Investor Lawyers Blog

Wall Street Wars: When Investment Advisors Sued the SEC and Won Did They ‘Tug on Superman’s Cape?’

Published on: June 21, 2007 | by Shepherd Smith Edwards & Kantas, LLP

As discussed in earlier stories on this blog, the SEC was challanged by an investment advisors association in court for exempting Wall Street brokerage firms from liability under laws governing investment advisors, despite the fact that the brokerage firms were performing identical services.

The investment advisors won their suit a few months ago, ending the “Merrill Rule”, which had strangely been championed by the SEC, a 75 year old govenment agency created to protect investors. The SEC Chairman then personally, and not on behalf of the SEC, asked Congress to end “soft dollar” arrangements for investment advisors which he said were being abused.

It its latest ComplianceAlert letter to chief compliance officers of registered firms, the SEC has highlighted numerous areas of noncompliance, including performance advertising deficiencies “discovered” during a SEC review of several registered investment advisers.

Merrill Lynch Seizes $400 Million of Assets from a Bear Stearns Managed ‘Subprime’ Hedge Fund for Failing to Meet Margin Calls

Published on: June 21, 2007 | by Shepherd Smith Edwards & Kantas, LLP

A hedge fund managed by Bear Stearns that takes both bullish and bearish positions in subprime loans has been hit heavily by conditions in that market. Some of the fund’s assets were held at Merrill Lynch, on margin. When the equity in the fund dropped, Merrill issued margin calls.

The hedge fund reportedly began with about $600 million in investor capital, $40 million of that from Bear Stearns and its executives, then borrowed $6 billion from Wall Street lenders, including Merrill, Goldman Sachs, Bank of America and Deutsche Bank.

As the fund’s assets lost market value, the Bear Stearns managers scrambled to sell hundreds of millions of dollars in assets to satisfy demands for cash and assets from creditors to stave off liquidation of the fund. The managers auctioned almost $4 billion in mortgage bonds, and attempted to present a 30-day plan to sell more assets, but was unable to persuade Merrill to refrain from seizing assets.

PBHG Investors Harmed By Fraudulent Market Timing To Receive $73 Million

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

The Securities and Exchange Commission says that investors who were affected by the fraudulent market timing in the PBHG Funds will receive $73 million. This is the second of three disbursements to be made from the Pilgrim Baxter Fair Fund.

Pilgrim Baxter & Associates, Ltd. was the investment adviser for PBHG Funds during the time when the fraudulent market timing took place. By the time the third disbursement is made, 384,000 investors affected by this fraud scheme will have been paid.

The Fair Fund came about because of the SEC enforcement actions charging the PBHG Funds of “unlawful market timing” by Harold J. Baxter, Gary L. Pilgrim, and Pilgrim Baxter & Associates Ltd. The charges against PBA for allowing certain investors to market time were settled three years ago when PBA agreed to the fine of $90 million in civil penalties and disgorgement (although PBA did not deny or admit guilt). It also agreed to put into place mutual fund governance and compliance reforms.

NASD Says Citigroup To Pay $15.2 Million For Misleading BellSouth Retirees

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

Citigroup Global Markets Inc is being charged $3 million by NASD to settle charges connected to misleading materials it allegedly gave Bellsouth employees during retirement meetings and seminars held in North Carolina and South Carolina. NASD also says that Citigroup has to pay over 200 ex-Bellsouth employees $12.2 million in restitution. The latter comes came from a civil class action involving Smith Barney, which had tried to get the case dismissed under SLUSA.

NASD says that Citigroup neglected to properly supervise certain brokers located in Charlotte, North Carolina that used the misleading sales materials during numerous meetings with BellSouth Corp. employees. The materials made “exaggerated and unwarranted projections of future earnings” and did not elaborate on the related risks of making certain investments.

Following these presentations, over 400 BellSouth employees opened more than 1100 accounts via these brokers. Many of their investors had retired early from BellSouth and had less than $350,000 in savings. Many of them cashed out their 401(k) accounts and pensions and invested these funds with the Citigroup brokers.

Wall Street Wars: SEC Chairman’s “Payback” to Investment Advisors?

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

Last year, money managers directed a billion in dollars of their clients’ funds in hidden commissions to Wall Street investment firms, says SEC Chairman Christopher Cox. These “soft”dollars” are purportedly for research and other services. Instead, the funds are made available to the money managers who often use these for “lavish trips, theater tickets, and fancy meals,” Cox added.

In these “soft dollar” transactions, clients of investment advisers pay an extra five cents or so per share which is credited to cover costs of research and other services of the firm handling the transaction. A nickel per share may seem small, but on tens of billions of total shares traded becomes a huge amount. Those paying these costs include investors into mutual funds, pension funds, and 401(k) plans.

Laws impose a “fiduciary duty” on money managers to protect their clients’ interests, even over their own. Yet, a “safe harbor” was enacted in 1975 which allows the managers and brokerage firms to “bundle” research and other services with executions and not be liable for violating duties to their clients, including the duty to shop for the best execution price.

Lawyers Speak Out Against Dry Cleaner “Lost Pants” Suit

Published on: June 15, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The American Association for Justice (formerly the American Trial Lawyers Association) has called for a disciplinary investigation of District of Columbia Administrative Law Judge Roy Pearson Jr., who brought a $65 million lawsuit against a family-owned dry cleaning business for losing his pants.

The Association’s members are U. S. lawyers who file lawsuits on behalf of clients. Its President, Lewis S. “Mike” Eidson, stated: “Our court system has no place for those who abuse the instruments of justice for personal gain or the intimidation of others.”

In addition to the call for investigation, Eidson added: “As attorneys who are committed to helping Americans receive justice throughout courts, we are outraged by the very idea of a $65 million claim over a pair of pants. It is not only ridiculous – it is offensive to our values.”

Putnam and Its Former Portfolio Managers Settle SEC Charges Over Short-Term Trading of Mutual Fund Shares

Published on: June 14, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The SEC says that former Putnam Investment advisers Omid Kamshad and Justin Scott have settled charges that they improperly traded mutual fund shares. The SEC says that they did so without denying or admitting wrongdoing and are barred from future violations of the 1940 Investment Advisers Act.

In addition, Scott agreed to disgorging $489,439 plus prejudgment interest of $159,475, while Kamshad will disgorge $57,157 and a $13,709 prejudgment interest. They also agreed to being suspended from the advisory industry for one year and to each paying $400,000 civil penalties.

The SEC had accused both men of making short-term trades in their Putnam-administered compensation and retirement accounts, potentially causing harm to other shareholders. In this case, the SEC has alleged that by taking part in personal trading while being in charge in other investors’ funds, both men did not appear to have their investors interests in mind.

HSBC Brokerage Ordered by NASD to Pay $250K to Settle Best Execution Charges

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

HSBC Brokerage, a New York firm which allegedly directed all government securities orders to an affiliated broker-dealer, agreed to pay $250,000 to settle NASD charges it failed to have adequate systems in place to ensure the best execution for its clients.

Allegedly the firm routed orders to affiliate, HSBC Securities (HSI), without taking adequate steps to ensure that its customers could not get better prices through other sources. The NASD said in a news release that “HBI’s inability to provide documentary evidence of its supervisory review for best execution of trades inhibited NASD’s ability to review transactions for best execution.” HBI settled this action without admitting or denying the charges.

Prior to a merger of the two related firms, HBI’s retail brokerage business was primarily located in HSBC bank branches, the NASD said. To support the retail business, HBI operated a trading desk to handle orders placed by brokers.

Janus Avoids Responsibility to Mutual Fund Shareholders for Alleged Role in Widespread Market Timing Scandal

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

Shareholders of mutual funds Janus Capital Group may not pursue a class action claim that the company violated federal securities laws by permitting hedge funds to engage in market timing with the shares of mutual funds operated by Janus, the U.S. District Court for the District of Maryland ruled.

In recent years, the U.S. Congress has been persuaded to limit class actions involving securities only to claims under federal securities laws. Meanwhile, federal securities claims are limited to misrepresentations and omissions in the purchase and sale of securities and do not, for example, include claims for actions which are simply fraudulent or negligent. Furthermore, courts have decided that no one can be held liable for assisting, or “aiding or abetting”, others in violating federal securities law. Such limitations enabled Janus avoid its responsibility and have the class action against it dismissed.

In their complaint, the plaintiffs, purchasers of Janus Group stock, alleged that the Janus Funds misstated in their fund prospectuses their policies regarding market timing and late trading.

Fees on 12 B-1 Mutual Funds (or “B Shares”) Under Renewed SEC Scrutiny

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

“B Share”, or “back-end load”, mutual fund issues are being reconsidered by The Securities and Exchange Commission. The “B share” nick-name is derived from Rule 12 b-1 of the Investment Company Act of 1949, amended a quarter century ago to allow for the creation of such shares.

To combat a huge growth in “no load” mutual funds in the 1980’s, commission based investment firms lobbied for the creation of a product to compete. In response, the U. S. Congress agreed to amend the Investment Company Act to provide for a new class of mutual funds. On such funds, mutual fund companies can, instead of charging the investor an up-front commission, pay commissions to investment firms and their brokers right away, then charge the investor fees over time to recoup those commissions.

Since that time regulators have been besieged with complaints regarding B Shares. Deception, omission and out-and-out misrepresentations have often been made to lure investors into believing such funds are “no load”. Most observers acknowledge the potential for such abuse, yet little has been done to address the issue.