Investor Lawyers Blog

Investors Seek Arbitration Resolutions Against Charles Schwab for Alleged Securities Violations

Published on: July 1, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Charles Schwab & Co. has recently been barraged with FINRA arbitration claims filed by investors alleging that the firm violated industry regulations and state securities laws. In their complaints, investors are accusing Charles Schwab of misleading them about the risks associated with certain mutual funds, including the degree to which the funds were exposed to the hazards of the sub-prime mortgage market. They say that rather than diversify the investments, the brokerage firm over-concentrated them in securities tied to the mortgage industry.

The claims cite numerous omissions and misrepresentations in mutual funds that the brokerage firm had underwritten, including those involving Schwab YieldPlus Funds Investor Shares (SWYPX) and the Schwab YieldPlus Fund Select Shares (SWYSX). The funds have undergone major losses recently, and investors claim these losses were not brought about by market events, but, rather, due to mismanagement by Schwab fund managers, including its failure to disclose key information to investors.

Investors say that in addition to Schwab’s alleged failure to diversify its fund assets, the brokerage firm also failed to reveal that Schwab’s leading broker-dealers issued most of the bonds that the funds held, there was no primary market for the majority of the bonds, and the firm’s credit and market analyst did not have the experience to evaluate the value and risk of mortgage backed securities.

Massachusetts Commonwealth Secretary William Galvin Sues UBS for Fraud

Published on: June 30, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Commonwealth of Massachusetts Secretary William Galvin is suing UBS because it says the investment firm pushed auction-rate securities onto investors in an effort to minimize its own losses. In his complaint, the state’s head securities regulator cited fraud as grounds for the lawsuit.

Galvin cites several e-mails that indicate that UBS told its sales team to aggressively sell the notes to as many investors as possible after the firm realized that the $300 billion auction-rate securities market was in trouble and there were beginning to be more people selling than buying.

One e-mail, dated December 15, indicates that UBS’s wealth management unit held $33 billion of the auction-rate securities and that the firm had underwritten $43 billion of the market’s securities. Galvin says UBS engaged in a “comprehensive and deliberate” strategy to minimize their inventory.

Connecticut Brokerage Aide Must Pay $58,825 To Settle Charges He Made Unauthorized Securities Trades

Published on: June 27, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Southern District of New York has ordered a Connecticut man to pay $58,825 in civil penalties, prejudgment interest, and disgorgement to settle charges he engaged in a scheme to take part in unauthorized securities trades, which caused prices to rise dramatically.

The Securities and Exchange Commission says that Joshua Eudowe, who worked at a brokerage firm owned by his stepfather, Lawrence Goldstein, was not a registered representative but was brought in to help with marketing and research efforts.

In 2006, the SEC says that he made several unauthorized purchases of CreditRiskMonitor.com Inc. and FRMO Corp. stocks in client accounts of investment partnerships managed by his stepfather. Eudowe also is accused of hacking into the company Web site and using Goldstein’s password to engage in unauthorized securities trades without permission.

Citigroup Settles Securities and Exchange Commission Charges Over Accounting Issues Related to Argentine Bonds

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

Without admitting to our denying any wrongdoing, Citigroup has agreed to settle Securities and Exchange Commission charges that it took part in improper accounting related to specific Argentine bonds. According to the SEC, Citigroup was able to avoid paying another $479 million in pre-tax charges during the 4th quarter of 2001.

Citigroup became affected by Argentina’s economic and political problems because the bank owns Argentine government bonds and over $1 billion in Argentine-related consumer loans. Because of the crisis, the South American country’s government had to default on certain sovereign debt obligations and devalue the country’s currency.

Citibank had to make several accounting decisions, including those involving Argentine government bonds that were not eligible for bond swap, government-sponsored exchanges involving bonds for loans, the sale of Banco Bansud S.A. (a bank subsidiary that Citigroup had acquired), and the result of government actions that lead to the conversion of $1 billion in Citigroup loans to Argentine pesos.

Another Lawsuit Against Former Merrill Lynch Research Analyst Henry Blodget is Dismissed Due to Loss Causation

Published on: June 23, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Southern District has dismissed a securities fraud lawsuit filed by investor Nicholas Vale against ex-Merrill Lynch Internet Group head Henry Blodget on the grounds that Vale failed to factually show how the defendant’s fraud caused his investment losses.

In his lawsuit, Vale accused Blodget of issuing bogus positive reports about Internet Capital Group Inc. and B2B Internet HOLDRs, an exchange traded fund. He says that he depended on reports by Blodget and Merrill Lynch when he bought almost 3,000 ICGE stock shares for about $300,000 in 1999 and he would not have bought the shares if not for Blodget’s reputation as a research analyst.

In 2002, the New York State Attorney General’s Office accused Merrill Lynch, Pierce, Fenner & Smith Inc., Merrill Lynch & Co. Inc., and Blodget of regularly issuing false or misleading recommendations about Internet-based stocks to try and increase the firm’s underwriting business. Merrill Lynch settled the allegations with a $100 million fine. Vale, who says that he suffered major losses after selling the shares in 2000, is one of a large number of investors that have filed lawsuits accusing Merrill Lynch and Blodget of securities fraud.

Lincoln Funds International Inc. and Its Principals Issued Restraining Order Following Alleged $21 Million Biotech Scam

Published on: June 19, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Central District of California has slapped Lincoln Funds International Inc with a temporary restraining order and told the advisory firm to temporarily freeze its assets. Judge Cormac J. Carney also appointed a temporary receiver over the assets, as well as the assets of three Lincoln Biotech Venture funds and Brookstone Capital, which is Lincoln Fund’s predecessor company.

Lincoln Funds, along with its three principals, are accused of engaging in a biotechnology investment fraud scam, raising over $21.8 million from hundreds of investors. According to the SEC, Robert L. Carver, his son Robert L. Carver II, and James L. DeMer sold securities in Lincoln Funds, the three biotech funds, and Brookstone Capital while making “baseless predictions” and promising that there would be initial public offerings at the two companies.

The Commission charges that the defendants took part in “sham transactions” to make it appear as if Lincoln Funds was not associated with Brookstone or Carver because both had been subject to state regulatory orders. It is also accusing the defendants of misappropriating and misusing at least $2.5 million in investor funds, defrauding the partnerships as a result.

SEC Judge Slaps Next Financial Group With $125,000 Fine Over Recruiting Practices

Published on: June 18, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Securities and Exchange Commission Administrative Law Judge James T. Kelly is ordering Next Financial Group Inc. to cease and desist from recruiting practices that violate privacy laws. He also has slapped the company with a $125,000 penalty.

Recruiting practices that need to stop included those involving use of clients’ private information. Next has been known to ask recruits to provide their user id and password so that the firm could enter the computer systems of the recruits’ brokerage firms and collect clients’ non-public personal information.

The SEC had originally requested that the judge impose a $325,000 on Next. Judge Kelly, however, acknowledged that there is general confusion within the securities industry about Regulation S-P, which implements stricter privacy laws under the Gramm-Leach-Bliley Act of 2000. However, even Next’s expert witnesses agreed that using the passwords and user ID’s of recruits in this way is not in line with normal industry practices.

SEC and State Regulators Probe Whether UBS Played a Role in Auction-Rate Securities Collapse

Published on: June 16, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The Boston Globe says it has reviewed documents that indicate that UBS Financial Services continued selling municipal bond investments without warning clients of the risks even though the firm already knew that trouble was brewing. Yet when the $330 billion auction-rate securities market shut down in February, UBS brokers expressed surprise at the collapse.

This lack of disclosure is in contrast to UBS’s dealings with some of its bigger clients. The investment bank reportedly advised them of the pending problems at least three months before all trading ended. All this indicates that there is a possibility that UBS played a bigger part in the auction-rate securities collapse than it has owned up to, and the Securities and Exchange Commission and New Hampshire and Massachusetts regulators are investigating this matter-in addition to trying to determine whether UBS did in fact mislead investors.

UBS has acknowledged that it did not give some investors enough warning, and it has refused to explain why it warned other clients about the auction-rate securities risks. If only one side of UBS did in fact know about the upcoming auction-rate securities crisis and did not warn the other side, securities attorneys say that the investment firm could be in legal hot water.

Former JP Morgan Chase and Credit Suisse Banker is Sentenced to 10 Years in Prison for Insider Trading Tip Scam

Published on: June 12, 2008 | by Shepherd Smith Edwards & Kantas, LLP

In the U.S. District Court for the Southern District of New York, former JP Morgan Chase and Credit Suisse investment banker Hafiz Muhammed Zubair Naseem was sentenced to 10 years in prison for his involvement in an insider tip scam.

Prosecutors say that Naseem retrieved insider information from the internal bases of both Credit Suisse and JP Morgan Chase. Confidential information that he pulled from Credit Suisse’s files included data related to possible deals with TXU Corp., John H. Harland Co., Caremark Rx Inc., Hydril Co., Trammell Crow Co., Jacuzzi Brands Inc., Veritas DGC Inc., Energy Partners Ltd., and Northwestern Corp.

Insider information from JP Morgan Chase dealt with possible transactions in Engineered Support Systems, Computer Science Systems, Alliance Data Systems, K2 Inc., Education Management Corp., Aramark Corp., Huntsman Corp., and Northwestern Corp.

State Regulators Investigate World Financial for Deceptive Sales Practices

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

Security regulators in Missouri, Utah, and a number of other US states are accusing World Financial Group of making variable annuities sales that are unsuitable and misrepresenting investment returns. A number of World Financial customers have filed private arbitration claims making similar allegations.

World Financial is owned by Dutch insurer Aegon NV. World Financial’s agents sell annuities, life insurance, and mutual funds. Unlike more traditional sales teams, however, agents make money based on a pyramid-like multilevel sales system. The agents receive most of their compensation from their recruitment of new agents rather than products sales, including a portion of the commissions that the new agents make.

In a 2006 investor presentation, Aegon USA CEO Patrick Baird called World Financial a “real recruiting machine.” The company reportedly has over 18,000 licensed insurance agents and brokers and, according to an Aegon executive in 2006, about 80,000 “producers,” which includes unlicensed and part-time members. Those who meet sales goals are awarded jewelry and trips to the top of the Transamerica Building in San Francisco that is owned by Aegon. Clients are sometimes invited to join the company’s sales force.