Investor Lawyers Blog

UBS Securities, Citigroup Global Markets, and Deutsche Bank Securities Agree to FINRA Sanction Over Vonage IPO

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

Citigroup Global Markets, Deutsche Bank Securities, and UBS Securities have agreed to pay fines for Financial Industry Regulatory Authority sanctions over their handling of Vonage LLC stock’s initial public offering in 2006. FINRA says that the firms’ failure to adequately supervise communications with customers cost investors hundreds of thousands of dollars. By agreeing to settle, none of the broker-dealers are agreeing to or denying wrongdoing.

The three firms acted as the Vonage offering’s lead underwriters. A “directed share program” was included. Clients used accounts with the broker-dealers to purchase about 4.2 million shares.

An external company designed and administered a Web site for DSP participants that the firms’ clients used to communicate about the IPO. According to the SRO, however, inadequate supervision and the failure to follow procedures regarding outside sourcing and directed share programs resulted in the broker-dealers being unable to respond appropriately or take effective action when certain clients obtained misinformation about their orders.

By the time customers were finally notified that shares were allocated to them, the Vonage stock price had dropped significantly compared to the offering price. In addition to paying the higher price, investors sustained financial losses when the stocks were sold.

UBS, Citigroup, and Deutsche Bank have agreed to fines totaling $845,000. UBS will pay a $150,000 fine and a maximum of $118,000 to 26 clients who are potentially eligible. In addition to its $175,000 fine, Citigroup will pay 284 potentially eligible customers a maximum of $250,000. Deutsche Bank will pay 59 potentially eligible clients a maximum of $52,000, plus its $100,000. Customers are to be compensated the difference between Vonage stock’s price when clients found out they had been allocated shares and the $17/share IPO price that they paid.

Related Web Resources:
FINRA Fines Citigroup Global Markets, UBS and Deutsche Bank $425,000, Orders Customer Restitution for Supervisory Failures in Vonage IPO, FINRA, September 22, 2009
Citi, UBS, Deutsche Fined Over Vonage IPO
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Securitization of Life Insurance Settlements Might Lead to Next Financial Crisis, Say Lawmakers

Published on: September 27, 2009 | by Shepherd Smith Edwards & Kantas, LLP

House Financial Services capital markets subcommittee chairman Rep. Paul Kanjorski recently warned that unless “additional safeguards” are put in place, the growing securitization of life insurance settlements could lead to the next financial crisis. During a hearing on the issue, Kanjorski said regulators, Congress, and credit ratings agencies should have done a better job moderating the high demand for subprime mortgage backed securities. He says their failure to supervise contributed to the financial debacle.

Life settlements, also known as viaticals, are not securities, but they do fall under the purview of the Securities and Exchange Commission when they are pooled and put up for sale in the capital markets. They are, however, at this time not subject to a registration requirement and have been sold during private offerings. Because of this, the SEC only has limited authority over life settlements.

The agency has set up a task force to assess the issues involving life settlements. The task force will determine whether regulatory changes need to be made and if Congress should expand the SEC’s authority.

According to the SEC Division of Corporation’s associate director Paula Dubberly, life settlements investors need full disclosure so they can understand the risks that arise with the viaticals’ securitization. The task force will examine the “tension” between the insured’s privacy rights and providing investors with this type of disclosure.

Credit Suisse’s Life Finance Group global head Kurt Gearhart says that as only 35 states regulate life settlements, consumers are lacking protection in 15 states. National Association of Insurance Commissioners vice president Susan E. Voss, however, disagrees with Gearhart’s figures. He says there is some form of life settlement regulation in 45 states. Meantime, Life Partners Holdings Inc. chairman and chief executive officer Brian D. Pardo is calling for stronger federal regulation.

Related Web Resources:
AARP

Panel To Look At Life Settlement Securitization
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Regions Bank Settles SEC Charges Over Latin American Investment Fraud Scam

Published on: September 24, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Regions Bank has agreed to a $1 million fine to settle SEC allegations that it helped defraud some 14,000 investors. Most of the affected investors are based in Latin America.

According to the SEC, Regions Bank helped two unregistered broker-dealers, U.S. College Trust Corp. and U.S. Pension Trust Corp., commit securities fraud against Latin American investors.

Beginning October 2001, Regions Bank played the role of “trustee” to the broker-dealers’ investment plans. It continued to accept USPT clients until January 2008. The SEC contends that this affiliation with a US bank gave the securities fraud scheme an aura of “legitimacy” and became a big draw for Latin American investors.

The SEC says that by taking on the role of trustee, Regions Bank formed individual trust relationships with investors, processed client contributions, and bought mutual funds on their behalf.

Investor had the option of paying one lump sum or making yearly contributions. Investors were not notified until March 2006 that USPT deducted substantial chunks of investors’ contributions-up to 85% of initial contributions made by investors who took part in an annual plan and up to 18% of single contributions-and used the money to pay for commissions and other fees.

The SEC says that Regions Bank either knew or should have known about USPT’s deceptive sales practices. The Commission is accusing Regions Bank of dispatching representatives to Latin America to meet prospective investors and allowing USPT to use the bank’s name in marketing and promotional materials.

The $1 million penalty will be placed in a Fair Fund to compensate investment fraud victims. Regions bank has also agreed to a cease-and-desist order.

SEC charges Regions Bank for role in Latin American fraud scheme, Investment News, September 21, 2009
Read the SEC Complaint (PDF)
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Bank of America’s Merrill Lynch unit agrees to $26.5 million national settlement stemming from Texas securities fraud claim

Published on: September 22, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Following a Texas securities fraud claim that Bank of America‘s Merrill Lynch, Pierce, Fenner & Smith Inc. allowed unregistered sales persons to sell securities, the Bank of America unit has agreed to pay $26.5 million as part of a national settlement over the allegations. The state of Texas’s portion of the settlement is $1.6 million. The other states that were part of the task force, led by the Texas State Securities Board, are Arizona, Colorado, Vermont, Missouri, Delaware, and New Hampshire.

Client associates who accept trade orders must be registered not just in their own state but also in the client’s state. Per the probe, the task force determined that Merrill did not have a supervisory system that was designed in a manner that made sure that associates were in compliance with registration requirements. The task force was investigating a tip, provided in May 2008 by a Merrill Lynch employee, that the company saved money on registration fees by allowing client associates to register only in their home state and in a neighboring state.

Last week, Merrill Lynch agreed to pay the state of Texas another $12.7 million over a Texas securities fraud cause involving auction-rate securities. The settlement ends the state’s probe into the broker-dealer’s handling of ARS and clients’ funds even as the market was collapsing.

The board determined that not only did Merrill Lynch not tell investors that the market could very well collapse, but also that the broker-dealer offered financial associates sales incentives to sell ARS despite knowing that the auction process could fail.

September has been a rough month for Bank of America and Merrill Lynch. On the same day that the Texas securities commissioner announced the $26.5 million settlement, New York Attorney General Andrew Cuomo accused high-level Bank of America Corp. executives of failing to reveal key information about its Merrill Lynch & Co. takeover. Cuomo is threatening to press charges. Bank of America, however, is calling Cuomo’s allegations “spurious.”

BofA’s Merrill to pay US$26.5M in settlement on unregistered salespeople, AP/Yahoo, September 8, 2009
Bank of America Calls Cuomo’s Merrill Allegations ‘Spurious,’ Bloomberg.com, September 10, 2009
Merrill Lynch pays $12.7M to settle Texas auction rate securities case, Taragana.com, September 14, 2009 Continue Reading ›

Former Stifel Nicolaus and AG Edwards Stockbroker Sentenced to 21-Months in Prison for Investment Fraud Scam

Published on: September 21, 2009 | by Shepherd Smith Edwards & Kantas, LLP

A former broker who was fired from both AG Edwards, Inc.and Stifel Nicolaus & Co. has been ordered to serve a 21-month federal prison sentence for selling fraudulent investments to Stifel Nicolaus clients. Neil Rolla Harrison told clients that they were investing in commodities futures or the gold market when in fact the stockbroker was using their money to support his drinking and gambling habits.

A federal grand jury indicted the 54-year-old former broker last May. Harrison pleaded guilty to one count of mail fraud. He has been ordered to pay $91,303 in restitution.

It is not clear, however, whether the investment fraud victims will recoup their losses. One of his targets, 67-year-old Ralph Brock, says that because he has worked as a self-employed trucker for most of his life, the only retirement he had was the one he created through investing.

AG Edwards fired Harrison in 2005 after the broker-dealer discovered that he was borrowing money from clients. Stifel Nicolaus hired him soon after even though the broker-dealer knew that AG Edwards had fired him. Stifel Nicolaus fired Harrison when the thefts were discovered.

Brokers are entrusted with the responsibility of handling a client’s finances. Many investors seek the services of a stockbroker because they don’t have the knowledge and experience to make their own investments in a sound manner.

When a broker breaches that duty of care and money is lost it is usually the victims of securities fraud that suffer. This can be devastating-especially for the many clients who rely on their investments to get them through retirement or put their children through school. Any loss as a result of stockbroker fraud is unacceptable.

Related Web Resources:
Former stockbroker gets 21-month sentence, The Telegraph, September 18, 2009
Stifel broker gets jail time for scam, St. Louis Business Journal, September 18, 2009
United States Postal Inspection Service

Illinois Securities Department
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Securities Fraud Lawsuit Against UBS AG Gets Added Steam with Employee Email Calling Collateralized Debt Obligations “Vomit”

Published on: September 16, 2009 | by Shepherd Smith Edwards & Kantas, LLP

UBS AG must post a $35.6 million bond, says Superior Court Judge John Blawie. Blawie says that hedge fund Pursuit Partners, LLC has sufficient evidence to pursue its securities fraud case claiming that the investment bank knew it was selling collateralized debt obligations that were toxic to institutional investors but did nothing to inform clients about the risks.

Blawie cited an e-mail written by a UBS employee that called the asset-backed securities “vomit.” Another e-mail noted that UBS was selling Pursuit CDOs that were “crap.”

The judge is letting the securities fraud complaint go forward without ruling on the case’s merits. Between July and October 2007, UBS sold the hedge fund CDOs valued at $40.5 million. Following the global credit crisis, there has been $1.7 trillion in losses and writedowns.

Morgan Keegan Hit with Large Penalty for Fouling Ex-NBA Star

Published on: September 14, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Following a dispute that was resolved in arbitration, broker-dealer Morgan Keegan & Co. must pay former NBA player Horace Grant $1.46 million. The amount is the largest arbitration loss for Morgan Keegan to date. Morgan Keegan is the securities brokerage firm of Regions Financial Corp.

The award, issued by the Financial Industry Regulatory Authority, is for damages that Grant incurred because he invested in Morgan Keegan’s risky mutual funds that were involved in collateralized debt obligations connected to residential mortgages. Grant had originally sought $1.5 million for the damages he sustained.

There are still several hundred investment fraud lawsuits pending against the brokerage firm over mutual funds involving subprime mortgages that declined because the US housing market fell apart and loans defaulted. Up to 95% of the funds’ value has dissolved since the middle of 2007.

Green used to play for the Chicago Bull, the Los Angeles Lakers, the Seattle Supersonics, and the Orlando Magic. In his arbitration case, the former NBA basketball player contended that Morgan Keegan misrepresented the level of risk that came with the bond funds that he purchased.

Already, Morgan Keegan has lost a number of cases in 2009. Seven of the cases have cost the broker-dealer $3 million. Other professional athletes who have filed lawsuits against Morgan Keegan for losses that they say they sustained from the bond funds are Jerome Woods, formerly of the Kansas City Chiefs, and former St. Louis Cardinals baseball player Tim McCarver. Woods won $950,000 against the brokerage firm while McCarver resolved his claim for $100,000.

Our stockbroker fraud law firm represents numerous investors who have sued Morgan Keegan for misrepresenting risky investments as safer kinds of investments.

Related Web Resources:
Ex-NBA star wins $1.45M arbitration claim against Morgan Keegan, Investment News, September 14, 2009
Morgan Keegan ordered to pay former NBA star $1.4M, Memphis Business Journal, September 14, 2009
NFL retiree gets $950,000 for Morgan Keegan mutual fund losses, Commercial Appeal, April 14, 2009
McCarver Awarded $100K in Morgan Keegan Claim, Memphis Daily, February 26, 2009 Continue Reading ›

Texas Securities Commissioner, Appointed New President of Nationwide Association of Regulators, Seeks Additional Investigations into Wall Street Fraud

Published on: September 12, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The incoming head of the North American Securities Administrators Association, Denise Voigt Crawford, is warning brokerage firms that more enforcement actions over Wall Street fraud are likely to follow. Crawford is also the Texas Securities Commissioner. She will formally assume her role as NASAA president on September 15.

In her new role, Crawford plans on playing a key role in the government’s plans for regulatory reform. She wants the states to have a more prominent position when it comes to regulatory oversight.

At this time, state regulators only supervise investment advisors that are managing assets of $25 million or below. She wants states to regulate investment advisors with assets as high as $100 million. Since most of these firms are located in regional areas, Crawford says it is easier for state regulators to oversee them.

SEC Warns Broker-Dealers to be Mindful of Their Recruiting Bonuses

Published on: September 10, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Securities and Exchange Commission Head Mary Shapiro is warning broker-dealers to be careful of the recruiting tactics they employ-especially those involving recruiting bonuses. She cautioned that attractive compensation packages can compel registered representatives to watch out for their own self-interests over the interests of investors, resulting in acts of securities fraud. For example, Shapiro cautioned that a broker who knows that she or he will be given a larger compensation for meeting certain commission goals might make unsuitable investment recommendations, churn customer accounts, or take part in other commission-revenue focused actions that aren’t necessarily in the clients’ benefit.

Shapiro is also asking broker-dealer heads to watch over big up-front bonuses. Brokerage firms continue to offer large recruiting bonuses to top registered representatives at rival investment banks. Recruiting packages at wirehouses Merrill Lynch, UBS, Morgan Stanley, and Wells Fargo Advisers are between 200-250% of trailing 12-month production. In many instances, an investment adviser who satisfies production targets and brings in a certain percentage of assets is frequently rewarded.

Shapiro’s letter to the firm’s CEOs reminded them that it is the broker-dealer’s responsibility to “police such conflicts” and supervise broker-dealer activities, especially those related to sales practices. She reminded the broker-dealers that when a sales group expands, it is the investment bank’s responsibility to not just supervise advisers but to make sure the compliance structure maintains the adequate capacity. She noted that investor interests must always be of prime importance when investment products, such as securities, are sold.

Unfortunately, there are brokers who choose to place their own financial gain over the interests of their clients. This can result in securities fraud losses for investors. A few examples of broker misconduct include churning, misrepresentation, negligence, breach of fiduciary duty, and unauthorized trading.

Related Web Resources:
Read Shapiro’s Letter (PDF)

Schapiro Message to B-D CEOs: Watch Your Recruiting Tactics, Research Mag, September 1, 2009
Chairman Mary Schapiro, SEC Continue Reading ›

$150 Million Settlement in Merrill Lynch Securities Fraud Lawsuit is Granted Preliminary Approval by District Court Judge

Published on: September 8, 2009 | by Shepherd Smith Edwards & Kantas, LLP

A district court judge issued his preliminary approval of a proposed $150 million settlement in the securities class action lawsuit against Merrill Lynch. The securities fraud lawsuit was filed for purchasers of specific Merrill Lynch preferred securities and bonds.

The plaintiffs of the Bond Action had invested in over $24 billion in preferred debt and securities that the broker-dealer had made available to the public between October 2006 and May 2008. The lead plaintiffs in the securities class action lawsuit were the Louisiana Municipal Police Employees’ Retirement System and the Louisiana Sheriffs’ Pension and Relief Fund. They pursued their claims under the Securities Acts’ Sections 11, 2, and 15.

In addition to Merrill Lynch, a number of the company’s officers and directors, as well as the offering underwriters, are named as defendants in the complaint.

The lawsuit claims that offering documents for certain securities offerings did not accurately reveal the “existence and the value of tens of billions of dollars of complex derivative securities linked to subprime mortgages” that were contained in Merrill’s balance sheet. Such exposures allegedly almost “wiped out” the broker-dealer by September 2008 and nearly caused Bank of America, Merrill’s acquirer, to “topple.” A federal bailout helped rescue the merger.

The parties had previous agreed to a $475 million settlement, in addition to a $75 million settlement for a related class action per ERISA.

The defendants went into the settlement even though the motions to dismiss the amended complaint were pending. A November 23 hearing for granting final approval is now scheduled.

Related Web Resources:
BofA to settle Merrill lawsuit for $150 million, Reuters, August 24, 2009

Louisiana Municipal Police Employees’ Retirement System

Louisiana Sheriffs’ Pension and Relief Fund
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