Investor Lawyers Blog

JP Morgan to Repurchase $480 Million in ARS from Michigan Investors

Published on: October 24, 2009 | by Shepherd Smith Edwards & Kantas, LLP

JPMorgan Chase & Co. is offering to repurchase $480 million in auction-rate securities from investors in Michigan. The full buybacks are for investors who bought ARS between 2006 and early 2008. JPMorgan’s offer is part of a settlement that it reached with the Michigan Office of Financial and Insurance Regulation.

The broker-dealer is also paying the state of Michigan $664,000 to settle allegations that it misled clients into thinking that the ARS they were buying were liquid like cash. 90% of the settlement went to the state’s general fund, while 10% was deposited in the OFIR’s Michigan Investor Protection Trust.

OFIR also reached similar agreements with Citigroup, Banc of America Securities, Merrill Lynch, Comerica, and Wachovia. The state of Michigan has negotiated over $3.5 billion in payments for investors and received over $6.5 million.

Many investors were caught off guard when their ARS accounts froze after the market collapsed. Many broker-dealers were accused of misleading clients and making it seem as if auction-rate securities were as liquid as cash.

Michigan is not the first state that JPMorgan Chase & Co. has settled with over allegations that it misled clients about ARS. In August 2008, JP Morgan Chase, along with Morgan Stanley, agreed to give back more than $7 billion to ARS investors as part of the settlement they reached with New York State Attorney General Andrew M. Cuomo.

Related Web Resources:
OFIR Announces $480 Million Auction Rate Securities Settlement with JPMorgan Chase, MichNews.org, October 8, 2009
Cuomo Settles JP Morgan, Morgan Stanley ARS Claims, CFO, August 14, 2008
Michigan Office of Financial and Insurance Regulation
Continue Reading ›

Two Dresdner Kleinwort Traders Censured for Market Abuse by UK’s FSA

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

Two Dresdner Kleinwort traders were censured for market abuse by the United Kingdom’s Financial Services Authority. According to the FSA, Darren Morton had access to inside information about a possible new issue of Barclays floating-rate bonds in March 2007 that would offer more favorable terms than the last issue.

The FSA says that Morton shared what he knew with trader Christopher Perry and the two men sold the whole holding of the previous issue held by K2, a Dresdner investment vehicle with a portfolio containing $65 million of Barclay’s FRNs. That same day, a new issue was announced, and counterparties that bought the bonds from K2 lost some $66,000.

Rather than accept the FSA’s offer to settle and receive a fine and/or penalty at a lower amount, the two men took their case to the FSA’s tribunal authority. The regulatory committee found that the two men did not realize that they were engaging in market abuse.

While the two men were censured, they were not fined and their right to work was not challenged. The FSA cited a number of factors to explain the sanction chosen:

• The two did not make money personally from the trade.
• They have undergone market abuse training.
• No one gave them proper guidance.
• Their compliance and disciplinary records are clean.

FSA enforcement director Margaret Cole, however, noted that insider dealing is cheating regardless of the market. She promised that future offenders will be slapped with harsher sanctions.

Related Web Resources:
The FSA and the intriguing case of Dresdner Kleinwort bond managers, Guardian.co.UK, October 7, 2009
SA censures Dresdner traders over market abuse, MarketWatch, October 7, 2009
Financial Services Authority
Continue Reading ›

Elder Securities Fraud: FINRA Bars Former Broker From Industry

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

The Financial Industry Regulatory Authority has barred former broker Sergio M. Del Toro from the industry for allegedly defrauding an elderly investor, age 90, of over half a million dollars. Del Toro has agreed to the bar but is not admitting to or denying wrongdoing.

FINRA says that between 2004 and 2006, Del Toro recommended that the elderly investor, who died in 2006, invest $511,000 in 3rd Dimensions Inc, a speculative, development-stage company. FINRA is accusing Del Toro of promising to buy back at $400,000 the securities that the senior investor had bought for $351,000 if the latter was dissatisfied. The elderly client bought additional stock at Del Toro’s suggestion. The former broker received about $76,650 in commissions.

FINRA claims that not only did the client pay $3-$4 for 3rd Dimension stock, which was not appropriate given the investor’s financial situation and age, but also, Del Toro allegedly did not have any reasonable grounds for valuing the stock at those prices when he sold them to his client.

FINRA claims Del Toro knew 3rd Dimension was making little if no revenue at the time and did not notify the two broker-dealers that he was registered with about his activities.

Elder Financial Fraud
Unfortunately, elderly senior investors can be easy prey for brokers that are willing to take advantage of them. It can be devastating to have your life savings (that you worked so hard for and hoped could cover your retirement or be passed on to your children and grandchildren) stolen from you by a financial professional.

Elder investment fraud is a crime. It is also a form of elder abuse when the victim is an older senior investor. Continue Reading ›

Market Timing Violations Against AG Edwards & Sons Inc. Supervisors and Broker Upheld by the SEC

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

The US Securities and Exchange Commission is upholding the market timing violations against two AG Edwards and Sons Inc. supervisors and one of its stockbrokers. Billions of dollars were involved in the mutual fund market timing transactions.

While market timing, which involves the buying and selling of mutual fund shares in a manner that takes advantage of price inefficiencies, is not illegal, a violation of 1934 Securities Exchange Act Section 10(b) and Rule 10b-5. can arise when there is intent to deceive.

Last year, the ALJ found that AG Edwards and Sons brokers Charles Sacco and Thomas Bridge intentionally violated antifraud provisions when they engaged in market timing activities even though they had been restricted from doing so. The ALJ also found that supervisors Jeffrey Robles and James Edge failed to properly supervise the stockbrokers.

The antifraud charges filed against Bridge by the SEC Enforcement Division involved 1,352 trades (representing $1.126 billion) he executed over a two-year period for companies belonging to client Martin Oliner. The Enforcement Division accused Sacco of entering 25,533 market timing trades (representing $4.036 billion) for two hedge fund clients between 5/02 – 9/03.

The SEC determined that Edge, who was Bridge’s supervisor, knew and was complicit in the latter’s actions. Although Robles was not considered to have been complicit in Sacco’s alleged broker fraud, the commission said he should have noticed there were problems.

The SEC ordered Bridge to cease and desist from future violations. He is also barred from associating with any dealers or brokers for five years. Sacco has already settled his broker-fraud case.

Edge is barred from acting in a supervisory role over any dealer or broker for five years. Robles received a similar bar lasting three years. All three men were ordered to pay penalties, while Bridge was ordered to disgorge almost $39,000 plus $16,665.57 in prejudgment interest.

Related Web Resources:
Read the SEC’s Opinion regarding this matter

Commission Sanctions Thomas C. Bridge for Violations of the Antifraud Provisions of the Securities Laws and James D. Edge and Jeffrey K. Robles for Failing to Supervise Reasonably, Trading Markets, September 29, 2009 Continue Reading ›

Ex-Enron Broadband CEO Goes to Prison for Texas Securities Fraud

Published on: October 16, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Joseph Hirko, the ex-Enron Broadband Chief Executive Officer, has been sentenced to a prison term of 16 months for Texas securities fraud. Hirko pleaded guilty to wire fraud a year ago for giving out false information to improve Enron’s financial figures.

The former Enron Broadband CEO and others knew that the broadband operating system was still in development yet Hirko promoted it in press releases and during analyst conferences in order to to elevate Enron’s stock price.

The US Justice Department says Hirko consented to give up approximately $7 million, which will be given through the SEC’s Enron Fair Fund to Enron victims. As part of Hirko’s plea agreement, Enron Creditor’s Recovery Corp. will get $1.7 million from him.

The sentence issued by US District Court Judge Vanessa Gilmore is the maximum possible under federal guidelines for the wire fraud charge. If Hirko had been found guilty during trial, he could have been sentenced to years in prison.

The former Enron Broadband CEO and several others were accused of numerous activities connected to the artificial inflation of the company’s stock. Chief Operating Officer Kevin Hannon and Hirko’s co-CEO, Ken Rice, also pleaded guilty.

Hirko and four other defendants, Rex Shelby, Kevin Ward, Scott Yeager, and Michael Krautz, went to trial in 2005. They were acquitted on certain charges but the jury deadlocked on the rest of the charges. Retrials were scheduled.

A jury acquitted Krautz and convicted Howard, but Judge Gilmore threw out the latter’s conviction on the grounds that the government applied a flawed legal theory. Howard then pleaded guilty. The Supreme Court ruled that because the jury acquitted Yeager of other charges connected to the same alleged scam, he could not be retried.

Related Web Resources:
Former Broadband CEO given 16-month sentence, Chron.com, September 28, 2009

Ex-Enron Broadband Co-CEO Sentenced for Wire Fraud, Bloomberg, September 28, 2009
Read May 15, 2000 Enron Broadband press release, HighBeam.com
The Fall of Enron, Houston Chronicle Continue Reading ›

SEC Warns Charles Schwab Corp. of Possible Civil Charges Over Two Bond Funds

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

Charles Schwab Corp. has received a Wells notice from the Securities and Exchange Commission about possible civil charges related to the discount brokerage’s Schwab Total Bond Market Fund and Schwab YieldPlus Fund. Schwab has been the target of regulatory investigations over the two funds and is a defendant in a number of civil lawsuits.

SEC staff members plan on recommending civil charges against a number of Schwab affiliates over possible securities violations. The Wells notice is not a finding of wrongdoing or a formal allegation. It does, however, give Schwab an opportunity to respond before the SEC makes a decision on whether to move forward with an enforcement action. The discount brokerage says the possible charges are unwarranted.

In San Francisco, Schwab is defending itself against a class-action fraud lawsuit in federal district court. YieldPlus fund investors are accusing the brokerage firm of failing to fully disclose the risks connected with some securities in the Schwab funds.

Notice: Schwab YieldPlus Investors Must Act Quickly To File Independent Claims For Losses

Published on: October 13, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Investors who invested into YieldPlus Funds issued by the Charles Schwab Corp. must take immediate action to avoid being limited in recovery to the amount obtained through a class action suit. Many with significant losses have been advised by attorneys to seek individual recovery in Securities Arbitration through the Financial Industry Regulatory Authority (FINRA). Those with smaller losses are being advised to remain in the class action.

Most investors who seek recovery of investment losses through private claims receive a greater portion of their losses than those who remain in class actions, even after paying expenses including legal fees. In some cases investors can recover many times the amount paid through class action settlements.

To file a private claim a YieldPlus investor must “opt out” of the class on or before December 28, 2009. This requires the investor to provide a written statement requesting exclusion from the Schwab YieldPlus class-action lawsuit, sign and date the request, include their mailing address and mail this information by the due date. It is highly recommended that this be done earlier than that date and on a form provided by the Administrator. Any flaw in the process can result in a failure to be eligible to proceed.

Citigroup ordered to pay $600,000 FINRA fine for inadequate supervision that may have allowed foreign clients to avoid paying taxes on dividends

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

Citigroup, Inc. has agreed to pay a $600,000 Financial Industry Regulatory Authority fine to settle claims that its alleged inadequate supervision of certain derivative transactions between 2002 and 2005 allowed a number of foreign clients to avoid paying taxes on dividends.

The way this allegedly worked is that during a period of dividend payments, the customer would sell stock to Citigroup. The bank would pay the client an income equal to the dividend. It would also pay any share price increase.

FINRA is accusing Citigroup of failing to control trades and failing to prevent improper trades, both internally and with trading partners. The dividend equivalent that certain foreign Citigroup clients obtained was not considered subject to withholding taxes. Citigroup’s strategy was allegedly intended to lower its tax bill.

NASAA Releases Investment Adviser Best Practices To Improve Compliance

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

The North American Securities Administrators Association has updated its best practices for investment advisers. The best practices were developed after a series of exams revealed several problem areas.

458 state-level investment advisers took part in examinations between January and May 2009. Some 1,887 deficiencies in 13 compliance areas, including the areas of books and records, registration, supervision, unethical business practices, and financials, were found.

NASAA President Denise Voigt Crawford says the best practices should help strengthen internal compliance programs. This will hopefully decrease the chances of regulatory violations (that can lead to securities fraud) while helping investment advisers provide better client services and meet compliance challenges.

NASAA Best Practices Recommendations for Compliance Procedures and Practices:

• Update contracts.
• Revise and update the disclosure brochure and form ADV every year.
• Back up information that is stored electronically.
• Ensure records are protected.
• Prepare and maintain financial records, other mandatory records, and client profiles.
• Develop a manual of relevant, written compliance and supervisory procedures.
• Make sure financials are always accurate.
• Each year, prepare and send out a current privacy policy.
• If necessary, maintain surety bond.
• If applicable, put into place the proper custody safeguards.
• Ensure that all advertisements are accurate.
• Look at disclosures, solicitor agreements, and delivery procedures.

At this time, state regulators are in charge of overseeing investment advisers who manage under $25 million. The Securities and Exchange Commission supervises investment advisers who manage over $25 million. NASAA is seeking to increase state oversight to include investment managers who oversee assets of up to $100 million. The Financial Industry Regulatory Authority also wants to expand its investment adviser authority.

Related Web Resources:
State inspectors find fewer problems among investment advisers, Investment News, September 29, 2009
NASAA Outlines Best Practices For Investment Advisers, NASAA.org Continue Reading ›

SEC Office of Administrative Services’ Office of Acquisitions Has Shortfalls that Could Impede Operation, Says Audit

Published on: October 8, 2009 | by Shepherd Smith Edwards & Kantas, LLP

According to an external audit of the SEC Office of Administrative Services’ Office of Acquisitions (OA), there exists “significant risk areas” that could affect operation and lead to improper accounting of federal resources. OA is responsible for the SEC’s contracting and procurement functions.

Shortfalls revealed included:

• Failure to submit accurate information in the Federal Procurement Data System • Failure to keep accurate information and records about contracting and procurement • Failure to engage in contract close-out procedures that are in accordance with Federal Acquisition Regulation and SEC regulations.
• Failure to properly manage and supervise personnel training and contract activities at regional offices
Per the report, shortfalls appear to have occurred due to a number of issues, including insufficient data for properly managing operations, poorly trained employees, and operational procedures that are not consistent.

Also, after checking the SEC’s Office of Financial Management records, the Audit found $13 million in contracts that were not identified in OA’s consolidated spreadsheet. In certain cases, OA had marked certain contracts as closed when OFM still noted them as open.

Following the audit, 10 recommendations were issued, including establishing new internal review processes, revising recordkeeping procedures, modifying operational processes, and coming up with a training plan for contracting obligations and personnel performing procurement duties.

SEC Inspector General H. David Kotz also issued a separate audit which found problems within the SEC’s Office of Freedom of Information. His audit found that the SEC had compliance issues with the Freedom of Information Act, which outlines procedures that have to by abided by when members of the public ask the federal agency for information.

Deficiencies included a lack of written procedures and policies for handling such requests, improper or inadequate procedures for disclosing documents that are not in compliance, failing to properly manage certain information, discriminating against certain entities asking for data, the improper processing of certain request, and failure to comply by rules requiring that an information request receives a response within 20 days.

Related Web Resources:
Watchdog:Flaws In SEC Acquisitions,Freedom Of Information Offices, Dow Jones, September 25, 2009
SEC Office of Administrative Services’ Office of Acquisitions

SEC FOIA/PA Program, The Freedom of Information & Privacy Act Office, SEC.gov Continue Reading ›