Investor Lawyers Blog

Hartford to Pay $115 Million for Late Trading – and More!

Published on: August 3, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Hartford Financial Services Group will pay $115 million to settle market-timing and broker-compensation charges brought by the Attorney General offices of Connecticut, New York and Illinois.

The three state regulators charged that the Hartford insurance unit failed to properly oversee hedge funds that were engaging in market-timing sales of its variable annuities. New York Attorney General Andrew Cuomo said his investigation also found that Hartford invested into a hedge fund that was market-timing Hartford’s variable annuities, reaping nearly $16 million in profits from the hedge fund, while hiding its role and profit to customers.

The Connecticut Attorney General said his investigation revealed that Hartford also provided fictitious quotes to insurance brokers including the Marsh & McLennan Companies. He stated that Hartford provided Marsh with the intentionally high and noncompetitive bids, knowing it could “deceptively create the mirage of a competitive market–with the understanding that it could win other desirable future business from Marsh,” adding, “Hartford colluded with brokers and agents to pay concealed contingent commissions to get steered business.”

Morgan Stanley Fined Again – This Time for Overcharges

Published on: August 3, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The New Financial Industry Regulatory Authority (FINRA) has fine Morgan Stanley $1.5 million and ordered restitution of $4.6 million for overcharging clients on bonds.

FINRA is the former NASD, plus the NYSE regulatory unit, and is the primary regulator of the securities industry. FINRA discovered that Morgan Stanley’s retail unit had overcharged clients on 2,800 purchases totaling $59 million. The securities in question are notes issued by Kemper Lumbermen’s Mutual Casualty Co.

The value of bonds is often difficult to determine and unwary clients can often easily become victims of overcharges. A rule of thumb is that securities should not be marked up more than 5%, except in extraordinary situations. However, markups on debt instruments, including bonds and notes, should be even lower because such markups greatly alter the investor’s return.

Weekly Update Aug. 1, 2007 Wall Street Notes

Published on: July 31, 2007 | by Shepherd Smith Edwards & Kantas, LLP

MERRILL LYNCH: The firm’s retail brokerage revenues increased 13% to $3.3 billion, and new profits were up 23.7 %. Its broker count rose to 16,200 and it claims “net positive recruiting against all our major competitors, along with its lowest turnover of top producers in years. The firm also reported a rise in fee-based business, as it and other Wall Street firms operate on a short reprieve from the SEC to either register its representatives under the Investment Advisor’s Act, reassign the accounts to those already registered or restructure those accounts.

BEAR STEARNS: The firm continues to suffer the slings and arrows of critics over its CMO hedge fund debacle. Meanwhile, head manager of those funds was previously reported to have maintained his golf scores at the climax of the funds. Or did he? It has been reported that a three-member committee at the Hollywood Country Club in Deal, N.J., is investigating his victory at a July 4 golf tournament, to determine whether he changed his scores. Apparently, allegations of such cheating by executives at the club are frequent.

“We’re FINRA – the Financial Industry Regulatory Authority”, announced the old NASD, plus the NYSE’s regulatory functions. As we reported weeks ago, it was the third try at names for the NASD. First it offended 1.4 billion Islamic persons, then embarrassed itself with an acronym that sounded like a disease. Finally, it chose FINRA, which brought criticism from those in the financial industry that it doesn’t regulate. As we predicted, the NASD was much too arrogant to make yet another change. As well, it was intent on replacing “association” with “authority,” so it would not appear to be a fox in charge of a henhouse, despite its structure being similar to a country club (see above).

What Worries Your Broker? This Should Scare You!

Published on: July 31, 2007 | by Shepherd Smith Edwards & Kantas, LLP

“There are two things I worry about: Clients dying and the government putting me out of business,” said a Merrill Lynch rep who says he gets about 80% of his revenue from B-shares shares and fee-based business. Apparently, the safety of his clients’ assets must be down the list.

Meanwhile, regulators are currently engaged in a crackdown on brokers who shove clients into B-shares when the breakpoints of A-shares are much more appropriate, and those who use wrap accounts then ignore their clients. Hundreds of millions of mutual fund load refunds have been ordered. It has been discoverd that some clients have paid $5,000 to $20,000 per transaction while ignored in fee-based accounts at major firms.

Loss of the fees “would make me wonder whether I should stay in business,” said Curtis Mohr, a Pasco, Wash., broker affiliated with Royal Alliance Associates Inc. Good riddance!

Merrill Manager at Center of Harassment Claim Now at Southwest Securities – But Claims and Counterclaims Continue

Published on: July 31, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Former Merrill Lynch employee Hydie Sumner sued that firm saying she was sexually harassed. She was represented by lawyer Linda Freidman. In 2004, a panel of three NASD arbitrators decided Hydie was right and awarded her $2.2 million. They also forced Merrill to reinstate her.

Meanwhile, an email was allegedly sent to Merill Lynch by Ms. Sumner’s attorney Linda Freidman, reportedly at Sumner’s direction, questioning Merrill’s ethics for employing “a man like [Blas] Catalani,” Sumner’s Merrill Lynch manager. According to Catalini, this defamed him and caused him to be fired, his clients were then distributed to other brokers at Merrill and he found it “extremely difficult” to become re-employed in the securities industry.

Catalini, therefore, filed a lawsuit against Sumner and her lawyer, claiming defamation. Not to be outdone, Hydie Sumner then filed a counterclaim against Catalini claiming that he damaged her reputation by reporting that she was the reason he was terminated by Merrill Lynch.

Loss on Enron, Worldcom, etc.? It May Not Be Too Late!

Published on: July 31, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Usually lawsuits must be filed within a few years after the wrongful acts, or when one knew or should have known of the wrongdoing. For example, federal and most state securities laws require lawsuits to be filed by 2 or 3 years after the problem is known or made public, but no later than 5 years in any event.

However, if a class action is filed on behalf of shareholders, this “tolls” the limit for filing a case for those the case seeks to represent. If, for example, if a shareholder decides to “opt out” of the class action, or it is later decided the class action can not be maintained, the “window” for such shareholders to file their own cases remains open. (Caution: The remaining time to file a case may then be quite short.)

WorldCom Inc. bondholders were in this position. A class action was filed, including a class of bondholders. Some of these bondholders decided to file their own case before the class was “certified” (when the court decides whether the class members have claims common to all of them, etc.) Using strange reasoning, the federal judge presiding over their case decided that, because these bondholders did not wait for the class to be certified, they could not use the tolling benefit of the class action. Because the case was otherwise filed too late, it was dismissed.

Three Letter Symbols for NASDAQ Stocks? Is Nothing Sacred on Wall Street?

Published on: July 27, 2007 | by Shepherd Smith Edwards & Kantas, LLP

For more almost forty years I could fell safe knowing that if a company’s stock symbol had three letters it was listed on the New York Stock Exchange or possibly the American Stock Exchange. If the symbol had four or five letters, it was listed on the NASDAQ.

Delta Financial Corp. (DFC) recently transferred its listing to from the Amex to Nasdaq and sought to use the same symbol. Despite numerous (well-founded, I hasten to add) objections, the SEC decided to approved a rule change to permit an issuer to keep its three-character ticker symbol if it transfers its listing to Nasdaq from another domestic listing market.

The SEC says it approved the change to avoid the anti-competitive effect of the prior ban. It added that there was little reason to impose the costly and disruptive burden involved in changing a company’s ticker symbol if it simply wants to list on another exchange.

Viaticals: Ghoulish Wall Street Even Seeks to Profit on the Dying

Published on: July 26, 2007 | by Shepherd Smith Edwards & Kantas, LLP

What do Bear Stearns, Deutsche Bank, Lehman Brothers, Merrill Lynch, UBS, Wachovia and Wells Fargo and other big securities firms have in common? No conscience. For decades we have thought that Wall Street will do anything for money. Now we are sure.

Two years ago, about 250 people attended an event in New York to discuss yet another exotic product to come out of Wall Street. This spring, as the subprime mortgage market was crumbling, nearly 600 representatives of most largest players in the finance industry met to talk about the product, one they could sell investors which had enough pricing difficulty that large mark-ups could easily be generated. That product is “death bonds.”

In brightly lit rooms with a festive atmosphere, the wizards of Wall Street discussed how they could profit off diseased and dying folks who happen to have life insurance. Death bonds are securitized products which, instead of mortgages, are backed by life insurance policies.

FSC Securities Unit of AIG – A ‘Cozy’ Place for Fraud?

Published on: July 26, 2007 | by Shepherd Smith Edwards & Kantas, LLP

FSC created “an extremely cozy environment for a man bent on defrauding his customers,” said three NASD Securities Arbitrators, “management ineptness was broad” and the firm ignored red flags that the broker had “selling away” issues (using one’s status at a firm to aid in the sale of investments not approved by the firm).

FSC Securities of Atlanta, part of the AIG Financial Group, had warning when it hired broker Scott Hollenbeck that he had problems during his past employment, said a panel of three arbitrators in their award to several investors. During his past employment, they say, he even embezzled money from a church organization.

Hollenbeck was based in Kernersville, N.C. where he was employed by FSC for over 5 years, ending in 2002, not counting a 20 month hiatus. Not named in the arbitration claim, Hollenbeck faces charges over an alleged Ponzi investment scheme which reportedly took place after he left FSC and included the use of billboards.

Industry Group Wants to “Reform” – Not End – Abuse Prone B-Shares

Published on: July 26, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The Independent Directors Council (IDC) recently provided the Securities and Exchange Commission with a list of “reforms” regarding 12b-1 mutual funds, including that mutual fund directors should oversee the fees. The group claims that the fees are used to pay for advice and shareholder servicing, when the true use is to pay high comissions that can be hidden or obfuscated from investors.

In 2006, the mutual fund industry collected $11.8 billion in 12b-1 fees. The SEC sponsored a roundtable discussion on B-shares in June to discuss whether to do away with such shares. Seeking compromise, The IDC now suggests “clarification” of 12b-1 plans, improved disclosures to investors and send-it-to-committee type delay tactics – all intended to avoid the proposed end to the issuance of such shares.

Three decades ago Wall Street sought to compete with “no-load” mutual funds being sold directly by mutual fund companies. In 1980, it got help from Washington to create “B shares,” so-called because these are authorized under section 12-b of the Investment Advisors Act. While no front end load is paid to buy such shares, sellers are paid up front to sell the shares. Buyers are then charged fees each year for 5 years and, if they try to get our earlier, are charged a penalty for early withdrawal.