Investor Lawyers Blog

Goldman Sachs Permanently Exempted from Company Act Disqualification Provision, Says SEC

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

The Securities and Exchange Commission has decided to permanently exempt Goldman & Sachs Co. from a 1940 Investment Company Act provision that would have disqualified the financial firm from serving as a principal underwrite. Goldman and several of its affiliates applied for exemption from ICA Section 9(a) after settling for $550 million SEC securities fraud charges that it made material misrepresentations related to the 2007 structuring and sale of derivative product connected to subprime mortgages.

Under the provision, a person cannot act as a principal underwriter or investment adviser for an investment firm if, due to misconduct, the party in question is enjoined from taking part in any practice or conduct related to the purchase or sale of any security. Goldman, in its application, noted that since the district court had barred it and its affiliates from violating federal securities laws moving forward, the provision would apply to disqualify them from giving advisory services to investment companies.

After granting the broker-dealer a temporary exemption in July, the SEC issued Goldman a permanent one. The SEC noted that the applicants’ behavior did not make it against the “public interest or protection of investors” to grant the permanent exemption.

Regarding the $550 million securities fraud settlement, which is the largest penalty that the SEC has ordered a financial firm to pay, Goldman was accused of misleading investors about a synthetic collateralized debt obligation as the housing market was collapsing. Investors suffered more than $1 billion in financial losses. The brokerage firm admitted that it provided incomplete marketing information for the product and has agreed to reform its business practices.

Related Web Resources:
Investment Company Act of 1940

Goldman Sachs, SEC Reach $550 Million Settlement, PBS News, July 15, 2010 Continue Reading ›

Three Houston Men Accused of $103 Million Texas Securities Fraud Involving Life Insurance Scam that Victimized at Least 800 Investors

Published on: September 10, 2010 | by Shepherd Smith Edwards & Kantas, LLP

In an indictment unsealed in federal court, Adley H. Abdulwahab, Christian M. Allmendinger, and David C. White were charged with running a life insurance scam and stealing $103 million from at least 800 investors in the United States and Canada. Their Texas securities scheme allegedly involved the sale of “bonded life settlements” that guaranteed 10-20% returns. All three men are principals of A&O Resource Management Ltd., which is based in Houston.

In the US, A & O is accused of using funds from investors in 37 states to purchase the investments. A life insurance policy is bought by a third party, while the policy owner receives a cash payout. Meantime, the buyer pays the premiums and when the insured passes away, is supposed to collect on the death benefits. However, the Texas State Securities Board does not believe that the bonds purchased by A & O gave investors the returns that they were promised.

According to US Attorney Neil H. MacBride, the defendants defrauded investors for personal gain. The three men are accused of making misrepresentations regarding A & O’s previous successes, office locations, and number of employees, its investment offerings’ risks, and its use and safekeeping of investor money. Abdulwahab and his co-conspirators allegedly made up sham transactions involving A & O selling to two shell corporations once state regulators started examining investor funds.

The three defendants are charged with conspiracy, securities fraud, mail fraud, and money laundering. The Justice Department is seeking the forfeiture of about $103 million from the men.

Morgan Stanley, UBS, Wells Fargo, and Merrill Lynch Recruit Other Investment Firms’ Brokers

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

UBS AG unit UBS Wealth Management Americas recently recruited Bank of America Corp.’s Merrill Lynch financial adviser Nina Hakim to join its Westfield, New Jersey office. Hakim, who reportedly managed $300 million in client assets and generated $1.5 million in commissions and fees, will now report to UBS branch Manager Erik Gaucher.

Another new addition to the UBS team is Morgan Stanley Smith Barney adviser Raymond Schmidtke, who will be based in Seattle, Washington. According to regulatory records, Schmidtke, was employed by Citigroup Inc. for over two decades and stayed at the MS joint venture for a year. He reportedly had close to $100 million in assets under management and $1 million in annual production. He now reports to UBS branch manager Shawn MacFarlan.

In other investment adviser news, a team of now former Wells Fargo Advisors advisers has joined Morgan Stanley Smith Barney. Francis Schiavetti and Ben Dembin’s base will be the Boca Raton, Florida office. The team reportedly manages $107 million in client assets and produces approximately $1.2 million in commissions and annual fees. The two men both were employed by Wells Fargo and predecessor firm Wachovia Securities before joining the Morgan Stanley Smith Barney team.

In August, the Financial Industry Regulatory Authority fined and censured Morgan Stanley $800,000 for not making public disclosures, which is required under the SRO’s rules that oversee research-analyst conflicts of interest. FINRA claims that the financial firm also did not comply with a key 2003 Research Analyst Settlement provision when it failed to disclose independent research availability in customer account statements. Every six months, for the next two years, Morgan Stanley must now review a sample of its research reports and certify that they are in compliance with FINRA’s rules.

Related Web Resources:
Hires Merrill Lynch, Morgan Stanley Brokers, Fox Business, August 24, 2010
Morgan Stanley Adds Team From Wells Fargo, Faces FINRA Fine, Investment Advisor, August 24, 2010
FINRA Fines Morgan Stanley $800,000 for Deficient Conflict of Interest Disclosures in Equity Research Reports and Public Appearances by Research Analysts, FINRA, August 10, 2010 Continue Reading ›

US Closed-End Funds Continue to Hold $26.4 Billion in Auction-Rate Preferred Shares, Says Fitch Ratings

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

Even though it’s been awhile the auction-rate securities market froze in 2008, credit-ratings firm Fitch Ratings’s new report says that US closed-end funds still hold $26.4 billion in auction-rate preferred shares (ARPS). Researchers say that even though this figure is a 57% drop from the $61.8 billion that was trapped in ARS in January 2008 they are still surprised by the current amount.

While ARPS holders have obtained liquidity through many redemptions, there is still a significant amount that is outstanding. Fitch says that 61% (250) of closed-end funds continue to be leveraged with auction-rate preferred shares. This is down from the 347 in January 2008. Fitch’s report is based on a review of 437 US closed-end funds’ publicly available financial statements.

Since the ARS market collapse in February 2008, closed-end funds have redeemed shares at par value via refinancing or by lowering the funds’ leverage. Still others have offered to purchase the shares at below par value. 22% of the funds that Fitch reviewed has fully redeemed about $22.9 billion in ARPS, while 50% undertook partial redemptions of shares totaling $12.7 billion.

Municipal Securities Rulemaking Board Can Expand Public Information on Municipal Variable Rate Demand Obligations and Auction Rate Securities, Says SEC

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

The US Securities and Exchange Commission has approved the Municipal Securities Rulemaking Board’s proposal to expand publicly available information about auction rate securities and municipal variable rate demand obligations. The SEC also approved letting the MSRB require that municipal securities dealers provide more information about these securities while allowing them to make this data available through its Electronic Municipal Market Access website. The disclosures will hopefully enhance transparency for investors that want to assess key information regarding the degree of dealer support, auction liquidity, and variable rate securities resales.

Once the approval is implemented, which could take nine months, the MSRB will gather liquidity facility documents for variable rate demand obligations from municipal securities dealers. Documents may include stand-by purchase agreements, letters of credit, and identifying information related to the provider of the liquidity facility that was available at the time of the interest rate. Dealers will have to report ARS bidding data and documents defining auction procedures and interest rate setting mechanisms to the MSRB. All documents and information from the dealers will be made accessible through the EMMA Web site. EMMA currently offers free public access to interest rate information for ARS and VRDOs.

MSRB regulates banks and securities firms that trade, underwrite, and sell municipal securities. It also gathers and gives out market information and is committed to ensuring the key municipal market data is available and free to the public. This data allows retail investors to evaluate the risks and benefits. MSRB is a self-regulatory organization subject to Securities and Exchange Commission oversight.

Related Web Resources:
MSRB Receives SEC Approval to Create Additional Transparency for Variable Rate Securities, MSRB, August 26, 2010

Municipal Securities Rulemaking Board

Electronic Municipal Market Access

Stockbroker-fraud.com

Charles Schwab & Co. Defendant in Class-Action Securities Fraud Lawsuit Filed on Behalf of Schwab Total Bond Market Fund Investors Over CMOs and Mortgage-Backed Securities

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

A class-action securities complaint has been filed against Charles Schwab & Co. on behalf of investors that own Schwab Total Bond Market Fund (Nasdaq: SWBLX) shares that were purchased after May 31, 2007. The securities fraud lawsuit accuses Charles Schwab of causing the fund to deviate from its fundamental business objective, which was to track the Lehman Brothers U.S. Aggregate Bond Index, and of violating the California Business & Professions Code.

According to the plaintiffs’ legal representation, the defendant caused investors to suffer financial losses when it started investing in high-risk mortgage backed securities without letting shareholders know. Per the fund’s prospectus, Charles Schwab is supposed to obtain shareholder approval through a vote.

The plaintiffs contend that by investing 25% of the fund’s portfolio assets in high-risk, non-agency collateralized mortgage obligations (CMO’s) and mortgage-backed securities that were not part of Lehman’s US Aggregate Bond Index, Charles Schwab failed to stay true to its stated fundamental investment objective. They claim that this deviation led to tens of millions of dollars in shareholder losses because of the decline in the non-agency mortgage-backed securities value. According to their lawyers, the investors ended up experiencing a negative 12.64% in differential in total return for the fund compared to the Lehman Bros. U.S. Aggregate Bond Index from August 31, 2007 to February 27, 2009.

The investor plaintiffs are seeking restitution for all class members and for the return of management and other associated fees collected after the fund’s alleged deviation from its fundamental business objective.

Related Web Resources:
Class Action Lawsuit Filed Against Charles Schwab & Co., Star Global Tribune, September 7, 2010
Plaintiffs charge Total Bond Market Fund deviated from stated investment strategy, Investment News, September 7, 2010

Related Blog Stories Resources:
Schwab Must Pay SSEK Client $604,094 Over California Yield Plus Fund Investments, Says FINRA Arbitration Panel, https://www.stockbrokerfraudblog.com, April 22, 2010
Securities Law Firm Shepherd Smith Edwards & Kantas LTD LLP Investigates Investor Claims Related to Short Term Bond Funds, https://www.stockbrokerfraudblog.com, August 9, 2008 Continue Reading ›

Raymond James Loses Texas Auction Rate Securities Case and is Ordered by FINRA to Pay Couple $925K

Published on: September 4, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Raymond James and Associates Inc. and financial advisor Larry Milton must pay Rex and Sherese Glendenning $925,000, says a Financial Industry Regulatory Authority panel. The Texas securities case involved an auction-rate securities dispute. brokerage firm advisor Milton has been accused of misrepresenting that the ARS the couple invested in was extremely liquid.

The Glendennings opened their Raymond James (NYSE: RJF) account in 2008 right before the ARS market failed. They claim that Milton, who had invested $1.4 million of their funds in an ARS that consisted of sewer revenue bonds, did not tell them that there was an inherent possibility that the securities might fail. Instead, they allege, he lead them to believe that the ARS could be easily sold. You can imagine their dismay when Raymond James refused their request to repurchase the ARS at full value.

The Gleddenings are not the only ones that the broker-dealer has been ordered to compensate. In just the last two months, Raymond James has been ordered to buy back $3.5 million in ARS from investors. A FINRA panel ordered the brokerage firm to repurchase $2.5 million in ARS from investor Greg Merdinger, who claims that not only was he told that auction-rate securities were safe and very liquid (even more than market funds), but also he contends that no one apprised him that there was an illiquidity risk. Raymond James affiliates Raymond James & Associates Inc. and Raymond James Financial Services Inc. were ordered to make the ARS repurchase.

Related Web Stories:
FINRA: Raymond James must pay $925,000 to couple, Reuters, August 25, 2010
Raymond James faces $2.5 million payback ruling, Tampa Biz, July 26, 2010

Related Blog Posts:
Raymond James Ordered to Buy Back $2.5M in ARS by FINRA, https://www.stockbrokerfraudblog.com, July 28, 2010
Raymond James and RBC Capital Markets Fined $1.4 Million in Total Over Improper Stock Lending Activities, https://www.stockbrokerfraudblog.com, June 22, 2009 Continue Reading ›

Eaton Vance and Closed-End Trusts Sued for Breach of Fiduciary Duty Related to Redemption of Auction Preferred Securities

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

Eaton Vance Management says that five of the closed-end management investment companies that it advises have each received a demand letter on behalf of a putative common shareholder of the “Trusts” alleging breach of fiduciary duty related to the redemption of auction preferred securities after the auction markets failed in February 2008.

The “Trusts”:
• Eaton Vance Floating-Rate Income Trust (NYSE:EFR – News)
• Eaton Vance Tax-Advantaged Global Dividend Income Fund (NYSE:ETG – News)
• Eaton Vance Limited Duration Income Fund (NYSE Amex: EVV)
• Eaton Vance Insured Municipal Bond Fund (NYSE Amex: EIM)
• Eaton Vance New Jersey Municipal Income Trust (NYSE Amex: EVJ)

The letters seeks to have the Trusts’ Board of Trustees take certain steps to remedy the alleged breaches of duty. Eaton Vance Management is an Eaton Vance Corp. subsidiary.

Also, purported class action complaints have been filed against ETG and EVV on behalf of a putative common shareholder of each Trust. The securities lawsuits are claiming breach of fiduciary duty related to the redemption of auction preferred securities. Eaton Vance Management, Eaton Vance Corp., and the Trustees of the Trusts also are defendants. Eaton Vance provides institutional and individual investors with a wide range of wealth management solutions and investment strategies.

Our securities fraud lawyers represent institutional investors throughout the US. We are here to help you recoup your investment losses.

Related Web Resources:

Institutional Investors, Eaton Vance

Closed-End Management Company, Investopedia

Read our Stockbroker Fraud Blog

Raymond James Must Pay $925,000 Over Auction-Rate Securities Dispute

Published on: September 1, 2010 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority panel says that Raymond James and financial advisor Larry Milton must pay Sherese and Rex Glendenning $925,000 over an auction-rate securities dispute. This is the third time this summer that Raymond James Financial Inc. (NYSE: RFJ) subsidiaries have been involved in an ARS dispute that was decided in FINRA arbitration. Since July 1, independent broker-dealer Raymond James Financial Services Inc. and brokerage firm Raymond James & Associates have been ordered to repurchase $3.5 million in ARS from clients.

The Glendennings set up their account with Raymond James in January 2008 before the market meltdown. Milton placed the couple’s $1.4 million in an ARS that contained sewer revenue bonds while failing to tell them about the risk involved.

The couple contends that Milton’s behavior wrongly gave them the impression that their investment was highly liquid and could be easily sold. However, Raymond James turned down their request to buy the ARS back at full value.

According to the Glendennings’ securities fraud attorney, the timing of the purchase was key to winning the award. The securities that they bought came up for auction for the first time thirty five days after they made the purchase. The auction failed and the couple were never able “ to go to auction.”

At the time of the ARS market crash in February 2008, Raymond James Financial clients held $1.9 billion in auction rate debt—now down to $600 million. To date, none of the securities regulators have sued the firm over ARS sales. Other financial firms, including Oppenheimer & Co. Inc. and Charles Schwab & Co. haven’t been as lucky.

Related Web Resources:
Raymond James pays more auction rate claims, Investment News, August 26, 2010

FINRA rules against Raymond James in auction rate securities case, Tampa Bay Business Journal, August 26, 2010

Stockbroker-Fraud Blog

Former Bank of America CEO Denies Allegations of Securities Fraud During Merrill Lynch Acquisition

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

Kenneth D. Lewis, Bank of America‘s former chief executive, says that New York Attorney General Andrew Cuomo’s securities fraud allegations in connection with the bank’s merger with Merrill Lynch are without merit. Lewis is accused of purposely withholding information from the shareholders who approved Bank of America’s acquisition of Merrill.

In his filing with the state supreme court, Lewis claims that Cuomo’s securities lawsuit places blame “where it does not belong.” Lewis contends that all decisions he made regarding the acquisition were done in “good faith” and with the shareholders’ best interests in mind.

Cuomo’s securities fraud complaint charged BofA, Lewis, and ex-CFO Joe Price of concealing from shareholders the fact that Merrill brought with it billions of dollars in debt. The NY Attorney General contends that the information was withheld so that the shareholders would approve the merger between the two financial institutions. He also has accused the defendants of exaggerating the degree of Merrill’s losses so that federal help would be provided through the Troubled Asset Relief Program.