Investor Lawyers Blog

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.

Former Broker-Dealer Chanin Capital Settles SEC Charges That It Failed to Set Up Proper Insider Policies and Processes

Published on: May 15, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Former broker-dealer Chanin Capital LLC says it will pay a $75,000 fine to settle Securities and Exchange Commission charges that it failed to set up procedures and policies to prevent employees and others from misusing inside information. The firm’s compliance officer at the time, A. Carlos Martinez, agreed to cease and desist from further violations and to pay $25,000 in a related SEC administrative proceeding.

According to the SEC, from January 1999 through September 2003, Chanin did nothing to enforce the policies it had designed to prevent others from misusing its material nonpublic data. The former broker-dealer showed an improvement in honoring its own polices after September 2003 and even revised its compliance procedures twice. However, the SEC says that Chanin still lacked the necessary policies and procedures to maintain and enforce its revised compliance program.

The SEC says that Martinez aided and abetted Chanin’s violations because the compliance officer was in charge of putting into place and enforcing the broker-dealer’s insider trading and compliance policies.

GunnAllen Financial Settles FINRA Charges Over the Firm’s Alleged Involvement in Trade Allocations

Published on: May 14, 2008 | by Shepherd Smith Edwards & Kantas, LLP

GunnAllen Financial Inc. has settled Financial Industry Regulatory Authority charges that it was allegedly involved in a trade allocation scheme, in addition to several reporting, anti-money laundering, supervisory, and recordkeeping deficiencies. The trade allocation scheme was allegedly conducted by Alexis J. Rivera, the former head trader at GunnAllen.

FINRA says that in 2002 and 2003 and acting through Rivera, GunnAllen participated in a “cherry picking” scam. Rivera took profitable stock trades and put them into his wife’s personal account instead of GunnAllen customer accounts. Rivera allegedly made over $270,000 in illegal profits.

The ex-trader has been barred from FINRA. The trade allocation scheme violated FINRA rules and the federal securities laws’ anti-fraud provisions. Rivera’s supervisor, Kelley McMahon, has agreed to a six-month suspension from taking part in a principal role with any FINRA-registered company. She has also agreed to a $25,000 fine.

UBS To Pay Massachusetts Municipalities Over $35 Million for Auction-Rate Securities Losses

Published on: May 11, 2008 | by Shepherd Smith Edwards & Kantas, LLP

UBS Financial Services Inc. and UBS Securities LLC, both units of UBS AG, have agreed to pay 19 Massachusetts public agencies and local governments over $35 million for their losses in the auction-rate securities market. The sum represents the return of principal payments by the municipalities.

The settlement agreement follows a probe by the Massachusetts Attorney General’s Office into accusations that the two UBS units misled the local entities by convincing them that the investments were low-risk enough that they were allowable for towns and cities under Massachusetts law.

According to a UBS spokesperson, the investment bank agrees that the auction-rate securities investments are not in fact permissible under this law. The spokesperson said that the repayment and agreement with the Massachusetts entities only apply because of this specific law.

Wachovia Securities LLC Sued For Alleged Fraud Involving the Sale of Le Nature’s Senior Subordinated Notes

Published on: May 9, 2008 | by Shepherd Smith Edwards & Kantas, LLP

In Los Angeles Superior Court, a number of life insurance companies, mutual funds, retirement systems, and other investors are suing Wachovia Securities LLC for alleged fraud related to the sale of senior subordinated notes for beverage maker Le Nature’s Inc. The Pennsylvania-based company filed for bankruptcy in 2006.

Causes of action include fraud, negligent misrepresentation, aiding and abetting fraud, and fraudulent inducement. California Public Employees’ Retirement System (CalPERS) and the Nature Conservancy are among the scores of plaintiffs.

The plaintiffs are accusing Wachovia of knowing about the fraud and financial problems at Le Nature’s but keeping this information from investors so that the beverage company would keep paying the firm substantial fees. They say the lack of disclosure also helped Wachovia’s high-yield debt business.

Are Investment Banks Taking the Necessary Steps to End the Auction-Rate Securities Crisis?

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

More than 80 days into the auction-rate securities crisis, about $300 billion

in investor funds continue to remain inaccessible. It is important to note that taxpayers, in addition to investors, are suffering in this frozen market because the municipal issuers (including schools, towns, highway authorities, and other entities) of auction notes are being asked to pay up to help restructure and redeem the debt.

$78 billion in auction-rate securities-many of them involving municipal notes that come with high interest penalty rates-are expected to be redeemed. Investors with remaining issues, however, aren’t us lucky.