Investor Lawyers Blog

NASD Hearing Panel Sanctions Former Knight Securities Executives for Supervisory Failures

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

An NASD Hearing Panel issued $100,000 in fines against Kenneth Pasternak, former CEO of Knight Securities, L.P. (now known as Knight Equity Markets, L.P.), and John Leighton, former head of the firm’s Institutional Sales Desk, for supervisory violations in connection with fraudulent sales to institutional customers in 1999 and 2000.

In addition, Pasternak was suspended in all supervisory capacities for two years, while Leighton was barred in all supervisory capacities.

In March 2005, NASD’s Department of Market Regulation charged Pasternak and Leighton with failure to supervise the firm’s leading institutional sales trader, Joseph Leighton, who is John Leighton’s brother. The NASD complaint also charged Pasternak with failing to establish and enforce a supervisory system designed to ensure compliance with federal securities laws and NASD rules.

Enron Shareholders Want The U.S. Supreme Court to Review 5th Circuit Certification Decision

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

The Enron Corp. shareholders that are suing three big investment banks for their alleged roles in helping Enron hide its failing financial position have petitioned the U.S. Supreme Court to look at a ruling made by the U.S. Court of Appeals for the Fifth Circuit that reverses the certification of a single plaintiff case. The court had ruled on March 19 that while Enron had a duty to its shareholders, banks do not.

The appeals court concluded that the plaintiffs did not have a right to a presumption of reliance on the banks’ failure to reveal their alleged participation in the Enron controversy. It also ruled that the plaintiffs do not have a right to the presumption of reliance afforded by the “fraud-on-the-market” concept.

In their certiorari petition, filed by the University of California Regents on behalf of Enron shareholders, the plaintiffs say that the Supreme Court needs to review the case to resolve a “clear conflict” in the circuits and lower courts about the meaning of so-called “scheme liability.” They also said that the appeals court decision was not correct.

NASD Warns Investors – Not Brokers – of the Risks Associated with Using Margin to Purchase Securities

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

Washington, DC – The NASD today issued an updated Investor Alert warning investors – not brokers – about the risks associated with trading on margin. Since the release of a previous Alert on this topic in 2003, the amount of debt taken on by investors to buy securities has reached a record high of $321.2 billion in February 2007.

“We are concerned too many investors are unaware they could suffer substantial financial losses by using debt to purchase securities,” said Mary L. Schapiro NASD Chairman and CEO. “By updating our Alert on this topic, we hope to remind investors not to underestimate the risks involved.”

The Alert, Investing with Borrowed Funds: No “Margin” for Error, explains that investors who cannot satisfy margin calls can have large portions of their accounts liquidated under the market conditions at the time, favorable or unfavorable. That liquidation can result in substantial losses. Some of the risks associated with opening a margin account explained in the Alert are:

JP Morgan Chase and Co. Not Liable For Securities Fraud Related To Enron Collapse, Says New York District Court

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

For a second time, the U.S. District Court for the Southern District of New York told J.P. Morgan Chase &Co. shareholders that they cannot hold the investment bank responsible for securities fraud related to its alleged complicity in helping Enron cover up its true financial situation.

Judge Sidney H. Stein said the second amended complaint had the same flaws as the first complaint: The Enron shareholders, not the investment bank’s shareholders are the victims of Enron’s collapse and therefore the ones defrauded-if the allegations were borne out.

According to the plaintiffs, they became investors in JPM Chase because it was known for its financial discipline and integrity. The bank, however, was unlawfully helping and abetting Enron’s wrongful conduct. Its reputation suffered after its role in the Enron scandal was revealed.

Citigroup May Reduce Compliance in Cost Cutting Move.

Published on: April 10, 2007 | by Shepherd Smith Edwards & Kantas, LLP

At a time when The New York Stock Exchange is paying-off National Association of Securities Dealers members to take over its compliance responsibilities, private firms are seeking to reduce oversight evern further. For decades the securities industry has insisted its self-regulatory structure works best to protect the public. Yet, after massive fraud was discovered on Wall Street and billions lost by investors, instead of tighter reins on the industry oversight is shrinking.

The latest to reduce compliance may be Citigroup, now the largest financial firm on Wall Street, culminating with the amalgamation of Smith Barney and a number of other fiancial firms. According to the New Yok Times, after “a series of messy scandals”, including questionable research and alleged participation in such failures as Enron and WorldCom, Citigroup increased its compliance efforts. Yet, in an article this week, the Times states that that firm is now poised to reduce oversight of its operations.

Under pressure from investors, Citigroup CEP Charles O Prince, III will soon to release plans for a cost-cutting overhaul. Prince’s plan is reportedly to eliminate or reassign more than 26,000 jobs, or about 8 percent of the work force, as part of a broad effort to streamline the bank’s unwieldy global operations and get its costs under control. Citigroup’s consumer and investment banking businesses are expected to face severe cuts, but legal and compliance departments are likely to also take a hit, according to those who have been briefed on the plans.

Commodities Regulators Accuse Firms of Misrepresenting Public

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

The Commodity Futures Trading Commission filed enforcement actions in the U.S. District Court for the Southern District of New York March 22 against nine firms with names identical to or extremely close to those of legitimate firms and exchanges. The actions accuse the firms of fraud while soliciting customers to purchase commodity futures and options contracts (CFTC v. American Futures and Options Exchange, S.D.N.Y., No. 07-CV-2377, 3/22/07; AFTC v. International Energy Exchange, S.D.N.Y., No. 07-CV-2378, 3/22/07; CFTC v. New York Petroleum Option Exchange, S.D.N.Y., No. 07-CV-2379, 3/22/07; CFTC v. New York Options Exchange, S.D.N.Y., No. 07-CV-2376, 3/22/07).

The CFTC also stated that the defendants used misrepresentations on their Web sites to defraud the public out of millions of dollars. Customers were solicited to trade futures and options on energy and currency. In reality, however, the defendants actually invented phony exchanges and brokers to deceive clients.

Those charged–some of which share the names of legitimate firms–are New York Options Exchange (NYOEX); Tahoe Futures; International Energy Exchange (INTENX); Vitol Capital Management; New York Petroleum Option Exchange (NYPOE); HPR Commodities; American Futures and Options Exchange; Metro Financials; and American Futures and Options Trading Commission (AFOTC).

NASD Form U-5 Notice of Termination Statements Are ‘Absolutely Privileged,’ Says A Divided New York Court of Appeals

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

A Federal Appeals Court in New York reversed prior decisions and decided that statements in a NASD Notice of Termination Form U-5 are subject to absolute privilege from defamation actions. The Securities Industry and Financial Markets Association claim the ruling is a victory for investors and that firms will now be encouraged, rather than discouraged, from offering investors full disclosure regarding a broker that has participated in any wrongful actions. Yet, observers believe it is the brokerage industry itself that won a victory.

In Judge Victoria A. Graffeo’s opinion, the court discussed that Chaskie Rosenberg was hired as a financial services representative in 1997 for defendant Metropolitan Life Insurance Company’s All-Boro agency. Based in Brooklyn, the agency served members of the local Hasidic Jewish community. Most of its employees were also Hasidic Jews.

MetLife performed an agency audit in 1999 because the agency accepted third-party checks to pay for life insurance policy premiums. Following another audit, MetLife shut the agency down and moved employees to a different office. Rosenberg was let go after a third audit by MetLife. ‘

Purchasers of USA Capital First Trust Deeds May Have Been Defrauded

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

USA Capital Mortgage Company, a Las Vegas company, filed for bankruptcy last year listing approximately three-quarters billion dollars in debts to creditors. Most of this is owed to investors who purchased mortgage trust deeds and/or unit trusts which contained trust deeds. Apparently there were a number of brokerage firms involved, with an office of Financial West Investment Group, a California Based securities firm, at the center of the controversy.

According to court documents filed by Financial West in Clark County, Nevada, hundreds of investors may have been defrauded by the sale of unsuitable securities, some victims of elder abuse. The documents allege that David M. Berkowitz, a former registered representative of Financial West, sold mortgage/trust deed securities issued by USA Capital Mortgage Company; USA Capital Realty Advisors, LLC; USA Capital Diversified Trust Deed Fund, LLC; USA Capital First Trust Deed Fund, LLC; and USA Securities, LLC. When the companies then filed for bankruptcy, some investors were left wondering what will happen to their life savings.

Berkowitz was permitted to resign from Financial West Group in July of 2006 amid an “investigation of sales practice violations related to the sales of first trust deeds and trust deed funds,” according to documents made available by the National Association of Securities Dealers. According to the NASD’s “BrokerCheck” Report, Mr. Berkowitz has sixteen customer disputes recorded, eleven of which are still pending, consisting of claims of unsuitable investment recommendations, failure to supervise, breach of fiduciary duty, churning, misrepresentation and breach of contract. In addition, NASD records show that at least ten customers have filed complaints against Berkowitz for his sales of USA Capital First Trust Deeds.

Is the Arbitration System Stacked In Favor Of Brokerage Firms and Against Investors?

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

After the U.S. Supreme Court decided to let brokerage firms make customers sign arbitration agreements, a lot of people thought that this was a faster, less expensive alternative than letting investors take their claims to courts. Recently, however, what seemed like a good way to resolve disputes between brokers and investors has come under close scrutiny.

Certain regulators and lawmakers are now saying that the system needs to be reviewed. According to William Galvin, the Massachusetts Secretary of the Commonwealth of Massachusetts, the arbitration side of disputes need to be fairer and not “stacked against” investors.

These kinds of concerns are taking on a new importance in the wake of the upcoming consolidation of the NYSE Group Inc.’s New York Stock Exchange and the National Association of Securities Dealers.

Court Rules That SEC Exceeded Authority With Decision Regarding IAA Exemption

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

The U.S. Court of Appeals for the District of Columbia Circuit ruled last week that the U.S. Securities and Exchange Commission went beyond its authority to promulgate a rule exempting broker-dealers that offer investment advice to clients with fee-based accounts from regulation under the 1940 Investment Advisers Act.

The SEC had adopted the Investment Adviser/Broker-Dealer Rule, IAA Rule 202(a)(11)-1 in 2005, but the ruling was subsequently challenged by the Financial Planning Association. The court ruled in the FPA’s favor, citing exemptions, such as the broad definition of the term “investment adviser.” The court also said that the rule failed to meet certain requirements for an exemption to be consistent with the IAA. In addition, Judge Judith Rogers noted that the U.S. Congress had already addressed this “precise issue at hand.”

This is the third time in less than 12 months that the court has ruled against the SEC. Merril Hirsch, the FPA’s chief attorney said the ruling was a significant victory for consumers. He also said that any uncertainty resulting from vacating the rule was nothing compared to the uncertainty created by the broker-dealer rule.