Investor Lawyers Blog

Wisconsin School Districts Sue Royal Bank of Canada and Stifel Nicolaus and Co. in Lawsuit Over Credit Default Swaps

Published on: October 7, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Five school districts in Wisconsin are suing Stifel Nicolaus & Co., Inc. and Royal Bank of Canada (RBC) for losses incurred after the bank and brokerage firm sold the districts “Credit Default Swaps,” (also called “CDS” or complex credit derivatives) worth $200 million resulting in some $150 million in losses. The school districts claim that the bank and brokerage firm told them that the CDS investments were safe even though they knew otherwise.

The school districts involved in the lawsuit include Kimberly Area School District, Kenosha Unified School District, School District of Waukesha, Whitefish Bay School District, and West Allis – West Milwaukee School District. They are seeking full recovery of their money. Attorney Robert Kantas of the stockbroker fraud firm law firm Shepherd Smith Edwards & Kantas LTD LLP is representing the school districts.

The districts’ lawsuit accuses Royal Bank of Canada and Stifel Nicolaus of either negligently or purposely misrepresenting the investments and withholding key information. The plaintiffs’ complaint names specific times when they were told that “15 Enrons” would need to happen before the districts would be affected, none of the CDO’s had sub-prime debt, and the investments were “safe” and “conservative.” The districts later found out that some of the CDOs they purchased included leases, home equity loans, commercial mortgage loans, residential mortgage loans, credit card receivables, auto finance receivables, and other debt obligations.

2004 SEC Vote that Changed Net Capital Rule May Have Played a Role in Current FInancial Crisis

Published on: October 6, 2008 | by Shepherd Smith Edwards & Kantas, LLP

A recent New York Times article about the current US financial crisis refers to an April 28, 2004 meeting involving members of the Securities and Exchange Commission.

During the meeting, the SEC members considered an urgent request made by large investment banks for an exemption from an old regulation limiting the amount of debt that their brokerage units could take on. The exemption would release millions of dollars that were in reserve as a cushion against the brokerage units’ investment losses. The released funds could then be used by a parent company to invest in credit derivatives, mortgage-backed securities, and other instruments.

Although one commissioner, Harvey J. Goldschmid, had questions the consequences of such an exemption, he was reassured that only large firms with assets over $5 billion would be able to avail of the exemption. Market regulation head Annette L. Nazareth, who would later be appointed and serve as an SEC commissioner until January 2008, told the commission that the new rules would allow the commission to forbid companies from engaging in high risk activities. Another SEC commissioner, Roel C. Campos, supported the exemption, albeit with “fingers crossed.”

Following a 55 minute discussion that was not attended by many people, a vote was called. The unanimous decision changed the net capital rule-designed to be a buffer during tough financial times. In loosening these rules, the agency also decided to depend on investment companies’ computer models to determine an investment’s risk-level. This essentially left the task of monitoring investment risks to the banks themselves.

One man-Indiana software consultant Leonard D. Bole-loudly disagreed with this approach, noting that the firms’ computer software would not be able to predict certain kinds of market turmoil. His letter to the SEC, sent in January 2004, never received a response.

Once the firms availed of the rule change, the ratio of borrowing compared to their overall assets increasing dramatically. While examiners were aware of potential problems related to risky investments and a heavier dependence on debt, they virtually ignored the warning signs while assuming that the firms had the discipline to regulate themselves and not borrow too much.

The SEC, which was now finally able to monitor the large investment banks’ riskier investments, never fully availed of this advantage. Seven people were given the task of monitoring these companies, yet their department currently does not have a director. And not one inspection has been completed since SEC Chairman Christopher Cox reorganized the department some 18 months ago.

The commission formerly ended its 2004 program last month, acknowledging its failure to anticipate problems that have resulted with Bear Stearns and the four other large investment banks. Cox says it is now obvious that “voluntary regulation does not work.” Critics of the SEC, however, say the commission has fallen short with its enforcement efforts in recent years.

If you have lost money during the financial crisis because of broker-dealer misconduct or mismanagement, there are legal remedies available to you.

Related Web Resources:

Agency’s ’04 Rule Let Banks Pile Up New Debt, New York Times, October 2, 2008
SEC
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Almost 7,000 Broker-Dealers from FSC Securities, AIG Financial Advisors, and Royal Alliance Associates Will Be Part of AIG Advisor Group Sale, Says Source

Published on: October 2, 2008 | by Shepherd Smith Edwards & Kantas, LLP

A source in investment banking who is choosing to remain anonymous says that the futures of nearly 7,000 financial advisors and registered representatives responsible for generating some $1.3 billion in fees and commissions in 2007 will be decided by American International Group Inc’s large scale asset sale. Details of the sale could be announced as early as Friday by new AIG head Edward Liddy.

Published reports also say that AIG New York is thinking of selling over 15 business lines to repay the federal government for an $85 billion emergency loan.
AIG Advisor Group is made up of FSC Securities Corp, AIG Financial Advisors Inc., and Royal Alliance Associates Inc.

The unnamed source is also predicting that Liddy will retain the services of a Wall Street company to conduct a quiet auction for the broker-dealers and that aggressive bids from different firms, including Raymond James and LPL Financial are likely. According to other sources and recruiters, the Financial Services Network of San Mateo, California, which is one of the largest advisor groups affiliated with FSC Securities, could end up with LPL or one of its subsidiaries.

In an interview with the Wall Street Journal last month, AIG Chairman and CEO Liddy said that he expects the company will emerge from its current financial turmoil. Liddy was appointed to his new post two days after the federal government’s loan, intended to keep AIG from bankruptcy.

Related Web Resources:

Another Bailout: Government Lends AIG $85 Billion, NPR.org, September 17, 2008
AIG Advisor Group
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Lehman Brothers’ “Structured Products” Investigated by Stockbroker Fraud Law Firm Shepherd Smith Edwards & Kantas LTD LLP

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

This week, the securities fraud law firm of Shepherd Smith Edwards & Kantas LTD LLP announced that it is investigating claims involving “structured products” that were created by Lehman Brothers. Structured products are also called “structured notes.”

These financial instruments combine derivatives with equities and/or fixed incomes to create a product meant to provide the upside of the stock market along with fixed income security. These notes were usually marketed to conservative investors wanting a reasonable yield, the possibility of a modest gain in principal, and the preservation of capital. Other brokerage houses that marketed structured products to their own clients included Merrill Lynch, UBS, JP Morgan Chase, Citigroup, and Wachovia.

There is a brochure that discusses structured notes sold by Lehman Brothers in August 2008 (just one month before the now defunct brokerage firm filed for bankruptcy) that promised “100% principal protection” and “uncapped appreciation potential” based on Standard & Poor’s 500 Index gains. The collateral material also said that, at worst, an investor would regain the principal amount invested within three years. However, Lehman Brothers and other brokerage firms were actually using structured products to cover their operational shortfalls.

FBI Investigates Former HFI Securities Inc. Vice President After Gold and Silver Coins Worth Millions of Dollars Found in His Basement

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

The FBI is currently investigating Don Weir, a broker and former vice president of investment firm St. Louis-based HFI Securities Inc. The federal probe comes after silver and gold coins worth millions of dollars were found in the basement of Weir’s former home.

The authorities confiscated the bouillon after Weir’s estranged wife contacted the president of HFI Securities and suggested that he visit the home. According to an attorney for HFI, the coins were being held for investors that worked with Weir. However, HFI’s attorney also says that the firm was not aware that Weir had purchased the coins and that he was stashing them in the Missouri basement.

So far, no criminal charges have been filed. Weir, who has been a brokerage firm representative for over 20 years, however, is now unemployed. He reportedly tried to commit suicide soon after the coins were discovered. In the meantime, HFI is trying to determine which of its customers may be the owners of the silver and gold coins.

If you are an investor that has lost money because of a broker’s misconduct, you should speak with a stockbroker fraud lawyer immediately. Continue Reading ›

Former LPL Financial and Ameriprise Representative Charged with Theft and Fraud of Persons He Met through Church and Little League

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

A former LPL Financial and Ameriprise representative has been charged with 14 counts of theft and one count of fraud-all charged as felony crimes-after he allegedly stole $5 million from over 20 people he was acquainted with through Little League and church. James J. Buchanan was indicted last May at Maricopa County Superior Court in Arizona.

Buchanan was affiliated with Ameriprise Financial before joining LPL in 2006. The alleged theft and fraud incidents occurred between 2001 and April 2006 when LPL fired him.

Investigators say that there have been a number of victims and unknown damages as a result of the theft and fraud crimes. Buchanan allegedly convinced a number of elderly investors to let him handle their life savings for them, while presenting himself as a certified financial planner.

Court documents portray the former adviser as committing affinity fraud, which involves fraud inflicted upon members belonging to a specific group or community. He was considered an honest Christian and was a church board member.

In March, one victim told police that she had been defrauded $200,000 and that Buchanan had asked her not to report him. The former adviser also is accused of stealing $1 million from the Christ Life Church of Tempe, Ariz. Another alleged victim, a retired cop, says Buchanan promised him returns on his investment and convinced him to retire early.

Elderly investors are often the target of investment scams. There are remedies available that could allow you to recover your losses.

Related Web Resources:

Ex-LPL adviser charged with fraud, theft, Investment News, May 30, 2008
Affinity Fraud: How To Avoid Investment Scams That Target Groups, SEC Continue Reading ›

Court Upholds that New Jersey Division of Investment Cannot Hire External Pension Fund Investment Managers

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

According to the New Jersey Superior Court, Appellate Division, the New Jersey Division of Investment went beyond its authority with its rules allowing the division director to hire external managers to oversee pension fund investments. The panel however, did uphold the rules allowing the division to invest in private equity funds, hedge funds, as well as other alternative investment vehicles.

In June 2005, the New Jersey Securities Investment Council adopted regulations allowing investments in hedge funds or an absolute return strategy, as well as private equity funds. Soon after, pension funds were committed to private equity partnerships Warburg Pincus IX LLC, Blackstone Capital Partners V L.P., Quadrangle Capital Partners II L.P., and Oak Hill Capital Partners II L.P.

In 2006, the SIC put into effect procedures to bring in external investment managers to supervise pension funds in publicly traded securities. In 2007, the SIC adopted rules allowing the Division of Investment and the director to hire the managers.

The New Jersey Education Association and the Communication Workers of America appealed the actions made by the SIC, the New Jersey Treasurer, and the Division of Investment to adopt and implement the rules. After looking at the statutes, the New Jersey Court found that while the Director has the authority to invest, he or she does not have the authority to give that power to another party. Therefore, not only were any regulations giving the director this authority invalid, but any agreements made by the external managers because of such regulations were also not valid.

The court noted that while the director had the authority to invest in private equity funds and alternative investment management strategies, the director was subject to specific limitations, per N.J.S.A. 52:18A-89c.

Related Web Resources:

Court: No outside hedge fund managers for N.J., Pensions and Investments, August 25, 2008
Court Says US Pension Funds Can Invest in Alternatives, Online Financial News, August 26, 2008
Division of Investment, State of New Jersey Department of the Treasury Continue Reading ›

Hedge Fund Manager Settles SEC Charges He Helped Defraud Investors of Nearly $20 Million

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

A hedge fund manager has settled Securities and Exchange Commission charges that he misrepresented Pinnacle West, LLC and Sunquest Development, LLC as sound investments and, as a result, defrauded investors of almost $20 million. Mark Joseph Peterson Boucher will pay a $100,000 civil fine and will be barred from giving investment advice for five years. He also agreed to a permanent injunction from antifraud violations in the future.

Per the SEC’s complaint, the San Francisco-based hedge fund manager told clients that the real estate development companies did not have much debt and owned viable real property when, in fact, one of the companies did not own any property and the other company owned one property and had debts that exceeded potential profits. Along with the companies’ owners, Boucher was accused of using the invested funds for personal purposes. He is not agreeing to or denying the allegations by settling.

The SEC says that even though Boucher was not a registered investment adviser, he charged a fee to give clients advice. He is the author of the book The Hedge Fund on investing and the SEC says that he recommended the companies to clients in a newsletter that he owns.

Gary Paul Johnson, who owns 20% of Sunquest Development stock, also settled antifraud allegations. As part of his agreement with the SEC, Johnson will pay a $120,000 civil penalty, disgorge over $1.8 million in ill-gotten gains and about $700,000 in pre-judgment interest. Defendant and primary Pinnacle West owner John Earl Brake has not yet reached a settlement with the SEC.

SEC Charges Bay Area Investment Adviser, Others in Real Estate Investment Scam, SEC, August 27, 2008
Read the SEC Complaint (PDF)
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District Court Finds that Viatical Settlements are Securities In Michigan and Oklahoma

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

The US District Court for the Western District of Michigan says that under Oklahoma and Michigan laws, viatical settlements are securities. The court, however, did not rule on whether the instruments are securities under Texas law.

Investors in a number of states had sued Trade Partners Inc. and its affiliate partners for viatical settlements that were sold between 1996 and 2003. They wanted the courts to have the instruments declared securities under Texas, Oklahoma, and Michigan laws.

The court noted that earlier in the year, it found that under the Michigan Securities Act, the instruments were settlements under Michigan law. And, based on relevant information and the fact that in 2004, the Oklahoma Securities Act was amended and viaticals became included in the definition of what constituted an “investment contract” securities, the district court found that under the Oklahoma Securities Act, viatical settlements are securities.

The court pointed out, however, that the only Texas court that had considered the issue did not find that the instruments were securities under the Texas Securities Act. It also noted that the Texas Securities Board had told a defendant in a state criminal case that viaticals were securities. Because of these conflicting authorities, the district court opted not to determine whether, under the Texas Securities Act, viatical settlements are securities.

A viatical settlement is also called a life settlement. In this kind of transaction, a chronically ill or terminally ill person can sell his or her life insurance benefits to another party.

Oklahoma Uniform Securities Act of 2004

The Texas Securities Act

Michigan Legislature
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Rosenthal Collins Group LLC Settles CFTC Charges Over Failure to Enforce Compliance and Supervisory Procedures

Published on: September 15, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Rosenthal Collins Group LLC has reached an agreement to settle Commodity Futures Trading Commission charges that it neglected to properly supervise employees and enforce compliance procedures. The futures commission merchant says it will pay $310,000 to settle the charges for violations that the CFTC says took place for over two years, between April 2003 and December 2005.The company also agreed to monitor and enforce its compliance rules in the future.

According to RCG’s compliance rules and procedures, issuing third party checks was prohibited unless the Compliance Department approved the checks or they were used to pay for a customer’s business expenses. The approval of the company’s compliance department was also required for any cash payments to customers.

The CFTC says that RCG did disburse cash to someone that worked for a New York Mercantile Exchange floor brokerage operation even though the worker was not an account holder that had been authorized to receive cash from the account. The futures commission merchant also disbursed a number of checks to third parties while failing to obtain the proper approval.

Related Web Resources:

CFTC Sanctions Rosenthal Collins Group, LLC $310,000 for Failing to Enforce Compliance Procedures and Diligently Supervise Employees, CFTC.gov, August 26, 2008
Rosenthal Collins Group, LLC
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