Investor Lawyers Blog

US Supreme Court Won’t Hear InfoSpace Founder’s Appeal Requesting to Sue Attorneys and Stock Management Company for Allegedly Botching Insider Stock Trading Case

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

The US Supreme Court has decided not to listen to an appeal filed by InfoSpace founder Naveen Jain requesting that he be allowed to sue JP Morgan Securities and his former attorneys for allegedly mishandling an insider stock trading lawsuit.

What happened was that InfoSpace Inc. INSP shareholder Thomas Dreiling filed a derivative action against Naveen and his wife, InfoSpace cofounder Anuradha. Dreiling contended that they violated short-swing trading prescriptions that prevent corporate insiders from selling and buying or buying and selling company stock during a six-month period.

The federal court ruled in Dreiling’s favor and the Jains were ordered to pay $246.1 million in disgorgement. The lawsuit was eventually settled for $105 million.

The Jains, however, then sought to get the amount they were fined for participating in illegal short-swing transactions from their stock management company and their attorneys. He and his wife had accused the defendants for the language in his company’s initial public offering prospectus that contributed to such a healthy judgment against them. Their lawsuit alleged breach of fiduciary duty, negligence, malpractice, and equitable indemnity.

Since then, the lower courts, including the Washington Court of Appeals, have thrown out their lawsuit because federal law bars complaints that blame security companies for such trades. The appeals court, in affirming the initial dismissal, noted that an insider who violates Section 16B of the Securities Exchange Act cannot receive indemnification from others for any liability that results. While the state court acknowledged that the rule against indemnification might protect some securities professionals from the repercussions of their misconduct, Congress still wants corporate insiders to be held strictly liable for short-swing violations.

Related Web Resources:
Supreme Court turns down appeal from InfoSpace founder, Seattle Times/AP, March 9, 2009
InfoSpace

Supreme Court of the United States
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GM, Ford, Chrysler Retirees: Beware of Financial Advisors Seeking to Invest Your Severance!

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

About 7,500 General Motors workers have agreed to a buyout of early retirement incentives and leave, the company reported today. Chrysler has also agreed to extend its offers bo buy-out workers beyond tomorrow. This follows tens of thousands of other autoworkers workers who were in recent years persuaded to retire and retire early and receive large sums of money.

Unfortunately, many retiring persons have little if any experience in investing. Enter droves of salespersons hawking financial plans. In the past, strict laws and regulations were enforced regarding investors’ funds, especially retirement funds. As we have recently witnessed, securities regulators are apparently overwhelmed or incompetent. This has resulted in tragic results recently as retirees have not only lost their careers but also their only safety net.

For decades, Wall Street has blamed abuse of investors on a few “rogue” brokers. Now many believe it is Wall Street itself that is rotten to the core. In fact, the majority of financial advisors sincerely and diligently seek to serve their clients. Yet, many products they are told to sell are inappropriate, riddled with costs or just plain fraudulent. As well, too many of the worst of advisors attract unwary investors with false promises.

Victims of financial abuse are also often unaware they can recover undue investment losses according to the law. They must understand, however, that regulators “police” the industry, and write tickets when they catch the bad guys. In order to recover, victims almost always have to hire an attorney to represent them in court or securities arbitration.

Our law firm has represented thousands of investors, most who lost retirement funds, and many who are former autoworkers. If you or someone you know has lost retirement funds you feel were invested improperly, contact us today for a free consultation.
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First New York Securities LLC and Four Ex-Traders to Pay $435,000 in FINRA Sanctions Over Short Selling

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

First New York Securities LLC and four of its ex-traders have reached a settlement with the Financial Industry Regulatory Authority over allegations that they improperly covered short positions involving secondary offering shares, as well as engaged in associated oversight failures.

Per the FINRA settlement, First New York Securities LLC will pay $170,000 and disgorge $171,000. The former First Securities New York traders are to pay: $7,500 from Kevin Williams, $50,000 from Joseph Edelman, $30,000 from Michael Cho, and $30,000 from Larry Chachkes. By agreeing to settle with FINRA, the firm and its former brokers are not admitting to or denying the allegations.

FINRA says the trading addressed by the short selling case took place during a specific restricted period (usually five business days) when the Securities and Exchange Commission doesn’t allow for short sales to be covered with securities from secondary offerings and before the secondary offering is priced. This matter is addressed in Rule 105 of Regulation M.

The self-regulatory organization says that a 2005 probe found that the investment bank violated the rule related to five public offerings. The SRO says First New York Securities and its traders engaged in short selling during the period when they weren’t allowed to and covered short positions using shares from the offering. FINRA says that as a result, the firm and its four traders earned $171,504 and effectively got rid of their market risk.

FINRA also accuses the investment firm of neglecting to properly supervise its traders, as well as neglecting to establish proper supervisory procedures or to enforce such a system. The SRO also accuses First New York Securities of failing to maintain the proper books and records connected to the transactions that are being addressed.
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Associated Securities Ordered by Arbitrators to Pay $8.8 Million to Investors for Losses in APEX Equity Options Fund

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

Members of 16 different California households were sold shares of APEX Equity Options Fund which collapsed in August 2007. Collectively, these investors lost almost $9 million. They contacted an experienced securities law firm which advised them to jointly file a claim in Securities Arbitration through The Financial Industry Regulatory Authority (FINRA), formerly the National Association of Securities Dealers (NASD)

The investors claimed that Jeffrey Forrest of WeathWise LLC failed to properly advise them when selling the shares of the APEC fund. Because Forrest was licensed as a securities broker by Associated Securities, the claim in arbitration included claims against Associated, which is responsible to supervise the activities of its brokers.

Because of the large number of parties involved, hearings on the arbitration claim lasted for 12 days. After the conclusion of the hearings the three person arbitration panel deliberated, then rendered an award requiring the respondents to pay back these investors all of their losses of $8.8 million.

Houston Broker at Deutsche Bank Alex Brown Leaves Suicide Note Suggesting Clients Sue over Aravali Fund

Published on: March 23, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Tales of the stock market crash of 1929 contain images of victims jumping from windows of Wall Street buildings. An eerily sign of the similarities to the current 21st Century crash may be the recent suicide of a despondent broker at Deutsche Bank Alex Brown Securities (Deutsche Bank), who left a note telling clients to contact a lawyer to seek recovery of losses.

A law suit, with Smith’s suicide letter attached, was soon filed by Bernard and Joan Spain, of Pennsylvania, and Lonnie Duncan, of California, trustee of the Duncan Family Trust. The initial paragraph of the letter states:

“Since you are reading this, I have just taken my life. It was necessary because the alternatives were totally unpalatable. I consider you a friend first and a client second. That said, I had a fiduciary relationship with you that charged me with putting your interest first. I can say that I always tried to do that. However, some of the investment recommendations that I chose did not work out the way I had anticipated. I regret that very much.”

Merrill Settles SEC Charges Over ‘Squawk Box’ Misuse for $7 Million

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

Merrill Lynch will pay $7 million to settle Securities and Exchange Commission administrative charges that the investment bank neglected to protect customers whose orders were transmitted over “squawk boxes.” The penalty is the second highest fine that the SEC has imposed for cases involving Section 15(f) of the 1934 Securities Exchange Act and Section 204A of the 1940 Investment Advisers Act violations. These statutes mandate that investment advisers and broker dealers implement procedures and policies that would keep employees from misusing nonpublic, material data.

The SEC says that from 2002 to 2004, a number of Merrill Lynch brokers at three branch offices let day traders, who did not work for the company, hear customers’ unexecuted orders as they were being broadcast over the internal intercom systems. The traders used the information to trade before Merrill’s institutional clients’ orders were placed.

The SEC says Merrill did not have the procedures or polices to prevent employees from accessing the squawk boxes or to supervise them to make sure that they did not misuse customer order data. In addition to paying the penalty, Merrill Lynch says it will implement a number of measures to ensure that customer order data is protected any time it is sent over squawk boxes or other technologies used for their transmission.

U.S. Attorney for the Eastern District of New York had filed criminal charges related to the squawk box front-running activities against a number of Merrill employees, A.B. Watley Group Inc., and several individuals. While seven defendants were acquitted of nearly all the charges, they must go back to trial for a single count of conspiracy to commit securities fraud. Former Merrill stockbroker Timothy O’Connell was found guilty of witness tampering and issuing false statements.

Wachovia Securities Must Pay Texas $4 Million for Auction-Rate Securities

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

The Texas State Securities Board has fined Wachovia Securities $4 million for misleading investors about auction-rate securities. The Wells Fargo & Co unit must also have completed buying back ARS from investor clients in Texas by June 30.

This is the final step in the auction-rate securities case against Wachovia in which a tentative settlement agreement was reached last year when Wachovia Securities agreed to pay back over $8.5 billion in ARS from investors throughout the US.

It is also part of Texas’s efforts to deal with problems related to securities. The nearly $4 million is Texas’s share of the $50 million penalty Wachovia said it would pay. Last December, the Texas State Securities Board issued a final order mandating that Citigroup pay the state $3.6 million for making misrepresentations to investors about the auction-rate securities.

According to the Texas order, Wachovia Securities created misconception when it told investors that ARS were like cash and could be retrieved at nearly any time. The order accused Wachovia and its registered securities agents of knowing that the ARS market was in trouble yet neglecting to provide investors with this information. Wachovia Securities is one of the registered securities dealers in Texas.

UBS Financial Services, Merrill Lynch, and Citigroup are among the large investment firms that reached similar billion-dollar settlements with state regulators and the Securities and Exchange Commission. The collapse of the auction-rate securities market in February 2008 left many investors with frozen ARS that they thought were going to remain liquid and safe.

Wachovia Securities Ordered To Pay Texas $4 Million In ARS Probe, CNNMoney.com, March 17, 2009
Texas State Securities Board
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Stifel Nicolaus Will Repurchase Auction-Rate Securities from Costumers Within Three Years

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

Stifel Financial Corp says that subsidiary Stifel Nicolaus & Co. Inc. will buy back all of its customers’ auction-rate securities in the next three years. This is a significant change from its initial offer to purchase 10% of the clients’ ARS holdings.

The ARS repurchase will occur in four stages:
• By June 30, 2009: $25,000 or 10% (whichever is greater).
• Before June 30, 2010, $25,000 or 10% (whichever is greater).
• Prior to June 30, 2011, $25,000 or 10% (whichever is greater).
• Prior to June 30, 2012, the balance of any outstanding ARS.

Employee accounts, however, are only eligible once the last phase of the enhanced plan begins.

Stifel CEO & Chairman Ronald J. Kruszewski says the plan reflects the proper balance between shareholder and client interests. He says the plan will give relief to its 1200 ARS clients and that about 40% of the accounts would be completely liquidated by the end of June 2009.

The repayment offer applies to ARS that are held by retail clients who purchased the securities through Stifel before the ARS market fell. In return, Stifel says it will take assignment of actionable legal claims by customers against the large players in the ARS market for the amounts it buys back. Stifel maintains that it would not have told its clients to purchase ARS if the key market participants had told the financial firm what they knew about the ARS market collapse.

Missouri securities regulator Secretary of State Robin Carnahan, however, is still concerned that this new offer is still not enough to guarantee that customers will get back all their funds. She noted that three years might be too long for many investors and she called on Stifel to guarantee that it would make its investors whole again.

Soon after Stifel’s announcement of its ARS repurchase plan, Carnahan filed a lawsuit against the St. Louis-based financial firm for misleading clients that had purchased ARS.

Related Web Resources:
Missouri’s Carnahan files suit against Stifel, Forbes/AP, March 12, 2009
Stifel Financial plans 100 percent buyback of ARS, The Street.com, March 9, 2009

Missouri Secretary of State Robin Carnahan
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Madoff and Stanford Victims Can Claim Theft Losses as Tax Deductions, Says Internal Revenue Service

Published on: March 18, 2009 | by Shepherd Smith Edwards & Kantas, LLP

According to Internal Revenue Service Commissioner Douglas Shulman, investors who were defrauded by R Allen Stanford and Bernard Madoff can claim these theft losses as deductions when filing their taxes. The IRS announced these new procedures on Tuesday. These new IRS rules are applicable to victims of any Ponzi scam but the tax filings must be filed for the year 2008.

Theoretically, the investors would have been paying capital gains taxes if their investments had made profits. Now that it has been discovered that the profits were bogus, however, the IRS says that these same investors should be refunded those taxes.

Under the new guidance, investment losses incurred because of arrangements involving criminal fraud will be classified as theft losses instead of capital losses (usually capped at $3,000 annually). This will allow the victim to receive the larger deduction. For small businesses with $15 million in gross annual receipts, theft loss deductions can be carried back up to five years for 2008 returns instead of the usual 2-years. Also, fictitious income can also be claimed as theft losses.

Investors that file securities fraud lawsuits against Bernard Madoff because they were bilked by his multibillion-dollar Ponzi scam are allowed a 75% deduction for theft losses. Investors who don’t sue the 70-year-old investment advisor can obtain an immediate 95% deduction as soon as possible and seek to obtain the rest in the future if they don’t get back any of their monies. They could also take a deduction for investment income they thought they made.

Related Web Resources:
IRS Says Madoff Victims Can Claim Theft Losses, Bloomberg.com, March 17, 2009
IRS To Allow Madoff Victims To Deduct Theft Losses For 2008, Fox Business, March 17, 2009
Securities Investor Protection Corporation

Internal Revenue Service
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Despite Financial Market Volatility, Most Investment Advisors Are Telling Clients To Stick With Their Investment Plans

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

According to a TD Ameritrade Institutional survey, most investment advisers continue to tell their clients that now is a great time to invest in the financial market rather than encouraging them to cash out their investments in the wake of the financial crisis:

• 93% of investment advisers are not telling clients to cash out investments.

• Over 50% of these registered advisers believe now is the time to invest in equities.

• 43% of them are telling clients to increase their fixed income allocations.

• 53% are having clients increase cash allocations.

• 41% have dramatically increased their communications with clients so they can offer them reassurance.s

506 registered investment advisers participated in the survey. TD Ameritrade Institutional managing director of advisor advocacy and industry affairs Brian Stimpfl says that the results demonstrate how most advisors are staying committed to sticking with their clients’ investment strategies despite volatility in the financial market.

Shepherd Smith Edwards & Kantas LTD LLP Founder and Stockbroker Fraud Lawyer William Shepherd, however, had this to say: “When markets fell 20% or so by early September, brokers and financial advisors should have been listening to their clients carefully to learn the true nature of their risk-tolerances. When any investor expresses strong feelings about losses in an account the investment advisor must act to revise the client’s objectives. Several of our clients told their advisors they were losing sleep over their investments. Yet, instead of revising the clients’ investment objectives – and their investments – as required, the advisors adamantly told their clients not to sell. Now that these investors’ nightmares have come true, the advisors want to hide behind objectives marked on the old forms without taking responsibility for their reckless inaction.”

Related Web Resource:
FA Magazine
TD Ameritrade Institutional
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