Investor Lawyers Blog

Freddie Mac and Fannie May Drop After They Delist Their Shares from New York Stock Exchange

Published on: June 25, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Fannie Mae dropped 39% to 56 cents and Freddie Mac went down 38% to 75 cents when the mortgage firm delisted their preferred and common shares from the New York Stock Exchange at the request of the Federal Housing Finance Agency. The moves were ordered after the NYSE told Fannie Mae that its shares did not meet listing standards any longer because over the last 30 days its closing price had dropped under $1. The voluntary delistings will go into effect in early July. The companies are expected to trade on the Over-the-Counter Bulletin Board.

The two mortgage companies, which are 80% owned by US taxpayers, guarantee or own nearly half of the US’s $11 trillion mortgage market. Shareholders include Blackrock Inc., Vanguard Group, California’s state pension fund, and Kinetics Asset Management.

The two firms have been at risk of delisting since September 2008 when they were seized by regulators and their share prices dropped. The US Treasury has infused about $145 billion ($61.3 billion into Freddie Mac and $83.6 billion into Fannie Mae) into the companies since then to keep them afloat despite defaults of mortgages and foreclosures. Taxpayer aid could end up reaching the hundreds of billions of dollars. The US government has promised to keep financially supporting the mortgage firms while Congress deliberates over overhauling the country’s mortgage finance system. The two firms are still a key source of funding for mortgage lenders and banks.

“This is more insult to the injury sustained by those who were sold shares, especially preferred shares, of Fannie Mae and Freddie Mac,” says Securities Fraud Attorney William Shepherd. “Most investors were told that these were very safe investments. Many were told that these were as safe as government bonds. It is not too late to seek damages for such misrepresentations.”

Related Web Resources:
Fannie, Freddie Plunge After Moving to Delist Shares, Bloomberg, June 16, 2010
Fannie Mae, Freddie Mac to delist from NYSE, CNN, June 16, 2010 Continue Reading ›

As BP Oil Spill Reaches Crisis Mode, A Number of Wall Street Analysts Placed “Buy” Rating On the Company’s Plunging Shares

Published on: June 22, 2010 | by Shepherd Smith Edwards & Kantas, LLP

When BP oil spill in the Gulf Coast first became news, the company’s shares started to drop. According to the Huffington Post, the unfolding crisis incited a mad dash on Wall Street, with dozens of securities analysts encouraging investors to “buy, buy, buy” BP (BP.L: Quote, Profile, Research, Stock Buzz) (BP.N: Quote, Profile, Research, Stock Buzz).

Among those to jump into the fray were Credit Suisse, Citigroup, and Morgan Stanley. Thomson Reuters says that of 34 analysts that rated the BP shares as recently as May 11, 27 gave “buy” or “outperform” ratings. 7 rated the shares with a “hold.” None of the analysts gave the shares an “underperform” or “sell” rating.

As estimates of how much oil was being spilt grew and was coupled with news of BP’s unsuccessful efforts to stop the leak, BP stock kept dropping, destroying some $100 billion in shareholder wealth. Unfortunately, when Wall Street makes mistakes, it is the investors that end up losing money.

Some experts saying that with so many analysts making the wrong call, the BP crisis has exposed the problems that continue to plague the sell-side analyst community despite all the reform that has been implemented in the last 10 years. Some investment firms are afraid to be left out, which can contribute to what appears to be an existing “group think” mentality. Analysts may also be unwilling to challenge companies for fear of jeopardizing their relationship with leading executives-a classic case of conflict of interest.

Meantime, the analysts are coming to their own defense. They say that the Deepwater Horizon oil spill was unprecedented and therefore it was hard to predict its outcome and related financial ramifications. Granted, as the risks became more obvious, many on Wall Street downgraded their buy ratings to more cautious notes. Natixis and Goldman were among those that lowered their ratings from “buy” to “hold” or neutral.” There were also a small group of analysts that did accurately call the effects the oil spill would have on BP’s stock prices.

Related Web Resources:
Wall Street Said ‘Buy, Buy, Buy’ BP Stock As Gulf Crisis Unfolded, The Huffington Post, June 18, 2010
BP Stock Sinks Back Near Oil-Spill Low, The Street, June 22, 2010
A Timeline of the BP Oil Spill Crisis, WallStCheatSheet.com, May 6, 2010 Continue Reading ›

LPL Investment Holdings, Inc. IPO Registration Gives Evidence of Disparities Between Wirehouse Broker-Dealers and Independent Brokerage Firms

Published on: June 21, 2010 | by Shepherd Smith Edwards & Kantas, LLP

According to InvestmentNews, LPL Investment Holding Inc’s recent IPO registration is clear evidence that the 4 wirehouse brokerage firms still dwarf the approximately 1,200 independent contractor broker-dealers when it comes to controlling client assets. LPL is an independent broker-dealer.

Currently, there are approximately 114,000 independent reps and about 55,000 wirehouse reps. Yet even though there are so many less wirehouse reps, they still are in charge of a larger pool of client assets than their independent counterparts. While wirehouse reps manage $3.95 trillion in client assets, independent reps handle about $1.8 trillion. This means that a wirehouse broker, on average, manages $71.8 million in assets, and independent reps manage about $16 million in assets.

Also, while both wirehouse and independent reps make about 1% in commissions and fees on client assets, wirehouse reps get a 40% average payout of the fees and commissions, while independent reps get about 85%. While the average independent rep makes under $134,000 annually, the average wirehouse rep makes about $287,000 a year.

LPL rep’s earn an average payout of about $155,360. Acquired by two private equity firms in 2005, LLP states in its IPO registration that due to its efficient operating model and scale, its payout to independent contractors far exceeds that of wirehouse firms. InvestmentNews says it is unclear how many of the $1 million plus-producing brokers joined LPL because they wanted the higher payout.

LPL is owned by private equity firms Hellman & Friedman LLC and TPG Capital. The brokerage firm has filed to raise up to $600 million in its IPO.

Related Web Resources:

Does LPL’s filing reveal an unspoken truth about indie B-Ds?, Investment News, June 21, 2010
TPG-Backed LPL Investment Holdings Files for $600 Million IPO, Bloomberg Businessweek, June 4, 2010 Continue Reading ›

FINRA Suspends License of Dallas Broker-Dealer Linked to Failed Medical Capital Notes

Published on: June 18, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Dallas-based securities firm Cullum & Burks Securities Inc. has had its license suspended by the Financial Industry Regulatory Authority Inc. The broker-dealer, which had 1,300 client accounts, 100 affiliated reps, and $150 million in assets, reportedly failed to files its mandatory, quarterly Focus report.

Last November, FINRA said the Texas broker-dealer had violated its net capital requirement because it didn’t have enough capital to stay in business. It was then that Cullum & Burkes raised more capital.

The securities firm was one of three broker-dealers listed as sellers of Medical Provider Funding Corp. V, which is a series of private placements that were created by Medical Capital. Other sellers on the list included Securities America Inc. and First Montauk Securities Corp., which is now defunct.

A Reg D filing with the SEC in 2007 reported that the offering was for $400 million. Medical Capital raised about $2.2 billion in investor funds. Now, over half of the investors’ money has been lost.

Cullum & Burks Securities Inc. is the subject of a class action lawsuit filed over the Medical Capital notes sale. The complaint contends that the notes should have been registered with the Securities and Exchange Commission. However, the securities firm denies that it engaged in broker-misconduct in relation to the sale and sees itself as a victim of any wrongdoing committed by Medical Capital. In 2009, the SEC charged Medical Capital Holdings Inc. with securities fraud related to private placement sales.

Related Web Resources:

Another broker-dealer down: Dallas B-D capsized by MedCap, Investment News, June 16, 2010
FINRA
Continue Reading ›

House and Senate Negotiators Can’t Seem to Agree on Fiduciary Standard in Financial Regulatory Reform Bill

Published on: June 17, 2010 | by Shepherd Smith Edwards & Kantas, LLP

According to InvestmentNews, negotiators in the Senate and the House have reached an impasse regarding the fiduciary standard provision found in the financial regulatory reform bill. While the House wants the US Securities and Exchange Commission to impose a universal standard of care that would be applicable to anyone offering personalized investment advice to retail clients, such as investment advisers, insurance agents, and broker-dealers, to reveal conflicts of interests and act in clients’ best interests-the Senate only wants the SEC to examine the issue for a year before proceeding to rulemaking.

According to Securities Fraud Lawyer William Shepherd, “Virtually all advisory professionals have a fiduciary duty to their clients, and brokerage firms claim to be professionals. Having a ‘fiduciary duty’ means professionals cannot put their own interests ahead of their clients. All types of ‘financial advisors’ were considered fiduciaries, until some Wall Street-friendly judges said otherwise. Congress needs to pass a law restating that brokers are fiduciaries. If not, rest assured that Wall Street will use lack of clarification as proof they do not owe an affirmative duty to their own clients.”

While speaking before the Financial Industry Regulatory Authority on May 27, US Deputy Treasury Secretary Neal Wolin says that the White House is strongly in favor of making retail brokers subject to the toughest possible consumer protection while also having them abide by a fiduciary duty. Wolin also says that the Obama Administration wants heightened regulation of credit rating agencies, Volcker rule limits on banks’ proprietary trading activities, and effective resolution authority against failed companies.

Stockbroker Fraud Attorney Shepherd says “It is preposterous to even say that stockbrokers are not fiduciaries. The law (Investment Advisors Act of 1940) says that those who advise clients regarding securities are held to a fiduciary standard. Meanwhile, stockbrokers insist they are not just order takers – which people pay $8.00 to get online – but are instead ‘advisors,’ ‘financial consultants,’ etc. who can charge 10 to 100 times what online trades cost. Wall Street wants to make the big bucks, but not have any duties to their clients. It’s simple as that.”

Related Web Resources:
House-Senate negotiators hit impasse on fiduciary standard, InvestmentNews, June 17, 2010
Treasury’s Wolin Vows Fight for Broker Fiduciary Duty in Reform Law, Investment Advisor, May 27, 2010
Financial Regulatory Reform, New York Times, June 15, 2010 Continue Reading ›

Lehman Brothers Lawsuit Claims Its Bankruptcy Was In Part Due to JP Morgan Chase’s Seizure of $8.6 Billion in Cash Reserves

Published on: June 14, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The estate of Lehman Brothers Holdings is claiming that JP Morgan Chase abused its position as a clearing firm when it forced Lehman to give up $8.6 billion in cash reserve as collateral. In its securities fraud lawsuit, Lehman contends that if it hadn’t had to give up the money, it could have stayed afloat, or, at the very least, shut down its operations in an orderly manner. Instead, Lehman filed for bankruptcy in September 2008.

JP Morgan was the intermediary between Lehman and its trading partners. Per Lehman’s investment fraud lawsuit, JP Morgan used its insider information to obtain billions of dollars from Lehman through a number of “one sided agreements.” The complaint contends that JP Morgan threatened to stop serving as Lehman’s clearing house unless it offered up more collateral as protection. Lehman says it had to put up the cash because clearing services were the “lifeblood” of its “broker-dealer business.”

JP Morgan’s responsibilities, in relation to Lehman, included providing unsecured and secured intra-day credit advances for the broker-dealer’s clearing activities, acting as Lehman’s primary depositary bank for deposit accounts, and serving in the role of administrative agent and lead arranger of LBHI’s $2 billion unsecured revolving credit facility.

SEC Inquiring About Wisconsin School Districts Failed $200 Million CDO Investments Made Through Stifel Nicolaus and Royal Bank of Canada Subsidiaries

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

According to local new services, the US Securities and Exchange Commission is asking five Wisconsin school districts for additional information about the $200+ million in synthetic collateralized debt obligations that they purchased through Stifel Nicolaus and Royal Bank of Canada subsidiaries in 2006. The CDO’s are now reportedlyworthless.

The districts collectively bought the CDOs with $35 million of their own money and more than $165 million borrowed from Depfa bank. Since then, the entire investment has failed. In March, Depfa noticed default on the district trusts which had been established for the investments and took the $5.6 million in interest that had been earned since the purchase was made.

In their 2008 securities fraud lawsuit against the investment firms, the districts accused the defendants of deceptive practices and fraud. School officials contend that they were misled into investing in CDO’s because of a Stifel product that was supposed to build trusts for post-retirement teacher benefits. They say that they weren’t told that that they could lose their entire investment because of the 4 – 5% default rate among companies within the CDO. They also contend that they were never advised that their investments included sub-prime mortgage debt, credit card receivables, home equity loans, and other risky investments.

J.P.Morgan Securities Ltd. Ordered by UK’s Financial Services Authority to Pay $48.7 M for Breaching Client Money Rules

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

Upon issuing its largest fine ever, the United Kingdom’s Financial Services Authority says it is ordering J.P.Morgan Securities Ltd. to pay $48.7 million for breaching Client Money Rules that are there to make sure that financial organizations properly protect clients’ funds. FSA claims that between November 1, 2002 and July 8, 2009, JPMSL failed to segregate billions of dollars-between $1.96 billion and $23 billion-that belonged to its clients.

PER FSA’s Final Notice on May 25, JPMSL, one of the largest holders of client money in the UK, held its futures and options business’s client in a JPMorgan Chase Bank N.A. unsegregated account. The mistake was a breach of the financial service regulator’s Principle 10 and the Client Money Rules. The rules require that client funds be held in a segregated account overnight.

FSA says that JPMSL’s error would have placed clients at “significant risk” if the investment bank were to ever become insolvent. During the insolvency process, the clients would not have been able to claim from a “pool of protected client money” because they would have been “classed as general unsecured creditors.

FSA says that when determining JMPSL’s penalty, the facts that JMPSL’s misconduct wasn’t intentional and that no clients sustained any financial losses because of the mistake were factored into account.

Related Web Resources:
FSA levies largest ever fine of £33.32m on J.P.Morgan Securities Ltd for client money breaches, FSA.Gov.UK, June 3, 2010
F.S.A. Clamps Down on Client Money Rules, New York Times, June 8, 2010 Continue Reading ›

FINRA Fines Piper Jaffray $700,000 for E-mail Retention Issues and Other Violations

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

The Financial Industry Regulatory Authority is fining Piper Jaffray & Co. $700,000 for violations related to the investment bank’s alleged failure to maintain about 4.3 million emails from November 2002 through December 2008 and for neglecting to tell FINRA about the issues it was having with email retention and retrieval. FINRA contends that this lack of disclosure not only affected Piper Jaffray’s ability to fully comply with the SRO’s email extraction requests, but it also may have impacted the investment bank’s ability to respond to email requests from other regulators, as well as from parties involved in civil arbitration or litigation.

By not disclosing that “it was not making complete production of its emails,” per FINRA Executive Vice President and Acting Director of Enforcement James S. Shorris, Piper Jaffray was “potentially preventing production of crucial evidence of improper conduct…” Shorris said email retention was a “critical regulatory requirement” for broker-dealers.

The broker-dealer was first sanctioned for email retention failure in 2002. Piper Jaffray settled by agreeing to reevaluate its systems and certify that it had set up systems and procedures that were aimed at preserving email communications. Since making that certification in 2003, Piper Jaffray has never indicated that it was experiencing system failures.

It wasn’t until FINRA investigators asked for emails that a former Piper Jaffray employee suspected of misconduct had sent and received that the investment bank’s ongoing email retention deficiencies were discovered. A CD-ROM sent by Piper Jaffray that reportedly had all of the employee’s emails was missing an email that had led to the internal probe. This investigation resulted in the employee’s firing and in FINRA making an enforcement action against the worker.

By agreeing to settle, Piper Jaffray is not admitting to or denying FINRA’s charges.

Related Web Resources:
FINRA Fines Piper Jaffray $700,000 for Email Retention Violations, Related Disclosure, Supervisory and Reporting Violations, FINRA, May 24, 2010
Retention issue: Finra fines Piper Jaffray over e-mail archiving, Investment News, May 25, 2010
Read the Letter of Acceptance (PDF)
Continue Reading ›

Alleged $800,000 Affinity Fraud Scheme Prompts SEC to Sue GTF Enterprises and Its Money Manager

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

U.S. Securities and Exchange Commission has filed a securities fraud lawsuit against investment firm GTF Enterprises Inc., money manager Gedrey Thompson, and associates Sezzie Goodluck and Dean Lewis. The SEC claims that GTF and Thompson targeted investors from the African-American and Caribbean communities in Brooklyn, NY. The affinity fraud scam bilked at least 20 investors of over $800,000 between 2004 and 2009.

The SEC claims that Thompson convinced clients to invest the money in GTF in exchange for lucrative investment returns with guaranteed safety of principals and other promises. He then went on to invest a “fraction” of the clients’ funds (losing thousands of dollars in the process), while using hundreds of thousands of their dollars to pay for his own expenses. The affinity fraud scheme cost some investors their life savings.

Among the multiple misrepresentations that the SEC says Thompson made to investors was the claim to one client that her investment was “150% guaranteed.” He allegedly told another investor that he could make him a millionaire. Thompson and GTF allegedly covered up the securities fraud by generating bogus quarterly account statements for clients. Goodluck and Lewis are accused of helping Thompson with his investment scheme.