Investor Lawyers Blog

Texas Class Action Securities Fraud Claim Against Cushing MLP Total Return Fund CEO and CFO Can Go Forward, Says District Court Judge

Published on: February 2, 2010 | by Shepherd Smith Edwards & Kantas, LLP

In Texas, a US district court judge has refused to dismiss a class action securities fraud claim against Cushing MLP Total Return Fund CEO Jerry V. Swank and CFO Mark Fordyce. The Texas securities fraud claim accuses the defendants of misrepresentations and omissionsrelated to the fund’s deferred tax asset. Other claims, including a 1940 Investment Company Act Section 36(b) claim over tax advisory fees, were dismissed.

The defendants named in the Texas securities fraud claim are investment adviser Swank Energy Income Advisers LP, Swank Capital LLC, fund board chairman, trustee, president and CEO Jerry V. Swank, fund CFO and trustee Mark Fordyce, fund audit committee member and lead independent trustee Edward N. McMillan, fund trustee and audit committee chair Brian R Bruce, and fund trustee and committee head Ronald P. Trout.

Lead plaintiff Terri Morse Bachow says that between September 1 and December 19, 2008, individual investors bought Cushing MLP Total Return Fund stock. She says that most of the reported net assets in the fund (which were invested in the energy infrastructure sector) was an accounting accrual owing to time differences in tax payments.

Throughout the class period, the deferred tax asset increased and the possibility that the fund would make money that the deferred tax asset could be used against became practically nonexistent. When the class period was over, the accounting accrual was made up of over 50% of the fund’s stated net assets and the chance the accrual would lead to any benefit was all but nonexistent.

The plaintiff claims that fund shareholders lost tens of millions of dollars when this data was disclosed on December 19, 2008 and the fund’s shares market price went down from $7.40 to $3.81. Bachow then filed a Texas securities class action claim.

In the claim, Swank and Fordyce are accused of making statements that were materially misleading, making it sound as if the fund was likely going to use deferred tax in “fact sheets” distributed to shareholders and in two SEC filings. The fund CFO and CEO are accused of failing to correct these statements even after discovering that they were misleading or untrue.

The court refused to drop the 1934 Securities Exchange Act Section 10(b) claim against the two men, noting that the plaintiff demonstrated that this information was important to any reasonable investor who was deciding on what to invest in. The court, however, did drop the Section 20(a) control person claims since the securities fraud claim name the two men (and not Swank Advisers and the fund), which makes it impossible for the two defendants to be their own “control persons.” The claim as to Trout, Swank Capital, Bruce, and McMillan failed because there was no allegation that the “controlled person” committed securities fraud.

Related Web Resources:
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SEC is working on issues related to asset-backed securities, credit ratings, and money market mutual funds, says Schapiro

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

According to Securities and Exchange Commission Chairman Mary Schapiro, the agency is dealing with a number of credit crisis-related issues associated with money market mutual funds, asset-backed securities, and credit ratings. She also said that the SEC is working on ABS rule proposals that would allow the interests of investors and sellers to align.

The proposals, and other measures, would seek to give investors easier access to loan level data, allow them more time to review products before they invest, create a mechanism to allow for continuous disclosure, and modify “shelf” offerings eligibility standards. Schapiro says that the proposals are meant to be preemptive and would tackle certain areas where issues similar to the ones that surfaced during the current financial crisis might arise in the future.

American and European regulators have been closely examining collateralized debt obligations, mortgage-backed securities, and other ABS because of the large parts they played during the financial collapse. The SEC is reviewing ABS regulations and ABS-related disclosures and reporting. The agency is also seeking to impose more stringent credit quality and maturity requirements for market mutual funds, as well as put into place substantial liquidity standards. Members will be voting on proposed rule amendments meant to strengthen the money market mutual funds’ framework. The SEC is in the process of taking out credit rating references in a number of its regulations and rules.

Judge Gives Lower Sentence to Former Credit Suisse Broker Convicted of Auction-Rate Securities Fraud

Published on: January 30, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Eric Butler, a former Credit Suisse Group AG broker, has been sentenced to five years in prison for securities fraud. A jury found the ex-stockbroker guilty of misleading clients into thinking that they were buying student loan-backed, low-risk auction-rate securities when they were actually buying ARS that were high-risk and backed by home mortgage assets. He modified the trade confirmations to conceal this discrepancy. His securities fraud scam collapsed when the ARS market did, but not before investors sustained $1.1 billion in losses.

The government asked that Butler be ordered to serve a 45-year prison sentence pay stiff penalties. However, U.S. District Court Judge Jack Weinstein sentenced him to just five years, imposed a $5 million fine, and ordered that he forfeit $500,000.

Following the guilty verdict, Weinstein expressed concern about placing all of the blame on Butler. He said that he gave the ex-Credit Suisse broker a reduced sentence because the financial services industry has a “pernicious and pervasive” corrupt culture.

Troubled GunnAllen Securities to be Acquired by Progressive Asset Management as Lawyers for Investors Investigate the Sale.

Published on: January 29, 2010 | by Shepherd Smith Edwards & Kantas, LLP

After undergoing major litigation costs, GunnAllen Financial Inc. has agreed to be acquired by Progressive Asset Management Inc., which already controls a smaller broker-dealer. Progressive claims to be a “socially conscious” investment firm.

The combination of the firms would appear to create a broker-dealer with about 1,000 independent advisors and brokers in more than 200 offices nationwide. If so, the resulting firm would be ranked in the 30 largest independent broker-dealers, according to information available from InvestmentNews.

The terms of the acquisition have not been disclosed, according to David Levine, executive vice president of Progressive, who also did not specify whether his firm would be acquiring GunnAllen’s broker-dealer firm or only its advisers and assets. Often buyers of troubled securities firms seek to buy only the assets leaving behind creditors with little or nothing, including former clients of the firm who have ongoing suits and claims.

Former Evergreen Investment Adviser Settles SEC Insider Trading Charges Involving Ultra Short Opportunities Fund

Published on: January 27, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Charles Marquardt, Evergreen Investment Management Co. LLC’s former chief administrator, has settled charges filed by the US Securities and Exchange Commission that he sold Evergreen Ultra Short Opportunities Fund shares after obtaining insider information that a number of the MBS holdings were going to drop down in value. Marquardt worked for Evergreen at the time he allegedly engaged in insider trading and served as the Evergreen Ultra Short Opportunities Fund’s investment adviser. The mutual fund mostly invested in mortgage-backed securities.

On June 11, 2008, he allegedly found out about the likely decrease in value of several of its MBS holdings and that there was a possibility that the Ultra Fund could end up shutting down. Marquardt is accused of having redeemed all of his shares the following day. One of his family members also sold Ultra Fund shares. Marquardt and his relative avoided incurring $4,803 and $14,304 in financial losses, respectively. The fund was liquidated on June 19 of that year.

To settle the charges against him, the investment adviser has agreed to a bar from future violations, as well as to a two-year industry bar. He will pay a $19,107 civil penalty, $1,242 in prejudgment interest, and $19,107 in disgorgement. By settling, Marquardt is not admitting to or denying wrongdoing.

Former Southwest Securities Broker’s Lifetime Industry Bar for Texas Securities Fraud is Affirmed, Says Appeals Court

Published on: January 26, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Court of Appeals for the Fifth Circuit has affirmed the Securities and Exchange Commission’s lifetime bar against a former Southwest Securities Inc. stockbroker. Scott Gann, who allegedly committed Texas securities fraud, is no longer allowed to associate with dealers, investment advisers, and brokers.

The SEC imposed the permanent bar against Gann because of his alleged involvement in a mutual fund market timing scheme. The appeals court says that the SEC’s ruling is not an abuse of discretion and is supported by the record.

Gann and George Fasciano, also a former Southwest Securities broker, are accused of engaging in market timing trades for Haidar Capital Management and Capital Advisor. They allegedly got around the rules of some of the mutual funds that prohibit market timing by using multiple representatives and account numbers. Despite receiving 69 block notices from 34 mutual funds, their strategy allowed them to continue executing market timing trades.

The SEC filed an enforcement action in federal district court accusing the two men of violating the 1934 Securities Exchange Act Section 10(b). Fasciano settled before the case went to trial.

The district court held that Gann was in violation of Section 10(b). An SEC administrative law judge then entered a permanent associational bar against the ex-Southwest Securities broker. The SEC affirmed the bar, as did the appeals court.

The appeals court also noted that as Gann is convinced he did not engage in any wrongdoing even though the SEC and two courts found that Gann acted wrongfully-there is no guarantee he won’t commit future violations.

Related Web Resources:
Gann v. SEC, SEC.gov (PDF)

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Securities Class Actions are No Longer the Fad as Investors Hire Their Own Attorney to Recover Far More!

Published on: January 23, 2010 | by Shepherd Smith Edwards & Kantas, LLP

According to Advisen Ltd, 910 securities lawsuits were filed in 2009 in the wake of the economic crisis-a 13% increase from the 804 complaints filed in 2008. 239 securities fraud class action lawsuits were filed in 2009-the same number filed in 2008. Advisen reported a 22% increase in the number of regulator-filed securities fraud complaints last year compared to the year before.

The author of Advisen’s report, John W. Molka III, says lawsuits over the Madoff ponzi scam and the credit crisis kept regulators and litigators busy during the first half of last year. Plaintiffs’ lawyers then had a backlog of other complaints to work on during the second half of the year.

Molka says that even though there wasn’t a change in the number of securities class action complaints filed, overall they made up a smaller percentage (about 25%) of the total number of lawsuits submitted. This decline in securities class action lawsuits has been going on since 2005, when they comprised about 50% of all securities complaints.

Advisen says that meantime, regulators continue to increase their enforcement efforts with lawsuits and actions. Securities actions filed in state courts and breach of fiduciary complaints are also growing in number.

To obtain the maximum recovery for your securities case, you should speak with a securities fraud law firm about your legal options. Our securities fraud lawyers represent clients with arbitration claims and securities lawsuits against negligent financial firms and other liable entities.

Related Web Resources:
Advisen, Ltd.

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Court Stops Results One Financial LLC Adviser’s Alleged Investment Fraud Scam

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

Per the Security and Exchange Commission’s request for emergency relief, the U.S. District Court for the Northern District of Illinois has halted an alleged investment fraud scam involving Results One Financial LLC adviser Steve W. Salutric. He is co-founder of the financial firm. Hon. William J. Hibbler ordered that all assets under Salutric’s control be frozen and he issued a temporary restraining order against him. Hibbler is also granting other emergency relief.

The SEC complaint accuses Salutric of making unauthorized withdrawals from clients’ accounts that were located in another financial institution that was the custodian of Results One Financial’s client assets, forging client signatures on withdrawal request forms, and submitting the signed forms to the account custodian.

The SEC is charging the investment advisor with misappropriating several million dollars of his clients’s finds. Beginning in 2007, Salutric allegedly misappropriated more than $2 million from at least 17 clients to support entities and businesses that are linked to him. Funds that were allegedly misdirected include $610,000 to a film distribution company, $259,000 to two restaurants, and $321,000 to the church where he is treasurer. The SEC is accusing Salutric of misappropriating over $400,000 from a 96-year-old nursing home resident who has dementia. He also allegedly made Ponzi-like payments to certain clients.

Courthouse News Service says that Salutric managed over $16 million through Results One. The SEC says that there may be more clients who were defrauded and additional funds may have been misappropriated.

The SEC is seeking penalties, disgorgement, and an injunction.

SEC Cannot Order Former Rauscher Pierce Broker to Compensate Investors for Losses, Says Court

Published on: January 19, 2010 | by Shepherd Smith Edwards & Kantas, LLP

According to the U.S. Court of Appeals for the District of Columbia Circuit, the Securities and Exchange Commission cannot order former Rauscher Pierce Refsnes Inc. broker Michael Siegel to uphold an award of restitution to investors who sustained financial losses as a result of his alleged broker misconduct. Siegel worked as a general securities representative for the financial firm from October 1997 to June 1999.

In 2002, NASD’s Department of Enforcement charged Siegel with “selling” away and making inappropriate recommendations to certain investors. Specifically, the investors that the alleged violations involved are Dorothy and Barry Landry and Linda and Huntington Downer, who invested in World Environmental Technologies Inc. The NASD has accused Siegel of recommending that they invest in World ET without reasonable cause for why doing so would be appropriate for them. To discipline him, NASD ordered Siegel to serve two six-month suspensions. They also fined him $30,000.

While the NASD disciplinary committee did not order restitution, an NASD appeals panel did. He was told to pay $100,000 to the Landers and $303,000 to the Downers. Siegel appealed but the SEC affirmed the appeals panel’s decision.

Dismissal of Lone Star’s $60 Mortgage-Backed Securities Texas Fraud Action Against Barclays is Affirmed by Federal Appeals Court

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

The U.S. Court of Appeals for the Fifth Circuit has affirmed the dismissal of LSF5 Bond Holdings LLC and Lone Star Fund V (U.S.) L.P.’s $60 million securities fraud claims against Barclays Capital Inc. and Barclays Bank PLC. The court noted that Barclays never represented that the mortgage pass-through certificates purchased by the private equity firms did not have delinquent mortgages. Also, the court said that seeing as the language used in the parties’ agreement obligated Barclays to substitute or repurchase delinquent representation, Lone Star failed to allege misrepresentation.

In 2006, Barclays bought mortgage loans from then-subprime lender New Century Capital Corp. Barclays then pooled about 10,000 mortgage loans into the BR3 and BR2 Trusts. The trusts then gave out pass-through certificates or mortgage-backed securities. $60 million of the securities were bought by LSF5.

Although trust offerings supplements and prospectuses included representations and warranties that as of “transfer service dating” the mortgage pools did not have any 30-day delinquencies, Lone Star found that nearly 300 of the BR2 mortgages were at least 30 days delinquent beginning the date of purchase. 850 mortgages in the BR3 Trust were also over 30 days overdue.

Lone Star filed a Texas securities fraud lawsuit against Barclays claiming that the delinquent loans were misrepresentations on the investment bank’s part. Barclays sought to have the lawsuit dismissed, arguing that if there were delinquent loans then Barclays must either substitute or repurchase them.

The district court turned down Lone Star’s remand request and agreed with Barclay’s interpretation of the language in the agreement. The court dismissed the case. The appeals court upheld the dismissal.

Related Web Resources:
Lone Star Fund V (U.S), LP et al v. Barclays Bank PLC et al, Justia Federal District Court Filings and Dockets
Read the 5th Circuit Opinion (PDF)
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