Investor Lawyers Blog

SEC’s New IDEA Will Let Investors Easily Access Data About Public Companies and Mutual Funds

Published on: September 9, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Securities and Exchange Commission Head Christopher Cox has introduced IDEA, an interactive system that will let investors more easily access key financial data about mutual funds and public companies. IDEA, which stands for Interactive Data Electronic Applications, Is the successor to the SEC’s EDGAR database and will eventually replace the older system.

The majority of SEC filings currently can only be accessed through EDGAR and in government-prescribed forms. Investors that access the information have to sift through each form and re-keyboard the data.

IDEA will let investors collate information from thousands of companies so that they can immediately generate analysis and reports. The new structure will allow both investors and the SEC to be prepared for when information related to financial disclosures are available in interactive form. The SEC has formally proposed that US investment firms provide their financial information in interactive form. A separate proposal has been made to mutual funds about the information related to their public filings.

Interactive data depends on computer “tags” that work like bar codes, which can identify each individually labeled item included in a company’s financial disclosures. Investors, journalists, analysts, and financial intermediaries would be able to take data from thousands of companies and download, reorganize, and analyze the information. The interactive data filings can be accessed through IDEA later this year.

Investors will still be able to access EDGAR while the transition to IDEA takes place, and EDGAR users can avail of IDEA-like features that will be available through the older system. EDGAR will also continue to serve as an archive for older filings. SEC’s Office of Interactive Disclosure Director David Blazkowsky called the agency’s decision to cross the ‘data threshold’ exciting.

EDGAR, SEC Continue Reading ›

Federal Judge Vacates Guilty Pleas Against Three NYSE Traders Charged With Securities Fraud

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

Judge Sidney H. Stein of U.S. District Court for the Southern District of New York has dropped the securities fraud violation charges against three ex-traders. The nolle prosequi orders conclude the Justice Department’s probe, began in 2005, against 15 New York Stock Exchange specialists for securities fraud violations. Stein set aside the guilty pleas of Van der Moolen USA LLC specialists Patrick McGagh and Joseph Bongiorno, while prosecutors dropped criminal charges against former LaBranche & Co. LLC specialist Freddy DeBoer.

The government had indicted the specialists on claims that they engaged in certain stock-selling practices to defraud investors. In November 2006, however, U.S. Attorney Michael Garcia announced that five the specialists would not be prosecuted. Also in 2006, charges against two of the defendants were dropped while two others were acquitted.

Three specialists were convicted in district court. However, this year, the U.S. Court of Appeals for the Second Circuit reversed all three convictions. The latest decisions mean that the government was not able to sustain even one criminal action it had filed against the 15 defendants.

In the 2005 indictment, McGagh and Bongiorno were charged with federal securities violations. They were accused of using their positions to defraud investors, including 15,620 instances of interpositioning to generate illegal profits over $1.38 million, causing over 8,630 instances of trading ahead, and causing over $1.36 million in customer harm. McGagh was also accused of causing more than 21,290 instances of interpositioning that led to illegal profits of over $3.43 million, over 4,200 instances of trading ahead, and over $1.24 million in customer harm.

Specialists match sellers and buyers at the NYSE. When there is an imbalance on the floor, they sell and buy shares.

More Guilty Pleas Vacated In Probe of NYSE Trading, Wall Street Journal Continue Reading ›

Two Former Credit Suisse Brokers Charged With Fraud and Conspiracy Related to Auction-Rate Securities Scam

Published on: September 3, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission and the US Attorney’s Office in Brooklyn are charging Eric Butler and Julian Tzolov, two ex-Credit Suisse brokers, with coming up with an auction-rate securities scam to mislead customers and increase their commissions. The fraud and conspiracy charges relate to the alleged deceptive sales of subprime-related auction-rate debt, and charges include violation of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The SEC is seeking permanent injunctive relief, disgorgement of ill-gotten gains, civil money penalties, and prejudgment interest.

Butler and Tzolov are accused of deceiving customers into thinking that ARS were backed by federally guaranteed securities loans that were a safe and liquid investment choice when, in fact, the securities that the men bought for clients were backed by collateralized debt obligations, subprime mortgages, and other non-student loan collateral.

The SEC says ARS scam resulted in clients purchasing over $1 billion in subprime-related securities. According to the complaint, Butler and Tzolov sent out e-mail confirmations to foreign corporate customers with short-term cash management accounts that included the terms “Education” and “St. Loan” added to the names of securities that were not related to student loans. The terms “Mortgage” and “CDO” were deleted from the emails.

As a result, investors were left holding over $800 million in illiquid securities once the market started to collapse. The value of their ARS have dropped significantly since then.

Credit Suisse says it is working with authorities on the case. The investment bank says it suspended the two men after they found out they were involved in prohibited activities. The SEC investigation is part of a larger probe into whether potential market manipulation, fraud, and breaches of fiduciary duty played a role in the problems the credit markets are experiencing.

Related Web Resources:

Ex-Credit Suisse Brokers Charged With Subprime, Bloomberg.com, September 3, 2008
SEC Charges Two Wall Street Brokers in $1 Billion Subprime-Related Auction Rate Securities Fraud, SEC, September 3, 2008
Read the SEC Complaint (PDF)
Continue Reading ›

US Labor Department Wants Whistleblower To Show that Sarbanes-Oxley Act Covers UBS Financial Services

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

Whistleblower and former UBS Financial Services Senior Vice President Timothy Flynn has been asked to show that the UBS AG subsidiary falls under the federal whistleblower statute. According to Flynn’s attorney, The US Department of Labor made the request. The department is in charge of enforcing the Sarbanes-Oxley Act’s whistleblower protection for employees who report alleged wrongdoings that occur publicly traded companies.

While UBS AG is publicly traded, the labor department wants Flynn to show that subsidiary UBS Financial Services is integrated into the Zurich-based company and is therefore covered by the act. Flynn’s lawyer, however, says that when a whistleblower is employed by the subsidiary of a publicly traded company, the subsidiary, along with the entire company, is subject to the same securities laws.

Flynn filed his whistleblower complaint against UBS Financial Services last June. He alleges that after he told Massachusetts regulators that the company did not tell its advisors that there were liquidity issues brewing within the auction-rate securities market, UBS financial services retaliated by locking him out of his office, preventing staff members from interacting with him, and suspending him from his job.

Last May, UBS Financial Services said it would return $37 million to the Massachusetts Turnpike Authority and the state municipalities that invested in ARS. The repayments are part of the settlement the company reached with the Massachusetts Attorney General. The agreement was reached after Flynn, the broker for many of these clients, testified.

Related Web Resources:

Labor Asks Whistleblower to Show Why Act Covers UBS Subsidiary, Wall Street Journal, August 31, 2008
Ex-UBS broker sues, alleging firm retaliated, Boston.com, July 3, 2008
The Sarbanes-Oxley Act

Same broker tied investors to UBS, May 16, 2008 Continue Reading ›

SEC Reaches Preliminary Settlement with Merrill Lynch, Pierce, Fenner & Smith to Liquidate About $8.5 Billion in Auction Rate Securities

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

The Securities and Exchange Commission says it has reached a preliminary settlement agreement with Merrill Lynch, Pierce, Fenner & Smith to liquidate about $8.5 billion in auction-rate securities that are still held by the firm’s institutional and retail investors. Small businesses, individual investors, and charities have until January 15, 2010 to accept Merrill’s offer to repurchase at par value some $7.5 billion in ARS. The investment bank will provide liquidity to some $1.5 billion in ARS that were purchased by institutional investors.

Merrill has “agreed in principal” to the terms of the agreement and is not agreeing to or denying the SEC allegations by settling. The SEC has accused Merrill of misleading thousands of clients into thinking that ARS were highly liquid and equivalent to cash or money market instruments even when the investment bank knew that the market was in trouble.

This settlement does not exempt Merrill from being named in civil lawsuits filed by investors seeking restitution for their losses. As part of its agreement with the SEC, Merrill says it will not deny liability for liquidity loss. The SEC is also evaluating whether an additional fine needs to be imposed on Merrill.

Merrill, along with Goldman Sachs Group Inc. and Deutsch Bank AG, also reached an auction-rate securities market settlement with New York Attorney General Andrew Cuomo. As part of its agreement with the NY AG, Merrill will buy back from retail clients, with account balances up to $4 million, up to $12 billion of illiquid ARS at par. It will also pay a $125 million penalty fee.

Related Web Resources:

SEC Enforcement Division Announces Preliminary Settlement With Merrill Lynch to Help Auction Rate Securities Investors, SEC, August 22, 2008
Continue Reading ›

2nd Circuit Reinstates TIAA-CREF Enterprises Inc. Faces Negligence and Breach of Fiduciary Duty Claims

Published on: August 28, 2008 | by Shepherd Smith Edwards & Kantas, LLP

TIAA-CREF Enterprises Inc. is once more facing claims of negligent misrepresentation and breach of fiduciary duty following the US Court of Appeals for the Second Circuit’s reinstatement of the claims. The appeals court, however, did affirm the District Court’s decision to dismiss the 1934 Securities Exchange Act Section 10(b) and New York fraud claims.

Per the court’s account, plaintiff Vera Muller-Paisner filed the lawsuit against TIAA-CREF Enterprises Inc. and other entities. Mueller-Paisner was the executrix of the estate belonging to a woman named Mary Engel, who had purchased a fixed annuity from the defendants for about $1.2 million. The annuity was to pay Engel $8,000 each month until her death.

Engel would have recovered the purchase price in 12 years, but she
died six months after buying the annuity and had only collected $48,000. Muller-Paisner discovered that most of Engel’s assets had been used to buy the annuity. This made it impossible for the executrix to dispose of the decedent’s estate, per Engel’s will.

While the district court had dismissed the entire lawsuit, this month, the appeals court affirmed part of that ruling and reversed it in part.

The 2nd circuit says it dismissed common law fraud and federal securities claims because the plaintiff did not sufficiently allege both a scienter and that there had been a materially misleading misstatement or omission. The appeals court, however, also ruled that Muller-Paisner’s allegations were enough to withstand any motions to dismiss the negligence and breach of fiduciary duty claims. It noted, among the plaintiff’s allegations, claims by the defendants that they have the resources and system in place to help customers buy the best options available to them that will maximize their income and allow them to support their post-retirement lives.

Related Web Resources:

US Court of Appeals for the Second Circuit
Continue Reading ›

Investigation Underway of Asset Management Fund’s (“AMF”) Ultra Short Fund (AULTX) and the Role of Shay Asset Management

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

When investors placed funds in The Ultra Short Fund (Nasdaq: AULTX), managed by The Asset Management Fund (“AMF”), they believed their funds were safely on the sidelines in a money market alternative. Later surprised by substantial losses in this fund, many now seek legal representation.

On its website, AMF describes itself as a no-load mutual fund complex managed by Shay Assets Management, Inc., a privately-held investment adviser registered with the Securities and Exchange Commission (“SEC”). The AMF Funds are distributed by Shay Financial Services, Inc., a member of FINRA and SIPC. Shay Asset Management’s corporate headquarters are located in Chicago, Illinois.

The Ultra Short Fund’s objective is listed as “current income with a very low degree of share-price fluctuation.” However, the fund has declined more than 15% year to date. For investors seeking modest income and very low degree of price fluctuation, such losses are unacceptable, said Kirk G. Smith, a partner of the law firm Shepherd Smith Edwards & Kantas LTD LLP (SSEK).

Charles Schwab, Fidelity, and Other Downstream Brokerages are Subpoenaed as NY Attorney General Cuomo’s Auction-Rate Securities Probe Expands

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

As part of his widening investigation into the auction-rate securities market collapse, New York Attorney General Andrew M. Cuomo has subpoenaed Charles Schwab, Fidelity, E*Trade Financial, TD Ameritrade, Oppenheimer & Co., and other ‘downstream’ brokerages that sold the securities to clients even if they did not underwrite them.

The Regional Bond Dealers Association had told Cuomo, in an August 15 letter, that entities that sold ARS to its clients but had nothing to do with managing their issuance should not be made to repay clients back at par illiquid the way financial services firms, such as Citigroup Inc., Morgan Stanley, Wachovia Corp, JP Morgan Chase and Co, UBS AG, and Goldman Sachs Group Inc., are now required to do, so per their settlements with federal and state regulators. The RBDA says downstream brokerages did not know that ARS were illiquid, rather than “highly liquid cash equivalents” that many Wall Street firms presented them to be.

The NY AG Special Assistant Benjamin Lawsky, however, says that the downstream brokerages’ culpability will depend on what their probe reveals. He says the NY AG’s probe has already discovered some “disturbing facts” that contradict the downstream brokerages’ claims of innocence.

Federal and state regulators have maintained that financial firms told their clients that ARS were highly liquid and easily redeemable at auctions. The ARS auctions started failing in February, which made it impossible for investors to sell their securities. Many investors have been unable to recoup their investments since then.

Related Web Resources:

Auction-rate securities probe expands to nearly 40 brokerages, Los Angeles Times,
August 22, 2008

NY Attorney General Cuomo’s Office
Continue Reading ›

NY Attorney General Coumo Estimates that Wall Street Firms Have Only Agreed to Repurchase 18% of ARS Securities

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

The nearly $35 billion in auction-rate securities-related frozen debt that Wachovia Corp, Citigroup Inc, JP Morgan Chase & Co, UBS AG, and Morgan Stanley have agreed to repurchase consists of less than 18% of the $200 billion that New York Attorney General Andrew Cuomo says is outstanding. Charities, individuals, and small businesses are the ones expected to benefit from the repurchase agreements made with the Wall Street firms.

Meantime, corporate finance officers that also purchased auction-rate securities because banks had marketed the securities to them as safe investments have not been offered the same commitment. Only Wachovia and UBS have agreed to buy back securities from institutional investors-Wachovia has set its date in June 2009, while UBS said it would begin repurchasing frozen securities from institutions starting June 2010. Google Inc, United Parcel Service Inc., and Texas Instruments Inc. are among the companies that have taken significant markdowns on over $32 billion in auction-rate securities holdings.

During the press conference announcing that Morgan Stanley & JP Morgan agreed to buy back $7.5 billion of the auction-rate securities, Cuomo said that he was making it a priority to return the money of retail investors. He also said that institutional investors needed “to be fairly compensated.” He and other state securities regulators have called on Wall Street firms to help institutional investors convert their securities into cash.

However, the settlements reached could worsen the situations for companies with debt. If banks buy back the securities from individual investors and end up selling the securities at reduced rates, companies may have to mark down their portfolios even more.

Related Web Resources:

Attorney General Cuomo Announces Settlements with JP Morgan and Morgan Stanley to Recover Billions for Investors in Auction Rate Securities, NY Attorney General
Cuomo Snubs Treasurers in Auction-Rate Debt Rescue, Bloomberg.com, August 21, 2008 Continue Reading ›

Arbitration Claims for Consequential Damages on Auction Rate Securities (ARS)

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

After months of uncertainty and delays, investors in Auction Rate Securities continue to receive conflicting news about their situation. While some investors may have access to funds in the near future, many have been severely damaged by this debacle and the delays. In settlements with regulators several firms were forced to acknowledge such “consequential damages” by investors

A special arbitration program is currently being designed to determine claims for “consequential damages” in which some firms have agreed not to contest their own liability. The arbitrations will be conducted through the Financial Industry Regulatory Authority (FINRA), formerly the National Association of Securities Dealers (NASD).

What is FINRA Arbitration?