Investor Lawyers Blog

Wachovia Securities Settles NASD Supervision Charges and Agrees to $2 Million Fine

Published on: June 28, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Wachovia Securities LLC of Richmond, Virginia says that it will pay $2 million in restitution to settle charges that it did not properly supervise its fee-based brokerage business from 2001 to 2004. It also says that it will pay some 1,300 customers who were either allowed to continue the inappropriate fee-based accounts or were asked to pay account fees on Class A mutual fund shareholdings that had already been paid for.

In a settlement reached with NASD, Wachovia says it will work with an outside consultant to evaluate the way that it identifies and pays customers their restitution. 549 customers collectively paid Wachovia fees of about $1.9 million, although they did not conduct any trades for at least two years.

NASD says that firms are obligated to look at whether fee-based accounts are appropriate. Customers with fee-based accounts are generally asked to pay a yearly fee (either a set rate or a percentage fee) instead of a commission every time a transaction takes place.

JB Oxford Violated Late Trading Rules but Claims Against Its Former General Counsel Are Dismissed

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

An SEC administrative law judge found that JB Oxford Holdings, Inc. “violated the forwarding pricing rule” when it executed trades after 4pm EST at the same day price, but found the firms former general counsel was not to blame.

ALJ Robert Mahoney determined that JB Oxford Holdings was involved in over 12,000 late mutual fund trades affecting over 600 funds in violation of “forward pricing” rules but dismissed charges against Scott G. Monson, JB Oxford Holdings Inc.’s former general counsel.

The SEC charges stated that seven JBOC clients were allowed to enter into transactions after market closing at prices established and Monson drafted a procedural agreement which allowed this. However, the ALJ said Monson was not to blame because he did not know what the prices were or that there was any issue regarding the legality of the trade time.

Son of Brookstreet Founder Joins Wedbush Morgan and Invites Brookstreet Brokers to Join Him

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

First announced on this Blog last week was news of problems at Brookstreet Securities. Midweek, the firm then reported that “disaster” had struck because CMOs owned by the firm and its clients had been marked down in price and margin calls had caused the firm to reach the brink of failure. On Friday, Brookstreet closed for business.

Over the weekend we heard a rumor, not confirmed, that Scott Brooks, the son of Brookstreet founder Stanley Brooks, had joined Wedbush Morgan Securities of Los Angeles and invited the Brookstreet brokers to do the same. That rumor was confirmed today in news reports.

Brookstreet’s brokerage business was conducted through independent contractor brokers similar to giant Linsco Private Ledger and other firms. Before now, Wedbush Morgan did not have an independent contractor brokerage arm, as do other firms including Raymond James Financial, Inc.

Brookstreet Liquidates Portfolio after Margin Calls by Fidelity Unit

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

Brookstreet Securities Corp. has liquidated securities following margin calls by National Fidelity Securities (NFS), a division of Fidelity Investments.

Earlier in the week, it was reported on this blog that Brookstreet informed its agents in an E-mail that “disaster” had struck the firm. NFS had marked down the value of collateralized mortgage obligations (CMOs) that the firm and its clients held and that the firm would likely fail without an infusion of capital. A copy of that E-mail can be found in an earlier Blog story.

Because of the markdowns of the CMOs, margin calls were issued leading to a liquidity crunch, according to a Brookstreet trader. When the margin calls were not satisfied, the securities were liquidated. On Friday, the firm announced that it had closed for business.

Stockbrokers and Their Firms: The Story of Bad Apples from Bad Orchards

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

As a former Vice President and registered representative at several major brokerage firms for 20 years, I witnessed Wall Street in action. My assessment of Wall Street is that the majority of the 600,000+ registered representatives at over 5,000 brokerage firms are fairly honest people who seek the best interest of their clients. Unfortunately, there are some “bad apples” in that barrel – brokers who seek to line their own pockets with little regard for their clients.

Yet, it is not so much the apples but the “orchard” that is most troubling today. When I began my investment career in 1970, those running investment firms sought to take care of their clients and maintain their firm’s image. Over the following 20 years, I witnessed their profit motive increasingly outstrip those goals.

Today, it is clear that most financial firms pay little more than lip-service to their clients’ welfare. In the past decade, those who run these firms have discovered an important fact: Crime pays on Wall Street! The best example is the widespread research scandal which led to massive investigations, fines and lawsuits.

Do Wall Street Powerhouses Earn Billions Through Fraudulent Fund Sweeps?

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

Merrill Lynch, Morgan Stanley, Smith Barney and Charles Schwab are being sued for claims they improperly directed their clients’s funds into lower paying deposit accounts at affiliate banks, enabling those banks to reap billions in extra profits. Attorneys for investors seek permission to add Wachovia, based on “sweep” accounts it will receive from AG Edwards in an impending merger.

Details of the suit, filed in January but amended last month, had not previously been reported. Bank deposit sweep programs “put the broker in a very conflicted position” said an attorney for the investors recently, adding “this is not what they should be doing as financial advisers.”

The claim states that the firms are positioning themselves as objective financial advisers, but send their customers’ funds into bank deposits paying far less than market rates, adding that the firms disclose to clients that more profitable accounts are available, but bury the disclosures in documents while failing to mention the magnitude of their profits.

This Time the Feds -Not the SEC- Abandoned Enron Investors

Published on: June 23, 2007 | by Shepherd Smith Edwards & Kantas, LLP

According to reports, the SEC asked the Justice Department’s Office of the Solicitor General to file an amicus curiae (friend of the court) brief to U.S. Supreme Court in support of the Enron investors’ position in a seminal case involving “scheme liability” under a key provision of the federal securities law.

However, lawyers for the Justice Department failed to honor the SEC’s request. After the deadline for such briefs was missed, a spokesman for the U. S. Solicitor General’s Office confirmed that the brief was not filed, while declining to say “whether or when we would file something in the future.”

The case, which has wound its way to the U.S. Supreme Court, was filed against Wall Street banks and brokerage firms for their alleged roles in assisting Enron to defraud its shareholders. Trial was eminent in a Houston Federal Court when a Court of Appeals in New Orleans intervened and said the Securities Exchange Act does not allow such claims. (Congress has forbid all class action claims by investors except under the federal securities laws.)

NASD and NYSE Seek Guidelines To Supervise Electronic Communications

Published on: June 23, 2007 | by Shepherd Smith Edwards & Kantas, LLP

NASD and NYSE regulators, which will soon merge, jointly released proposed guidance for broker-dealers to establish policies and procedures on electronic communications employees use to conduct business and to “take reasonable steps” to monitor such compliance.

The two securities self-regulatory organizations (SRO’s) stated that brokerage firms should have a supervisory system in place to make sure brokers are complying with all applicable rules when employing all types of electronic communications.

The SRO’s added that, once “reasonable” policies and procedures are in place, the firms would themselves decide what “additional supervisory policies and procedures are required to adequately supervise their business and manage the member’s reputational, financial, and litigation risk.” Unlike SRO rules, SRO “guidelines” do not require approval of the SEC.

Wrap fees? Beware of “investment professionals” who say they only charge a percent or two!

Published on: June 23, 2007 | by Shepherd Smith Edwards & Kantas, LLP

In a letter to his Berkshire Hathaway shareholders entitled “How to Minimize Investment Returns,” Warren Buffett points out that between December 31, 1899 and December 31, 1999, the Dow rose from 66 to 11,497. That’s a 17,400% gain! Thus, a hundred dollars invested into a Dow portfolio during the 20th century would have grown to $17,500!

Yet, that’s an annual compound return over 100 years of only 5.3%, said Buffet while adding that, if only 1% per year is paid in management fees, nearly 20% of the profits would go to the money manager.

Building on Mr. Buffets warning: If a $100 investment was made the last day of 1899 and managed for 1%, it would COMPOUND at a net rate of only 4.3%. Thus, the portfolio would have grown to only $6,736 during the century that followed. The fee would have cost great-gramps over $10,000, leaving him with a little over one-third what he would have without “professional help”.

Morgan Stanley is Fined $500,000 for Faulty Oversight

Published on: June 22, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The New York Stock Exchange’s regulator group says that Morgan Stanley must pay $500,000 for not overseeing a group of brokers that had recommended unsuitable transactions for accounts belonging to the guardians of injured children and to retirees. The guardian accounts were for children, 10 to 18 years of age, who received medical malpractice settlements after being injured at birth or as a child.

NYSE regulation started investigating the brokerage firm about three years ago. Disciplinary action has been taken against two brokers, while two other brokers and a branch manager were also investigated for misconduct.

The branch manager investigated in the case is believed to have known that there were court-ordered trade restrictions for the guardian accounts but did not tell staff members about them. The court had only authorized the guardian accounts to invest in Treasury strips and bonds. Commissions and fees were to remain low, which they did not.