Investor Lawyers Blog

FINRA Consolidation Results in Fewer Exams for Securities Firms

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

Thanks to the consolidation of NYSE and NASD into the Financial Industry Regulatory Authority (FINRA), security firms registered in the United States will now content with fewer regulatory tests. FINRA officials announced the decrease in the number of examinations.

Currently, a lot of firms are required to take a sales practice test and a financial examination with different regulators. Next year, however, the firms will be required to take just one examination that evaluates both finances and sales practices.

FINRA officials will oversee this new test. Brokers will also be given exams on price verification, valuations, proper disclosure procedures, and fees received.

Rafferty Capital Markets to Pay Over $400,000 in Sanctions Over Alleged Market Timing Trading Practices

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

Rafferty Capital Markets LLC says it will pay over $400,000 in sanctions and abide by a 90-day ban preventing it from opening mutual fund brokerage accounts for customers. The penalties resolve FINRA charges that Rafferty Capital engaged in improper market timing trading practices. FINRA also charged Rafferty Capital with getting rid of e-mails pertaining to the transactions in question and failing to respond to warnings of improper timing practices.

According to FINRA, Rafferty Capital helped six hedge fund customers circumvent market timing restrictions without detection from January 2001 to August 2003. The firm i s accused of using various broker branch codes to engage in market timing.

The firm also allegedly allowed two hedge fund clients to continue market timing from April 2001 through April 2002 and circumvented efforts by mutual fund companies to prevent this type of trading. This alleged misconduct resulted in 118 more mutual fund exchanges. The $59,605 profit was made at the expense of other investors.

Morgan Stanley and WestLB Lose Cases Because of E-Mail Evidence—or Lack Thereof

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

Brokerage firms involved in legal disputes are finding that they are being forced to hand over relevant electronic conversations that are resulting in large jury verdicts, regulatory fines, and the possibility that investors might re-open arbitration cases where e-mail conversations had been suppressed.

Here are a few cases where e-mail records played a key role that was generally not in the favor of the brokerage firm:

Morgan Stanley may have to pay several thousand investors anywhere from $3,000 to $20,000 after settling a case with FINRA, who says the brokerage firm did not in fact lose millions of e-mails because of the September 11 terrorist attacks. Investors had said these e-mails could have helped prove their arbitration cases against Morgan Stanley. FINRA says that millions of these e-mails had been restored to the firm’s system and Morgan Stanley tried to withhold this fact.

Citadel’s $2.5 Million Investment into E-Trade Raises New Questions About Mortgage-Backed Securities

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

Citadel Investment Group is investing $2.5 million into E*Trade Financial Corp, which has been negatively affected by shaky mortgage investments. The “bailout” will increase the hedge fund’s stake in E*Trade from 2.5% to 18%. Citadel will pay $800 million for E*Trade’s $3 billion in asset-backed securities. This will allow E-Trade to take off the riskiest assets from its balance sheet.

Citadel says the investment is a good business opportunity. The hedge fund cited E*Trade ‘s online brokerage platform as a big reason for making the large investment.

The investment deal is an indicator of how much hedge funds have become involved in both sides of the mortgage crisis, sometimes as a victim and at other times as a rescuer. It also shows the growing influence that hedge funds have in the financial arena.

Supreme Court to Rule on Whether Employee Can Sue for 401K Losses

Published on: November 30, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The US Supreme Court is considering a case that could allow employees to file lawsuits involving the mishandling of their retirement funds. The issue involves the limits placed on lawsuits under the Employee Retirement Income Security Act (ERISA), which regulates private sector retirement plans and protects pension fund money from misappropriation.

James LaRue, a former employee at DeWolff Boberb & Associates, a management consulting company in Dallas, Texas, says that he lost $150,000 because the company did not follow his instructions on how he wanted them to invest his retirement funds.

LaRue claims that he asked DeWolff Boberb & Associates to change the way his money was allocated in mutual funds available through his 401 (k) plan. They did not make the changes he requested.

Prosecutors Say Smart Online Inc. CEO Scammed Investors to Drive Up Shares

Published on: November 29, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Prosecutors charged former Smart Online Inc. CEO Dennis Nouri, his brother Reza, and brokers Ruben Serrano and Alain Lustig on charges of conspiracy to commit fraud and securities fraud. The four men allegedly took part in a scam, in which they sold stocks to investors to drive up Smart Online shares.

US Attorney Michael Garcia is also accusing Dennis and Reza, also Smart Online employee, of bribing the brokers to sell the stock aggressively so that the stock’s price would go up. The brothers were also charged with commercial bribery and wire fraud.

The SEC complaint said that Dennis Nouri paid over $170,000 to the brokers, who sold over 267,000 shares to investors. The investors did not know about these payments. The complaint says that Dennis Nouri covered up the bribes by calling them “consulting fees.”

Bear Stearns is Charged with Violating Securities Laws in Hedge Fund Case

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

The Massachusetts Securities Division says that Bear Stearns Asset Management Inc. (BSAM) violated securities laws in principal transactions it took part in with two hedge funds that it also advised.

State securities officials filed an administrative complaint against the company earlier this month. In the complaint, Bear Stars is charged with taking part in improper trading activities in the Enhanced Leverage Fund and the Bear Stearns High Grade Structured Credit Strategies Fund. Both funds fell into bankruptcy over the summer.

The complaint claims that BSAM traded securities from its account into the two founds without permission from the client funds’ independent directors. Consent is necessary under state and federal securities laws and BSAM’s own prospectus and representations.

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.