Investor Lawyers Blog

Court Says Investor Must Arbitrate Claims Against Broad Street Securities, Pershing LLC, and Bank of New York Mellon Over Contract Alterations

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

The U.S. District Court for the Eastern District of Michigan has concluded that Mouayad Shammami, an investor that is accusing brokerage firm Broad Street Securities Inc. of fraudulently inducing him to change his investment goals, must arbitrate this dispute rather than pursue the matter through the courts.

In 2004, Shammami entered into an agreement with Broad Street stating that the brokerage firm would give him investment and management advice. Broad Street and clearing broker Pershing LLC had their own agreement between them that allowed Broad Street to ask Pershing to trade securities for Shammami. Shammami and Pershing entered into a marginal agreement in 2005, which contained a pre-dispute arbitration clause.

In 2007, Shammami filed a lawsuit alleging that Broad Street and Pershing traded securities and churned his account without honoring his stated investment goals. Pershing and its parent company Bank of New York Mellon LLC filed a motion to have the case dismissed. Per the terms of the agreement with Shammami, both firms wanted to resolve the dispute in arbitration.

W.P. Carey & Co Settles SEC Charges Over Payments of Undisclosed REIT Compensation

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

REIT Manager W.P. Carey & Co has reached a $30M settlement agreement with the SEC over antifraud charges.

According to the SEC, W.P. Carey, its ex-CFO John J. Park, and its former chief accounting officer Claude Fernandez paid $10 million in undisclosed compensation to a brokerage firm that sold real estate investment trusts (REITs). The three parties then misrepresented these moneys in periodic filings to keep the compensations secret.

These activities allegedly benefited the broker-dealer and W.P. Carey, which received larger fees as a result, including $6.4 million in reimbursements and illegal fees. Park and Fernandez are accused of using fake invoices to hide the payments and get around the regulatory limitations about compensation.

JP Morgan Chase’s Bear Stearns Acquisition Could Make The Firm Vulnerable to Lawsuits

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

Following JP Morgan Chase & Co’s acquisition of Bear Stearns Companies Inc., JP Morgan Chase Chief Financial Officer Michael Cavanagh says the firm is reserving as much as $6 billion for “transaction-related costs,” including possible litigation.

Class action lawsuits could come from investors regarding corporate disclosure, as well as from employees over pension plans. Any securities lawsuits targeting Bear Stearns as the plaintiff will also go to JP Morgan Chase.

Lawsuits expected may include those related to the 1934 Securities Exchange Act Section 10(b) (a general antifraud provision) by investors that may feel that Bear Stearns did not disclose accurate information about the company’s health. Employees may sue if they believe that the Employee Retirement Income Security Act (ERISA) had been violated.

Too Little Too Late: Fund Compies’ Attempts to Refinance Auction Rate Preferred Securities Using Leverate or Varible Rate Securities Unlikely

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

Some closed end funds which issued preferred shares in the auction rate market suggest they might obtain liquidity in Auction Rate Preferred Securities (ARPs) using leverage and Variable Rate Demand Preferred Securities. Such statements may give hope to those holding ARPs, yet we believe that these solutions unlikely create the liquidity sought.

This action by the closed-end fund companies is likely intended to benefit these companies and will not help the preferred share holders. If the goal were truly to benefit ARP holders, such action would have been initiated prior to the lock-up of the ARP market. As the broker-dealers actually increased sales to unwary investors, the fund companies were silent as risk to ARP investors grew and liquidity disappeared.

According to the Investment Company Institute, closed end fund companies manage a total of $314 billion dollars worth of assets for their common shareholder clients. Closed-end funds have borrowed about $60 billion of this total using preferred shares. The preferred shares were created to use a low rate paid to preferred holders in order to boost yield to common mutual fund shareholders. Risk to preferred shareholders could have been avoided by liquidating holdings within each respective fund when possible. This would have also greatly reduced risk to common fund shareholders by “getting them off margin.”

Wachovia Securities Analyst Comments on Bear Stearns’ Sale and Calls Merrill Lynch the “Riskiest” Investment Bank

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

In a note to investors, Wachovia Securities Analyst Doug Sipkin commented on the state of the leading Wall Street securities firms in light of the worsening global credit crisis.

Sipkin blamed the “The failure of Bear Stearns” on a “management issue” rather than a “market issue.” JP Morgan Chase & Co. recently purchased Bear Stearns, the fifth largest securities company, for $236 million-that’s $2/share-a 90% market drop in just two days. The securities firm ran out of money after clients took away funds.

Sipkin, however, reassured investors that the action taken by the Federal Reserve to reduce emergency lending rates will keep the other four big securities firms in business.

Wells Fargo Brokerage Services. FTN Financial, and Stone Youngberg Among Founders of Regional Bond Dealers Association

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

14 regional bond dealers have founded Regional Bond Dealers Association (RBDA). The purpose of the association is to tackle issues that are important to U.S. regional, fixed-income securities dealer. Issues to be examined include revising the tax code and matters affecting auction-rate securities.

Founding members are:

• Wells Fargo Brokerage Services LLC.

Bear Stearns Sold to JP Morgan – One Firm’s Trash Is Another Firm’s Treasure!

Published on: March 17, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Yesterday – Sunday – it was reported that JP Morgan bailed-out Bear Stearns by paying its shareholders a measly quarter of a billion dollars. One question plaguing Wall Street is how many other victims of sub-prime mortgages will emerge? Below we assess the winners and losers of this deal and also report some good news: Claims by investors who had accounts at Bear Stearns are not dead!

Winners and Losers?

A year ago, BSC’s stock sold for $150 per share. Last Friday BSC’s shares fell from 57 to 30. Reportedly, as government big-wigs and financial moguls met on Saturday to attempt to salvage BSC, there were discussions with several firms to pay around $15 per share but on Sunday only JP Morgan was left – offering $2 per share. Although BSC faced certain bankruptcy if nothing were done, Bear Stearns shareholders say they are the big losers.

A.G. Edwards & Sons Stockbrokers Ordered to Pay $750,000 Fine for Market-Timing Scam

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

Three A.G. Edwards & Sons Inc. brokers are being ordered to pay $750,000 in fines for their participation in a market-timing scam that involved mutual funds that benefited certain customers.

The brokers, Thomas Bridge, James Edge, and Jeffrey Robles, were also ordered to serve suspensions from the securities industries. Bridge, a former registered representative in the firm’s Boca Raton, Florida office, must also disgorge $39,808.53. Edge was the branch manager at the same office. Robles worked as a branch manager at Edwards’ Back Bay office.

Securities and Exchange Commission Chief Administrative Law Judge Brenda Murray ordered the sanctions. The market-timing scam occurred from the Edwards’ branch offices in Lake Worth, Boca Raton, and Boston.

Ex-UBS Executive Pleads Guilty to Insider Trading And Could Spent 90 Years in Prison

Published on: March 13, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Former UBS Executive Mitchel Guttenberg is looking at a possible 90 years in prison. Guttenberg recently pled guilty to two counts of conspiracy and four counts of securities fraud for his involvement in an insider trading scam.

Prosecutors had accused Guttenberg of selling nonpublic data from UBS stock analysts about potential downgrades and upgrades to trader to David Tavdy. Tavdy then allegedly used this private information to illegally make at least $15 million for hedge funds and $10 million by trading on his own account.

According to the U.S. Justice Department, Guttenberg repeatedly sold insider information to Tavdy over a nearly five-year period.

Countrywide Financial, Merrill Lynch, and Citigroup Executives Defend Their Hefty Compensations Following Subprime Mortgage Crisis

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

Appearing before the U.S. Congress last week, Countrywide Financial CEO and founder Angelo Mozilo, Ex-Citigroup CEO Charles Prince, and Ex-Merrill Lynch Chairman and CEO Stanley O’Neil gave their testimonies to the House Committee on Government and Oversight Reform.

The three men say that reports about their compensation are “grossly exaggerated” and that they too have lost millions of dollars from the mortgage debacle. On Thursday, the Congressional issued a report stating that the three men earned $460 million between 2002 and 2006.

All three men say their income from the firms are tied to the profits that the companies made in the years prior to the mortgage crisis and that their company stock has dropped dramatically since then.