Investor Lawyers Blog

Wall Street Wars, Part VI: After Losing “Merrill Rule” Case, SEC is Exploring Changes in Investment Advisors Act – BEWARE!

Published on: July 9, 2007 | by Shepherd Smith Edwards & Kantas, LLP

First, a recap: The Investment Advisors Act of 1940 states that investment advisors have a fiduciary duty to clients. Stock Brokerage firms have worked for decades attempting to escape any fiduciary duty to their clients. When they decided that, in addition to being brokerage firms, becoming investment advisors was also lucrative, what were they to do?

Simple, use their political influence at the SEC. While the SEC’s job is to protect investors, as political appointees, its Commissioners are political (the present SEC Chairman is a former activist Republican Congressman). To accommodate Wall Street, the SEC simply said Wall Street firms were exempt from the Investment Advisors Act.

Crying foul, the Financial Planning Association, those who are not stock brokers, sued the SEC – and, two months ago, they won! Stinging from the defeat, the SEC decided not to appeal. (After all, how can the SEC exempt anyone from laws written by Congress?) Wounded, Wall Street then asked for and was granted several months to decide what to do.

Some Brookstreet Brokers Become Wedbush Morgan Brokers

Published on: July 9, 2007 | by Shepherd Smith Edwards & Kantas, LLP

As we reported in June: Brookstreet Securities Corp. reported severe problems with CMO securities and soon announced its closing. Scott Brooks (son of Stan Brooks, founder of Brookstreet) left for Wedbush Morgan Securities Inc. of Los Angeles, inviting Brookstreet’s representatives to join him.

Brookstreet operated using independent contractors almost exclusively and Wedbush reportedly plans to sign the Brookstreet representatives to similar agreements. Wedbush Morgan had about 40 independent contractor reps of 260 total brokers, said Ed Wedbush, that firm’s CEO. About 100 of the 650 Brookstreet brokers have so-far followed Scott Brooks, according to Ed Wedbush. “We’re recruiting, like other firms, some of their brokers and bond traders,” he said.

Many Brookstreet reps don’t know much about Wedbush, said Larry Papike, a San Diego-based recruiter, “So I think brokers really started looking around for other solutions,” he said. Securities America Inc. and J.P. Turner & Co. have picked up a number of Brookstreet reps, Mr. Papike said.

As Bear Stearns Hedge Fund Faced Liquidation its Head Manager’s Golf Game Did Not Suffer

Published on: July 9, 2007 | by Shepherd Smith Edwards & Kantas, LLP

As a sub-prime mortgage hedge fund managed by Bear Stearns encountered margin calls and was on the brink of liquidation, the situation apparently did not faze the golfing of its chief executive, John Cayne.

Weather permitting, Mr. Cayne hops a helicopter from Manhattan to a golf club in Ocean Township, N.J., landing on the grounds. According to posting on an online golf database, Cayne continued to golf through the weeks in June as one of his firm’s hedge funds was evaporating.

On June 14, the day Bear Stearns reported a 10 percent drop in its operating earnings for the second quarter, Mr. Cayne played a round of golf, shooting a 96, according to the online database. The next day, he played again.

SEC’s New Terrorism Search Site Is the Latest Target of Fear-Mongering Tactics by Business Community

Published on: July 8, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The SEC has stirred controversy with its new online tool that allows investors to search for companies with ties to countries the State Department has designated as “state sponsors of terrorism.” The official list includes Sudan, Syria, North Korea, Iran and Cuba.

The SEC initiated the online search site on June 25, with its Director saying that “no investor should ever have to wonder whether his or her investments or retirement savings are indirectly subsidizing a terrorist haven or genocidal state.”

However, some in the business community claim that some companies, including Baker Hughes and Immtech Pharmaceuticals, were wrongly placed on the SEC’s so-called terrorism “blacklist.” The list, they say, unfairly portrays a number of internationally-headquartered financial institutions and other corporations in a misleading, negative light and has been compiled without regard to the extent of their dealings, if any, with the five countries.

Update: Do Insurance Companies Use Scam Artists to Sell Unsuitable Annuities to the Elderly?

Published on: July 8, 2007 | by Shepherd Smith Edwards & Kantas, LLP

According to the Government Accounting Office (GAO) Americans over 65 hold more than $15 trillion in assets and, with “Baby Boomers” soon reaching retirement age, that figure will likely balloon. As financial firms, including insurance companies, design products aimed at this pot of gold, scam artists lick their chops for a piece of the action. Unfortunately, their paths cross.

As we very recently reported, a federal judge in Hawaii dismissed a class action suit against Midland National Insurance saying that, because different sales pitches were used by different salespersons, the claims by elderly Hawaiians can not go forward. Meanwhile, regulators warn that scam artists are selling insurance products to the elderly. Thus, it appears that insurance companies can simply look the other way while con artists victimize the elderly using their annuities. [OUR FIRM PURSUES CLAIMS ONE AT A TIME TO AVOID THIS PROBLEM.]

A NY Times article today reports that a Massachusetts insurance agent became a “certified senior adviser” then advertised this and other credentials to retirees. Yet, he did not mention how easily he received that title: He paid $1,095 for a correspondence course, then took a multiple-choice exam with dumbed-down questions. The agent, and over 18,700 other applicants since 1997, passed the course.

Judge Tosses Suit by Elderly Who Claim They were Misled into Annuity Losses

Published on: July 8, 2007 | by Shepherd Smith Edwards & Kantas, LLP

A judge in The U.S. District Court in Honolulu ruled that those who lost in annuities cannot bring a class-action suit against the annuity insurer, despite potential misleading and deceptive actions by the insurance firm. [Yokoyama et al. vs. Midland National Life Insurance Company.]

Lawyers representing the plaintiffs in the case alleged the defendant, Midland National Life Insurance Company, sold elderly Hawaiians inherently unsuitable, deceptive indexed annuity products that were designed to hide the true cost of an early contract cancellation.

The court cited two reasons it denied the class action against Midland. The first was that, whether or not Midland’s actions were misleading or deceptive, different sales pitches by different insurance salespersons were made to those purchasing the annuities, therefore the investors did not have similar claims. The second, said the judge, was that the losses were not caused by the alleged misleading actions, but by changes in the securities market.

SEC Halts Debt Offering by Amerifirst Funding, Alleging Fraud Targeting Elderly Investors

Published on: July 7, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission filed an emergency action in a Dallas federal court against Amerifirst Funding, Inc. and Amerifirst Acceptance Corporation alleging fraud.

The SEC contends that the offering of securities, known as Secured Debt Obligations (“SDOs”), are notes purportedly secured by automobile financing receivables created or purchased by the defendants. The district court entered temporary restraining orders suspending the offering, freezing the defendants’ assets and requiring an accounting and repatriation of assets.

The court also appointed a receiver to secure assets for investors, and ordered defendants to preserve documents and submit to expedited discovery. The SEC says the ruling has frozen the assets of the investment firm, which it accused of running a scam that targeted senior citizens, mostly in Texas and Florida, since early 2006.

While Former Merrill Lynch & Co. Stockbroker is Found Guilty of Witness Tampering, Seven Other Defendants are Acquitted in “Squawk Box” Securities Fraud Case Involving A.B. Watley Employees

Published on: July 7, 2007 | by Shepherd Smith Edwards & Kantas, LLP

In the U.S. District Court for the Eastern District of New York, a jury issued its verdict in the “squawk box” front running case. Seven people were acquitted of securities fraud, while Timothy O’Connell, a former Merrill Lynch & Co. stockbroker was found guilty of making false statements and of witness tampering. The judge, however, declared a mistrial for the one remaining conspiracy count to commit securities fraud against O’Connell. He faces up to 15 years in prison for the convictions, and prosecutors have announced that they will retry the conspiracy charge.

According to prosecutors, O’Connell, and the two other broker defendants, David Ghysels-a former Lehman Brothers broker-and Kenneth Mahaffy-a former Merrill Lynch & Co. brokers, purposely placed off-the-hook phones that were active next to internal speaker systems at their firms.

The purpose of doing this was to let a number of former A.B. Watley employees, including ex-president Robert Malin, former proprietary trading supervisor Keevan Leonard, former compliance director Linus Nwaigwe, and former CEO Michael Picone, listen in while large orders about to be made by institutional clients were broadcast over the boxes.

Want to Make Big Bucks Without Responsibility? Become a Corporate Director

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

A Texas judge dismissed a shareholder class action against the directors of energy firm TXU, holding that, under Texas law, shareholders of a company can not sue that company’s directors. Thus, shareholders can only sue the company itself, which is really suing themselves. Meanwhile, the company can sue the board members but, since the board members would decide that, what is the likelihood? (An arcane action known as a shareholders derivative suit can be filed by the shareholders, if they can demonstrate the board should have initiated the action – against themselves – but did not.)

The lawsuit filed by the TXU shareholders claimed the directors violated their fiduciary duty in agreeing to acquisition of TXU by a private equity firm for $45 billion paid to the shareholders. Were the shareholders cheated? We will never know, will we, because the suit was dismissed, meaning that these and other shareholders can’t sue a company’s directors – at least not in Texas.

If you learn of job openings for Corporate Directors, apply fast – and give me a call!

Follow Up: North Carolina Treasurer Urges Elimination of Brokerage Firms Voting of Client Shares

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

On June 11, 2007, we published an article entitled “Should Brokerage Firms Continue to Vote Their Clients’ Shares without Permission, Including for Corporate Directors?” State Treasurer Richard Moore of North Carolina has recently answered that question with a resounding “No!”

In a statement, Moore contends that allowing such votes thwarts corporate reform and prevents shareholders of a company from having adequate representation in director elections. Moore is also a board member of NYSE Regulation and called on SEC to approve an NYSE proposal that would change its Rule 452 to eliminate broker voting in all director elections.

Under the NYSE’s current rule, brokers may vote on “routine” proposals if the beneficial owner of the stock has not provided specific voting instructions to the broker at least 10 days before a scheduled meeting. The proposed change would end all voting of customer shares for directors by categorizing all such elections as “non-routine.”