Investor Lawyers Blog

SEC Examines Proxy Advisory Firms

Published on: October 14, 2010 | by Shepherd Smith Edwards & Kantas, LLP

According to Securities and Exchange Commission Chairman Mary Schapiro, the agency is reviewing the proxy process to determine how information is transmitted to shareholders and the public. They are also studying how shareholder votes are counted.

She says the exam will focus on the role of proxy advisory firms, the types of conflicts they deal with, the way these issues affect their business and the voting process, and the role that the agency should play when it comes to regulate proxy advisory firms. She expressed commitment to a “top-to-bottom review of proxy infrastructure” and the role that proxy advisory firms face.

Schapiro made her remarks in front of the Economic Club of New York last month. At the event, she also noted that although the Obama Administration has increased the SEC’s budget—the Dodd-Frank Wall Street Reform and Consumer Protection Act did not give the agency the ability to oversee its own budget—she said that she still would like the SEC to be self-funded.

The financial regulatory reform legislation did provide the SEC with reserve funds to go toward hiring and technology upgrades. Schapiro says that the agency has been successful in its efforts to recruit from hedge funds, trading desks, institutional and retail investment firms, and credit ratings agency analysts.

Related Web Resources:
Chairman Mary L. Schapiro, SEC.gov

UBS AG Motion to Dismiss Class Securities Case Test’s US Supreme Court’s Ruling Regarding Extraterritorial Transactions

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

UBS AG has filed a motion to dismiss a class securities case against it. The move is putting the US Supreme Court’s recent ruling in Morrison v. National Australia Bank Ltd. to the test.

In this securities fraud case, four institutional investors—three of them foreign—are charging UBS and a number of individual defendants with violating Section 10(b) of the 1934 Securities Exchange Act. This is based on misstatements that were allegedly made regarding its auction rate securities-related and mortgage-related activities. They are seeking relief for all purchasers of UBS stock on all worldwide exchanges. Most of the statements in question were issued from the bank’s headquarters in Switzerland.

In 2008, the defendants asked the court to dismiss the allegations due to lack of subject matter jurisdiction. They cited the decision made in Morrison by the U.S. Court of Appeals for the Second Circuit, which had dismissed the action.

Now that the US Supreme Court issued its ruling in Morrison, with the justices concluding that Section 10(b) only applies to securities transactions on domestic exchanges and in other securities, the defendants are attempting to also have the securities case against them dismissed per Morrison’s “bright-line, location-of-the transaction rule.”

The defendants say that the plaintiffs have advised them that they will use the Supreme Court’s use of the word “listed” to end-run Morrison. Per the justices’ decision, Section 10(b) applies to transactions involving securities that are “listed on an American stock exchange.” UBS shares can be found on the NYSE.

However, the defendants are contending that there isn’t any support in the “the test of Section 10(B), its legislative history, or Morrison” for this type of unprecedented interpretation. They say that the word “listed,” as it is used in Morrison is only applicable to two kinds of securities that can be purchased in the US—an unlisted security that trades over the counter in this country and a listed one that trades on a US exchange. The defendants claim that the plaintiffs are misreading the word “listed” in order to authorize international class action lawsuits based on securities purchases on a foreign market and that this “flies in the face of Morrison’s statements that Section 10 (b) doesn’t “regulate foreign securities exchanges.”

Related Web Resources:
Morrison v. National Australia Bank Ltd., Supreme Court (PDF)

1934 Securities Exchange Act

Most Investors Want Fiduciary Standard for Investment Advisers and Broker-Dealers, Say Trade Groups to SEC

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

The North American Securities Administrators Association, the Consumer Federation of America, the Investment Adviser Association, the Financial Planning Association, AARP, and the National Association of Personal Financial Advisors have sent a letter to Securities and Exchange Commission Chairman Mary Schapiro asking that the agency examine a recent national survey that shows that the majority of investors don’t know the differences between investment advisers, brokers, and financial planners. ORC/Infogroup conducted the survey for the trade groups.

1,319 investors were polled. Per the survey, investors appear to “overwhelmingly believe” that representatives who provide investment advice should disclose conflicts of interest and act in clients’ best interests. Many of them are wrong in their belief that investment advisers, broker-dealers, and insurance agents are currently held to a fiduciary standard.

Among the Survey’s Other Findings:
• More than three out of five investors are under the wrong impression that there is no difference between an investment adviser and a stockbroker.

• About 1/3rd of investors are not clear about the role that stockbrokers play or what services that they offer.

The group told Schapiro that per the survey’s findings, a common standard should apply to investment advice that is given, regardless of whether the recommendation is made by an investment adviser or a broker-dealer. They say that the “principles-based fiduciary duty that applies under the [1940 Investment] Advisers Act” should be the standard. Per the survey, many investors feel that a fiduciary standard should also apply to insurance agents that sell investments.

Related Web Resources:
Investment Adviser Association

SEC Chairman Mary L. Schapiro

North American Securities Administrators Association

The Consumer Federation of America

Financial Planning Association

AARP

National Association of Personal Financial Advisor

ORC/Infogroup
Continue Reading ›

Broker-Dealers Press Clients to Settle Arbitration Claims, Says Illinois Securities Regulator

Published on: October 11, 2010 | by Shepherd Smith Edwards & Kantas, LLP

According to Illinois securities regulator Tanya Solov, brokerage firms are driving investors with securities arbitration claims against them to settle their cases. Solov says that they are doing this by barraging investors with discovery information requests. Solov was quoted at the yearly North American Securities Administrators Association Inc. meeting.

Solov said that broker-dealers’ discovery practices end up making the FINRA arbitration process more costly for investors. Such tactics, says Solov, are compelling investors to settle their securities cases rather than go into litigation. She also noted that while broker-dealers keep pressing investors into coming up with discovery material, many investment firms, when faced with a discovery request by an investor, have been known not to provide the information.

William Shepherd, a securities fraud attorney and the founder of Shepherd Smith Edwards & Kantas LTD LLP, represents many clients with securities cases against brokerage firms. He noted the challenges his investment fraud firm has had when trying to obtain discovery information for his clients: “Our firm responds in kind, fighting hard for discovery from the firms as well. We have invested in the latest technology to be able to process millions of documents and search these for clues. We do not let abusive requests thwart our goal and we protect our clients from such abuses. We refuse to be bullied by large financial firms who think they can run over investors and their attorneys. These firms now know we are ready, willing and able to fight them and most have abandoned such tactics against us.”

Municipal Securities Investors Need More Information About Bond Purchases, Says SEC

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

According to US Securities and Exchange Commissioner Elisse Walter, municipal securities market investors with securities fraud cases are entitled to clear information about the bonds they are purchasing. Walters spoke at an SEC-sponsored hearing last month. Other panelists also echoed the need for accuracy, transparency, and timeliness of disclosure for bond buyers so that they are given the proper information at the right time.

Walter said that about 51,000 local and state entities issue bonds for maintaining and constructing infrastructure projects. She also noted that even though retail investors hold 36% of outstanding municipal securities directly and another 34% own them indirectly through close-end funds, mutual funds, and retail-sized trade accounts for up to 81% of trading, volume, the municipal securities market is missing a number of the protections that exist in other sectors of the US capital markets. Walter said that municipal securities investors have the right to these same protections, as well as the right to information that doesn’t have material omissions or is materially misleading. She classified the treatment of municipal securities investors as “second class.”

Walter said that even though municipal securities are reputedly safe, they can and have been known to default. Between 1999 and 2009, out of $3.4 trillion dollars issued, issuers defaulted on more than $24 billion in municipal bonds. Last year alone, 194 municipal bonds that had an overall dollar amount of nearly $7 billion in bonds defaulted.

The hearing is the first of several that gives participants the forum to examine the $2.8 trillion municipal securities markets. Topics include financial reporting and accounting, investor protection and education, market liquidity and stability, municipalities as conduit borrowers, the Municipal Securities Rulemaking Board, professionals and market intermediaries, offering participants, 529 plans, and Build America Bonds. The commission is going to issue a staff report that will include recommendations for industry “best practices,” regulatory changes, and legislative changes.

Related Web Resources:
SEC’s Walter takes aim at ‘second-class treatment’ of muni investors, Investment News, September 21, 2010

Speech by SEC Commissioner: Statement at SEC Field Hearing on the State of the Municipal Securities Market, SEC, September 21, 2010

Lincoln Financial Advisors Corp. Ordered by FINRA to Pay $4.43M Over Alleged “Selling Away” Scheme to Investors

Published on: October 8, 2010 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority panel has ordered Lincoln Financial Advisors Corp. to pay $4.43 million in damages and interest to about 22 investors that had accused brokerage manager Scott B. Gordon of “selling away.” The panel wrote in its decision that the brokerage firm was “negligent” in failing to prevent Gordon from using an outside business to raise money from investors. The alleged misconduct took place for almost a year.

“Selling away” involves a broker soliciting clients to purchase securities not offered by his/her broker-dealer and without the brokerage firm’s approval. Regulators consider “selling away” to be a violation of securities laws.

Gordon became software-development company Healthright Inc.’s chief executive in 2005 and ran the company from his Lincoln Financial office. Two Healthright investors sent a written complaint to Lincoln the following year.

A request by Gordon to the brokerage firm that he be able to conduct outside business activity was not approved or denied. In 2006, Grant Gifford, who is a Healthright investor and a claimant in the securities fraud case, discovered alleged misstatements and omissions that Gordon had made. In 2008, FINRA barred Gordon from the securities industry.

Except for Gifford, who lent money to Healthright in his personal capacity, all the other investors in the securities case against Lincoln were part of Healthright Partners, LP.

Related Web Resources:
Finra Panel Orders Lincoln to Pay $4.3 Million to Investors, The Wall Street Journal, October 7, 2010
Lincoln Financial hit with hefty arbitration award over selling away, Investment News, October 5, 2010
Activity Away From Associated Person’s Member Firm, FINRA Continue Reading ›

FINRA Wants to Make All-Public Arbitration Panel for Investors Permanent

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

The Financial Industry Regulatory Authority says it wants investors with securities claims against broker-dealers to have the right to an arbitration panel that doesn’t include industry representatives. FINRA will file its proposal with the Securities and Exchange Commission for approval.

Under the new rule, investors would have the option of choosing between a panel comprised of one industry arbitrator and two public arbitrators and a panel made up of three public arbitrators. FINRA is hoping this will create a greater perception of fairness in the mandatory arbitration system, which it oversees.

During the last two years, FINRA has run a pilot program that gave investors the option between the two types of panels. The program was created to test whether all-public panels gave investors a fairer shake in their disputes with broker-dealers. 14 investment firms took part in the program. According to FINRA, investors chose to have their securities case heard by an all-public panel 60% of the time. 50% of the time they chose the panel that included one industry member. The pilot has been extended for another year. As of September 28, nearly 560 cases have been part of this program.

Now that the Dodd-Frank Wall Street Reform and Consumer Protection Act has been enacted, the SEC can limit or ban mandatory arbitration clauses, which can be found in contracts between broker-dealers and their clients. Investor advocates are hoping for this.

Related Web Resources:
Finra asks SEC to OK all-public panels for arbitration disputes, Investment News, September 28, 2010
FINRA Proposes to Permanently Give Investors the Option of All-Public Arbitration Panels, September 28, 2010
Number of FINRA Arbitration Claims Rose in 2009 Following Market Crisis, Stockbroker Fraud Blog, January 13, 2010 Continue Reading ›

Goldman Sachs International Fined $27M by UK’s FSA for Not Reporting SEC Investigation into Abacus 2007-AC1 Synthetic Collateralized Debt Obligation

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

Goldman Sachs International has been ordered by the United Kingdom’s Financial Services Authority to pay $27 million. The FSA says that Goldman failed to notify it about the US Securities and Exchange Commission’s probe into the investment bank’s marketing of the Abacus 2007-AC1 synthetic collateralized debt obligation, a derivative product tied to subprime mortgages.

Goldman Sachs and Co. has settled the SEC’s case for a record $550 million dollars. However, even though Goldman knew for months in advance that SEC charges were likely, the investment bank did not notify regulators, shareholders, or clients.

FSA’s Enforcement and Financial Crime Managing Director Margaret Cole says that while GSI didn’t intentionally hide the information, it became obvious that the investment firm’s reporting systems and controls were defective and that this was why its ability to communicate with FSA was well below the level of communication expected. Cole says that large institutions need to remember that their reporting obligations to the FSA must stay a priority.

FSA contends that Goldman was in breach of FSA Principle 2, which says that a firm has to “conduct its business with due skill, care, and diligence,” FSA Principle 3, which talks about a firm’s responsibility to “organize and control its affairs responsibly and effectively, with adequate risk management systems,” and FSA Principle 11, which stresses a firm’s responsibility to disclose to the FSA that “of which it would reasonably expect notice.”

For example, Fabrice Tourre, a Goldman vice president that worked on the Abacus team and who became an FSA-approved person after he was transferred to GSI in London, was later slapped with SEC civil charges. Along with Goldman, the SEC accused Tourre of alleged misrepresentations and material omissions in the way the derivatives product was marketed and structured.

Cole notes that FSA was disappointed that even though senior members of GSI in London were aware that Tourre had received a Wells Notice that SEC charges were likely, they did not take into account the regulatory implications that this could have for the investment firm. Because of the failure to notify, Tourre ended up staying in the UK and continued to perform at a “controlled function for several months without further enquiry or challenge.”

Because FSA did not find that GSI purposely withheld information, the investment bank received a discount on the fine, reducing it from $38.5 million to the current amount.

Securities fraud lawsuits and investigations have followed in the wake of the SEC’s case against Goldman.

Related Web Resources:
FSA fines Goldman Sachs £17.5 million, Reuters, September 9, 2010

Goldman Sachs Settles SEC Subprime Mortgage-CDO Related Charges for $550 Million, Stockbroker Fraud Blog, July 30, 2010

Morgan Keegan to Pay $9.2M to Investors in Texas Securities Fraud Case Involving Risky Bond Funds

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

In a Texas securities case, FINRA arbitration panel has ordered Morgan Keegan & Co., a Regions Financial Corp., to pay 18 investors $9.2M for losses related to risky bond funds. The investors contend that the investment firm committed securities fraud when it convinced them to invest in certain funds that included high-risk “subprime” mortgage assets. Clients also claimed that they were persuaded to automatically reinvest dividends in the funds.

This is the biggest award that an arbitration panel has awarded in a Morgan Keegan case involving six bond funds that were heavily involved in mortgage-related holdings. The funds dropped in value significantly in 2007 and 2008. Hundreds of securities claims against the brokerage firm followed. Last July, Regions Financial announced that Morgan Keegan had recorded a $200M charge for probable costs of the bond fund lawsuits.

Arbitrators in Houston made the ruling in the Texas securities case. Included in the total sum was $1.1M in legal fees that, per state law, will be paid to investors. All of the investors involved were clients of Russell W. Stein, a Morgan Keegan broker. Stein is no longer with the broker-dealer. Regulatory filings indicate that he is currently employed with Raymond James Financial Inc. unit Raymond James & Associates Inc.

Stein and his wife were original claimants in this Texas securities fraud case. They too had invested in the bond funds. Their claims are now part of another case involving a group of other investors. Morgan Keegan is considering appealing the FINRA arbitration panel’s decision.

Related Web Resources:
Morgan Keegan to pay bond fund investors $9.2 mln, Reuters, October 6, 2010
Morgan Keegan Must Pay $9.2Mln To Investors – Panel, Wall Street Journal, October 6, 2010
Morgan Keegan Ordered by FINRA Panel to Pay Investor $2.5 Million for Bond Fund Losses, Stockbroker Fraud Blog, February 23, 2010
Morgan Keegan Again Ordered by Arbitrators to Pay Bond Fund Losses to Investors, Stockbroker Fraud Blog, October 27, 2009
Financial Industry Regulatory Authority
Continue Reading ›

$2.6M Texas Securities Fraud Settlement: Hedge Fund Adviser Settles SEC Allegations Involving Violations Related to Improper Public Stock Offering Participation After Short Selling

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

Carlson Capital L.P. has agreed to pay over $2.6 million to resolve charges that it wrongly participated in 4 public stock offerings after short selling the same securities. The Texas securities fraud charges were brought by the Securities and Exchange Commission against the a Dallas-based hedge fund adviser. By agreeing to settle for $2,653,234, Carlson Capital is not denying or admitting to the allegations of securities misconduct.

According to the SEC, the Texas hedge fund violated Rule 105 four times and lacked adequate procedures and policies to keep the firm from taking part in the relevant offerings. During one occasion, Carlson Capital allegedly violated the rule even though the portfolio manager that purchased the offering shares and the one that sold short the stock were not the same person. The SEC determined that Rule 105’s “separate accounts” exception, which allows the purchase of an offered security in an account that is “separate” from the account used through which the same security was sold short, did not apply in this case. The SEC also found that the portfolio manager that sold short the stock during the restricted period had been given information indicating that the other portfolio manager was planning on buying the offerings.

Rule 105 of Regulation M
This rule helps prevent short selling, which can lower the proceeds received by shareholders and companies by artificially depressing the market price not long before the company issues its public offering price. Rule 105 is there to make sure that the natural forces of supply and demand, and not manipulation, sets the offering price. The short sale of an equity security during the restricted period and the purchase of the same security through the offering are prohibited.

During the SEC’s investigation into the allegations, Carlson Capital implemented remedial steps, including putting into place an automated system that assists in the review of the firm’s previous short sales prior to it taking part in offerings.