Investor Lawyers Blog

Department of Defense Continues Crack Down on Crooked Financial Advisers Targeting Military Personnel

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

In the past year, the Department of Defense has kept up its “war” against bogus financial advisers in an effort to protect military members that are wanting to invest. Last September, state insurance regulators were given one year to cooperate with the Secretary of Defense in developing strategies to protect armed forces members from “dishonest and predatory insurance sales practices while on a military installation of the United States.”

The yearlong deadline was part of a new federal law created to protect soldiers and other members of the armed forces from shady financial advisers. To date, 14 states have been in compliance with the legislation. 16 more states are expected to follow by the end of 2007.

The law is called the Military Personnel Financial Services Protection Act. It also requires the Secretary of Defense to maintain a list of advisers (along with their contact information) that have been banned, barred, or restricted from military bases because they engaged in the dishonest selling of investment products at these sites. The first listing of agents was published last May.

SEC Investigates Credit Rating Agencies’ Policies Regarding Debt-Related Securities

Published on: September 24, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The SEC and NY Attorney General Andrew Cuomo are conducting a probe of credit rating agencies to examine their policies regarding debt-related securities.

Standard & Poor’s (S & P), Fitch Ratings Inc., and Moody’s Investors Service have all been contacted by the SEC and questioned about their procedures and policies on rating collateral debt obligations (CDOs) and residential mortgage-backed securities (RMBS).

On September 5, before the House Financial Services Committee, SEC Market Regulation Director Erik R. Sirri announced that the probe was taking place. He also said that the commission was examining the advisory services that agencies might have provided to mortgage originators and underwriters, as well as rating performance, disclosures, and what the designated ratings signify.

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.