Investor Lawyers Blog

Wachovia Corp Sued by Carolinas Health Care System for More than $19 Million in “Bad” Investments

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

Carolinas Healthcare System (CHS) is suing Wachovia Corp for alleged bad investments that resulted in losses valued at over $19 million. CHS is also accusing the bank of “directly misleading” it, misrepresenting the risks associated with the investments, and failing to follow the hospital system’s orders that it be withdrawn from the securities-lending program. Wachovia spokesperson Mary Eshet says that the company disagrees about the allegations, was always in compliance, and only made appropriate investments for CHS.

In 2003, according to the investment fraud lawsuit, Wachovia recommended that CHS take part in a securities-lending program. As a participant, a third party would borrow securities from CHS’s portfolio in return for collateral that would be invested by Wachovia until the securities were returned. This would also hopefully result in additional returns.

Per the agreement, Wachovia was only supposed to invest in safe, liquid, quality securities. Any time CHS opted to withdraw from the program, the hospital system was supposed to get all of its investments back within five business days. Also, Wachovia would be allowed to keep 40% of the profits on one account and 35% on the other account.

Last summer, CHS determined that the securities-lending program was proving too risky, especially with the markets collapsing. In September, CHS notified Wachovia to return all borrowed securities right away.

Wachovia couldn’t return all of the securities immediately. Wachovia had invested for CHS $14.9 million in Sigma Finance Corp-issued floating rate notes (now worth $750,000) and $5 million in Pricoa Global Funding floating-rate notes (now worth $4.95 million).

The lawsuit contends that Wachovia never notified Carolinas HealthCare System that the investments were not appropriate until CHS decided to end its participation in the securities-leading program. 5 days after Sigma went into receivership last October, Wachovia told the hospital system for the first time that its investment was, at that time, worth just $1.8 million. CHS says there is now no market for the Pricoa-related securities.

CHS contends that Wachovia gained 40% of the profits but did not suffer any of the losses. The hospital system is solely responsible for returning the lost collateral to its borrowers.

CHS files suit vs. Wachovia over losses on investments, Charlotte Business Journal, January 9, 2009

Related Web Resources:
Carolinas HealthCare System

Wachovia Corp
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$865 billion in state pension fund losses are resulting in reduced benefits for new hires

Published on: January 14, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Because state governments have accrued about $865.1 billion in state pension fund losses, new hires are ending up with reduced benefits. The losses not only exceed the $700 billion Troubled Asset Relief Program that Congress approved last year, but they are accompanied by $42 billion in state budget deficits. In a letter to US Treasury Secretary Henry Paulson, the mayors of Atlanta, Philadelphia, and Phoenix asked for help for their financially beleaguered cities and noted growing pension costs and investment deficits.

According to the Center for Retirement Research at Boston College, 109 state funds’ assets dropped 37% to $1.46 billion between October 2007 and December 2008. A 41% decline during this time period also occurred on the Standard & Poor’s 500 index of stocks.

For the 109 funds to be restored to their 2007 actuarial funding levels by 2010, the Boston College Center says the funds would require yearly returns of 52% on assets. These estimated projections could occur if there was a 5.7% increase in yearly liabilities and a $50 billion growth in assets from contributions beyond yearly payouts. While state funds do have enough money to pay for benefits for the foreseeable future, taxpayers will still have to make up this one-time loss-a proposition that is a hard sell.

A number of states are creating two-tiered systems that offer less benefits to new employees in order to reduce pension costs. For example, As of June 30, 2008, the largest fund in Kentucky for state workers had just 52% of the assets required to pay 117,000 members their present and future benefits. Now, Kentucky officials have established age 57 as the state’s minimum retirement age for workers hired after September 1. In order to receive full benefits, 30 years of service (rather than 27) are required. In New York, Governor David Patterson wants to increase the retirement age from 55 to 62 and decrease new workers’ benefits.

The stock market decline has also resulted in pension funds’ asset losses. Marsh & McLennan pension consulting unit Mercer LLC says that defined benefit funds dropped from $1.3 trillion in September 2008 to $1.1 trillion the following month. There are also state retirement systems that have experienced derivatives losses. Public data put together by Bloomberg in 2007 shows that public pension funds purchased over $500 million in so-called equity trenches of collateralized debt obligations.

Related Web Resources:
State Pensions’ $865 Billion Loss Affects New Workers, Bloomberg.com, January 13, 2009
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Although $200 Billion Auction Rate Securities Are Unfrozen, Many Investors Still Hoping to Recover $135 Billion in Frozen ARS

Published on: January 11, 2009 | by Shepherd Smith Edwards & Kantas, LLP

There is some good new to report. Nearly one year since the auction-rate securities market collapsed and some $330 billion in what was supposed to be liquid, cash-like investments in government bonds became frozen, some $200 billion auction-rate securities are now unfrozen thanks to the efforts of Massachusetts and New York securities regulators. However, there is still a lot more work to be done.

About $135 billion in ARS remain frozen. For many individual investors, the possibility that they will recover these funds is limited. A number of non-profit groups and companies are also unable to access their frozen funds.

For example, Vicor’s $30 million in ARS are tied up until 2010, while Five Star Quality Care has $75 million in frozen ARS. Issuers and regulators have to find a way to retrieve these frozen ARS for investors so they can get their funds back.

The ARS debacle is much bigger than Bernie Madoff’s $50 billion Ponzi scam, which has been dominating the headlines. On BloggingStocks.com, Peter Cohen said that he believes the reason the Madoff scheme has gotten more media attention than the ARS collapse is because Madoff’s victims are high profile celebrities, such as Steven Spielberg and Kevin Bacon.

ARS Market Collapse
UBS, Bank of America, Merrill Lynch, Wachovia, and other large investment firms were accused of knowingly misleading investors into believing that auction-rate securities were “safe,” liquid like cash investments. When the ARS market dropped, these same investors became victims of the market collapse and could longer access these funds.

Related Web Resources:
$135b still frozen by an early ’08 debacle, Boston.com, December 31, 2008
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Former Regions Morgan Keegan Investment Funds Revise Their Names to Include Helios Brand

Published on: January 7, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Seven former Regions Morgan Keegan Investment Funds have changed their names. Each fund’s name now begins with “Helios,” to reflect the shift in management to Hyperion Brookfield Asset Management from Regions Financial.

Helios is Hyperion’s brand name. Hyperion took over Morgan Keegan’s beleaguered investment arm last year after a number of funds suffered serious value drops following the subprime mortgage collapse. Three open-end funds and four closed-end funds are affected by the name change:

New Names of Former Regions-Morgan Keegan Select Funds:
Helios Select High Income Fund: HIFAX (Previously MKHIX)
Helios Select Intermediate Income Fund: HSIBX  (Previously MKIBX)
Helios Select Short Term Bond Fund: Remains as MSBIX
New Names of Former RMK Funds:
Helios Advantage Income Fund: HAV (Previously RMA)
Helios High Income Fund: HIH (Previously RMH)
Helios Multi-Sector High Income Fund: HMH (Previously RHY)
HMH Helios Strategic Income Fund: HSA (Previously RSF)

Hyperion spokesperson Marion Hayes says it was important that the new names reflect the funds’ new management. Hyperion Brookfield President and Chief Executive Officer John Feeney also noted that the rebranding of the acquired funds is part of the company’s efforts to integrate them with its existing fund platform.

Shepherd Smith Edwards & Kantas LTD LLP Founder and Stockbroker Fraud Attorney William Shepherd, however, cautions, “It is not uncommon for mutual fund managers to change the name of funds in an attempt to escape negative publicity. Yet, if the goal is to hide widespread allegations of fraud from investors, this might be considered yet another fraudulent act!”

Related Web Resources:
Hyperion Brookfield Announces Changes to the Names and Ticker Symbols for its Closed-End Funds, MarketWatch, December 18, 2008
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Former Broker Charged with Conspiracy to Commit Wire Fraud Following Allegations He Helped Law Firm Founder Mark Dreier Defraud Hedge Funds Through Ponzi Scam

Published on: January 6, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Former broker Kosta Kovachev has been charged with conspiracy to commit wire fraud for his alleged role in assisting New York law firm founder Marc Dreier with an alleged $380 million Ponzi scheme. Dreier is the founder of Dreier LLP. He was arrested last month on charges he convinced two hedge funds to give him over $100 million after he made false claims that he was selling discounted notes issued by Sheldon Solow, a New York developer.

According to prosecutors, Kovachev posed as the controller of Solow Realty for Dreier-even though he never worked for the company-after a hedge fund employee asked to meet with a Solow representative after the promissory notes were not paid back on time. Authorities are also accusing Kovachev of helping Dreier sell fake notes, totaling $113.5 million, to two other hedge funds last October, as well as posing as Solow’s CEO during a conference call to talk about financial statements. If convicted, Kovachev could spend up to five years in prison and have to pay $250,000 or twice the gross loss or gain as a result of his offense-whichever is greater.

At Kovachev’s bail hearing, Assistant US Attorney Jonathan Streeter says Dreier paid people that took part in “impersonations” for him up to $100,000 a phone call. Drier LLP filed for bankruptcy last December.

In 2006, the Securities and Exchange Commission filed a civil suit against Kovachev accusing him and several others of engaging in a different Ponzi scam and defrauding over 600 investors of over $28 million. Kovachev, who was accused of selling unregistered securities that were structured as hotel timeshare rental interests, was ordered to pay $350,000.

Dreier Case Leads to Charges Against Broker Kovachev, Bloomberg.com, January 5, 2008
Ex-Broker Charged With Helping New York Lawyer in Elaborate Fraud Scheme, New York Times, December 23, 2008

Related Web Resources:

SEC Charges N.Y. Attorney Marc S. Dreier With Multi-Million Dollar Fraud, SEC, December 8, 2008
“Ponzi” Schemes, SEC.gov Continue Reading ›

Investor Fraud Lawsuits Stemming $50 Billion Ponzi Scheme May Name Madoff’s Family Members as Additional Defendants

Published on: January 5, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The civil lawsuits that will be brought by the victims of Bernard Madoff’s $50 billion fraud scam are expected to be numerous and massive. Not only will they likely target Madoff and his firm, Bernard L. Madoff Investment Securities LLC., but a number of his family members who work for the firm could also be named as defendants.

The company’s chief compliance officer and senior managing director is Madoff’s brother Peter. Madoff’s sons, Mark and Andrew, also are employed by the firm, as is Shana Madoff, Peter’s daughter. While Madoff has maintained that no family members were involved in the Ponzi scheme and that he acted alone, actual knowledge doesn’t have to be involved when there is a fiduciary relationship or if recklessness or negligence is a factor for someone to be held liable.

According to Securities and Exchange Commission staff attorney Peter J. Henning, two main types of litigation are expected from the Madoff scheme. One type of securities fraud litigation will target Madoff, his company, and his family members. Another kind of investor fraud lawsuit will target third parties, such as investment advisers, feeder funds connected to Madoff’s company, and other parties that sent investors Madoff’s way.

Complications are expected. Determining the liability of people who acted in an agent role but did not receive compensation when they referred investors to Madoff, differentiating between claimants that invested in feeder funds and those who directly invested with Madoff, and determining whether money can be gotten back from investors who redeemed their funds earlier, are just some of the difficulties that are likely to arise.

Already, a number of investors have filed class action and group lawsuits against the 70-year-old financial adviser, who remains under house arrest. In October, Bernard L. Madoff Investment Securities LLC., was the 23rd biggest market maker on Nasdaq.

Related Web Resources:
Suits From Madoff Fraud Will Be Massive, Will Involve Family Members, Attorneys Say, BNA, December 22, 2008
Bernie Madoff Victim List, Huffington Post, December 15, 2008
Bernard L. Madoff Investment Securities LLC
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Number of Federal Securities Fraud Cases Prosecuted Drop Significantly

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

A recent New York Times article reports that according to new data, federal officials are prosecuting far fewer cases involving fraudulent stock scams than they did in 2000 before the Bush Administration came into office. According to financial and legal experts, less strict enforcement polices, Securities and Exchange Commission staff cutbacks, and a greater focus on fighting terrorism have led to the federal government’s laxer policing efforts when it comes to pursuing securities fraud cases.

The new information, based on Justice Department information and put together by a Syracuse University research group, says that there haven’t been so few securities fraud prosecutions in a year since 1991. Also:

• During the first 11 months of the 2008 fiscal year, there were 133 securities fraud prosecutions-compare this to 2002 when there were 513 prosecutions, spurred by the WorldCom and Enron scandals, and 2000 when there were 437 prosecutions for this same time period.

Former Stanford Group Co. Financial Advisers Must Arbitrate Constructive Discharge Claims

Published on: December 29, 2008 | by Shepherd Smith Edwards & Kantas, LLP

This month, the Texas Court of Appeals concluded that two ex-Stanford Group Co financial advisers must arbitrate state labor law claims that their former employer constructively discharged them for complaining about its unethical business practices. The appeals court’s decision reverses a lower court’s ruling to not compel arbitration.

According to Chief Justice Hedges, former Stanford advisers Charles W. Rawl and D. Mark Tidwell signed U-4 registration applications that had arbitration provisions. The promissory notes they executed that were payable to Stanford also came with arbitration provisions.

While they worked for Stanford, the two men allegedly discovered that the company engaged in several unethical and illegal business practices, such as the deletion of certain electronic data in the wake of a Securities and Exchange Commission probe and the inflation of certain asset values in order to mislead potential customers. Tidwell and Rawl contend that they told management to investigate the alleged illegal activities, but their requests were ignored. The two advisers then resigned from the company because they thought they could be implicated for the alleged illegal activities.

After they left the firm, Stanford began FINRA arbitration proceedings against the two men to collect on promissory notes that allegedly were due to be paid as soon as they resigned. The former advisers responded by filing an employment discrimination lawsuit. They claim that their constructive discharge violates the Texas Labor Code because they refused to participate in Stanford’s alleged illegal acts. They also maintained that Stanford’s behavior was actionable under Sabine Pilot Services Inc. v. Houck, 687 S.W.2d 733 (Tex. 1985).

Stanford’s response was a motion to compel arbitration. The two men then said that under FINRA Rule 13201, their employment claims were excluded from arbitration.

The appeals court says that although the Texas labor code prohibits employment discrimination, the plaintiffs failed to note that their discrimination was based on any protected classes named in the statute. As a result, Judge Hedges said the trial court was in error when it did not compel arbitration.

According to Shepherd Smith Edwards & Kantas LTD LLP Cofounder and Securities Arbitration Attorney WIlliam Shepherd, “The key on this one is that registered securities representatives must go to securities arbitration and can not take employment cases to court despite language securities arbitration code concerning statutory labor claims in the Texas Labor Code. Our securities arbitration law firm often represents such persons against their employer or former employer.”

Related Web Resources:

3201. Statutory Employment Discrimination Claims, FINRA
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ARS Investors Can Seek Consequential Damages Recovery Through Special Arbitration Procedure Introduced by FINRA

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

This month, the Financial Industry Regulatory Authority introduced a special arbitration procedure that auction-rate securities investors can avail of to recover consequential damages. This procedure can be used by customers who are allowed to file for such damages under the ARS-related settlements that have been concluded with the Securities and Exchange Commission or with FINRA.

Under the special procedure, investment firms cannot contest liability related to ARS product sales or the illiquidity of ARS holdings. The companies also cannot use as its defense an investor’s choice not to borrow money from the firm (if it offered the ARS holder a loan option) or his or her decision not to sell ARS holdings prior to the settlement date.

Investors have the option to seek their recovery through this procedure or in other applicable forums, including through standard arbitration rules. FINRA Dispute Resolution President Linda Fienenberg says the special procedure offers a quicker, more affordable resolution for clients claiming consequential damages. Any fees related to the special arbitration procedure will be paid for by the firms.

A single public arbitrator will hear consequential damage claims under $1 million. If the amount is larger, the parties have the option, by mutual consent, to have their claim heard by a three-person arbitration panel.

Consequential Damages
These damages are the financial harm that was experienced by ARS investors because the market collapsed. This may include losses incurred by investors whose ARS assets are frozen, as well as opportunity costs.

As of the end of last month, 275 ARS arbitration claims had been filed under FINRA’s standard arbitration procedure. Investors that limit claims to consequential damages can opt to have their case heard under the special arbitration procedure.

In the wake of the ARS market’s downfall last February, FINRA has been working with the SEC and state regulators to provide investors recovery options. FINRA is also investigating some two dozen firms for alleged misconduct involving their handling of ARS.

FirstSouthwest Co and WaMu Investments have reached final settlement agreements with FINRA. Agreement in principles have been reached with City National Securities, Mellon Capital Markets, SunTrust Investment Services, Comerica Securities, SunTrust Robinson Humphrey, Harris Investor Services, and NatCity Investment, Inc.

Related Web Resources:

FINRA Provides Details on Special Arbitration Procedure for ARS Consequential Damages, MarketWatch, December 16, 2008
Special Arbitration Procedures for Investors Involved in Auction Rate Securities Regulatory Settlements, FINRA
FINRA
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UBS and Citigroup to Pay Nearly $30 Billion to Tens of Thousands of ARS Investors

Published on: December 22, 2008 | by Shepherd Smith Edwards & Kantas, LLP

UBS Financial Services, Inc., UBS Securities, LLC, and Citigroup have reached finalized settlements with the Securities and Exchange Commission to pay tens of thousands of ARS investors almost $30 billion. The settlements will resolve SEC charges that the companies misled investors about the risks involved with auction rate securities.

The SEC’s complaint accused UBS and Citigroup of misleading customers by telling them ARS were liquid, safe investments and failing to warn them of the growing dangers when the market started to fail. When the ARS market froze in February, the SEC says both firms left tens of thousands of clients holding billions of dollars in illiquid ARS.

These finalized settlements will restore about $22.7 billion in liquidity to UBS clients who invested in ARS and some $7 billion to Citigroup investors. SEC Chairman Christopher Cox says investors will get back “100 cents on the dollar on their ARS investments.” Both firms will buy ARS from affected customers at PAR. Customers that sold their ARS under the par difference will be paid between par and the ARS sale price. This is the largest settlement in SEC history.

UBS and Citigroup are not admitting to or denying the SEC’s allegations by agreeing to settle. Both investment firms, however, have agreed to enjoinment from future violations.

The U.S. District Court for the Southern District of New York still needs to approve the settlements, and additional SEC penalties could still arise for UBS and Citi. The SEC is also waiting to finalize the settlements-in-principle it reached with Merrill Lynch, Bank of America, Wachovia, and RBC Capital Markets.

Related Web Resources:
SEC Finalizes ARS Settlements With Citigroup And UBS, Providing Nearly $30 Billion in Liquidity to Investors, SEC, December 11, 2008
SEC Complaint Against UBS (PDF)

SEC Complaint Against Citigroup (PDF)
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