Investor Lawyers Blog

FINRA Says New Rule Book Consolidating NYSE and NASD Rules Might Not Be Completed Until 2009

Published on: November 5, 2007 | by Shepherd Smith Edwards & Kantas, LLP

FINRA enforcement chief Susan Merrill announced at a Practising Law Institute Gathering on “Coping with Dealer/Broker Regulation and Enforcement” that the Financial Industry Regulatory Authority rulebook, which consolidates NASD and NYSE Rules might not be completed until the end of 2008 or even into 2009.

Merrill said that the consolidation is causing FINRA to ponder whether different kinds of firms should be regulated differently and whether it makes sense to use principle-based standards more frequently.

Merrill says that different groups, including employees previously with NYSE and NASE, are looking at the different rules and trying to figure out how to best merge the two systems.

Bill Allowing American Stock Exchange to Increase Competitiveness With Second Tier Markets Passes House of Representatives

Published on: November 2, 2007 | by Shepherd Smith Edwards & Kantas, LLP

On October 23, The House of Representatives passed Bill H.R. 2868, which allows the American Stock Exchange (Amex) to move forward with plans to create a second tier market for smaller companies that have less restrictive listing standards. The plan will hopefully improve the global competitiveness of U.S. financial markets.

H.R. 2868 was introduced by New York Representatives Vito Fossella and Gregory Meeks. Both men claim that the bill is intended to slow down the flow of U.S. initial public offerings from U.S. exchanges to foreign exchanges.

The proposed Small Cap Competitive Listing Act would take away the “inadvertent” legal impediment brought about by the 1996 National Securities Markets Improvement Act (NSMIA) and allow for developmental listing tiers on the three major U.S. stock exchanges.

FINRA Cautions Investors to Watch Out For “Pump-and-Dump Scams” Using Energy Stocks

Published on: November 1, 2007 | by Shepherd Smith Edwards & Kantas, LLP

FINRA (Financial Industry Regulatory Authority) is warning investors to look out for “pump-and-dump” scams focusing on energy stocks. FINRA says that these scams involve energy stocks that are thinly traded issues from companies that are not well known.

In the alert that it issued on October 23, FINRA says that the purpose of the scams is to increase a stock’s price using misleading or false statements that create a demand for a company’s shares. The people who “pumped” the stock then sell their shares when the stock price is high enough. Investors are then left with stock that are worthless.

In one scam, investors were encouraged to invest in a Texas energy company involved in a business deal with a $23 million Chinese oil monopoly. The backers of the scheme told investors that they would receive huge returns if they invested immediately.

North American Securities Administrators Association Announces Investment Adviser Best Practices

Published on: October 29, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The North American Securities Administrators Association announced a series of investment adviser best practices that it is recommending after it conducted investment adviser tests that showed 2135 deficiencies in 13 compliance areas. 418 investment advisers in 43 states and provinces participated in the tests, which were overseen by NASAA’s Investment Adviser Operations Project Group.

Five of the categories that had the largest amount of deficiencies included supervisory compliance (174 deficiencies), registration (504 deficiencies), books and records (384 deficiencies), unethical business practices (318 deficiencies) and privacy (142 deficiencies).

The leading three deficiencies in the category of registration involved:

Ameriprise Financial Again Charged With Fraud

Published on: October 25, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Ameriprise Financial Services, Inc. has been charged by The New Hampshire Bureau of Securities Regulation of forging and tampering with documents. The complaint also alleges that the firm failed to deliver nearly 500 financial plans, conducted unapproved sales contests and intentionally limited compliance oversight.

Furthermore, Minneapolis-based Ameriprise was accused of failing to adequately release fraudulent activities to the New Hampshire Bureau while it was under supervision of an independent consultant, which was mandated under an earlier action against the firm.

The New Hampshire securities regulator said that the latest action against the company, which maintains about 30 offices in the state, could result in penalties and client restitution of up to $10 million.

Fired UBS Broker’s $2.4 Million NASD Arbitration Award is Upheld

Published on: October 25, 2007 | by Shepherd Smith Edwards & Kantas, LLP

A $2.4 million NASD Arbitration Award to a former UBS financial adviser, who was fired in 2003 by the company that preceded UBS PaineWebber Inc. is being upheld by the U.S. District Court for the Western District of North Carolina. The court said that it did not agree with UBS’s theory that the arbitration award did not honor provisions made in the arbitration contract or that it was in manifest disregard of the law.

Former financial adviser W. Van Pelt Jr. had served as a financial advisor UBS and its predecessor JC Bradford from 1999-2003. Upon his hiring, he filled out a Form U-4 industry form in which he agreed to not hold UBS liable if it provided specific information, including notice of termination.

He was let go in January 2003 during an internal probe. UBS filed a U-5 form reporting Van Pelt’s termination because of “concerns of conduct” in a matter involving a customer transaction. On the form, UBS said that Van Pelt was not under investigation because the probe was already over at that time.

Guardian Wealth Management – Where Stockbrokers Go to Stop Working but Keep Earning

Published on: October 23, 2007 | by Shepherd Smith Edwards & Kantas, LLP

In the Galleria area of Houston is Guardian Wealth Management LLC, a Registered Investment Advisory Firm with an interesting business model: To provide a home for stockbrokers who want to retire or pursue another career – and continue to get paid!

Securities regulators report over 660,000 registered representatives, with about 15% (almost 100,000) annually retiring or leaving the securities industry to pursue other careers. Since 1970, Guardian’s partners say they have watched scores of co-workers leave their firms which then dealt out their clients to other brokers, often the newest kids on the block.

“Brokers can work for years developing relationships with investors but are then helpless to protect even their family and friends from those assigned to their accounts,” says Guardian’s Founder Jerrod Summers, adding that “Guardian was built as a ‘safe harbor’ for investors – free of widely publicized conflicts at brokerage firms such as tainted research, commission churning and high-load funds, annuities and other products.”

Mortgage Backed Securities and Collateralized Debt Obligation Losses Mount as Lawyers Weigh Investors’ Options

Published on: October 23, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The other shoe is dropping on mortgage securities holders who have already suffered devaluations on what many were told were low risk investments. Monthly interest payments are now falling and in some cases have ended on securities backed by risky home loans.

Large numbers of collateralized debt obligations (CDO’s) and mortgage back securities (CMO’s) made up of bonds backed by sub-prime home loans are starting to shut-off cash payments to investors. Such cash flow cutoffs are expected to accelerate, as observers speculate whether this will cause a new round of panic in the battered mortgage securities market.

Owners of collateralized obligations, including investment banks, hedge funds, insurance companies and public pension funds continue to write down mortgage investments beyond the billions they have already written off. Some of the securities may, for example, fall from 70 percent of face value to almost worthless overnight, bankers and analysts say.

Ex-Wood Rivers Partners Hedge Fund Manager to Serve 3 Years in Prison for Defrauding Investors of $88 Million

Published on: October 23, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Wood Rivers Partners LP Founder John Whittier has been ordered to serve 36 months in federal prison. The former hedge fund manager pled guilty to charges that he defrauded investors of about $88 million over a two-year-period.

Whittier admitted to deceiving investor clients and making them think that he would keep risks low while he employed diverse investment strategies. Prosecutors also say that Whittier lied when he told investors that the hedge fund they had invested in was being audited.

Instead, Whittier placed about 80% of the assets in his Wood River US hedge fund portfolio, worth $127 million, into one stock, called Endwave. In doing so, he was in breach of his investors’ trust.

Merrill Liable for $6 Million to Estate of Elderly Couple

Published on: October 22, 2007 | by Shepherd Smith Edwards & Kantas, LLP

A Florida jury has ordered Merrill Lynch & Co. Inc. to pay $6 million to the daughters of a New Jersey philanthropist and his wife. The claims against Merrill Lynch included that its broker took advantage of the elderly couple’s deteriorating mental condition in order to convert their money into investments that paid he and the firm higher commissions.

The suit also claimed the Merrill broker falsely told Mr. Rothman in three letters that the investments carried no fees or sales commissions. An attorney for the heirs said that Merill and its brokers made at least $2.5 million in fees on the Rothmans’ $32 million investment in variable annuities, while the investors only made $600,000.

“The verdict is astonishing in light of the undisputed fact that the Rothmans, who were wealthy, sophisticated investors, made $10 million on the annuities at issue, and did not lose money,” a Merrill spokesman said. “The verdict is unjustified by the facts and law.”