Investor Lawyers Blog

Auction-Rate Securities Probes Lead to More Enforcement Actions and Final Settlements with Investment Firms

Published on: June 1, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Another state has filed an individual enforcement against brokerage and investment banking firm Stifel, Nicolaus, & Co. Inc. On May 7, Virginia’s State Corporation Commission’s ‘s Division of Securities and Retail Franchising filed its civil lawsuit accusing the broker-dealer of making misrepresentations and false statements related to the sale of auction-rate securities, as well as failing to properly supervise its sales representatives that sold ARS to Virginia residents.

Just this March, Missouri Secretary of State Robin Carnahan had sued Stifel, Nicolaus, accusing the investment firm of making misrepresentations to over 100 ARS clients that were told that the securities were liquid, conservative investments. In May, Carnahan reached an agreement with two Bank of America Corp subsidiaries. Under the agreement, the bank would pay a $1.37 million fine and provide relief to numerous Missouri entities that bought $400 million in ARS.

Meantime, state officials are looking into whether TD Ameritrade Holding Corp., Charles Schwab Corp., and E*Trade Financial Corp also engaged in ARS-related violations. Broker-dealers that have reached preliminary settlements with federal and state regulators over their misrepresentation of ARS to clients include Citigroup Inc., Deutsche Bank AG, Credit Suisse Group, JP Morgan Chase & Co, Goldman Sachs Group Inc., Merrill Lynch & Co. Inc., Royal Bank of Canada, Morgan Stanley, Wachovia Corp, and UBS AG.

Per the agreements, settlement parties would repurchase up to $56 billion in illiquid ARS at par from charities, retail investors, and mid-sized and small businesses, as well as pay $522 million in penalties. The agreements with Bank of America, Wachovia, and Citigroup have been finalized.

Last month, the Financial Industry Regulatory Authority announced final settlements reached with NatCity Investments Inc. of Cleveland (a $300,000 fine), M & T Securities Inc. of Buffalo (a $200,000 fine), M & I Financial Advisors Inc. of Milwaukee (a $150,000 fine), and Janney Montgomery Scott LLC of Philadelphia (a $200,00 fine). FINRA also announced that SunTrust Investment Services Inc. and SunTrust Robinson Humphrey Inc. decided not to finalize their preliminary settlements. FINRA is still investigating both firms’ activities pertaining to ARS.

Related Web Resources:
Virginia sues Stifel, Nicolaus & Co. over auction rate securities, St Louis Business Journal, May 15, 2009
FINRA Announces Agreements with Four Additional Firms to Settle Auction Rate Securities Violations, FINRA, May 7, 2009
Carnahan Finalizes $400 Million Bank of America Auction Rate Securities Settlement, Missouri Secretary of State, May 14, 2009
Carnahan sues Stifel Nicolaus over auction rate securities, St Louis Business Journal, March 12, 2009 Continue Reading ›

Texas Securities Fraud: Court Grants SEC’s Request to Freeze Defendants’ Assets Following $40 Million Investment Scam

Published on: May 29, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Northern District of Texas has issued an order granting the Securities and Exchange Commission’s request for an asset freeze against Excel Lease Fund, Inc. and its owner, Benny L. Judah. Both are accused of being involved in a $40 million Texas securities fraud scheme that affected hundreds of investors.

In the consent order, the defendants did not admit to or deny the SEC’s allegations. Judah, a Texas business person, also agreed to an injunction barring him and any of his entities from issuing securities. He has control over 78 Texas businesses and plays a leadership role in almost 50 of them.

The SEC says that beginning January 2006, the defendants made a high-yield debenture offering to investors, while telling them that their money would go toward a number of “legitimate business” uses, including helping to retire a series of earlier debentures. The agency contends that Judah actually used the funds for non-Excel business purposes, as well as for his personal use. Investigators say at least $5 million of the funds may have been lost through day trading.

In addition, the SEC is accusing the defendants of overstating by at least 30% the value of assets behind the debentures, neglecting to disclose about $20 million in related-party loans to other Judah-owned companies, and overstating Excel’s assets through the use of some $15 million in bogus lease contracts. The SEC wants to obtain permanent injunctions, fines, and disgorgement against the defendants.

Over the years, our Texas securities fraud lawyers have helped many investment fraud victims recoup their losses.

Related Web Resources:
Benny L. Judah and Excel Lease Fund, Inc., SEC.gov, April 21, 2009
Feds freeze assets of Lubbock businessman Benny Judah, NewsChannel11, April 22, 2009
Read the SEC Complaint (PDF)
Continue Reading ›

Merrill Lynch Life Agency to Pay Illinois Division Of Insurance $18 Million Over Funeral Trust Scam Allegations

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

Merrill Lynch Life Agency Inc. will pay $18 million to the Illinois Division of Insurance to settle the state’s investigation into the investment firm’s involvement with a trust fund overseen by the Illinois Funeral Directors Association. The trust was supposed to cover funeral costs for about 49,000 consumers that had prepaid for funeral contracts. The $18 million will be placed in a special fund and will be used to offset losses by association members when delivering on their funeral contract commitments to consumers.

Merrill Lynch & Co. Inc, between 1986 and 1999, had marketed and sold tax-exempt variable universal life insurance policies as investments within the pre-need trust. Unfortunately, in 2007, the trust imploded, and its value dropped from over $300 million to approximately $250 million.

The Illinois Department of Financial and Professional Regulation then conducted a probe into the trust and discovered that the funds’ trustees had used the policies as investments within the trust. Also state comptroller Dan Hynes is asking the association to account for $10 million that trustees allegedly obtained from the trust as excess management fees.

According to state regulators, Merrill Lynch Life registered representative Edward L. Schainker, who served as the association’s investment advisor, recommended and sold over 300 policies to its members. The policies were to offer tax-exempt investment returns. Merrill Lynch’s life insurance division put forth 120 policies and received over $32 million in premiums that were invested in bonds and stocks that over the years have dropped in value and placed the trust’s solvency at risk.

Schainker is accused of violating Illinois insurable-interest laws and of failing to determine whether his investment plan could provide the needed revenue to cover trust liabilities. The Illinois secretary of state’s office has suspended his broker’s license and the state’s insurance division is seeking to revoke Schainker’s insurance license. He also has been ordered to pay civil penalties of $100,000.

By settling, Merrill Lynch Life is not admitting to the allegations made by the state of Illinois.

Related Web Resources:
Merrill Lynch to pay $18 million to halt state probe into funeral trust fund, Chicago Tribune, May 20, 2009
Illinois slams Merrill Lynch Life to the tune of $18M for funeral trust scam, Investment News, May 21, 2009
Illinois Funeral Directors Association

Illinois Department of Financial and Professional Regulation
Continue Reading ›

VSR Financial Services Settles FINRA Claim Over Improper Securities Sales Made to Senior Investors

Published on: May 25, 2009 | by Shepherd Smith Edwards & Kantas, LLP

VSR Financial Services, an investment firm, has agreed to pay $10.3 million to settle a FINRA claim that it failed to properly supervise two ex-brokers accused of improperly selling risky investments to 249 customers. The agreement ends the litigation brought by the investors, many of them retirees, against VSR and its two ex-brokers, Rebecca Engle and Brian Schuster.

Although a number of securities fraud lawsuits have been filed against Schuster, Engle, and VSR, most of the investment fraud victims opted to pursue their cases through arbitration because the terms of their investment agreements prevented them from filing lawsuits. The claimants have accused the former VSR brokers of selling them investments that were inappropriate and high-risk.

The majority of investors who were defrauded say that because they were already either retired or about to retire, they had wanted to place their money in investments that were conservative and low risk. Instead, they claim that Schuster and Engle made high-risk investments for them, selling them securities in Royal Palm Capital Group and American Capital Corp while failing to explain the risks involved. Schuster and Engle allegedly promoted these investments as “mini Berkshire Hathaways” and “can’t miss” opportunities when the companies were actually startups that had limited operating histories. According to criminal complaints and court documents, the investment fraud victims lost at least $20 million.

Engle and Schuster have been charged with eight felony counts of securities fraud. They worked together a number of times between 2000 and 2007 and have also been affiliated with Wachovia Securities LLC and Capital Growth Financial LLC. More arbitration claims against the other companies they’ve been associated with are pending.

Employer to pay $10M, CayCompass.com, May 24, 2009
VSR Financial Services settles securities claims, Kansas City, May 20, 2009 Continue Reading ›

Texas Securities Fraud: Ex-Dallas Football Player Charged with Alleged Involvement in $24 Million Investment Scheme

Published on: May 22, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Earlier this month, in U.S. District Court for the Northern District of Texas, ex-Dallas Cowboys football player Michael Kiselak and three other defendants were charge for their alleged involvement in a $24 million investment fraud scheme. The US Securities and Exchange Commission is suing the defendants, which include Kiselak, who is now a money manager, his Texas-based investment firm Kiselak Capital Group LLC, Jeffrey Sykes, and Gemstar Capital Group Inc, a venture capital company.

According to the SEC, Kiselak, acting on behalf of KCG, obtained about $24 million from 14 investors. However, the SEC says that the former professional football player misrepresented the way the funds would be invested, promised inflated returns, and failed to tell investors that his company would receive a 35% performance fees on any profits from trades. The SEC is also accusing Kiselak of telling investors that his company made a 2.25% month profit trading Treasury bills when he actually invested more than 90% of their funds in Gemstar.

KCG reportedly gave the SEC a brokerage statement showing that as of the end of March 2009, Gemstar had more than $23 million in segregated accounts that it was holding for KCG. The SEC contends, however, that the actual amount was closer to $20 million, and the funds had not been segregated to benefit KCG’s investors. The SEC now says that as of May 9, the amount in the account is about $19 million. As of May 12, KCG reportedly could not account for approximately $7 million of the investors’ funds.

The SEC is seeking permanent injunctions, disgorgement of ill-gotten gains, prejudgment interest, civil money penalties, and the appointment of a receiver to take charge of both firms’ assets. Judge John McBryde has frozen the defendants’ assets and granted a temporary restraining order.

Now a registered broker, Kiselak was a Dallas Cowboys football player from 1998 to 2000.

Related Web Resources:
Ex-Dallas Cowboy Defrauded Fund Investors, SEC, Bloomberg.com, May 12, 2009
SEC sues former Dallas Cowboys player Michael Kiselak and his financial firm, WFAA, May 12, 2009 Continue Reading ›

Wells Fargo Sued Over ARS Sales by California Attorney General for $1.5 Billion

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

California Attorney General Edmund G Brown, Jr. is suing Wells Fargo Investments LLC, Wells Fargo Institutional Securities, and Wells Fargo Brokerage Services for $1.5 billion. Brown is accusing the Wells Fargo affiliates of violating state securities laws and misleading California investors with false statements about auction-rate securities.

According to the California Attorney General’s securities fraud lawsuit, the Wells units engaged in fraud and deception to sell the securities, neglected to properly train and supervise the agents that sold the ARS, marketed the securities to investors that shouldn’t have been investing in them, and regularly misrepresented the securities when marketing them.

Brown says that nearly 40% of the ARS that the Wells defendants sold are owned by Californians. ARS investors included individuals, non-profits, small businesses, and others that were never fully informed about the risks of investing in theses securities.

ARS sales pitches by Wells Fargo representatives reportedly continued even though there were warnings as early as 2005 from the Financial Accounting Standards Board and others that auction-rate securities should not be considered cash-like equivalents. In November 2007, a Wells Fargo Bank’s Trust Department reportedly sent a memo warning against buying ARS.

Following the collapse of the $330 billion ARS market in February 2008, some 2,400 Californians, who were told that their ARS were liquid like cash, were unable to access their investments that ranged in worth from $25,000 to millions.

Brown says he is suing the Wells units because unlike Citigroup, UBS, Wachovia, and Merrill Lynch, the affiliates have not been able restore the securities’ cash value. The California Attorney General wants Wells Fargo to restore the securities’ value, disgorge any associated profits, and pay civil penalties at $25,000/violation.

Wells Fargo Chief Executive Officer Charles W. Daggs says the investment bank is disputing the claims made in the California Attorney General’s lawsuit. He also noted that Wells was among the first in the investment bank industry to voluntarily give clients with frozen securities significant liquidity. Daggs says that since April 2008, these clients have been able to access 90% of their ARP holdings’ par value via non-recourse loans with favorable rates.

Related Web Resources:
Calif. AG sues Wells Fargo for $1.5 billion, News Daily, April 23, 2009
Read the Attorney General’s Complaint Against Wells Fargo (PDF)
Continue Reading ›

Goldman Sachs Reaches $60 Million Settlement with Massachusetts Over Subprime-Mortgage Loans

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

Massachusetts Attorney General Martha Coakley has announced a $60 million settlement with Goldman Sachs over the alleged role the investment bank played in the subprime mortgage crisis. While Goldman did not originate the loans, it played a role in their securitization. Coakley has been conducting a nationwide probe targeting investment banks that knew certain loans were high risk but still opted to write them, as well as underwrite securities from these loans. Coakley says that state courts are in agreement that a number of these loans were destined to fail from the start.

Massachusetts will use $50 million of the settlement to help 714 Massachusetts homeowners with mortgages that are either delinquent or still performing. The money, however, won’t go toward helping homeowners whose homes have already foreclosed. The other $10 million will go to the state.

Among the terms of the settlement:

• Goldman has consented to principal write-downs of 25% to 30% for first mortgages and upward of 50% for second mortgages if owners want to sell or refinance their homes.

• A homeowner who is significantly delinquent will have to make manageable payments toward mortgages until they are able to sell or refinance.

• If a homeowner cannot sell his or her home, Goldman will help qualified borrowers to refinance and provide other solutions so that they don’t have to foreclose.

• Homeowners that have loans with Goldman entities and those that Litton Loan Servicing LP has serviced will receive immediate help.

By agreeing to the settlement, Goldman is not admitting to or denying wrongdoing. This is the first settlement, however, where an investment bank has been held to task for its role in the subprime lending crisis. Up until this point, prosecutors were only targeting the sources of the subprime loans and not the parties that put together the loans and presented them to investors.

Related Web Resources:
Massachusetts settles with Goldman Sachs, UPI, May 11, 2009
Goldman Sachs, Massachusetts reach settlement on mortgage securities, LA Times, May 12, 2009
Attorney General Martha Coakley
Continue Reading ›

Morgan Keegan & Co’s Regions Financial May Face SEC Charges Over Improper Auction-Rate Securities Sales

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

Regions Financial Corp, a Morgan Keegan & Co brokerage unit, says the US Securities and Exchange Commission may file a civil proceeding against it over charges that the firm allegedly engaged in the improper sale of auction-rate securities. The regulator filed a “Wells Notice” against Morgan Keegan in March. The notice means that a civil proceeding could be next. It also gives Morgan Keegan the opportunity to prepare a defense.

The SEC is examining the degree to which Morgan Keegan revealed to its clients the risks associated with investing in the auction-rate market and whether the firm sold a huge amount of that debt even when its ability to support the auction had declined.

Morgan Keegan is purchasing back the ARS it sold to clients. According to Morgan Keegan spokesperson Kathy Ridley, the investment firm has already gotten back $28 million in ARS.

Our securities fraud lawyers at Shepherd Smith Edwards & Kantas LTD LLP are working with numerous clients on claims against Morgan Keegan and Regions Financial over failed auction-rate securities investments, as well as investor claims involving these Morgan Keegan Bond Funds:

• RMK Strategic Income Fund (RSF)

• RMK Advantage Income Fund (RMA)

• RMK Multi-Sector-High Income Fund (RHY)

• RMK High Income Fund (RHM)

• RMK Select High Income Funds: C (RHICX), I (RHIIX), and A (MKHIX)

• RMK Select Intermediate Bond Funds: A (MKIBX), C (RIBCX), I (RIBIX)

The collapse of the $330 billion auction-rate securities market left many investors unable to sell auction-rate debt that they were told were safe to invest in and that were the liquid equivalent of cash. Since then, many investors have come forward complaining that they were misled about the risks tied to investing in the market.

Regions Financial unit may face SEC charges, Reuters, May 11, 2009
Regions Financial says Morgan Keegan unit received ‘Wells notice’, The Birmingham News, May 12, 2009 Continue Reading ›

Centaurus Financial Slapped with $175,000 FINRA Fine for Failing to Protect Confidential Client Info

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

The Financial Industry Regulatory Authority says it is fining Centaurus Financial Inc. because the firm failed to protect customers’ confidential information. The California-based company must notify brokers and affected customers of the breach and give clients a year of free credit monitoring. Also as part of its settlement with FINRA, Centaurus has agreed to entry of the SRO’s findings. It will also certify with the SRO that its systems and procedures comply with privacy requirements. Centaurus, however, is not denying or admitting to the FINRA charges.

FINRA says that from April 2006 to July 2007, Centaurus neglected to make sure that the computer firewall, password system, and username for its computer fax server were providing the necessary protections. As a result, FINRA contends that persons that lacked the proper authorization were able to gain access to images stored on the faxes that included account numbers, social security data, personal information, and other sensitive, confidential client information.

An unauthorized party was even able to use Centaurus’s fax server to run a “phishing” scheme in July 2007. The scam was intended to fool computer users into giving out their personal information, including credit card information, banking data, passwords, and usernames. Over a 3-day period, 894 unauthorized logins by 459 unique IP addresses occurred after a file simulating a known Internet auction site was loaded to CFI’s fax server.

Phishing Scams
These schemes are designed to persuade recipients to reveal personal account data. For example, a target might be sent a Web site link or an attachment via email that asks for confidential personal and financial data. The sender or the Web site involved may appear to be legitimate but is actually illegal.

FINRA says that following the “phishing” incidents, Centaurus sent to some 1,400 clients and their brokers letters about the incident but that what they told them was misleading. The SRO contends that rather than admit that the breach of confidentiality occurred because the firm’s protections were inadequate and, as a result, unauthorized logins occurred, Centaurus reported that only one person had unauthorized access to the client information found on the server and that that data was not openly accessible.

Related Web Resources:
FINRA Fines Centaurus Financial $175,000 for Failure to Protect Confidential Customer Information, FINRA, April 28, 2009
Recognize phishing scams and fraudulent e-mail, Microsoft, September 14, 2006 Continue Reading ›