Investor Lawyers Blog

Securities Fraud Law Firm Shepherd Smith Edwards & Kantas LTD LLP Warns Investors Against Affinity Fraud

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

Affinity fraud involves investment schemes that target specific groups, such as the elderly, those belonging to identifiable ethnic or religious communities or members of professional groups. Fraudsters seek to gain the trust of members of the group by either belonging to the group or pretending they belong. One tactic is to seek to fool group leaders into thinking the investments are legitimate so that they will assist in promoting the fraud. This is often accomplished by generating false profits for formal or informal leaders of the group at the beginning.

Pyramid schemes and ponzi scams are often employed to commit affinity fraud. In these schemes funds from new investors are used to falsify profits to current investors. This lulls them into believing their investments are turning a profit. as new investors are deceived into believing their investments will also soon grow in value. Inevitably, when there are no more new investors to sign up, the scheme falls apart and investors usually later learn the fraudster has stolen their funds.

However, affinity fraud can often involve abusing trust to lure victims into simply investing into high-risk and/or high-commission investments to generate commissions and fees, or buying and selling (“churning”) invesements to gain multiple comissions.

Oppenheimer Holdings Inc. Settles Massachusetts Auction-Rate Securities Allegations

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

Oppenheimer Holdings Inc. has settled a securities fraud-related administrative complaint filed against it by the state of Massachusetts for auction-rate securities sales to local residents. The broker-dealer will redeem 60 of the accounts with ARS. The other 10 accounts will be offered “enhanced liquidity.”

According to Massachusetts Secretary of State William Galvin, who had sought to make the investment firm repurchase up to $55.5 million in ARS that were sold in the state, 85% of Oppenheimer’s Massachusetts customer accounts will be completely redeemed over one year.

Galvin contends in his complaint that Oppenheimer misrepresented ARS and the ARS market when marketing to clients. He says that although company’s employees sold their ARS when they found out that the market was collapsing, they failed to notify investors about the unfolding crisis.

Galvin will submit a cease-and-desist order and findings against the broker-dealer over its unethical and dishonest conduct and the failure to properly supervise agents when they marketed and sold ARS. The redemptions will take place in three steps.

Oppenheimer also recently settled its ARS case filed by New York State Attorney General Andrew Cuomo on behalf of investors in his state, as well as throughout the US, for $31 million.

Related Web Resources:
Oppenheimer Settles Massachusetts Auction-Rate Case (Update3), BusinessWeek, February 24, 2010
Oppenheimer, Cuomo reach $31M agreement, LegalNewsline.com
William Francis Galvin, Secretary of the Commonwealth of Massachusetts
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Citigroup Ordered to Defend Against Securities Fraud Allegations by Terra Securities of Norway and Several Norwegian Municipalities

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

A district court judge has denied Citigroup‘s motion that the securities fraud lawsuit filed against it by Terra Securities of Norway and seven Norwegian municipalities be dismissed. The plaintiffs claim that Citi misrepresented the risk involved in the $115 million in securities they bought in May and June 2007. They are seeking over $200 million in compensatory damages.

Judge Victor Morrero rejected Citibank’s claim that the U.S. District Court for the Southern District of New York lacked jurisdiction over the case because the financial losses happened in Norway. The plaintiffs had argued that their securities fraud claims are a result of Citigroup’s conduct in New York.

In their securities fraud complaint, the plaintiffs are claiming that Citigroup sold fund-linked securities as if they were conservative, safe investments. In fact, the notes, which were tied to the Citi Tender Option Bond Fund, are very high risk.
The municipalities bought the derivatives through Terra.

In the months following their purchase, the notes would go on to significantly drop in value. Terra went bankrupt and the municipalities had to reduce funding that was intended for hospitals, libraries, schools, and social services. One of the plaintiffs, the municipality of Narvik, was forced to turn off street and road lights at night. This is an area experiences limited daylight hours during the winter. The other municipalities that are plaintiffs of this securities fraud lawsuit are Bremanger, Hemnes, Hattfjelldal, Rana, Kvinesdal, and Vik.

The plaintiffs’ securities fraud lawyer says that the judge’s ruling affirms foreign plaintiffs’ right to sue Citigroup for alleged fraud that occurred in NY over notes that were marketed abroad. Citigroup, which had pushed to have the case heard in Norway or England, denies any wrongdoing. The investment bank says it will vigorously defend against the charges.

Related Web Resources:
Citigroup Must Defend Norwegians’ Lawsuit Over Notes, BusinessWeek, February 17, 2010

Citigroup Must Defend Suit Over Derivatives Sales In Norway, Wall Street Journal, February 17, 2010 Continue Reading ›

SEC Says It Has Jurisdiction to Go After Ex-JP Morgan Executives For Securities Fraud

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

The US Securities and Exchange Commission has countered the motion to dismiss its securities fraud case against two former JP Morgan Chase (JPM) executives. The SEC had charged defendants Douglas MacFaddin and Charles LeCroy with paying the friends of Jefferson County, Alabama commissioners $8.2 million to garner $5 billion in business for JP Morgan Chase. The two men filed motions to dismiss on the grounds that swap agreements are not “securities-based swap agreements,” which means they aren’t under the SEC’s jurisdiction and therefore not subject to its enforcement.

However, the SEC’s brief argues that the defendants’ challenge is based on the question of whether the Bond Market Association’s Municipal Swap Index is an index of securities. The SEC argued that regardless of what you call the Municipal Swap Index, this “linguistic exercise” doesn’t make a difference to what the Index actually is, the manner in which it is calculated, and the connection between the bonds and interest rates that comprise the Index. The SEC notes that interest rates are securities.

The SEC asked the court to not dismiss the case over lack of subject matter jurisdiction and pointed to the ruling made in SEC v. Rorech. In that enforcement case, the U.S. District Court for the Southern District of New York refused to decide during the pleading phase whether credit default swaps are security-based swap agreements.

Related Web Resources:
Read the SEC Complaint (PDF)

Swap Transactions, All Business Continue Reading ›

Court Reinstates Texas Securities Arbitration Award

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

Claimant Leonard Claus was awarded $25,000 by a National Association of Securities Dealers’ arbitration panel for his Texas securities arbitration claim. Claus had made a verbal agreement with Jerry Short, who worked for Institutional Capital Management Inc. over the sale and purchase of bonds.

Clause, who bought the bonds, was planning to sell them to Sterling Financial Investment Group Inc. The resale plan didn’t work out, and he sold them to another buyer at cost.

Clause then sued ICM and Sterling for breach of contract, violations of federal and state securities laws, and negligence.

In addition to the $25,000 compensatory damages award, NASD charged Clause $22,000 in arbitration fees. They awarded his lawyer $70,000 in legal fees.

ICM and Sterling asked that the Texas securities fraud award be vacated by the district court. A magistrate judge vacated, claiming that the NASD panel went beyond its authority when it violated Texas law and directly issued an award to Clause’s lawyer.

Clause and IMS appealed, claiming that the judge made a mistake when vacating the entire award on the basis of the awarded attorney’s fee. Meantime, Sterling and ICM contended that the attorney’s fee violated Texas law and that it conflicted with the contingency fee arrangement between clause and his attorney, which the NASD panel is not allowed to override. ICM and Sterling said the legal fee award was unreasonable.

Court of Appeals ruled that even though Texas statute must directly authorize any fee awards, the party that is told to pay the fee cannot challenge the payment’s propriety. The court called the award error harmless and “immaterial to the party” that is ordered to pay it. The court also noted that ICM/Sterling did not challenge the evidence that supported the fee award.

Related Web Resources:

National Association Of Securities Dealers – NASD
Continue Reading ›

Ex-UBS AG Executive to Settle ARS Insider Trading Allegations Made by NY Attorney General Cuomo with $2.75 Million Penalty

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

As part of a deal to settle ARS insider trading allegations by New York Attorney General Attorney Cuomo, former UBS AG executive David Shulman has agreed to pay $2.75 million. Shulman is accused of finding out through nonpublic, material information that the investment bank’s student loan auction rate securities program was in trouble and that there was a possibility that future auctions involving the student ARS would fail. Yet he allegedly violated New York securities regulations when he proceeded to sell more ARS.

On December 13, 2007, two days after finding out about the ARS risks, Shulman, who supervised the ARS trading desk, sold $1.45 million in personal holdings of student loan ARS to the desk. He was suspended in July 2008.

Shulman has not denied or admitted to the document’s findings. However, as part of the agreement with Cuomo, he is subject to a retroactive 30-month suspension from working as a registered broker-dealer.

In the wake of the ARS market collapse in February 2008 that left so many investors, who were misled into believing their investments were as liquid as cash, with frozen securities, Cuomo remains committed to investigating broker-dealers’ auction-rate securities marketing and sales practices. Many of the investment firms that sold the ARS did so despite allegedly knowing that the securities were in danger of failing.

Since August 2008, Cuomo has gotten 12 financial service firms to agree to repurchase $61 billion of ARS at par. As part of their securities fraud settlements, the broker-dealers are paying $597.3 million in penalties.

Related Web Resources:
Former UBS Muni Chief Settles Probe for $2.75 Million, BusinessWeek, February 18, 2010
Attorney General Cuomo Announces $2.75 Million Insider Trading Settlement with Former UBS Top Executive David Shulman, Office of the NY Attorney General, February 18, 2010 Continue Reading ›

Morgan Keegan Ordered by FINRA Panel to Pay Investor $2.5 Million for Bond Fund Losses

Published on: February 23, 2010 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority panel has ordered Morgan Keegan & Co. to pay investor Andrew Stein $2.5 million because the bond funds that he invested in had bet poorly on mortgage-related holdings. Panel members found Morgan Keegan liable for failure to supervise, negligence, and for selling investments that were unsuitable for Stein and his companies. The claimants, who sustained financial losses, had initially sought $12 million.

Stein’s arbitration claim is just one of over 400 securities claims that have been filed against Morgan Keegan over its bond funds that had invested in subprime-related securities, such as CDO’s (collateralized debt obligations). When the US housing market collapsed, the funds went down in value by up to 82%.

Stein contends that Morgan Keegan did not reveal the kinds of risks involved in investing in the bond funds. He and his companies claim that Morgan Keegan artificially increased the fund assets’ value so that the funds would appear more stable and investors wouldn’t be able to see the actual risks involved.

Frontline Advisors LLC and Frontline Financial, Inc. Propose Texas Securities Fraud Settlement that Includes Permanent NFA Bar

Published on: February 20, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The National Futures Association has accepted Frontline Advisors LLC and Frontline Financial, Inc.’s proposal to permanently remove themselves as a member of the group. The Texas-based Commodity Trading Advisors and Commodity Pool Operators offered the settlement after the NFA filed a complaint against them in 2009 accusing FFI and principal Charles G. Rice of failing to disclose key information to participants in a pool they were running. Among the material information withheld:

• In exchange for promissory notes, the pool would lend money to third parties • When issuers of the promissory notes defaulted, the pool sustained losses • Even after one note went into default, FFI charged a monthly management fee to participants • FFI redeemed its interest in the pool • FFI wrote off notes but did not give participants specifics about the write-offs

The NFA also accused FFI of not filing an annual financial statement, disclosure document, or exemption notice for the fund. Meantime, Rice has also agreed to a withdraw himself as an NFA member for five years. If he decides to reapply for membership, he has to pay a $10,000 fine.

H & R Block Financial Adviser Claims: Securities Fraud Law Firm Shepherd Smith Edwards & Kantas LTD LLP Investigating Inadequately Supervised Reverse Convertible Notes for Investors

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

Our securities fraud lawyers are looking into claims by investors regarding their purchase of reverse convertible notes from H&R Block Financial Advisors. Just this week, the Financial Industry Regulatory Authority imposed a $200,000 fine on the broker-dealer for failing to set up proper supervisory systems over RCN sales. H & R Block was also ordered to pay $75,000 to an elderly couple that sustained financial losses from their RCN investments.

FINRA found that not only did H & R Block fail to properly monitor customer accounts for possible RCN over-concentrations, but they also failed to detect and respond to these possible over-concentrations. This is FINRA’s first enforcement action over RCN sales.

Reverse Convertible Notes

FINRA Fines H & R Block Financial Advisors (Now Ameriprise Advisor Services) over Sales of Reverse Convertible Notes (RCN)

Published on: February 17, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority (FINRA) has fined H&R Block Financial Advisors (now Ameriprise Advisor Services) $200,000 for failing to put in place the proper system to supervise its reverse convertible notes (RCN) sales to retail clients. FINRA also suspended H & R broker Andrew MacGill for 15 days while ordering him to pay a $10,000 fine and $2,023 in disgorgement for making unsuitable RNC sales to a retired couple. MacGill recommended that they invest close to 40% of their total liquid net worth in RCNs. Meantime, H & R Block has been ordered to pay the couple $75,000 in restitution for their financial losses. Without denying or admitting to the charges, the brokerage firm and MacGill consented to the finding’s entry.

According to FINRA, between January 2004 and December 2007, H&R Block sold RCNs without a system of procedures in place to properly monitor whether possible over-concentrations in RCNs were taking place in customer accounts. FINRA says that the brokerage firm relied on an automated surveillance system to monitor client accounts and review securities transactions for unsuitability but that the system was not set up to monitor RCN placement in customer accounts or RCN transactions. This caused H & R Block to miss signs of when there were potentially unsuitable levels of RCN in client accounts. Furthermore, FINRA says that the firm failed to provide guidance to its supervisors regarding the assessment of suitability standards related to their agents’ recommendation of RCNs to the firm’s clients.

This is FINRA’s first enforcement action over RCN sales.