complaint. The court, however, did deny Goldman’s motion to dismiss the plaintiff’s claims brought under the 1933 Securities Act’s Section 12(a)(2) and Section 15.

The Fund had purchased from Goldman a series of MBS certificates with a face value of $390,000 in the initial public offering on Oct. 15, 2007. The fund then bought another series of MBS certificates with a $49,827.56 face value from Goldman, which served as underwriter, creator of the mortgage loan pools, sponsor of the offerings, and issuer of the certificates after securitizing the loans and placing them in trusts.

Per the 1933 Act’s Section 11, the Fund alleged that in the resale market the certificates were valued at somewhere between “‘between 35 and 45 cents on the dollar.” However, instead of alleging that it did not get the distributions it was entitled to, the plaintiff contended that it was exposed to a significantly higher risk than what the Offering Documents represented. The court said that NECA failed to state any allegation of an injury in fact. The court granted the defendants’ motion to dismiss.

Following the court’s decision, Shepherd Smith Edwards and Kantas Founder and Securities Fraud Attorney William Shepherd said, “It is sad that large and small investors have little clout in the processes of selecting judges. Thus, Wall Street continues to gain advantages in court—especially federal court.”

Related Web Resources:

NECA-IBEW

Ex-Employee Accuses Bank of America of Securities Fraud Involving Complex Derivatives Products

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

A former Bank of America employee is accusing the investment bank of aggressively recommending complex derivatives products to investors while at the same time failing to tell them of the risks involved. In a letter to Securities and Exchange Commission Chairman Mary Schapiro, the whistleblower said that the sales of these structured notes were so important to the BofA’s brokerage unit during the economic collapse that workers were threatened with termination if they warned clients against investing in the products or did not meet their quotas.

The ex-employee writes that another employee’s job was threatened after he told clients to liquidate their notes because of the possibility that BofA might become “nationalized,” which would make the notes worthless. The whistleblower claims to have been notified that aggressive sale of the notes was the only way the brokerage unit could fulfill its revenue goals at that time.

Bill Halldin, a Bank of America spokesperson, says that the investment firm has not heard about any such complaint regarding these allegations. He maintains that the investment bank has a policy abiding by “applicable laws and industry practices” when conducting business.

Broker Misconduct
Broker-dealers are obligated to notify investors of risks involved in an investment. They must also make sure that any investment that they recommend is appropriate for a client. Failure to fulfill these duties of care can be grounds for a securities fraud case.

Structured Notes
These derivative-like contracts allow investors to bet on bonds, stocks, or other securities. While some notes are “guaranteed” and promise a return on principal upon expiration, there are still those, such has Lehman Brothers’ notes, that fail to meet that guarantee. This can leave the holders to deal with the financial consequences. Banks may also stop trading the notes at any time.

Related Web Resources:
Informer: BofA hawked risky deals to customers, NY Post, October 29, 2010
Informer: Bofa Hawked Risky Deals to Customers, iStockAnalyst
Bank of America Blog Posts, Stockbroker Fraud Blog
Whistleblower Lawsuits, Stockbroker Fraud Blog Continue Reading ›

Imperia Invest IBC’s Assets are Frozen Following SEC Allegations of British Viatical Settlements Scam That Targeted Deaf Investors

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

A district court issued an emergency order this month to freeze the assets of Imperia Invest IBC. The order came after the Securities and Exchange Commission accused the internet-based investment company of operating a securities scam involving the British version of viatical settlements.

According to the SEC, Imperia Invest IBC had raised over $7 million from more than 14,000 investors located in different parts of the world with the promise that they would earn returns of just above 1% a day. More than half of the money raised came from deaf investors in the US. The agency is seeking disgorgement of fraudulent gains, penalties, an injunction from future violations, and emergency relief for investors.

The SEC claims that the investment company solicited investors through its Web site, which stated that returns could only be accessed through a Visa credit card and purchased from Imperia for a few hundreds dollars. The company, however, did not have a business tie with the credit card company. Imperia also listed bogus addresses in Vanuatu and the Bahamas.

Morgan Stanley’s Motion to Bar Ex-Hedge Fund Promoter Conrad Seghers from Pursuing FINRA Arbitration in Texas Securities Case is Granted by District Court

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

A district court has granted plaintiff Morgan Stanley’s motion that Conrad Seghers, a former hedge fund promoter, be preliminarily barred from pursuing Financial Industry Regulatory Authority arbitration proceeding against the broker-dealer over the way over his accounts were allegedly mishandled. Judge Denise L. Cote said that Seghers waved the right to arbitrate by proceeding with his Texas securities lawsuit when he litigated with earlier action. The dispute between the investment bank and Seghers has been going on for nearly a decade.

According to the court, a number of hedge funds and related entities run by Seghers and his associates opened accounts with Morgan Stanley in 1999. In 2001, Seghers and his partners accused the broker-dealer of serious errors that allegedly caused the funds’ value to sustain huge financial hits. A major investor in a Segher hedge fund would go on to file a Texas securities fraud complaint against the fund promoter, the funds, and his partners.

The following year, a number of the funds sued Morgan Stanley in court. The Texas securities dispute went to NASD (now FINRA) arbitration and the case was eventually settled.

When Seghers sued Morgan Stanley for $35 million in federal court over the investment bank’s allegedly fraudulent misstatements that led to the funds to drop in value, the lawsuit was dismissed as untimely under the Texas limitations period of four years. Seghers chose not to appeal the ruling.

However, not long after, one of the funds founded by Seghers that had traded assets through the Morgan Stanley accounts filed NASD arbitration proceedings accusing the investment bank of breach of contract and fraud related to the same alleged misconduct as the federal district court action. A court in New York dismissed the case as untimely.

This April, Seghers commenced a FINRA arbitration against Morgan Stanley. In July, the investment bank filed a complaint seeking declaratory judgment that the hedge fund promoter waived his right to arbitrate because of his earlier lawsuit, as well as due to the fact that the Texas arbitration was time-barred. The court granted Morgan Stanley’s motion.

Related Web Resources:
Arbitration and Mediation, FINRA Continue Reading ›

Goldman Sach’s $550 Million Securities Fraud Settlement Not Tied to Financial Reform Bill, Says SEC IG

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

According Securities and Exchange Commission Inspector General H. David Kotz, there is no evidence that the SEC’s enforcement action against Goldman Sachs or the $550 million securities fraud settlement that resulted are tied to the financial services reform bill. Kotz also noted that it does not appear that any agency person leaked any information about the ongoing investigation to the press before the case was filed last April. The SEC says that the IG’s report reaffirms that the complaint against Goldman was based only on the merits.

That said, Kotz did find that SEC staff failed to fully comply with the administrative requirement that they do everything possible to make sure that defendants not find out about any action against them through the media. Kotz notes that this, along with the failure to notify NYSE Reg[ulation] before filing the action and the fact that the action was filed during market hours caused the securities market to become more volatile that day. Goldman had settled the SEC’s charges related to its marketing of synthetic collateralized debt obligation connected to certain subprime mortgage-backed securities in 2007 on the same day that the Senate approved the financial reform bill.

Last April, several Republican congressman insinuated that politics may have been involved because the announcement of the case came at the same time that Democrats were pressing for financial regulatory reform. SEC Chairman Mary Schapiro denied the allegation.

Earlier this month, Rep. Darrell Issa (R-Calif.) wrote Schapiro asking to see an unredacted copy of the internal investigative report by the IG. Issa is the one who had pressed Kotz to examine the decision-making process behind the Goldman settlement. Issa’s spokesperson says the lawmaker is concerned that the SEC can redact parts of its IG reports before the public and Congress can see them. However, at a Senate Banking Committee last month, Kotz, said that the SEC redacts information because the data could impact the capital markets.

Related Web Resources:

Goldman Settles With S.E.C. for $550 Million, The New York Times, July 15, 2010

SEC’s Inspector General to Investigate Timing of Suit Against Goldman Sachs, Fox News, April 25, 2010

General H. David Kotz, SEC

NASAA Recommends Best Practices After Finding Brokers Deficient in Five Areas

Published on: October 26, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The North American Securities Administrators Association says that broker-dealer compliance programs throughout the country tend to exhibit deficiencies in several key areas:

• Registration and licensing • Sales practices • Operations • Supervisions • Books and records
Failure to follow written procedures and policy for supervision, variable product suitability, and advertising sales literature are considered the three most commonly noted problem areas.

NASAA issued its findings based on the 567 deficiencies in these five areas that were discovered by regulators in 30 states during 290 examinations that took place between January 1 and June 30. NASAA president and North Carolina deputy securities administrator David Massey says that the organization is flagging the deficiencies to assist brokers in reducing the risk of regulatory violations.

To remedy the deficiencies, NASAA is offering 10 best practices, including those that involve broker-dealers:

• Updating and enforcing written supervisory procedures.
• Developing standards and criteria that can effectively determine which investments are suitable for each client.
• Documenting “red flags” and resolving these promptly.
• Establishing a “meaningful” audit plan that includes unannounced visits and a follow-up plan.
• Obtaining regulatory approval of sales literature and ads before using them • Setting up procedures that can prevent and detect unauthorized private securitization transactions.
• Ensuring that registered representatives’ outside business activities are reviewed before they take place.
• Effective monitoring of both hard copy and electronic correspondence.
• Acknowledging receipt of complaints and updating of a registered representative’s Form U-4.
• Conducting a thorough investigation of the allegations.

Investors that have lost money because of securities fraud or broker mistakes may be able to recoup their losses with the help of an experienced stockbroker fraud law firm.

Related Web Resources:
State Securities Regulators Offer Series of Compliance Best Practices, NASAA, October 12, 2010
Securities and Exchange Commission
Continue Reading ›