Investor Lawyers Blog

In Investment fraud Lawsuit Against Lehman Brothers, Goldman Sachs and Morgan Stanley, Court Grants Class Certification

Published on: August 31, 2009 | by Shepherd Smith Edwards & Kantas, LLP

A District Court judge has granted class certification in the securities fraud lawsuit against Lehman Brothers, Morgan Stanley, and Goldman Sachs. The plaintiffs are accusing the broker-dealers of putting forth misleading analysts reports about RSL Communications Inc. for the purposes of maintaining or obtaining profitable financial and advisory work from RSL. Per Judge Shira Sheindlin, the class is to be made up of all parties that bought RSL Common stock between April 30, 1999 and December 29, 2000.

RSL investors, who are the plaintiffs, contend that the defendants artificially inflated the market price of RSL common stock, which injured them and other class members.

In July 2005, the court had certified a class that included anyone who had bought or acquired RSL equity shares between the dates noted above after determining that the plaintiffs had made “some showing” that Rule 23 requirements had been satisfied. The broker-dealer defendants appealed.

The US Court of Appeals for the Second Circuit vacated the class certification order and remanded the action for reconsideration. It’s decision in e Initial Public Offering Securities Litigation, 471 F.3d 24 had clarified class certification standards.

Two years later, pending the outcome In re Salomon Analyst Metromedia Litigation, the court issued a stay. Following its opinion, which held that market presumption includes securities fraud allegations against research analysts, the Court lifted the stay, allowing the plaintiffs to renew their motion for class certification. The court granted the motion and noted that the defendants have been unable to “rebut the fraud on the market presumption by the preponderance of the evidence on the basis that the analyst reports” are missing certain key pieces of information. Per their securities fraud claim, plaintiffs can therefore avail of the “fraud on the market presumption to establish transaction causation.”

The court said that the plaintiffs have succeeded in proving that loss causation can be proven on a “class-wide basis.”

Related Web Resources:
Court OKs Class Cert. In Fraud Suit Against Lehman, Law360, August 5, 2009
U.S. District Court for the Southern District of New York (PDF)
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Monex Deposit Company Cannot Compel Investors to Resolve Consumer Investment Dispute in Arbitration, Says Appeals Court

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

Yesterday, the California Court of Appeals reversed a trial court’s ruling that the plaintiffs who had filed an investment fraud lawsuit against Monex Deposit Company had to go through arbitration instead because of the mandatory arbitration provisions that were included in the investors’ contracts. Per Monex’s arbitration provisions, three arbitrators from JAMS were to participate in the proceedings. Also, the provisions prohibit the joinder or consolidation of claims.

While the trial court sided with Monex’s motion to compel arbitration, the appeals court said that the provisions were unconscionable and therefore could not be enforced. It found that the court-not the arbitrator-should decide whether arbitration provisions are enforceable. The court said that Monex’s arbitration provisions failed to “clearly and unmistakably” reserve to the arbitration panel the matter of whether the provisions are enforceable. It also noted that because arbitrators charge healthy fees for their services, there exists a conflict of interest whenever they are asked to make a decision about arbitrability.

The California appeals court called Monex’s arbitration provisions substantively and procedurally unconscionable-especially considering that calling for a panel of three JAM arbitrators would cost $9,600/day, with each party sharing in the cost.

Brokerage Firm Amerivet Securities Inc. Sues FINRA for Alleged Misconduct

Published on: August 26, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Amerivet Securities Inc. has filed a complaint suing the Financial Industry Regulatory Authority. The brokerage firm wants to figure out whether the self-regulatory organization’s failed to regulate large financial institutions and took part in “reckless” investment strategies. In the District of Columbia superior court, Amerivet Securities argued that it needed access to the SRO’s records and books to determine whether misconduct did occur, resulting in investment losses last year and certain executive compensation practices within FINRA. In a letter dated July 31, FINRA refused to turn over the documents.

Amerivet says that between 2005 and 2008 FINRA failed to supervise and regulate Lehman Bros. Inc., Bear Stearns & Co., Bernard L. Madoff Investment Securities Inc., Merrill Lynch & Co., Stanford Financial Group, Sky Capital Holdings LLC., and its other larger member firms. The brokerage firm is also accusing FINRA of recklessly pursuing investment strategies that were extremely risky and not appropriate for the “preservation of capital.” The SRO’s purchase of $862 million in auction-rate securities was one risky venture that the plaintiff cited as an example. In 2008, FINRA reported losses the equivalent of 26.5% of its investment portfolio-that’s $568 million.

Amerivet says it believes that FINRA invested with Bernard Madoff and either suffered losses or may have “clawback” claims related to their investments with him. The plaintiff says that if FINRA had been doing its job properly, the SRO would have exposed and stopped Madoff’s ponzi scam rather than becoming one of its victims.

Amerivet says that FINRA, like NASD, overpays its senior executives. For example, after NASD and NYSE Regulation Inc. merged to become FINRA in 2007, NASD chairperson Mary Schapiro’s income allegedly increased by 57%.

Amerivet made its claim per Section 220 of the Delaware General Corporation Law.

Amerivet Complaint Against FINRA Alleges Madoff Investment, NoQuarterUSA.net, August 25, 2009
Read the Complaint (PDF)
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Will Two Former Credit Suisse Group AG Brokers Convicted of Securities Fraud Get More Lenient Sentences Because of Industry’s “Culture of Corruption?”

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

A federal judge says that when sentencing former Credit Suisse Group AG brokers Eric Butler and Julian Tzolov, he will consider the fact that they committed their securities fraud crimes while working in the securities industry’s “culture of corruption.” He also asked defense and government attorneys to touch upon this issue when they submit their sentencing recommendations.

Earlier this week, a jury found Butler found guilty of conspiracy and securities fraud for his involvement in an alleged scheme to mislead investors about auction-rate securities so that higher commissions could be generated. Butler faces a maximum 45 years in prison.
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According to the government, Butler and Tzolov changed securities’ names on communications with investors so that clients wouldn’t find out that federally guaranteed student loans were not backing their investments. Instead, they put the funds in riskier products that were connected to ARS. Investors lost close to $1 billion when the ARS market collapsed.

Butler’s attorney, however, says the failed market, not his client, is at fault for the investors’ losses. Butler plans to appeal the verdict.

Tzolov was arrested last month in Spain. He was under house arrest in New York City in May but fled the country. Tzolov pleaded guilty to securities fraud, conspiracy, visa fraud, wire fraud, and bail-jumping charges. Tzolov then testified for prosecutors in the criminal case against Butler.

While commenting on these recent developments, Ann Woolner, on Bloomberg.com, noted that just because federal regulators weren’t paying attention to misconduct on Wall Street doesn’t make it okay for brokers to lie to their clients-it just makes it easier for them to not get caught. She also commented that while people don’t die from white collar crimes, securities fraud can cause a great deal of suffering for investors who were robbed.

While the two former Credit Suisse brokers shouldn’t be punished because of the shortcomings within the securities industry, the “culture of corruption” argument shouldn’t be the reason to shorten their prison sentences. Just because everyone’s doing it doesn’t make it okay.

Related Web Resources:
Wall Street ‘Corruption’ Might Buy Crook a Break: Ann Woolner, Bloomberg.com, August 21, 2009
Broker Convicted in Auction-Rate Case, Wall Street Journal, August 19, 2009
Former Wall Street broker pleads guilty to fraud, MSNBC, July 22, 2009 Continue Reading ›

Wachovia Securities Ordered by Pennsylvania Securities Commission to Repurchase $325 Million in Auction-Rate Securities

Published on: August 20, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Wachovia Securities, LLC and related entities will offer to refund $324.6 million in auction-rate securities from Pennsylvania investors. The Pennsylvania Securities Commission announced the ARS repurchasing agreement on August 11. Wachovia must also pay the commonwealth a $2.52 million assessment for the part the broker-dealer played in the ARS market.

According to Robert Lam, the commission chairperson, Wachovia failed to properly supervise its agents that dealing with investors over the sale of auction-rate securities, as well as engaged in business practices that were “unethical or dishonest.” Commissioner Steven Irwin said Wachovia sold and marketed ARS as liquid investments even though they were long-term investments that were involved in a complicated auction process. The auction-rate securities market failed in 2008.

Right before the ARS market went downhill, over 1,300 Pennsylvania retail investors held ARS that they had purchased from Wachovia. Now, the broker-dealer will repurchase the ARS.

The Pennsylvania commission is investigating other firms over any alleged misconduct committed that caused investors to get stuck with frozen ARS that they had been told were liquid, similar to cash. The commission has made it clear that they will not allow members of the securities industry to take part in dishonest or unethical business practices.

Wachovia sold more than $12.8 billion in ARS to investors throughout the US. Securities regulators in different states have pushed for Wachovia and other brokerage firms, such as Wells Fargo, Citigroup , Bank of America, and UBS to buyback the frozen auction-rate securities that investors were left with after the market dropped. Broker-dealers are accused of misrepresenting ARS to clients and that despite knowing that the market was about to collapse continuing to sell ARS to investors.

Related Web Resources:
Pennsylvania Securities Commission Orders Wachovia to Refund Over $300 Million to More Than 1,300 for Auction Rate Securities, Earth Times, August 11, 2009
Wachovia to Buy Back $325 Million in ARS, Wall Street Journal, August 11, 2009 Continue Reading ›

FINRA Bars Ohio Broker Accused of Stealing $90,000 Inheritance from Two Sisters from the Securities Industry

Published on: August 19, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Richard Wood, an Ohio broker, has agreed to be barred from the securities industry for allegedly committing broker misconduct. According to the Financial Industry Regulatory Authority, the broker, working for American General Securities Inc., allegedly stole the $90,000 that a client had left to two of her nieces.

FINRA says that Wood helped liquidate the estate in 2006. He then suggested that the nieces, who are sisters, open a brokerage account and invest in bonds. He was to oversee their investments. Instead, he allegedly misappropriated the money and told the sisters to issue their checks to STL Financial, Inc., an entity that he alone controlled rather than an actual brokerage firm.

The self-regulatory organization claims that Wood gave each of the sisters a bogus account number to a brokerage account that didn’t exist. He also allegedly put together more than one false customer account statement when one of the sisters became suspicious.

After District Court Dismisses Texas Securities Fraud Against Billionaire Mark Cuban, SEC Appeal Can Now Move Forward

Published on: August 17, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Last week, the U.S. District Court for the Northern District of Texas dismissed the Texas securities fraud charges that the Securities and Exchange Commission had filed against billionaire Mark Cuban. The SEC had asked the judge to close the case after deciding not to file an amended complaint against the Dallas Mavericks’ owner. The court’s ruling now makes way for the SEC to consider whether to appeal the decision.

The SEC is accusing Cuban of engaging in insider trading. Cuban found out from the chief executive officer of Mamma.com that the company was going to raise money via a PIPE deal or public entity or a private investment. Cuban, who owned a 6.3% stake (600,000 shares) in the company, verbally said he wouldn’t tell anyone about the PIPE offering and then sold his whole stake in the company right before the PIPE deal became public knowledge. As a result, the SEC says that Cuban prevented himself from losing $750,000 when company’s stock dropped.

The SEC had filed its Texas insider fraud trading lawsuit against Cuban based on the “misappropriation theory.” In United States v. O’Hagan in 1997, the US Supreme Court ruled that a defendant is in violation of the antifraud provisions of the 1934 Securities Exchange Act if he or she “misappropriates” confidential information for trading purposes and breaches the duties of confidentiality and loyalty.

The SEC’s Rule 10b5-2 was put in place in 2000 to clarify what that duty entailed. In Cuban’s case, the duty of confidence or trust exists when a person agrees to keep information confidential.

The district court presiding over the SEC securities fraud lawsuit against Cuban, however, said that the defendant would have misappropriated the information if, in addition to promising to keep what he knew confidential, he had agreed that he wouldn’t trade based on the information that was given to him. However, the judge agreed with the defense that Cuban never promised that he wouldn’t trade. His legal representatives say there was no reason for him to abstain from trading.

Related Web Resources:
SEC Won’t File Amended Complaint Against Mark Cuban, The Wall Street Journal, August 12, 2009
SEC Files Insider Trading Charges Against Mark Cuban, SEC, November 17, 2008
Related Web Resources:
Mamma.com

The SEC Complaint (PDF)

The Mark Cuban Weblog
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SEC Seeks Legislation Allowing It to Pursue Securities Regulators After Their Resignation

Published on: August 15, 2009 | by Shepherd Smith Edwards & Kantas, LLP

On July 29, the House voted by voice to approve a bill that clears away any confusion regarding the Security and Exchange Commission’s authority to go after individuals accused of violating federal securities laws while working for a self-regulatory organization (New York Stock Exchange, Financial Industry Regulatory Authority, etc.) even if they are now employed elsewhere.

Rep. Kevin McCarthy (R-Calif) had introduced H.R. 2623 last May. McCarthy says that the bill doesn’t broaden the SEC’s authority, but it does eliminate any questions about whether the agency can pursue “formerly associated persons” that are no long working for the SRO. McCarthy noted that there are “loopholes” in the 1934 Securities Act that let employees at certain organizations get out of being held accountable just by resigning.

The change also would make it obvious that the SEC can pursue former employees of registered clearing agencies, government securities broker-dealers, and the Municipal Securities Rulemaking Board.

In the past, Congress has attempted to grant the SEC this authority. Although the Securities Act of 2008 contained an identical provision that the House passed by voice vote on suspension, this did not make it through the Senate Banking Commission. That bill also suggested that the SEC be given the authority to issue monetary fines in cease-and-desist proceedings, as well as during litigation.

Rep. Barney Frank (D-Mass), who also chairs the House Financial Services Committee, made a motion to pass H.R. 2623 on suspension of the rules.

McCarthy says that Congress needs to codify the scope of the SEC’s authority of “formerly associated persons” of various entitites, including SRO’s, so that the courts can hear these cases rather than dismissing them because there is no statutory authority. McCarthy says it became clear that this kind of legislation was necessary in 2007 when the SEC accused Sal Sodano of failing to enforce compliance with the 1934 Securities Act. Sodano had been the CEO and chairman of the American Stock Exchange at the time the allegations were said to have taken place but by 2005 he had resigned from the Amex post. According to an administrative law judge, the law allowed the SEC to sanction former employers that had worked for different entities, but not an ex- SRO director or officer.

Related Web Resources:
House Passes Legislation Allowing SEC to Sanction Former SRO Officials, Financial Crisis Update, July 31, 2009
HR 2623, Washington Watch Continue Reading ›

UBS AG and Merrill Lynch Collectively Fined $250,000 by FINRA for Closed-End Fund Actions

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

UBS Financial Services Inc. has agreed to be fined $100,000 and Merrill Lynch, Pierce, Fenner & Smith Inc. has consented to a $150,000 fine, says the Financial Industry Regulatory Authority, for alleged supervisory failures that resulted in the inappropriate short-term sales of closed-end funds that were bought at initial public offerings for the funds. By agreeing to settle, the broker-dealers are not deny or admitting to the FINRA charges. They are, however, consenting to the findings.

FINRA also announced that it was suspending five Merrill Lynch brokers for 15 days. Each of them must pay a $10,000 fine for allegedly making fund recommendations that were unsuitable for investors.

Merrill Lynch brokers that FINRA has sanction include:

• Kenneth C. Iwelumo (his clients lost about $563,000)
• Joseph Miller (approximately $130,000 in client losses)
• Ronald Kemp (about $411,000 in customer losses)
• Michael Kizman (about $210,000 in losses)
• John Ong (about $350,000 in client losses)

The investigation into the activities of a number of former UBS brokers is ongoing.

Closed-End Funds
Closed-End Funds are investment companies that sell a fixed number of shares during an initial public offering. These sales come with built-in sales charges. The CEF’s at issue came with a 4.5% sales charges and a 30-90 day penalty bid period after the IPO. If a client sold the CEF that had been purchased at the IPO during this time period, the broker would lose the commission.

FINRA says that both broker-dealers knew that CEF’s bought at IPO’s are more appropriate for long-term investments and that because of the sales charges that come with their purchases, it is inappropriate to engage in the short-term trading of CEF’s. FINRA claims that Merrill Lynch and UBS did not have the proper supervisory procedures and systems in place so that brokers couldn’t and/or wouldn’t make such unsuitable CEF sales.

FINRA also says that both broker-dealers failed to warn supervisors about the potential issues that could result from such activity and did not properly train registered individuals. Due to this improper supervision, brokers for Merrill and UBS recommended that certain clients engage in short-term sales of CEF’s bought at IPOs without fully understanding the financial ramifications these recommendations would have on their clients’ finances.

FINRA is concerned about brokers who convince customers to buy CEF’s during their IPO’s and then wait until after the penalty bid period is over to recommend that clients sell the CEF’s-usually at a loss. These brokers then recommend that clients use the proceeds from the sale to purchase more CEF’s at initial public offerings.

FINRA Fines Merrill Lynch, UBS for Supervisory Failures in Sales of Closed-End Funds; Customers Get More Than $5 Million in Remediation, FINRA, July 28, 2009
Merrill, UBS Are Fined in Closed-End-Fund Case, The Wall Street Journal, July 29, 2009 Continue Reading ›

SEC Says Prime Capital Services, Inc. Defrauded Elderly Investors in Florida with “Free” Lunch Seminars and Unsuitable Variable Annuity Sales

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

The US Securities and Exchange Commission is accusing broker-dealer Prime Capital Services Inc., income tax preparation business Gilman Ciocia Inc., and seven individuals of defrauding senior investors in Florida. The agency claims that the two companies, as well as the individuals named, allegedly used “free” lunch seminars that resulted in the sales of unsuitable variable annuities and, on occasion, millions of dollars in commission.

Robert Khuzami, the SEC Enforcement Director, called the free lunches “bait” for the scam. Elderly investors who are persuaded to purchase unsuitable financial products frequently are never able to fully recover their financial losses, which can severely deplete their retirement savings.

In addition to cease and desist proceedings against the respondents, the SEC is seeking remedial action, including civil penalties and disgorgement. According to the attorney representing PCS, Gilman, PCS President Michael P. Ryan, CCO Rose M. Rudden, one of the registered representatives, and one of the supervisors, the conduct under question occurred in the late ’90’s and 2000’s and has been remedied for some time. The respondents plan to defend themselves against the charges.

SEC investigators say the senior investment fraud scam occurred between November 1999 and February 2007 and that during appointments conducted with seminar participants, PCS representatives either left out important information or made misrepresentations about variable annuities. For example, PCS representatives are accused of telling investors they would have unrestricted access to the money they invested but did not tell them that there would be substantial charges if they withdrew their money early.

The SEC claims that representatives’ commissions when selling variable annuities was 6%. Their commission on other investment products was just 3%. The agency also claims that Ryan and a number of supervisors neglected to implement PCS’s supervisory procedure to identify when misconduct was occurring, as well as prevent broker misconduct from happening.

Related Web Resources:
Read the SEC’s Order (PDF)

“Free-Lunch” Seminars Still Baiting Seniors, Retirement Income Journal, July 15, 2009 Continue Reading ›