Investor Lawyers Blog

Stock-Loan Traders from Morgan Stanley, Janney Montgomery Scott, and Other Brokerage Firms Charged In $12 Million Stock-Loan Scam by SEC and DOJ

Published on: October 4, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission and the Department of Justice have separately filed charges against a number of people for their alleged involvement in a $12 million stock-loan fraud scam.

The criminal case involves charges filed for securities fraud conspiracy and other charges against stock-loan traders at Janney Montgomery Scott LLC and Morgan Stanley, including Anthony Lupo, Peter Sherlock, Donato Tramontozzi, Craig DeMizio, and Andrew Caccioppoli.

The DOJ says charges stem from its going investigation kickbacks and bribery that are allegedly happening within the securities industry. It says that securities firms frequently borrow and lend securities to each other, as well as coordinate short-sale transactions. Stock-loan finders look for inventories of a given security and match lenders and borrowers for transactions.

Callan Associates Resolves SEC’s Incomplete Disclosure of Conflict Charges

Published on: October 2, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Callan & Associates has settled charges made by the SEC that the pension consultant firm incompletely disclosed a conflict of interest in an investment adviser registration form. The firm has agreed to obey the SEC’s cease and desist order.

According to the SEC, Callan told clients that BNY Brokerage Inc. is its preferred securities broker, but failed to disclose that Callan received payments based on the amount of commission it could generate from investors for BNY. The SEC says that not revealing this key information resulted in Callan’s disclosure to be misleading.

Callan sent letters to retirement clients every year to let them know that BNY is the firm’s preferred broker and clients could use BNY to pay Callan for services through direct brokerage. The letters, however, failed to reveal that the amount of compensation that Callan received from BNY depended on how much commission came from Callan clients.

Morgan Stanley to Pay $12.5 Million in Compensation and Fines

Published on: October 1, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Morgan Stanley says it will pay $12.5 million as part of a settlement to resolve charges that the company neglected to produce e-mails that had been lost during the September 11, 2001 terrorist attacks in New York.

The Financial Industry Regulatory Authority (FINRA) announced the settlement on Thursday. Morgan Stanley will pay $9.5 million to a fund designated for thousands of investors that have filed arbitration complaints. The remaining $3.5 million is a fine. The settlement also resolves charges that Morgan Stanley did not provide other documents required for certain arbitration cases.

Morgan Stanley will retain an independent consultant to make sure that retail brokerage clients in arbitration get specific materials that they need. By agreeing to the settlement, Morgan Stanley is not admitting to any wrongdoing.

Ex-Goldman Sachs & Co. Employee Pleads Guilty To Operating Multi-Million Dollar Insider Trading Scheme

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

Former Goldman Sachs & Co. Associate Eugene Plotnik has pled guilty to conspiracy to commit securities fraud, in addition to eight counts of insider trading. The charges carry a maximum of 165 years in prison.

Plotnik had been charged with running a “multi-faceted,” multi-million dollar scam that used inside information from at least three sources to conduct trading. The sources included a Merrill Lynch analyst, a federal grand juror, and two printing press employees that stole advance copies of a business publication with nonpublic information.

As part of his plea agreement, however, Plotnik promised that he would not appeal a lighter sentence ranging from 4 years and 9 months to 5 years and 11 months in prison. He also agreed to repay the money. More than $6.7 million acquired from the scheme is in illegal gains. Federal authorities have already frozen bank accounts to secure most of the funds.

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.