Investor Lawyers Blog

Shame on you Moodys! Shame on you S&P! A pox on both your houses!

Published on: September 20, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Founded 99 years ago, Moody’s Investors Service claims it “is among the world’s most respected and widely utilized sources for credit ratings, research and risk analysis.”

Standard & Poor’s traces its origins to the 1860 publication of Henry Varnum Poor’s History of Railroads and Canals in the United States, a precursor of modern stock reporting and analysis. S&P claims it ” is the world’s foremost provider of independent credit ratings, indices, risk evaluation, investment research, data, and valuations.”

For a century or more these two icons of the securities industry were respected as the gold standard for credit standards. Sadly, each has recently become just another Wall Street prostitude, peddling its opinions to anyone willing to pay them. Move over defrocked analysts Jack Grubman and Mary Meeker. Apparently, “POS” and “AAA” have much the same meaning when it comes to rating agencies.

SEC Provides Brokerage Firms with New Loophole to Avoid Breach of Duty to Investors

Published on: September 20, 2007 | by Shepherd Smith Edwards & Kantas, LLP

As discussed in earlier postings, after a court overturned the “Merrill Rule,” which exempted brokerage firms from duties of Investment Advisors Act of 1940, brokerage firms say they will cease “fee based” accounts rather than assume duties to clients mandated my that legislation. However, as predicted, regulators and legislators will instead come to their rescue.

The Securities and Exchange Commission fought hard to exempt brokerage frims from the advisors act, but lost, and is now busily helping Wall Street with new enforcement loop holes. For example, the SEC has now decided to permit non-discretionary advisory accounts to be exempt from certain principal trading restrictions. A principal trade is an order a broker-dealer executes for its own account rather than one it simply executes in the market for its client.

Under the new rule, brokerage firms must first provide written notice and obtain blanket consent from these clients. They are then exempt from breach of fiduciary duty for self-serving actions as they profit on sales of securities to these clients sold from the firms’ inventories.

Morgan Stanley Allegedly Made Illegal Financial Sales Calls to Individuals from CareerBuilder.com

Published on: September 19, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Regulators in Massachusetts have charged Morgan Stanley and three of its employees with illegally cold calling people that had posted their resumes on CareerBuilder.com.

According to the complaint by the stae, Arlen Fox, a Morgan Stanley broker in Boston, regularly downloaded thousands of resumes off the Web site. He and Morgan Stanley allegedly did not check to see whether the names were on “do-not-call” lists, and violated federal and state lists as a result. This alleged scam, violates Morgan Stanley’s legal agreement with CareerBuilder.com, as well as the privacy of the latter’s customers.

The resumes had valuable data, such as cell phone numbers and salary figures that Morgan Stanley should never have accessed through the site for prospecting purposes.

Broker-Dealer Legacy Financial Shuts Down Operations

Published on: September 18, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Legacy Financial Services Inc., an independent broker-dealer, has closed shop. Last July, the Petaluma, California company sold most of its affiliated registered representatives and their accounts to Multi-Financial Securities Corp.

Some 125 advisers with close to $10 million in gross dealer concession were transferred by Multi-Financial. A number of Legacy executives and Brecek & Young Advisors Inc., which is also a broker-dealer, also acquired advisers. Individual producers were given compensation packages to switch to Multi-Financial.

Legacy Financial is still facing allegations made by the Maryland Securities Division in an “order to show cause” earlier this year that the independent broker-dealer did not properly supervise Joseph Karsner, a formerly affiliated registered representative and insurance agent.

SEC and FINRA Say “Free Lunch” Seminars are Investment Scams Targeting Seniors

Published on: September 16, 2007 | by Shepherd Smith Edwards & Kantas, LLP

FINRA, SEC, and state regulators are saying that the “free lunch” investment seminars for senior citizens are actually high-pressure sales pitches, involving fraud and misleading claims about financial products that are not suitable for its elderly audience. A report of these findings will be issued to the public this week.

Alabama, California, North Carolina, Florida, Texas, Arizona and South Carolina are the U.S. states with the largest numbers of retirees. All seven states were included in the probe. The investigation took place from April 2006 to 2007 and concentrated on 110 investment firms and branch offices that held “free lunch” seminars for seniors.

The report blames investment firms for failing to properly supervise the employees that conducted the senior seminars.

Highly Touted Whistleblower Protection Law Is Lost in the Wind

Published on: September 13, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Only a tiny fraction of whistleblower claims against companies have been successful since the passage of the Sarbanes-Oxley law five years ago, raising questions about the ability of employees to raise the alarm about corporate malfeasance, a study claims.

While corporate America whines almost daily about “burdens” placed by it by the so-called “Sorbox” legislation, the truth is that companies continue to defraud investors almost with impunity, while abusing any employee who might dare point a finger at them.

Sarbanes-Oxley contained new pro-whistleblower provisions when it was passed in 2002 in the wake of the Enron and WorldCom scandals. Touted by some as a “revolution in corporate freedom of speech”, it was intended to strengthen the protections available to employees who bring to light cases of fraud by including strong “anti-retaliation” provisions.

Fraud is Cause of Financial Loss! Say One in Five Older Americans

Published on: September 13, 2007 | by Shepherd Smith Edwards & Kantas, LLP

“Mr. Chairman, there is no doubt financial fraud aimed at older Americans is real.”

This astounding statement was made at the SEC’s Senior Summit by Mary L. Schapiro, the Chief Executive Officer of the Financial Industry Regulatory Authority (FINRA), the regulatory body formed by the merger of the National Association of Securities Dealers and the regulatory arm of the New York Stock Exchange.

Ms. Schapiro backed her statement with the results of a recent FINRA survey which found that, of the 55 percent of respondents who said they lost money on an investment, 19 percent-almost one in five-attribute that loss to being misled or defrauded. While this is cause for concern, she added, it’s also an opportunity for creative collaboration by regulators.

Money Manager Sentinel Management Group is Missing $505 Million from Accounts

Published on: September 12, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Sentinel Management Group, the Chicago-based money manager that the Securities and Exchange Commission has accused of misappropriating client assets and defrauding clients, is reportedly missing $505 million in its accounts. The National Futures Association found the shortfall during a recent investigation.

The missing funds could bring up questions regarding a settlement that Sentinel made to creditors and Citadel Investment Group.

According to the SEC, the money manager allegedly mixed up funds from clients with its own funds. The Financial Times says that creditors from one account were given their money back after Citadel bought a number of assets. The SEC was opposed to the transfer, however, saying that the refunded assets likely belonged to creditors from a different account.

FINRA Is Pressured to Cut Ties Between Public Arbitrators and the Industry

Published on: September 11, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Industry arbitration critics want the Financial Industry Regulator Authority to forbid “public” arbitrators from having any connections to the industry. Although the majority of arbitration panels in the industry continue to be made up of one industry member and two “public” panelists, critics say that the public members are not actually public-especially if the arbitrator has any industry ties.

Investor attorneys want FINRA to adopt a “zero tolerance” policy toward any public arbitrators that have a connection to the industry.

Public arbitrators currently can have up to 10% of their yearly income from the last two years come from clients that participate in activities related to the securities industry.

SEC Files Charges in $428 Million Securities Fraud Case Over Exploitation of Senior Investors

Published on: September 10, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission filed charges against 26 defendants for their alleged involvement in a $428 million securities fraud scheme targeting thousands of senior citizens and other investors in the United States.

According to the SEC action, filed in Chicago’s federal district court, the defendants participated in selling “Universal Lease” securities that were structured as timeshares in hotels located in Cancun, Mexico. A pre-arranged rental agreement promising investors a high, fixed return rate was also included. The fraudulent scheme fell apart and investors have reportedly lost more than $300 million from the scam.

The SEC says that Michael E. Kelly and others scammed thousands of U.S. investors by persuading them to spend their retirement savings on the purchase of Universal Leases. Kelly and his team falsely promised returns that were secure and guaranteed. The SEC claims that Kelly and his group raised at least $428 million from investors, with IRA accounts as the source of over $136 million.