Investor Lawyers Blog

FINRA Pilot Program Offers Up All-Public Arbitration Panel to Hear Investor Claims

Published on: August 8, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Citigroup Global, Merrill Lynch, Wachovia Securities, UBS, Charles Schwab, and Morgan Stanley have volunteered to participate in a Financial Industry Regulatory Authority pilot program that would allow investors to have their cases heard by a panel consisting of three public arbitrators. Currently, investors have the option of having their cases dealt with by a panel made up of two public arbitrators and one non-public arbitrator.

Investors that choose to participate in the pilot plan and the firm they have filed a claim against will be given the same three arbitrator lists that those involved in regular arbitration proceedings would receive. The parties can strike the same number of names from the lists and rank according to preference the names of arbitrators they are willing to have on the panel. Parties participating in the pilot can cross out the names of all non-public arbitrators.

Except for Charles Schwab, all of the firms will submit 40 arbitration cases annually for the duration of the two-year program. Schwab will refer 10. However, the decision of whether to avail of this new panel model will be left to the investor. The pilot is available for eligible claims filed after October 6.

The program’s results will be assessed, including who decides to participate in the pilot, who decides to avail of an all-public panel, the duration of the hearings, and the outcomes of both pilot and non-pilot claims. FINRA CEO Mary Shapiro says the pilot “better serves and protects the interests” of investors.

“This is really a political move,” says Securities Arbitration attorney WIlliam Shepherd. “An outcry from consumer advocates has resulted in a bill Congress to make ‘pre-dispute arbitration’ clauses in consumer contracts un-enforceable. Some lawmakers want investors to be included as consumers protected by the bill.

“Wall Street brokerage firms are lobbying hard to exempt themselves from this mandatory arbitration ban,” adds Shepherd. “Despite its name, FINRA is the former National Association of Securities Dealers, a non-profit corporation owned by brokerage firms. FINRA is attempting to show Congress it is willing to reform securities arbitration rather than end it. Doing away with the ‘industry arbitrator’ is one of the so-called reforms it is proposing.”

Related Web Resources:

Test Lets Investors Pick Form of Arbitration Panel, The Wall Street Journal, July 25, 2008
FINRA to Launch Pilot Program to Evaluate All-Public Arbitration Panels, BusinessWire.com, July 24, 2008
FINRA
Continue Reading ›

Pluris Valuation Survey Finds Auction-Rate Securities Write-Downs Totaling $2.1 Billion

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

In its most recent survey of auction-rate securities holders, Pluris Valuation Advisors LLC found that 281 out of 460 public companies have taken write-downs on auction-rate securities worth $2.1 billion (a total par value of $32.2 billion). However, the remaining 179 companies still have to file 10-Q second quarter reports, and Pluris estimates that approximately 100 more companies will take impairments this month.

The filings with write-downs have increased from 40% to about 80%. The increasing write-downs signify a definite trend, but there is no consistency in the size of discounts, which have ranged from 98% to close to 0.

The survey also provides information about write-downs by audit-firms. For example, Deloitte and Touche, LLP’s fraction with write-down was 77% with an average 7% discount, KPMG write-down was 80% with a 13%average discount, Ernst & Young’s fraction-write down was 83%, with a 12% average discount. PricewaterhouseCoopers average discount was 12% with a fraction with write-down of 93%.

Pluris Valuation Advisors says that overall, the data from the survey indicates that all holders have not realized the full impact resulting from the loss of liquidity of the auction-rate securities market.

Auction-Rate Securities
Auction-rate securities include corporate bonds, municipal bonds, and preferred stocks with interest rates or dividend yields that re-set periodically through auctions. Prior to the crisis in 2008, the ARS market grew to over $300 billion. Many investors were told that ARS were “equivalent to cash,” and have been dismayed that they have been unable to access their money since the market collapse. Continue Reading ›

Massachusetts Slaps Merrill Lynch with Auction-Rate Securities Fraud-Related Charges

Published on: August 4, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The Massachusetts Secretary of the Commonwealth has filed securities fraud-related charges against Merrill Lynch for allegedly promoting the sale of auction rate securities while providing misleading information about market stability.

According to Secretary William Galvin, Merrill Lynch aggressively sold ARS to investors while telling research analysts to downplay market risks in its reports until the moment the company had to pull” the plug on its auctions.” The majority of auctions failed a day later. Galvin says that Merrill Lynch’s investors had no idea that potential trouble was brewing with their investments until it was too late for them to take action.

Galvin is also accusing Merrill Lynch of pressuring its research analysts, who are supposed to be neutral, into redacting or rewriting any reports that did not profile ARS positively. His complaint alleges that Merrill Lynch made approximately $90 million from the auction-rate securities market between 2006 and 2007. He wants Merrill Lynch to “make good” on the sales of the securities by making restitution to investors that sold their securities at below par.

Merrill Lynch issued a statement expressing disappointment that Massachusetts had filed its complaint. The company maintains that its advisers sold ARS because they thought that the securities would provide a higher return to investors.

Last week, Merrill Lynch said it would sell over $30 billion in toxic mortgage-related assets at a huge loss to help alleviate its own debt issues. A question to consider is whether Merrill Lynch, a large investment firm known for its powerhouse brand, can recoup its once solid reputation.

Related Web Resources:

Secretary Galvin Charges Merrill Lynch with Fraud in Auction Rate Securities Dealings (The Complaint)

Massachusetts sues Merrill Lynch over auction securities, USA Today, August 1, 2008
Merrill Lynch
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SEC Issues “ComplianceAlert Letter” Citing Common Weaknesses and Deficiencies of Registered Firms

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

The Securities and Exchange Commission has issued a staff letter reporting on the “common weaknesses and deficiencies” shared by SEC-registered companies. The findings were based on examinations given to the firms.

The “ComplianceAlert Letter” is intended to provide key information, encourage compliance officer to address these issues, and foster “robust compliance” within the industry. The letter, the second one sent in as many years by the SEC, is sectioned into distinct areas focusing on broker-dealers, investment advisers/mutual funds, and transfer agents.

Among the deficiencies:

• Failure to comply with procedures and polices
• Questionable personal trading practices
• Proxy service provider issues • Proxy voting • Valuation and liquidity issues • “Free lunch” seminars
Examiners recently finished a review of a number of big broker-dealers to evaluate their “valuation and collateral management practices” and how these impact subprime mortgage-related products. The SEC examiners noted that it had become increasingly difficult for firms to confirm inventory valuations because of insufficient market liquidity.

Issues of concern included:

• Inadequate staff and supervisory procedures • Insufficient documentation standards
• Pricing inconsistencies
• Lack of margin call processes
The agency also expressed concern that transfer agents may be engaged in a conflict of interest because they receive a partial search fee related to the search process for “lost” security holders and using third-party search companies.

Related Web Resources:

Read the SEC ComplianceAlert, July 2008
SEC Compliance Alert Warns Investment Advisers on Ethics, Hedgeco.net Continue Reading ›

Auction-Rate Securities Crisis Impacts Hospital Industry

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

Hospitals across the US are experiencing the downside of depending on auction-rate securities to raise capital at a low rate. With the collapse of the auction-rate securities market, the interest rates that hospitals had to pay for capital increased from 2-3% to 9-15%.

While many hospitals tried to obtain letters of credit to refinance their debt, costs for these letters of credit also increased-even doubling in many instances-and fixed-rate loan expenses also grew. In the meantime, credit rating agencies downgraded bond insurers and banks.

One area in which hospitals may have to make cuts to help them get through the financial squeeze is in the areas of expansion and new construction. Investment income has suffered because of the market’s collapse, and many hospitals have had to decrease their bottom line.

While certain publicly traded hospitals systems, such as Universal Health Services and Tenet Healthcare, are able to access equity markets when they need to raise funds, this source of money has also been severely hampered by problems affecting the stock market.

This is the ‘flip side’ of the auction-rate securities debacle: Many issuers were persuaded to issue auction-rate securities and are now forced to pay higher rates on these securities than they would be paying if traditional bonds had instead been issued. If these issuers now attempt to refinance this debt they must do so at a rate much higher than when the auction-rate securities were issued. Furthermore, many of these issuers, including hospitals and municipalities, are being forced to pay Wall Street firms repeatedly for auctions they know will fail. Our law firm is currently reviewing the legal position of such issuers. Continue Reading ›

Judge Approves Citigroup Falcon Fund Investors’ Decision to Withdraw Lawsuit

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

In New York, a judge has approved the decision by investors of a Citigroup Falcon Fund to drop their lawsuit asking for more data about how the bank plans to liquidate the fund.

On February 22, Citigroup announced it was providing the Falcon Funds a $500 million line of credit and consolidating $10 billion in liabilities and assets.
Citigroup began suspending distributions and redeptions and started closing down the fund in March. The fund’s value dropped by 80% and Citigroup offered to pay investors 45 cents for every dollar.

The investors had been asked to tender shares of Falcon Strategies Two LLC, but they wanted corrections made to the offering memo because misleading and missing information made it impossible for them to value their stakes. U.S. District Judge Sidney Stein, who this week approved the withdrawal of the investors’ class action suit, rejected their motion to push forward the lawsuit about the tender offer. He said the plaintiffs were trying to turn the securities laws’ anti-fraud provisions into provisions of broad disclosure.

The Falcon Funds mainly invested in fixed-income securities and other debt instruments, and they may have been exposed to weaknesses in the mortgage, credit, and bond markets. Citigroup brokers are accused of recommending the funds to investors looking for conservative investments when, in fact, the funds may have been accompanied by a high level of risk.

Related Web Resources:

The Law Firm of Shepherd Smith Edwards & Kantas LTD LLP Investigates Losses in Falcon Hedge Funds, Primenewswire.com, July 2, 2008
Citigroup Alternative Investments LLC : Falcon Strategies Two B LLC Hedge Fund, Stanford Law School Continue Reading ›

New York Attorney General Files Securities Fraud Lawsuit Against UBS

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

New York State Attorney General Andrew Cuomo filed a securities fraud lawsuit today against UBS AG related to what he is alleging was the firm’s fraudulent promotion of auction-rate securities as safe investments. He is reportedly seeking to make UBS offer to purchase back at face value approximately $25 billion in ARS instruments held by UBS clients in New York and across the United States.

Sources report that UBS is not the only entity that Cuomo may file charges against in the wake of his office’s investigation of auction-rate securities debacle. Thousands of investors have complained that they were told that the securities were like cash and would yield a little higher than a money market account.

Cuomo’s probe has focused on whether UBS and other investment firms notified investors of the risks involved with investing in auction-rate securities. He began his investigation in April when he subpoenaed 18 institutions. Since then, Cuomo has sent subpoenas to 100 individuals and 30 entities, including JP Morgan Chase & Co, Citigroup Inc., Goldman Sachs Group, Inc., and Merrill Lynch and Co.

SEC Subpoenas Over 50 Hedge Fund Advisors in Probe of Whether Stock Price Manipulation Affected Bear Stearns and Lehman Brothers Shares

Published on: July 21, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has subpoenaed over 50 hedge fund advisors, including SAC Capital Advisors, Goldman Sachs Group Inc., and Citadel Investment Group, as part of its probe into whether rumors affected the shares of Bear Stearns and Lehman Brothers.

The SEC is looking for information related to options trading and short-selling involving the two investment firms. The subpoenas are part of a wider investigation about trades in bank securities and the communications between the hedge funds and others. The SEC has reassured the parties being subpoenaed that they are not necessarily direct targets of the probe.

Last week, regulators announced that they are investigating whether certain managers had spread rumors to cause share prices to drop. Investigators are also trying to figure out whether correct policies and training procedures had been put in place to detect market manipulation.

Securities Regulators Arrive At Wachovia Securities Headquarters to Conduct Auction-Rate Securities Investigation

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

In St. Louis, Missouri, 10 securities regulators probing the auction-rate securities crisis arrived at Wachovia Securities today. The firm has reportedly failed to fully comply with requests related to the investigation, which is what prompted the onsite visit.

The investigators, from Missouri, Massachusetts, New Jersey, Illinois, Pennsylvania, and other US states, arrived to conduct interviews and demand documents regarding Wachovia’s marketing and sales practices.

The Missouri Securities Division investigation into Wachovia Securities began last April, and the office of Missouri Secretary of State Robert Carnahan has subpoenaed over a dozen Wachovia Securities executives and agents in search of more information related to the company’s auction-rate securities business. Carnahan says that hundreds of Missouri investors have contacted her office frustrated that they cannot access their money.

Scottrade Agrees to $950,000 Civil Penalty To Resolve SEC Charges of Fraudulent Misrepresentation Regarding Nasdaq Pre-Open Order Executions

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

Scottrade Inc. agreed to pay a $950,000 civil penalty to settle Securities and Exchange Commission charges that it made fraudulent misrepresentations to clients related to the execution of Nasdaq pre-open orders. The brokerage firm is not admitting to or denying wrongdoing by settling the charges. Scottrade is, however, agreeing to cease and desist from committing future violations.

Pre-open orders are normally placed after the market closes for execution when the market opens next. The SEC alleges that Scottrade made fraudulent misrepresentations when Scottrade told customers it would direct their orders based on a number of factors, including liquidity at market opening.

The SEC says that when a broker-dealer accepts customer orders, the firm is impliedly representing that it will make sure to review the quality of execution on orders. SEC Enforcement Director Linda Thomsen says that Scottrade not only failed to regularly and properly review the execution process but it neglected to consider the way technological advances were impacting the orders.