Investor Lawyers Blog

Bank of America To Settle SEC Charges Regarding Merrill Lynch Acquisition Proxy-Related Disclosures for $150 Million

Published on: February 15, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Bank of America Corp. (BAC) has agreed to pay $150 million, in addition to $1 million in disgorgement, to settle the Securities and Exchange Commission’s charges over the investment bank’s proxy-related disclosures regarding the Merrill Lynch acquisition. U.S. District Judge Jed S. Rakoff said he hopes to decide by February 19 on whether to approve the settlement. He also said he has more questions regarding the deal.

If approved, the settlement would conclude two SEC securities lawsuits against Bank of America over the Merrill Lynch merger. One complaint involves the investment bank’s alleged failure to reveal, prior to a 2008 shareholder meeting to vote on the acquisition, that financial losses were in the billions and rising at Merrill. The second lawsuit is over what the bank did and did not disclose about the billions of dollars in bonuses paid to Merrill Lynch employees right before the $50 billion merger was completed.

Under the proposed SEC settlement, the $150 million would go to Bank of America shareholders who suffered financial losses because of the investment bank’s alleged disclosure violations. Also, for three years BofA would have to maintain and implement a number of remedial measures, including hiring an independent auditor to look at its internal disclosure controls, hiring a disclosure counsel to work on bank disclosures, making sure that BofA’s chief financial officers and chief executive certify yearly and merger proxy statements, and allowing shareholders to have an advisory say-on-pay vote regarding executive compensation.

Earlier this month, New York Attorney General Andrew Cuomo filed a separate securities fraud lawsuit against Kenneth D. Lewis, who formerly served as BofA’s chief executive, Joe Price, the bank’s former chief financial officer, and Bank of America for allegedly concealing Merrill Lynch’s losses. The complaint alleges that BofA general counsel Timothy Mayopoulos was let go because he wanted to disclose the losses at Merrill Lynch before the deal was finalized.

Related Web Resources:
Bank of America Still Dealing With Fallout From Merrill Deal, Fox Business, February 5, 2010
Cuomo Sues Bank of America, Even as It Settles With S.E.C., NY Times, February 4, 2010
US judge has questions on $150 mln SEC-BofA accord, Reuters, February 16, 2010 Continue Reading ›

Dallas Securities Attorney and Former SEC Litigator Convicted of Fraud in Pump and Dump Stock Scam

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

A jury has convicted Phillip Windom Offill Jr. of Texas securities fraud. The Dallas lawyer and former SEC trial attorney was found guilty of nine counts of wire fraud and one count of conspiracy for his involvement in a “pump and dump” scam that sold nine companies’ unregistered securities to investors in order to make a profit.

Court filings had accused the Texas securities attorney of using bogus press releases and “blast” emails to get investors to buy certain companies’ shares. When stock prices would go up, those involved in the scam would dump stock to make money. 10 other defendants have pleaded guilty for their part in the securities fraud scheme.

The SEC’s civil complaint against Offill accused him of conspiring with others to create bogus investment firms that obtained an offering of millions of unregistered AVL shares. Offill was one of the people who allegedly would transfer the shares to the company’s founder and associates, who would then promote the company’s potential as stock was being dumped.

According to U.S. Attorney Neil H. MacBride, Offill purposely broke the law, so that he and others could make millions off of innocent investors who ended up with worthless stock.

Prosecutors want $15 million in forfeiture. Offill’s sentencing is scheduled for April. He faces up to 20 years in prison for each wire fraud conviction and a maximum of five years in prison for conspiracy.

Related Web Resources:
Jury Convicts Former SEC Lawyer, The Wall Street Journal, January 28, 2010
Lawyer indicted in alleged pump-and-dump stock scheme, ITWorld, March 13, 2009 Continue Reading ›

FINRA to Assess Amerivet Securities Inc. Allegations that Certain SRO Executives Received Excessive Pay in 2008

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

At a closed-door meeting scheduled for February 10, the Financial Industry Regulatory Authority board of governors will preside over a closed-door meeting to assess allegations made by Amerivet Securities Inc. that certain FINRA executives, including chief executive Mary Schapiro, received excessive pay. The brokerage firm submitted a letter to the board last year demanding that action be taken to recover this compensation, as well as the SRO’s unprecedented portfolio losses” in 2008.

A release, filed by Amerivet’s securities litigation lawyers, alleged that in 2008, under Shapiro’s leadership, FINRA failed to warn investors about auction-rate securities risks, paid senior FINRA executives close to $30 million, failed to discover that R. Allen Stanford and Bernard Madoff were engaged in Ponzi scams, and sustained close to $700 million in losses.

FINRA Executives’ Pay

Schapiro was paid $3.3 million in bonuses and salaries in 2008. Per her accumulated retirement plan benefits, She also received approximately $7.2 million.

Another 12 current and ex-FINRA executives made over $1 million in 2008, including ex-chief administrative officer Michael D. Jones, who received $4.3 million in severance, compensation, and accumulated benefits after over 10 years at the SRO. Elisse Walters, now with the SEC, was paid $3.8 million ($2.4 million was supplemental retirement benefits), and Douglas Schulman, now with the IRS, was paid $2.7 million in salary, retirement benefits, and bonuses after over eight years of service.

FINRA has called Amerivet’s statements “part of an ongoing publicity campaign” involving a counsel and a party who have been in “litigation with FINRA.”

Related Web Resources:
Finra execs overpaid? The board wants to know, Investment News, February 20, 2010
FINRA

FINRA Board of Governors
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Claims Filed Against Morgan Keegan Division of Regions Financial Causes Shortage of Arbitrators

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

The Financial Industry Regulatory Authority has had to bring in hundreds of additional arbitrators to deal with the approximately 400 securities fraud claims that investors have filed against Regions Financial Corp., the investment banking unit of Morgan Keegan & Co. Investors are seeking to recover $35 million after three of its mutual funds dropped in value by up to 82% when the housing market fell apart. The Region Financial Corp mutual funds contained subprime-related securities, including collateralized debt obligations, low-quality mortgages, and mortgage-backed securities.

Morgan Keegan claims that it notified investors of the risks associated with investing in the mutual funds. Regions says that to date, 79 arbitration cases have been heard. 39 of the cases were dismissed and 114 arbitration claims seeking $24 million were dropped before decisions were reached. The investment firm is putting up a tough fight against the complaints. So far, arbitrators have been awarded $7.6 million.

Because so many investors filed arbitration claims, FINRA has had to contact arbitrators in different parts of the US and ask them to come to the different cities where the hearings on the mutual funds are talking place. The average pool of arbitrators in each city is now approximately 721 persons. This is an increase from its previous average pool of 87 arbitrators.

Former JPMorgan Bankers Sued by SEC Over Swap Transactions Want Judge to Dismiss Securities Fraud Charges

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

Two ex- JPMorgan Chase & Co. bankers that the Securities and Exchange Commission is suing over their alleged involvement in certain swap transactions are asking the U.S. District Court for the Northern District of Alabama to throw out most of the securities fraud charges that the regulator agency has filed against them. According to the SEC, Douglas MacFaddin and Charles LeCroy paid close friends of county commissions and broker-dealers over $8 million in undisclosed payments to make sure that JPMorgan would be chosen as the bond offerings underwriter and its affiliated bank would be selected as swap provider so that both entities could make $5 billion in underwriting and interest rate swap agreement business.

The swaps involve three Jefferson County bond transactions that took place in 2002 and 2003 and are at least partly linked to the Securities Industry and Financial Markets Association’s municipal swap index. The SEC says this index is securities-based because it is derived from variable-rate demand notes. MacFaddin and LeCroy’s lawyers, however, say that the SIFMA swap index is a rate index, which therefall places the swaps outside the agency’s antifraud jurisdiction. The defendants want the case dismissed.

The ex-JPMorgan bankers’ lawyers claim the undisclosed fees were connected to the swap transactions and that the investment bank was not obligated to disclose them. The defendants’ motions argue that the SEC’s failure to cite an instance in which the two men committed securities fraud is another reason the charges should be thrown out.

To resolve SEC administrative charges over its alleged part in the alleged securities scam, J.P. Morgan Securities Inc. consented to pay $75 M and forfeit $647 M in termination fees.

Related Web Resources:
Ex-JPM Bankers Seek End to Swap Charges, Onwallstreet.com, January 21, 2010
Read the SEC Complaint (PDF)
Continue Reading ›

Securities Claims Over Morgan Stanley Mutual Funds Dismissed by Appeals Court

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

Upholding a lower court’s decision, the U.S. Court of Appeals for the Second Circuit affirmed that investors’ securities claims in two Morgan Stanley (MS) mutual funds-the Morgan Stanley Technology Fund and the Morgan Stanley Information Fund-should be dismissed. The claimants had accused the investment firm of failing to disclose conflicts of interest between investment banking arms and its research analysts.

The court ruled that mutual fund offering statements are not necessary to disclose possible conflicts of interest that occur due to the dismantling of the “information barrier” between stock researchers and investment bankers. The appellate panel also found that there are two class actions against the open-ended mutual funds that fail to identify illegal omissions in the funds’ prospectuses or registration statements.

According to investors, they should have been notified that objectivity could be compromised because the managers of the mutual funds heavily depended on broker-dealers for their stock research. Citing the Securities Act of 1933, they filed a securities fraud lawsuit against Morgan Stanley. The plaintiffs contended that the brokerage firm’s offering documents omitted the possible conflict of interest. The plaintiffs claimed that these omissions cost them $500,000 and that the combined losses for the class were over $1 billion.

A federal judge dismissed their broker fraud complaints, citing a failure to prove that the law mandates disclosure of possible conflicts of interest. The second circuit affirmed the lower court’s ruling, saying it agreed with the SEC’s amicus curiae stating that both Form 1-A and the Securities Act do not require defendants to reveal that the information the plaintiffs’ claimed had been left out and that what the plaintiffs considered to be risks specific to the Morgan Stanley funds were in fact ones that every investor faces.

Among the defendants: Morgan Stanley, Morgan Stanley DW Inc. (MSDWI), MS & Co, the Technology Fund, the Information Fund, Morgan Stanley Investment Management Inc. (MSIM), Morgan Stanley Investment Advisors Inc. (MSIA), and Morgan Stanley Distributors Inc.

Related Web Resources:
Second Circuit Rules Morgan Stanley Mutual Funds Not Liable for Failing to Disclose Conflicts of Interest with Stock Analysts, Law.com, February 1, 2010
Court Nixes Class Actions Against Morgan Stanley, Courthouse News, January 29, 2010 Continue Reading ›

SEC Warns that Disclosure of a “Possible Risk” is Misleading When the Event has Already Occurred

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

According to the US Securities and Exchange Commission, the Private Securities Litigation Reform Act’s safe harbor as it applies to certain forward-looking statements isn’t triggered by cautionary remarks made by defendants over the impact of “potential deterioration in the high-yield sector” if, per the plaintiffs’ claim, the defendants knew the deterioration was taking place. The SEC made its comments in an amicus curiae brief to the U.S. Court of Appeals for the Second Circuit.

The case is Slayton v. American Express Co. The class securities fraud action alleges that the defendant engaged in faulty disclosures related to losses in its high-yield investment portfolio. A district court dismissed the complaint over failure to plead scienter. The plaintiffs appealed the case, and the Second Circuit heard oral argument lat October.

The SEC’s statements address the application of the statutory safe harbor to specific statements that Amex made in its May 2001 Form 10-Q’s Management’s Discussion and Analysis section. Amex stated that the $182 million in high-yield losses was a reflection of it high-yield portfolio’s ongoing deterioration. Amex also stated that total investment losses for the rest of 2001 were expected to be significantly lower than losses sustained during the first quarter.

The parties disagreed about whether the cautionary language that Amex used was “meaningful” enough for the purposes of safe harbor.

According to the SEC, forward-looking statements in the MD & A, which isn’t part of a financial statement that abides by generally accepted accounting principals, doesn’t fall within the statutory exclusion for these kinds of statements. It also noted that Amex’s statement about the “potential deterioration in the high-yield sector” wasn’t enough for safe-harbor purposes because the defendants were warning about a possible deterioration that they knew was already happening. The SEC says that “It is misleading and therefore insufficient for a company to warn of a  potentiality that it is aware currently exists.” Also, “If the speaker knows that any of the implied representations is false,  then the speaker knows that the statement is misleading.”

Misstatements and omissions by an investment adviser, a broker, or an investment firm, can be grounds for a securities fraud claim or lawsuit if financial losses were sustained by others.

Related Web Resources:
Read the SEC’amicus curiae brief (PDF)

Private Securities Litigation Reform Act, Lectlaw Continue Reading ›

Texas Class Action Securities Fraud Claim Against Cushing MLP Total Return Fund CEO and CFO Can Go Forward, Says District Court Judge

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

In Texas, a US district court judge has refused to dismiss a class action securities fraud claim against Cushing MLP Total Return Fund CEO Jerry V. Swank and CFO Mark Fordyce. The Texas securities fraud claim accuses the defendants of misrepresentations and omissionsrelated to the fund’s deferred tax asset. Other claims, including a 1940 Investment Company Act Section 36(b) claim over tax advisory fees, were dismissed.

The defendants named in the Texas securities fraud claim are investment adviser Swank Energy Income Advisers LP, Swank Capital LLC, fund board chairman, trustee, president and CEO Jerry V. Swank, fund CFO and trustee Mark Fordyce, fund audit committee member and lead independent trustee Edward N. McMillan, fund trustee and audit committee chair Brian R Bruce, and fund trustee and committee head Ronald P. Trout.

Lead plaintiff Terri Morse Bachow says that between September 1 and December 19, 2008, individual investors bought Cushing MLP Total Return Fund stock. She says that most of the reported net assets in the fund (which were invested in the energy infrastructure sector) was an accounting accrual owing to time differences in tax payments.

Throughout the class period, the deferred tax asset increased and the possibility that the fund would make money that the deferred tax asset could be used against became practically nonexistent. When the class period was over, the accounting accrual was made up of over 50% of the fund’s stated net assets and the chance the accrual would lead to any benefit was all but nonexistent.

The plaintiff claims that fund shareholders lost tens of millions of dollars when this data was disclosed on December 19, 2008 and the fund’s shares market price went down from $7.40 to $3.81. Bachow then filed a Texas securities class action claim.

In the claim, Swank and Fordyce are accused of making statements that were materially misleading, making it sound as if the fund was likely going to use deferred tax in “fact sheets” distributed to shareholders and in two SEC filings. The fund CFO and CEO are accused of failing to correct these statements even after discovering that they were misleading or untrue.

The court refused to drop the 1934 Securities Exchange Act Section 10(b) claim against the two men, noting that the plaintiff demonstrated that this information was important to any reasonable investor who was deciding on what to invest in. The court, however, did drop the Section 20(a) control person claims since the securities fraud claim name the two men (and not Swank Advisers and the fund), which makes it impossible for the two defendants to be their own “control persons.” The claim as to Trout, Swank Capital, Bruce, and McMillan failed because there was no allegation that the “controlled person” committed securities fraud.

Related Web Resources:
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SEC is working on issues related to asset-backed securities, credit ratings, and money market mutual funds, says Schapiro

Published on: January 31, 2010 | by Shepherd Smith Edwards & Kantas, LLP

According to Securities and Exchange Commission Chairman Mary Schapiro, the agency is dealing with a number of credit crisis-related issues associated with money market mutual funds, asset-backed securities, and credit ratings. She also said that the SEC is working on ABS rule proposals that would allow the interests of investors and sellers to align.

The proposals, and other measures, would seek to give investors easier access to loan level data, allow them more time to review products before they invest, create a mechanism to allow for continuous disclosure, and modify “shelf” offerings eligibility standards. Schapiro says that the proposals are meant to be preemptive and would tackle certain areas where issues similar to the ones that surfaced during the current financial crisis might arise in the future.

American and European regulators have been closely examining collateralized debt obligations, mortgage-backed securities, and other ABS because of the large parts they played during the financial collapse. The SEC is reviewing ABS regulations and ABS-related disclosures and reporting. The agency is also seeking to impose more stringent credit quality and maturity requirements for market mutual funds, as well as put into place substantial liquidity standards. Members will be voting on proposed rule amendments meant to strengthen the money market mutual funds’ framework. The SEC is in the process of taking out credit rating references in a number of its regulations and rules.

Judge Gives Lower Sentence to Former Credit Suisse Broker Convicted of Auction-Rate Securities Fraud

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

Eric Butler, a former Credit Suisse Group AG broker, has been sentenced to five years in prison for securities fraud. A jury found the ex-stockbroker guilty of misleading clients into thinking that they were buying student loan-backed, low-risk auction-rate securities when they were actually buying ARS that were high-risk and backed by home mortgage assets. He modified the trade confirmations to conceal this discrepancy. His securities fraud scam collapsed when the ARS market did, but not before investors sustained $1.1 billion in losses.

The government asked that Butler be ordered to serve a 45-year prison sentence pay stiff penalties. However, U.S. District Court Judge Jack Weinstein sentenced him to just five years, imposed a $5 million fine, and ordered that he forfeit $500,000.

Following the guilty verdict, Weinstein expressed concern about placing all of the blame on Butler. He said that he gave the ex-Credit Suisse broker a reduced sentence because the financial services industry has a “pernicious and pervasive” corrupt culture.