Investor Lawyers Blog

Merrill Lynch, J.P. Morgan and Others fail to Obtain Dismissal of IPO Case by Houston Judge

Published on: February 9, 2009 | by Shepherd Smith Edwards & Kantas, LLP

In Texas, a Houston judge has ruled that a would-be class securities lawsuit filed against JP Morgan Securities, Inc., Merrill Lynch, Pierce, Fenner and Smith and a number of other defendants can move forward. The plaintiffs were investors in Superior Offshore International Inc., a company that collapsed following a failed initial public offering. The four other defendants are former Superior company executives.

In the US District Court for the Southern District of Texas, Judge Nancy Atlas found that the plaintiffs met their burden when pleading material misrepresentations and omissions in Superior’s registration statement. She denied the defendants’ request to dismiss the complaint.

Superior Offshore International Inc. had provided commercial diving services and subsea construction to the natural gas and crude oil industry in the Gulf of Mexico. The company began IPO proceedings of about 10.2 million commercial shares at $15/share in April 2007. Merrill Lynch and JP Morgan acted as the primary underwriters. It was after this that Superior experienced major losses and its price dropped until it reached $1.08/share in April 2008. Soon after, Superior announced that it was shutting down operations.

In their consolidated class action, the plaintiffs claimed that while the registration statement revealed that the Superior board chairperson’s two sons were receiving salaries of $48,000 and $120,000, it failed to note that the two men weren’t doing any significant tasks for their respective incomes. The plaintiffs also questioned Superior’s claims that there was a high demand for its services and that certain hurricane-related projects were expected to continue for a number of years when, in fact, that work had declined significantly. They challenged Superior’s claim that it had multiple customers and maintained that the company had provided materially misleading data about its management team.

The defendants had tried dismissing the complaint by citing a failure to state a claim. They said they could not be held liable for events that transpired after the IPO. While the Texas court said it recognized that Superior’s registration statement included warnings about possible risks that could arise, it determined that the plaintiffs were not questioning the accuracy of the potential risks that were noted. Rather, the court said they were challenging the completeness and accuracy of the information Superior had provided about its current state at the time of the IPO. Continue Reading ›

Securities and Exchange Commission Now Calling for Comments on FINRA Proposal Regarding New Financial Responsibility Rules

Published on: February 4, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission wants feedback about the Financial Industry Regulatory Authority’s proposal on new financial responsibility rules. Critics have expressed concern that the rules give FINRA wide discretion but without certain safeguards.

The Financial responsibility rules let FINRA make sure that some 5,000 brokerage firms have enough liquidity available so that they can take care of customer claims in a timely manner. FINRA recently submitted a filing with the SEC explaining how the proposed rules would give the self-regulatory organization the authority it needs to act quickly during an emergency or another unforeseen event. FINRA says the necessary safeguards already are in place and vowed to be judicious when exercising this authority.

The proposed rules are based on existing requirements in NYSE and NASD rules. FINRA says that a large number of provisions will only apply to firms that carry or clear customer accounts and would prevent such members from withdrawing equity capital for up to one year without the SRO’s consent. Members would also have to let FINRA know no later than 24 hours after when certain financial triggers are hit.

FINRA has been trying to develop a consolidated rulebook since its formation in July 2007 when the New York Stock Exchange and NASD were merged together. Last May, FINRA requested comments about the rule proposals.

The SRO says a few commenters were worried about how much authority FINRA had under rule 4110(a). Other commenters asked for more specific about the kinds of actions the SRO would have the authority to implement. Another commenter expressed concern that FINRA’s authority to ask for an audit might be too broad. Still others expressed concern over how one proposed rule that prevented members from withdrawing capital for 12 months was even stricter than the SEC’s own requirements.

Related Web Resources:
Financial Industry Regulatory Authority (FINRA) Rulemaking, SEC.gov Continue Reading ›

Agape Founder Nicholas Cosmo Arrested for Allegedly Running $370 Million Ponzi Scam

Published on: February 3, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Last week, Agape World Inc and Agape Merchant Advance LLP owner and founder Nicholas Cosmo was arrested and charged with running a $370 million mail fraud scheme. According to US authorities, Cosmo ran his alleged Ponzi scam from October 2003 to December 2008, taking money from over 1,500 individual investors.

Cosmo reportedly told investors that he would place their funds into bridge loans for businesses at interests as high as 16%. Investors were reportedly promised returns of up to 80%.

While a few commercial loans were made, the interest rates were significantly lower than what was promised. Also, less than $10 million was actually loaned out. Over $100 million was placed in commodity futures trading accounts that incurred about $80 million in losses. According to US Postal Inspector Richard Cinnamo, Cosmo paid recruiters some $55 million find investors. Many of the recruiters have criminal records.

Cosmo also reportedly used over $212,000 in investor funds to pay a court-ordered restitution from an earlier conviction. He also spent over $100,000 in investor funds for personal expenses and invested $300,000 in the National Tournament Baseball. Cosmo is president of that league.

In September, investors began complaining that their payouts had been postponed. Private investigator Mike Kessler notified the FBI, the New York Attorney general, and the Suffolk County district attorney that there were problems brewing, but no action was taken until investors were no longer getting paid.

In 1997, Cosmo was accused of misappropriating funds while working as a stockbroker. He pleaded guilty to one federal charge, was ordered to pay restitution, and was sentenced to 21 months in prison.

Related Web Resources:
In Echoes Of Madoff, Ponzi Cases Proliferate, Wall Street Journal, January 28, 2009
Agape World Inc
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Merrill Lynch Ends Investor and Employee Class Action Lawsuits with $550 Million Settlement

Published on: February 2, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Last month, Merrill Lynch & Co. reached a $550 million settlement with investors and employees over losses related to investments in subprime mortgage-backed assets. A court must approve the proposed settlements.

In the securities class action case, the plaintiffs have accused Merrill Lynch of using statements on collateralized debt obligations and other assets to inflate the market price of its own shares. As a result, the plaintiffs contend, investors lost money.

The Ohio State Teachers Retirement System is the lead plaintiff in the class action lawsuit, which represents investors who bought preferred shares between October 17, 2007 and December 31, 2008. The agreed upon settlement is $475 million in cash.

Plaintiffs of the Employee Retirement Income Security Act class action have agreed to settle for $75 million in cash. Participants in the ERISA lawsuit are Merrill Lynch employees with Merrill Lynch stock in specific retirement plans. The plaintiffs have accused Merrill of failing to adequately reveal subprime-related losses that impacted its retirement accumulation plan, its savings and investment plan, and its employee stock ownership plan.

By agreeing to settle, Merrill Lynch says it is not admitting to any wrongdoing.

Fallout from the Subprime Mortgage Crisis
The subprime mortgage crisis has resulted in millions of dollars in losses for investors. If you believe that you were a victim of investor fraud or broker dealer misrepresentation and that these inappropriate actions caused you to sustain investor losses, you may be entitled to the recovery of those losses.

Related Web Resources:
Ohio announces $475M Merrill Lynch settlement, Forbes.com, January 16, 2009 Continue Reading ›

Texas State Securities Board Orders Golden Triangle Energy Corp. and Vision Asset Development Co. to Stop Selling Securities

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

The Texas State Securities Board has issued an emergency cease and desist order telling oil and gas companies Golden Triangle Energy Corp. and Vision Asset Development Co. to stop selling securities. The board is accusing both companies of lying to investors about certain payments and selling unregistered stock shares.

The board contends that the companies’ leader, Michael Dannelly, sold unregistered stock shares and units of interest in a joint venture involved with oil and gas wells and leases. Dannelly previously did business as Oil & Gas Managing Partners.

While selling interests in oil and gas well drilling programs, Dannelly is accused of spending millions of investors’ funds at casinos and on other personal expenses. The order also says that Dannelly organized a Ponzi scam and neglected to tell investors that he had was sued for securities fraud. Two sales agents, Harley Garvin and William McGarry, are also accused of selling unregistered stock shares.

In a separate case, and just one day before issuing the order against Vision Asset Development Co. and Golden Triangle Energy Corp, the board put out a search warrant affidavit against Impact Energy accusing the company of engaging in fraud when it sold natural gas securities.

Texas State Securities Board
The Texas State Securities Board works to protect Texas investors and make sure that a free and competitive market exists in the state. Texas securities laws are committed to prohibiting securities fraud and misrepresentation during securities sales. The state laws also offer sanctions and remedies in the event of violations.
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Wall Street Did Not Know Mortgage Backed Securities were Junk. Baloney!

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

Investment firms pretend that they did not know until a year ago that mortgage backed securities were not safe and secure. Yet, many experts were sounding warnings that many of the mortgages, which made up these investments, were ‘toxic waste.’ Thus, Wall Street firms cannot use the “stupidity” defense” to insulate themselves from investor fraud claims that they deceived investors into mortgage-backed securities.

This week it was revealed that even the FBI, which is not the primary watchdog of Wall Street, knew as early as 2002 of wholesale problems with mortgages-the majority of which were packaged into mortgage-backed securities and sold to investors. In an article published on SeattlePI.com, two retired FBI officials say that the bureau knew for years that fraud involving mortgage-fraud scams, insider scams, and corrupt appraisers was a growing problem in the mortgage industry but failed to take action to stop it.

One reason no action was taken, the retired officials say, is that after September 11, 2001, most of the FBI’s manpower was focused on fighting terrorism. Some 2,400 agents were reportedly reassigned to counterterrorism after the terrorist attacks in New York.

The retired officials claim that the FBI never got the necessary tips from the banking regulatory agencies. They also say that the Bush Administration was fully briefed about the mortgage fraud crisis and its potential financial implications but that government officials decided not to give back to the FBI the agents they needed to deal with the fraud problems. According to one of the retired officials, certified public accountants with the bureau were either assigned to HealthSouth, Enron, or terrorist financing.

Another problem that reportedly prevented the seriousness of the situation from being fully understood, or those responsible from being prosecuted, is that mortgage lenders and banks were generating so much money that the fraud that was occurring did not appear to be costly enough to warrant more attention. One of the retired officials says the Securities and Exchange Commission showed no interest in working with the FBI on the fraud problem until after the economy fell apart.

FBI Assistant Director Ken Kaiser, however, disputes the implication that the FBI could have done more to prevent the mortgage-backed securities crisis. He says the FBI’s criminal division has made 1,000 arrests and “targeted 180 criminal enterprises since 2004.” Kaiser says the agency pursued buyers and lenders involved in multiple fraud or cases involving drugs or organized crime. Continue Reading ›

FINRA Says Securities Arbitration Claims Increased by 85% in 2008

Published on: January 28, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority says that between 2007 and 2008, the number of securities arbitration claims increased by 85%. While Investors filed 1,985 claims against brokerage firms in 2007, last year, 3,667 cases were filed.

Between November 30 and December 31, 2008, 462 securities arbitration claims were filed with FINRA. Through November 30, FINRA received 3,215 claims.

Some of the reasons why there were so many more claims last year than the year before are that the market has been so volatile and certain investment products have experienced losses. Among these are the frozen auction-rate securities market and losses from the Regions Morgan Keegan bond funds and a number of Charles Schwab YieldPlus funds.

Investors, frustrated that brokerage firms placed them in a position to experience such losses, are seeking to recover through arbitration and in court. Unfortunately, it is a challenging time for many investors to recover their losses, especially those involving defaults and bankruptcy. This is one reason why investors are filing their cases now instead of waiting to do so years later.

FINRA’s Arbitration Process
Arbitration provides parties with a way to resolve their securities industry-related disputes. This alternative to filing a securities fraud lawsuit is considered a less costly and more rapid way for investors to resolve their claims with broker-dealers.

The resolution of an arbitration case is considered final and binding. Parties who choose to resolve their case through arbitration have generally given up their right to bring the case to court.

Related Web Resources:
Charles Schwab YieldPlus funds
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District Court Denies Federal Government’s Request to Detain Investment Adviser Bernard Madoff After He Transferred $1 Million in Valuables

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

Earlier this month, the U.S. District Court for the Southern District of New York rejected a motion by the federal government to put investment adviser Bernard Madoff in jail. Madoff is charged with securities fraud over his involvement in a $50 million Ponzi scheme.

Federal prosecutors had claimed that the investment adviser violated the conditions of his bail when he removed nearly $1 million in valuables from his New York home in December and sent them to friends and relatives. Items that were mailed reportedly included more than 13 watches, an emerald ring, a diamond necklace, two cufflink sets, four diamond broaches, and other expensive jewelry.

Prosecutors say that Madoff’s actions were in violation of a preliminary injunction that prevented him from breaking up his assets so that his investor fraud victims could obtain restitution. Madoff’s attorneys, however, claim that their client did not think he was doing anything wrong and did everything he could to get the items back after he was told that he shouldn’t have sent them.

According to Magistrate Judge Ronald L. Ellis, however, the prosecutors’ argument wasn’t enough to mandate incarceration and the government made too huge a “leap” when it claimed that the community became endangered because Madoff transferred his assets. The district court did impose more bail conditions so Madoff cannot move additional items. The court also noted that these supplemental restrictions would provide additional protections.

Meantime, the Financial Industry Regulatory Authority says it has received at least 19 complaints about Madoff’s broker-dealer enterprise. However, FINRA noted that the complaints pertained to trading execution issues and not retail investment advisory issues or allegations of a Ponzi scam or fraud.

Related Web Resources:
U.S. loses another bid to jail Madoff, CNN Money, January 14, 2009
Madoff Is a ‘Danger,’ Argue Prosecutors, WSJ Online, January 8, 2009 Continue Reading ›

Madoff Investors May Have a Better Chance of Recovering their Investment Losses Through Tax Strategies Rather than Lawsuits

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

Investors who lost money in Bernard Madoff’s $50 billion Ponzi scam may have a better chance of recouping their losses through tax strategies rather than filing lawsuits. Under US tax law, Madoff clients are allowed to take income deductions for losses that occur due to theft. The claim can be filed for the year the loss was discovered, and there is reasonable expectation of recovery.

Madoff has been charged with securities fraud. The 70-year-old investment adviser allegedly confessed to swindling thousands of investors. If convicted, he could face up to 20 years in prison, have his assets forfeited, and be ordered to pay a $5 million fine.

Investors who were direct customers of Madoff can file their loss claims with the Securities Investor Protection Corporation. If they have determined that they are not likely to recover from an SIPC claim, they can file for a theft-loss deduction. Per this provision, Madoff’s victims who are eligible to file an SIPC claim but don’t would get their deduction reduced by the $500,000 cap on SIPC coverage for securities losses. According to the Internal Revenue Service, the loss from 1 occurrence has to be above $100, with the total loss needing to be over 10% of someone’s adjusted gross income for the year when the deduction is claimed.

SEC Rapped for Allegedly Failing to Fully Investigate Alleged Wrongdoings in the Municipal Securities Market

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

Congressman Spencer Bachus (R – Ala) says the Securities and Exchange Commission should have done more to probe alleged wrongdoings in the municipal securities market. Bachus issued a statement noting that the SEC knew as far back as 1997 of a potential “pay to play” scam involving water and sewer bonds in Jefferson County, Alabama, which is now facing the largest municipal bankruptcy in sewer bonds at $4 billion.

Bachus says that back then, Jefferson County Commissioner Bettye Fine Collins had sent the SEC a letter telling them about the municipal bond sales, but no follow up letter was sent to her. The congressman noted that it doesn’t appear to be an uncommon practice for the SEC to fail to use the tools to which it has access to investigation credible allegations.

Bachus said he resubmitted the original packet, along with information from 2007 to the SEC but nothing has been done to address his concerns. He also says that he provided SEC Chairman Christopher Cox with material about Jefferson County’s municipal bond indebtedness. The Commission responded by presenting a White Paper about municipal securities reform. Bacchus also noted new information has come to light indicating an “anti-trust collusion” involving investment advisers who inflated the fees that were “already outrageous.”

Jefferson County got into financial trouble when it changed from fixed rates to adjustable rates and refinanced its sewer bonds before becoming involved in complex interest rate swap agreements to hedge against higher rates. When the rates increased, Jefferson County found that it couldn’t refinance a return to fixed rates.

Last April, the SEC filed a lawsuit against Birmingham, Alabama Mayor Larry Langford, who formerly served as Jefferson County Commission president, for alleged improper payments involving the county’s bond business. While serving in the role of county president, Langford allegedly accepted over $156,000 in undisclosed benefits and cash from Blount Parris & Co. securities chairman William Blount. In exchange, Langford allegedly allowed Blount’s company to take part in all of Jefferson County’s security-based swap agreement transactions and municipal bond offerings and the firm earned over $6.7 million in fees.

Related Web Resources:
Jefferson County, Alabama

US Securities and Exchange Commission
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