Investor Lawyers Blog

SEC Enforcement Director Highlights Agency’s Efforts To Eliminate Fraud Targeting Senior Investors

Published on: November 20, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission says that it has brought about over 45 enforcement actions involving scams targeting senior investors in the past two years. At the ALI-ABA Life Insurance Company Products Conference earlier this month, SEC Enforcement Director Linda Thomsen talked about the agency’s efforts to fight fraud against the elderly. She expressed concern over the fact that there are so many investment schemes out there focused on defrauding the elderly.

Thomsen said that the SEC has targeted a number of cases involving supervisory deficiencies. In one case, a Georgia broker convinced the Fulton County Sheriff’s Office that it was investing with a MetLife affiliate, when, in fact, the affiliate was actually affiliated to the broker.

Thomsen says MetLife knew their broker had compliance issues yet failed to supervise him properly and let him work in a “detached location.” The broker also convinced the sheriff’s office that an investment was permissible when it was not.

Cromwell Financial Services and Several Employees Will Pay Over $20 Million to Settle Fraudulent Solicitations Allegations

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

Cromwell Financial Services Inc. and several of its employees says they will pay over $20 million to settle allegations by the state of New Hampshire and the Commodity Futures Trading Commission that they engaged in fraudulent solicitations.

The New Hampshire Bureau of Securities Regulation and the CFTC claim that Cromwell Financial Services and a number of its employees, from 2002 to 2003, engaged in sales presentations that were fraudulent and misleading in an attempt to convince some 900 people to trade options on commodity futures contracts. The options were from commodity futures contracts in accounts at two futures commission merchants.

According to the Consent Order of Permanent Injunction and Other Equitable Relief, Cromwell employees allegedly exaggerated the degree and possibility of profit, while minimizing the investment risks, and neglected to inform the public that over 75% of Cromwell investors have lost money.

Ex-Freddie Mac CEO Leland Brendsel Will Pay $16.4 Million Fine to Settle OFHEO Action

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

Former Freddie Mac CEO and Chairman Leland C. Brendsel says he will pay the $13 million in penalties imposed by the Office of Federal Housing Enterprise Oversight. As part of the deal, he will also waive his claim to $3.4 million from Freddie Mac. Payment of the fine would settle the OFHEO’s administrative enforcement action against the former Freddie Mac CEO.

The OFHEO charges, initially filed in December 2003, alleged that Brendsel created a company environment that permitted improper earnings management, allowed accounting to function without the proper resources, and neglected to set up proper controls within the company. As a result of the unsound and unsafe practices, as well as the misconduct, the OFHEO claimed that Freddie Mac sustained financial losses.

The consent order is connected to an accounting scandal that forced the company to restate up to $4.5 billion in earnings.

Oppenheimer to Pay $1 Million to Settle FINRA Bogus Data Charges

Published on: November 13, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Oppenheimer & Co. says it will pay a $1 million fine to settle charges by the Financial Industry Regulatory Authority that it turned in false information regarding mutual fund breakpoints. The company also has agreed to submit to having an independent consultant conduct an audit regarding how Oppenheimer handles regulatory inquiries. By agreeing to the settlement terms, Oppenheimer is not agreeing to or denying FINRA’s allegations.

Background

FINRA says it initially asked Oppenheimer for the information in March 2003 when the self-regulatory organization (then the NASD) looked at over 2000 broker-dealers who had sold front-end loan funds over a two-year period.

Corporation Owner and His Two Companies Can Sue Accountants For Fraud Involving Third Entity

Published on: November 12, 2007 | by Shepherd Smith Edwards & Kantas, LLP

A company owner and his two corporations have the right to sue their accountants for alleged defalcations at a third company because, at the time, the three companies were affiliated and only severed ties because of the misconduct at issue. The decision regarding whether or not the owner had standing was decided by the Wisconsin Court of Appeals last month when Judge Patricia S. Curley reversed the trial court’s grant of summary judgment.

Judge Curley found that plaintiffs do not have to be shareholders at the corporation where the alleged fraudulent accounting took place. She also said that the plaintiffs are trying to recover damages they had allegedly suffered, not damages sustained by another party.

Michael Vilione and Henry J. Krier were co-owners of three separate companies that were affiliated with each other. The companies, EOG Disposal Inc, EOG Environmental Inc, and Vil-Kri Investments LLC are involved in the hazardous waste storage business. Vilione and Krier became involved in a dispute over Vilione’s alleged personal use of corporate assets. In mediation, the two men decided to split the enterprise. Vilione got full ownership of EOG Environmental, while Krier took full possession of the other two companies.

Mortgage-Backed Securities, Collateralized Debt Obligations, Subprime Loans: Officials Scramble to Rescue Banks, Borrowers and Stock Market, but Forget Defrauded Investors

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

In August, Wall Street pundent Jim Kramer went ballistic when he felt the Federal Reserve did not act fast enough to rescue the stock market. Washington officials from George Bush to Nancy Pelosi are vying over how and how much to make avalible to troubled mortgage holders to keep afloat. The Chairman of the Federal Reserve acknowledges the need to preserve the banking system.

But no one seems worried about millions of individual investors who have chunked billions of dollars into mortgage related securities while being told these were completely safe. Many securities which were rated AAA only months ago, have lost a fourth of their value or more and likely face further markdowns in the near future.

Other investments which carried lower ratings, but were hyped as perfectly safe, are worth less than half their purchase value and may be all but wiped out before the dust settles. Many of these securities were sold as CD substitutes to small investors and retirees and to pension funds. The fallout of the failure of such investments will be tragic.

Broker-Dealers Get New Rule Governing Deferred Variable Annuities Sales

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

Broker-dealers are getting ready to cope with a new rule governing deferred variable annuities (VAs) sales.

Rule 2821 by the Financial Industry Regulatory Authority Inc. was finally approved by the Securities and Exchange Commission on September 7. The rule has been in the works since 2004. The official regulatory notice, to be issued this week, gives brokerage firms six months to comply. The rule is expected to go into effect in May or June 2008.

Rule 2821 has four provisions regarding the sale of deferred variable annuities and the exchange of variable annuities. The rule places a suitability requirement on products for sales. It also makes it mandatory for principals to look at transactions within seven business days and before a customer’s application is forwarded to an insurance carrier.

SEC and FINRA Announce Plan to Help Broker-Dealer CCO’s with Compliance Controls

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

The Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) have introduced an initiative that will assist broker-dealer chief compliance officers in maintaining compliance controls that work, creating effective communications about compliance risks, and implementing solid compliance programs at brokerage firms.

Regional and national seminars will be designed to focus on increased compliance practices at brokerage firms to increase investor protection. FINRA and SEC said that this new initiative is similar to the SEC’s current CCOutreach Program for investment company chief compliance officers and investment advisers.

A national compliance seminar is tentatively scheduled for March 2008 at the SEC headquarters in Washington D.C. Regional seminars will be held in cities across the United States.

FINRA Says New Rule Book Consolidating NYSE and NASD Rules Might Not Be Completed Until 2009

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

FINRA enforcement chief Susan Merrill announced at a Practising Law Institute Gathering on “Coping with Dealer/Broker Regulation and Enforcement” that the Financial Industry Regulatory Authority rulebook, which consolidates NASD and NYSE Rules might not be completed until the end of 2008 or even into 2009.

Merrill said that the consolidation is causing FINRA to ponder whether different kinds of firms should be regulated differently and whether it makes sense to use principle-based standards more frequently.

Merrill says that different groups, including employees previously with NYSE and NASE, are looking at the different rules and trying to figure out how to best merge the two systems.

Bill Allowing American Stock Exchange to Increase Competitiveness With Second Tier Markets Passes House of Representatives

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

On October 23, The House of Representatives passed Bill H.R. 2868, which allows the American Stock Exchange (Amex) to move forward with plans to create a second tier market for smaller companies that have less restrictive listing standards. The plan will hopefully improve the global competitiveness of U.S. financial markets.

H.R. 2868 was introduced by New York Representatives Vito Fossella and Gregory Meeks. Both men claim that the bill is intended to slow down the flow of U.S. initial public offerings from U.S. exchanges to foreign exchanges.

The proposed Small Cap Competitive Listing Act would take away the “inadvertent” legal impediment brought about by the 1996 National Securities Markets Improvement Act (NSMIA) and allow for developmental listing tiers on the three major U.S. stock exchanges.