Investor Lawyers Blog

State Regulators Investigate World Financial for Deceptive Sales Practices

Published on: June 10, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Security regulators in Missouri, Utah, and a number of other US states are accusing World Financial Group of making variable annuities sales that are unsuitable and misrepresenting investment returns. A number of World Financial customers have filed private arbitration claims making similar allegations.

World Financial is owned by Dutch insurer Aegon NV. World Financial’s agents sell annuities, life insurance, and mutual funds. Unlike more traditional sales teams, however, agents make money based on a pyramid-like multilevel sales system. The agents receive most of their compensation from their recruitment of new agents rather than products sales, including a portion of the commissions that the new agents make.

In a 2006 investor presentation, Aegon USA CEO Patrick Baird called World Financial a “real recruiting machine.” The company reportedly has over 18,000 licensed insurance agents and brokers and, according to an Aegon executive in 2006, about 80,000 “producers,” which includes unlicensed and part-time members. Those who meet sales goals are awarded jewelry and trips to the top of the Transamerica Building in San Francisco that is owned by Aegon. Clients are sometimes invited to join the company’s sales force.

Former SEC Commissioner Nazareth Says The US Not Keeping Up with Evolving Investment Markets

Published on: June 6, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Former Securities and Exchange Commissioner Annette Nazareth says that those in charge of overseeing the US financial markets are years behind when it comes to “rethinking regulation” and modernizing the structure required to keep up with the changing investment markets. Nazareth voiced her concerns to the US Chamber of Commerce during a forum about financial regulation last month and talked about how US regulation was lacking compared to other “respectable jurisdictions with robust economies that have rethought regulation.”

Recently, the US Treasury Department recommended the merging of the Securities and Exchange Commission and the Commodity Futures Trading Commission as part of a “blueprint” to restructure financial regulation. Nazareth did not directly endorse this recommendation, but she did talk about how a lot of existing regulation either leaves gaps or is redundant.

Nazareth also noted that while Sarbanes-Oxley imposed “burdensome” regulations, Congress has deregulated the futures markets. She said that there is a lot of business that exists on the cusps of securities and futures and that major issues that are key to the economy are not being systematically tackled.

Student Lender Brazos Group Inc. Wants Citigroup, Bank of America, and Other Banks to Solve Problems Caused By Auction-Rate Securities Market Crisis

Published on: June 4, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Student-loan company Brazos Group Inc. is $12 billion in debt, $7 billion of which it is unable to purchase back, refinance, or restructure. The company, which is the largest municipal borrower in the auction-rate securities market, wants Citigroup, Bank of America, and other banks to find a solution.

During the fiscal years of 2005-2007, Brazos used bonds to increase lending to $11.19 billion. However, Brazos and over 100 student lenders stopped making government-backed loans earlier this year when 98% of auctions to set rates on their debt did not attract enough bidders.

Brazos stopped making any more loans after the auction-rate securities market fell and currently pays about 5% on auction bond rates while getting 4% back on loans behind the securities.

SEC Charges North American Clearing, Inc. With Misusing Customer Funds

Published on: June 3, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Middle District of Florida has granted the Securities and Exchange Commission’s motion for emergency relief, including an asset freeze, to prevent North American Clearing Inc. from misusing customer funds. The general securities and clearing brokerage company is accused of using client funds to finance its daily operations and conceal its financial state.

The SEC says it also obtained an order appointing a receiver over North American Clearing, as well as a temporary restraining order. The SEC had filed securities fraud and other charges against North American, its president Bruce B. Blatman, its director and founder Richard L. Goble, and ex-financial and operations principal Timothy J. Ward on May 27, 2008 one day before the district court granted its requests.

With approximately 40 correspondent brokers, North American Clearing Inc. handles over 10,000 customer accounts. The SEC says that its own actions indicative of the SEC’s dedication to protecting investors.

First Southwest Co. Settles SEC Charges That It Improperly Intervened In Auction-Rate Securities Market

Published on: May 30, 2008 | by Shepherd Smith Edwards & Kantas, LLP

First Southwest Co. will pay a $150,000 fine and honor a cease and desist order to settle Securities and Exchange Commission charges that it interfered with the auction-rate securities market without disclosing its positions from January 2003 to June 2004. The Texas broker-dealer is not denying or admitting the administrative charges by agreeing to settle.

According to the SEC, First Southwest made bids to prevent failed auctions and all-hold auctions. As a result of these interventions, the auction’s clearing rate was affected and investors got a higher or lower rate of return on investments.

The SEC says that First Southwest violated Section 17(a)(2) of the Securities Act of 1933 that does not allow material misstatements and omissions during any securities sale or offer. The Commission also expressed concern that investors may not have known about the credit risks and liquidity associated with First Southwest’s actions.

SEC Director Says Deploying Enforcement Resources Continues to Be A Challenge

Published on: May 28, 2008 | by Shepherd Smith Edwards & Kantas, LLP

At the 28th Annual Ray Garrett Jr. Corporate and Securities Law Institute, Securities and Exchange Commission’s Chicago Regional Office Director Merri Jo Gillette told lawyers that the challenges of maintaining and deploying enforcement resources continues for the SEC.

Gillette says that the fiscal challenges brought about by the flailing US economy and the Iraq war that have affected other federal agencies are also impacting the SEC. Because of this, the SEC’s enforcement group’s 1,000 staff members are choosing to focus on the most urgent matters while maintaining an effective presence in “as many areas as we can.”

The SEC Enforcement Official said the division had developed a number of working groups, each one focusing on one securities enforcement issue. Working groups currently are concentrating on the issues of municipal securities, insider trading and hedge fund misconduct, sub-prime lending-related fraud, and options backdating.

Piper Jaffray Accused of Giving Faulty Advice in Two Bond Offerings

Published on: May 27, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Earlier this month, the U.S. Court of Appeals for the Eighth Circuit refused to hear an interloculatory appeal regarding attorney-client privilege related to the lawsuit accusing Piper Jaffray & Co of giving faulty advice in two bond offerings. The lawsuit names Union County, Iowa as the petitioner.

The case involves a soybean crushing plant in Union County. CF Processing, owned by Crestland Cooperative, was supposed to construct the plant. Union County says that Piper Jaffray gave the county advice regarding the issuance of two general capital loan notes-bond offerings worth $5.865 million-related to the construction project.

The mill was going to be assessed for property tax purposes. CF Processing agreed to pay any shortfall so the county could make its necessary debt service payments if the tax revenue generated from the assessment did not cover them. Crestland also gave its guarantee regarding CF Processing’s performance. The two companies, however, defaulted on all their obligations when they filed for bankruptcy in 2001.

E*Trade Securities LLC, TradeStation Securities Inc. and CIBC World Markets Corp. Face FINRA Fines For Failing to Accurately Report Equity Securities Order Information

Published on: May 22, 2008 | by Shepherd Smith Edwards & Kantas, LLP

E*Trade Securities LLC, TradeStation Securities Inc. and CIBC World Markets Corp. have collectively been fined $1.6 million for their failure to fulfill their obligation to accurately report data about equity securities orders and ensure compliance with applicable Financial Industry Regulatory Authority regulations.

FINRA announced the fines earlier this month. Along with the announcement, FINRA’S Market Regulation Department stressed how it is the firms’ responsibility to vigilantly monitor the thoroughness and accuracy of information that they give to regulators.

FINRA mandates that member firms must record information about NASDAQ listed equity securities orders, including when they are originated, received, sent, executed, canceled, or modified. All data must be electronically recorded and sent to OATS, FINRA’s Order Audit Trail System. The information is critical because it lets FINRA recreate an order’s life cycle and helps the SRO regulate more effectively.

Securities Fraud Lawsuit Against Ex-Merrill Lynch Analyst Accused of Issuing False Reports About CMGI Inc. is Dismissed

Published on: May 20, 2008 | by Shepherd Smith Edwards & Kantas, LLP

In New York, a judge has dismissed the securities fraud case against former Merrill Lynch research analyst Henry Blodget. The former lead Internet analyst of the company’s Internet Group is accused of allegedly issuing false reports regarding CMGI Inc. stock.

In 2007, investor Ronald Ventura had filed a securities fraud lawsuit against Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Inc., and Blodget. Ventura is one of a number of plaintiffs that have sued the defendants after the New York State Attorney General’s Office made allegations that they had published misleading or false recommendations about Internet-based stocks. Merrill Lynch agreed to a $100 million fine in 2002 as part of a settlement deal with the NYAG.

In The U.S. District Court for the Southern District of New York earlier this month, Judge John Keenan said that Ronald Ventura’s complaint “fails to plead that the alleged false statements made by the defendants were the cause of Ventura’s financial losses.”

SEC Director Erik Sirri Says Direct Market Access Systems Guidance For Broker-Dealers Is In The Works

Published on: May 18, 2008 | by Shepherd Smith Edwards & Kantas, LLP

At a Security Traders Association conference in Washington DC earlier this month, the Securities and Exchange Commission’s Division of Trading and Markets Director Erik Sirri told broker-dealers to “look for guidance” when using direct access systems when making trades.

The announcement that direct access systems guidance was pending comes after Goldman Sachs Execution and Clearing L.P., a prime broker and clearing affiliate of Goldman Sachs Group Inc., settled SEC charges over its alleged involvement in a customer fraud scheme that involved the use of direct access trading systems.

Also called sponsored access systems, direct access trading systems lets brokers quickly and efficiently handle large quantities of trades for clients. Sirri says that the guidance would help broker-dealers determine what controls need to be implemented to determine when customers are engaging in illegal trades. He says that the SEC and the Financial Industry Regulatory Authority have been in dialogues with direct access systems users.