Investor Lawyers Blog

Do Broker-Dealers Hire Brokers Already Suspected of Securities Fraud?

Published on: December 11, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Even though regulators are calling on broker-dealers to employ stricter hiring standards when it comes to screening brokers who have already gotten in trouble for alleged broker misconduct, many firms continue to hire these suspect workers. It doesn’t help that broker-dealers have a tendency to not reveal key details when a registered representative leaves the company under suspect circumstances in order limit the firm’s liability from potential investor lawsuits and arbitration claims.

For example, in 2003, Jeffrey Southard was working for American Express Financial Advisers (now Ameriprise Financial Inc.) when he was accused of selling unregistered securities and combining client funds with his own money. At the time, Southard accused American Express Financial Advisors of falsely accusing him of misdeeds and acting unprofessionally by violating his personal confidentiality. He left the firm to join Gunn-Allen Financial Inc. In July 2008, GunnAllen fired him.

Last month, the New Jersey Bureau of Securities accused the former GunnAllen broker of stealing $1.3 million from 16 senior investors. The state regulators also barred Southard from the securities business and ordered him to pay $50,000 in restitution.

The New Jersey regulators say American Express Financial Advisors failed to properly disclose to clients the problems that could have arisen from working with Southard. The regulators’ order also accuses Southard of misleading his clients. Many of them switched to GunAllen when he left American Express Financial Advisors after he told them that he was leaving was to pursue better opportunities. The New Jersey regulators say that while working with GunnAllen, Southard continued to engage in broker misconduct by selling fake bonds as tax-free investments.

Opinions among industry members are mixed about whether broker-dealers are doing enough to weed out broker candidates with already questionable performance records.

Related Web Resources:

Busted brokers continue bilking clients at new firms, Investment News, December 7, 2008
Ex-GunnAllen broker bilked $1.3M from seniors, Investment News,
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US Treasury Department Extends Money Market Fund Guarantee Program Through April 2009

Published on: December 10, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The US Treasury Department has announced that it will keep guaranteeing money market funds until the end of April 2009. The Temporary Guarantee Program for Money Market Funds was created because of worries that the funds’ net asset values would fall under $1 (a value drop known as “breaking the buck”).

The money market fund program guarantees a $1 minimum share price and insures the holdings of any publicly offered eligible funds that pay to take part in this temporary plan. The program, which covers over $3 million in assets, covers the participating funds’ shareholders up to the amounts that they held when business closed on September 19, 2008.

Only mutual funds that are currently taking part in the plan and meet the extension requirements can continue to participate in the program. To avail of the extended coverage, funds must submit a payment based on their net asset value since September 19. The extension notice must be sent by December 5.

The Temporary Money Market Fund Guarantee Program offers four kinds of Guarantee Agreements:

• Guarantee Agreement • Guarantee Agreement (Single Fund)
• Guarantee Agreement (Stable Value)
• The Guarantee Agreement (Stable Value Single Fund)

It is important to investors hat the standard $1 net value asset for money market mutual funds remain. Worries that money market funds would “break the buck” increased global market turmoil and resulted in serious liquidity strains. These repercussions resulted in greater volatility in exchange markets and caused certain short term interest and funding rates to spike.
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Stockbroker Fraud Law Firm Shepherd Smith Edwards & Kantas LTD LLP Investigate Securities Fraud Claims Involving Former World Group Securities Representatives David Olson and Edward Allen

Published on: December 9, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority says that former World Group Securities representative David Olson was named in a customer complaint filed in October 2008. The customer claims Olson persuaded him to buy real estate, which was leased back to the representative. The customer alleges that Olson agreed to pay the customer mortgage payments plus interest.

The customer says Olson defaulted on their deal and stopped making payments. The customer is also accusing the representative of soliciting three promissory notes for purchase and earmarking proceeds to buy other real estate properties.

It is considered improper for a FINRA registered representative to issue promissory notes, borrow money from clients, or engage in undisclosed, outside business.

Shepherd Smith and Edwards is investigating securities fraud claims involving David Olson and business partner Edward Allen, as well as their business entities WFG and A&O Companies. Allen also used to work for World Group Securities.

World Group Securities
World Group Securities brokers have been in the headlines recently following news that the US Securities and Exchange Commission was suing five of them due to allegations that they persuaded investors to use subprime mortgages to refinance their homes. The brokers allegedly were compensated for securities sales and mortgage refinancings.

Related Web Resources:

Shepherd Smith Edwards & Kantas LTD LLP Investigates Claims for Clients of David Olson, Edward Allen and World Group Securities, Inc., Marketwatch.com, December 3, 2008
Securities and Exchange Commission Sues Five World Group Securities Brokers For Persuading Clients to Refinance Homes With Subprime Mortgages, Stokbroker Fraud Blog, October 16, 2008 Continue Reading ›

Merrill Lynch NY Branch Manager is No Longer with the Firm

Published on: December 5, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Merrill Lynch & Co. is confirming that Branch Manager Joseph Mattia no longer works for the investment firm’s global wealth-management group. Mattia supervised 200 financial advisors in Merrill Lynch’s 5th Avenue office.

A spokesperson for Merrill Lynch refused to provide details. CNN reports that Mattia left the firm. Investment News, however, says that Mattia was escorted from the building on Monday. Industry insiders say there are a number reasons why a branch manager might be let go. Personnel problems and compliance issues are just two reasons.

Also on Monday, Merrill Lynch severed ties with Rosalie H. Fields, an adviser who also worked at the New York branch. Fields was one of 900 female brokers that filed a class action lawsuit against Merrill Lynch accusing the firm of gender discrimination. A settlement was reached with almost all of the plaintiffs.

Meantime, Bank of America, Corp. is still expected to acquire Merrill Lynch during the first quarter. Merrill Lynch is one of the bigger investment firms that took huge financial hits because of the credit crunch. Today, several hundred people showed up at a meeting at Merrill Lynch’s New York offices to vote on the merger between Bank of America and Merrill Lynch.

Bank of America shareholders also got together today to ratify the $50 billion acquisition. Because of Bank of America’s falling share price, however, the value of the deal has dropped by $30.3 billion since September and is now worth $19.7 billion. Continue Reading ›

SEC Proposes Road Map For The Mandatory Adoption Of International Financial Reporting Standards

Published on: December 4, 2008 | by Shepherd Smith Edwards & Kantas, LLP

A few weeks ago, the Securities and Exchange Commission formally proposed a road map that could result in the mandatory adoption of international financial reporting standards by US domestic financial report filers. For the largest filers, this could start as soon as 2014.

Beginning November 14, the SEC has opened up a 90-day period for comment on the road map. The SEC’s 165-page report says that making IFRS mandatory should improve the comparability of financial data prepared by foreign companies and US public companies.

Seven “Milestones” Must Be Met in order to Allow IFRS use in the US, including:

• Improved quality of accounting standards at the IASB and Financial Accounting Standards Board.
• Progress toward a funding mechanism for the International Accounting Standards Committee Foundation that is safe, steady, and independent.
• Improved interactive data capabilities for IFRS reporting.
• Early, voluntary IFRS use to show how it will improve financial reporting comparability.
• Proper IFRS education and training for investors, accountants, and auditors.
• SEC rule making fits that with domestic IFRS use.
• Determining whether it makes sense to adopt mandatory IFRS use and figuring out the best ways to sequence it.

Under the SEC proposal, large companies that meet specific criteria would be allowed to apply voluntarily for IFRS in the US. The SEC says that the increase in competition between global markets to raise capital is a key reason for letting US companies use IFRS within the country. The SEC also notes the value of adopting a single, widely accepted set of standards that would benefit US investors and the international markets.

According to Stockbroker Fraud Attorney William Shepherd: “In early 2007, we commented on the “race to bottom” regarding de-regulation and the ever-looser accounting standards for global corporations. Since then, we have witnessed a global meltdown of the financial industry. Yet, deregulation champion SEC Chairman Chris Cox, who has apparently never met a white collar criminal he did not adore, is using his last few days in office to relinquish accounting standards to foreign control. This comes on the heels of George Bush granting co-control over U.S troops and contractors to a shaky Iraqi government. What happened to an administration that disdained the UN, for example, even appointing a US ambassador who openly stated the UN should be disbanded and the US should not pay its dues? This is the most hypocritical group of people who ever walked the face of the earth!”

Related Web Resources:

Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards by U.S. Issuers, November 14, 2008, (PDF)

Submit Comments on File No. S7-27-08
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“Living Benefits” Annuity May Be Riskiest Product Ever Sold by Insurance Industry

Published on: December 3, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Variable annuities that guarantee “living benefits” could end up costing insurers a lot more than what they charge for them and may result in falling stock prices. These variable annuities come with a GMWB (guaranteed minimum withdrawal benefit). An investor’s money is placed in various mutual fund-like “sub-accounts” in return for a guaranteed minimum payout, as well as a higher return if your mutual funds’ values increase by over a certain amount
This means that even if a buyer sustains significant losses on an investment, he or she must still receive the fixed, minimum income benefits that were promised. It is also important to note, however, that there may not be an increase in future benefits.

Last summer, variable annuities became even more attractive to investors, as insurers competed with one another to generate more business. This move, however, is not boding well for insurance companies.

Fitch, AM Best, Standard & Poor’s, and Moody’s have all placed the life insurance industry in their “negative-outlook” columns. Even if insurers increase their prices or lower future guarantees, these moves may not suffice to cover the benefits they have promised.

Many GMWB annuities buyers had anticipated not having to withdraw from their annuities for a number of years, until their value had increased enough to pay more than the $5,000 annual minimum. Now, this won’t be possible until the annuity recovers everything lost plus yearly costs.

Related Web Resources:

Maximum Risk Didn’t Hurt These Investors, Bloomberg.com, December 3, 2008

The Cost Of Variable Annuity Guarantees, Investopedia.com Continue Reading ›

SEC Adopts Rules to Streamline Mutual Funds Disclosures But Delays Making Decision on Credit Ratings’ Final Rules

Published on: November 26, 2008 | by Shepherd Smith Edwards & Kantas, LLP

In a unanimous vote, the Securities and Exchange Commission agreed to adopt rule amendments to improve mutual fund disclosures. This includes letting investors receive a summary prospectus written in simple English. The SEC also adopted revisions to the mutual funds’ registration form known as form N-1A, including amendments that let exchange-traded funds use summary prospectuses.

Summary Prospectus

The summary prospectuses, which are voluntary, may include important information about investment strategies and goals, past fund performance, risks, and fees. As long as the statutory prospectus, summary prospectus, and other essential data can be accessed online, mutual funds that send investors a summary prospectus will be fulfilling their prospectus delivery requirements. Key data, such as selling and buying procedures, financial intermediary compensation, and tax consequences must also be included. The SEC expects approximately 75% of all mutual funds to use summary prospectuses.

Securities Fraud Class Action Lawsuit Against Hartford Financial Services Group Inc. is Reinstated in Appeals Court

Published on: November 25, 2008 | by Shepherd Smith Edwards & Kantas, LLP

This month, the U.S. Court of Appeals for the Second Circuit issued a decision granting class action plaintiffs another opportunity to make their securities fraud claims against Hartford Financial Services Group Inc. The district court had previously dismissed the class action lawsuit as untimely under the 1934 Securities Exchange Act.

That court had found that based on all media reports, regulatory filings, and information about several lawsuits available, the plaintiffs could have and should have filed their securities fraud lawsuit before the two-year statute of limitations had run out on July 25, 2001. Instead, the plaintiffs filed their complaint more than one year after the deadline had passed.

The securities fraud lawsuit, filed by Steve Staehr and a number of other plaintiffs who had acquired Hartford stock between August 6, 2003 and October 13, 2004, accuses the life and property/casualty insurer of acting fraudulently by concealing price manipulation and kickbacks involving insurers and commercial brokers. The plaintiffs also claim that because of the firm’s misrepresentations, omissions, and fraudulent concealments, they acquired Hartford stocks at artificially inflated prices. They filed their lawsuit soon after then-New York Attorney General Eliot Spitzer filed a lawsuit against Marsh, Inc., a Hartford broker.

Second Circuit Judge Colleen McMahon reversed the district court’s decision saying the information the plaintiffs had was not enough to place them on notice by July 2001 that Hartford was likely going to be investigated for “contingent” commissions. The appeals court also noted that Spitzer’s lawsuit connected Hartford to Marsh’s activities and that in 2003, Hartford revealed it paid brokers $145 million in kickbacks.

Related Web Resources:

Securities Fraud Class Action Lawsuit Against Hartford Financial Services Group Inc. is Reinstated in Appeals Court, Reuters, November 17, 2008
N.Y. Attorney General Spitzer Sues Marsh Over Contingent Commissions, Insurance Journal, October 25, 2004 Continue Reading ›

The Financial Regulation Reform Act of 2008 Seeks to Regulate Investment-Bank Holding Companies and Credit Default Swaps

Published on: November 24, 2008 | by Shepherd Smith Edwards & Kantas, LLP

US Senator Susan Collins (R-Maine) has introduced a new bill to regulate investment-bank holding companies, credit default swaps, and other financial instruments that state and federal regulators have yet to regulate. Collins says the bill, called the Financial Regulation Reform Act of 2008, seeks to restore public faith in the US financial system in the wake of current credit difficulties-problems that have led to plunging home prices, a decrease in consumer sales, an increase in foreclosure rates, and significant losses in retirement savings.

Collins says the new legislation will get rid of any gaps in the government’s oversight of the financial markets and develop more reforms of the financial regulatory system.

The Bill Proposes Three Main Reforms:

• Giving the Federal Reserve supervisory authority over investment-bank holding companies.
• Creating a national commission on financial regulation reform to evaluate, make recommendations, and implement changes to the current regulatory structure.
• Create transparency and oversight in the credit default swaps market by requiring that the Commodity Futures Trading Commission be notified about CDS contracts and mandating that parties make trades using a federally approved clearing house.

Credit Default Swaps
CDS are insurance-like contracts involving one party promising to cover losses on certain securities if a default occurs. Sold by hedge funds, banks, and other entities, they usually apply to mortgage securities, municipal bonds, and corporate debt.

Many CDS’s are represented as safe investments, when in fact, their risks often far outweigh their benefits. It was the unregulated credit default swaps market, a trillion-dollar-market, that reportedly led to the collapse of Lehman Brothers and AIG.

Sen Collins Introduces Legislation to Strengthen Financial Regulation and Oversight, Collins.Senate.gov, November 18, 2008
Credit Default Swaps: The Next Crisis?, Time, March 17, 2008 Continue Reading ›

Massachusetts Top Securities Regulator Charges Oppenheimer & Co with Unethical Conduct and Fraud

Published on: November 20, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Massachusetts Secretary of State William Galvin is charging Oppenheimer & Co. with unethical conduct and fraud. The state’s top securities regulator is accusing the investment bank of continuing to market and sell auction rate securities to clients even as Oppenheimer executives were getting rid of their own ARS holdings, worth $3 million, before the collapse.

Galvin says that Oppenheimer Chairman and Chief Executive Albert Lowenthal and other firm executives kept clients and other firm employees “in the dark” about the collapsing ARS market. His office is seeking to revoke Lowenthal’s broker-dealer registration in Massachusetts because he says that the CEO and other Oppenheimer executives “betrayed” their clients’ trust. This is the first time that a state regulator has charged one of the smaller brokers for its alleged involvement in the sale of auction-rate securities while the market was failing.

Galvin says that Oppenheimer clients in Massachusetts are unable to access some $56 million because their ARS investments have been frozen since February. Also named in Galvin’s complaint are ARS Managing Director Greg White and Senior Managing Director Robert Lowenthal.

Oppenheimer and its firm executives are denying Galvin’s allegations. On Tuesday, the investment bank issued a statement claiming that its employees had no knowledge of the kinds of actions that their larger firm counterparts engaged in that contributed to the ARS market collapse. The investment bank also maintains that its executives personally bought and sold ARS during the period noted in Galvin’s complaint, and they continue to hold a number of these securities.

Oppenheimer says it is working with financing sources and regulators to help investors cash out of their ARS.

Related Web Resources:

Massachusetts sues Oppenheimer & Co over ARS sales, Reuters, November 18, 2008
Galvin blasts Oppenheimer & Co. over auction-rate securities, Boston Herald, November 18, 2008

Related Web Resources:

View the Exhibits (PDF)

Oppenheimer & Co.
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