Investor Lawyers Blog

SEC Says Broker-Dealers Are Not Following Supervisory Procedures

Published on: January 24, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Mary Ann Gadziala, an associate director of the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations, says that broker-dealers often do not follow written supervisory procedures.

Speaking to an audience on broker-dealer regulation at the ALI-ABA conference on January 11, Gadziala says that this finding often comes up during examinations. She also said that although firms may have good written procedures, the practices were not necessarily consistent, but that she was reluctant to recommend the outsourcing of the creation of these written procedures that tended to be standardized-and that these procedures were not in compliance with the law if they did not cover the firm’s actual business activities.

Gadziala commented that she thought centralized or automated surveillance, rather than manual monitoring processes, should be used by high-volume firms. She did, however, say that the SEC has been working to develop manual (as opposed to electronic) monitoring for branch office supervision, procedures and staffers, and the suitability of products that were sold to clients.

American Association for Justice Asks SEC To Publicly Disclose Relationship To Merrill Lynch

Published on: January 23, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The AAJ (American Association for Justice) is asking Securities and Exchange Commission Chairman Chris Cox and General Counsel Brian Cartwright to address media reports that the SEC thought about supporting Merrill Lynch & Company during attempts by Enron shareholders to hold Enron banks accountable. The AAJ wants the SEC to publicly disclose the extent of its connections to Merrill Lynch.

On January 12, 2007, the AAJ turned in to the SEC a Freedom of Information Act request. The AAJ wants the SEC to disclose if, how, and when they communicated with Merrill Lynch regarding Enron and whether Counsel Cartwright and Chairman Cox have recused themselves from the Enron case because they had both once worked for the law firm (Latham and Watkins) representing Merrill Lynch. Also, the Center for Responsive Politics is reporting that Latham & Watkins was Chairman Cox’s largest contributor while he served in the U.S. Congress. The law firm reportedly contributed $124,594 on two separate occasions.

At least 30 states are supporting the Enron shareholders who have filed lawsuits against investment banks that are accused of taking part in accounting fraud because of the Enron scandal. Merrill Lynch is one of these banks.

Former Putnam CEO Agrees To Pay $75,000 In SEC Charges

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

Lawrence Lasser, the former CEO of Putnam LLC, has agreed to pay $75,000 to settle SEC charges that he neglected to make sure the company carried out its fiduciary duties.

The Securities and Exchange Commission issued the following statement on January 9, the day that Lasser agreed to pay the settlement fee. According to the SEC, Lasser “did not ensure that Putnam fulfilled its fiduciary duty to disclose adequately to the Putnam Funds’ board of trustees the use of fund brokerage commissions to pay for ‘shelf space’ arrangements or potential conflicts of interest created by this use.”

By agreeing to pay the settlement fine, however, Lasser is not admitting or denying the SEC’s charges against him.

JP Morgan Chase Reports Strong Profits For 4th Quarter From Investment Banking Growth And The Sale Of Their Trust Unit

Published on: January 18, 2007 | by Shepherd Smith Edwards & Kantas, LLP

JP Morgan Chase & Co. is reporting a 68% increase from the sale of their corporate trust unit, as well as strong investment growth. Credit quality became weaker, however. This suggests that the investment bank’s individual and commercial clients, like with many major banks, had a more difficult time paying their bills.

JP Morgan Chase is the third largest bank in the U.S. For its 4th quarter, the bank reported a net income of $4.53 billion, up $2.7 billion from the previous year. Revenue was $16.05 billion. According to analysts, 2007 is looking “modestly better than expected” for JP Morgan Chase.

Meanwhile, Wells Fargo & Co, the fifth largest bank in the country, reported a 13% rise in fourth quarter earnings. Credit losses for Wells Fargo also grew.

In Alleged $194 Million Scam, Florida Hedge Fund Operators Of KL Financial Group Face Fraud And Other Criminal Charges

Published on: January 17, 2007 | by Shepherd Smith Edwards & Kantas, LLP

In Florida, three people were charged with fraud and other criminal offenses in connection with a scam that allegedly lost almost $195 million of investors’ money.

Jung (John) Bae Kim, his brother Yung Kim, and brother Won Sok Lee were named as the defendants in a 35-count indictment that was unsealed in the U.S. District Court for the Southern District of Florida. While John Kim has been arrested, the other two men are still fugitives.

Charges in the indictment include money laundering, multiple counts of mail and wire fraud, conspiracy to commit mail and wire fraud, and conspiracy to commit money laundering. KL Group LLC, KL Triangulum Management LLC, and KL Florida LLC, the three hedge fund-adviser companies owned and operated by the three defendants, were also named in the indictment. The charges against the three companies were related to the alleged investment fraud conspiracy only.

In $1 Billion Viatical Scheme Connected To Mutual Benefits Corp., A Doctor From South Florida Pleads Guilty

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

Clark Mitchell, a South Florida physician, has pleaded guilty to two criminal counts related to a $1 billion viatical sales scheme connected to death benefits company Mutual Benefits Corp. The company has been shut down by state and federal authorities.

In a plea agreement announced at the U.S. District Court for the Southern District of Florida, Mitchell pleaded guilty to one count of conspiracy to commit health care fraud and one count of securities fraud.

The South Florida physician faces a 10-year prison sentence-to be determined in March. He is being ordered to pay a fine of more than $5 million. Also as part of the plea agreement, Mitchell will be responsible for some $367 million in restitution to Mutual Benefits Corp. investors, as well as over $500,000 in health care fraud restitution.

NASD Accuses Morgan Stanley Of Failing To Hand Over Emails And Blaming 9/11

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

The NASD says that securities giant Morgan Stanley lied when it said that millions of key email messages requested by plaintiffs and investigators in numerous proceedings against the company had been destroyed during the September 11 terrorist attack in 2001.

According to NASD head of enforcement and executive vice president James Shorris, thousands of cases were affected by this deliberate lie. “The firm made the claim they didn’t know the e-mail was restored, but everyone who came back to work on Sept. 17 turned on their computer, and the e-mail was there.”

The allegations were brought forth by the NASD late December in a disciplinary complaint. Pending an NASD hearing, remedies could include censure, a fine, disgorgement of gains associated with violations, a suspension or bar from securities industries, and payment of restitution.

Hampton Porter Investment Bankers’s Stockbrokers, Convicted For Securities Fraud In Pump-And-Dump Scheme, To Be Sentenced This Year

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

In California, four stockbrokers who were convicted for securities fraud and conspiracy because of their roles in a “pump-and-dump” scheme that cost investors over $5 million will be sentenced this year.

According to the U.S. Attorney’s Office, the four men worked for Hampton Porter Investment Bankers LLC, a San Diego-based company that failed to disclose the company’s financial interests in certain stocks when it sold these particular stocks to clients.

Hampton Porter allegedly held sales meetings where co-owner John Laurienti and former Hampton Porter retail manager James Green pressured brokers to sell “house stocks.” Brokers who sold these stocks were paid “special incentive” compensation that customers didn’t know about. Hampton Porter also had a “no net-sales” policy that prevented customers from selling their house stocks’ shares because brokers delayed or failed to make sell orders. Brokers from Hampton Porter also engaged in cross-trading, which consists of selling one client’s shares to another client.

N.Y. Attorney General’s Office Sues UBS Financial Services, Inc.

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

The New York Attorney General’s Office is suing UBS Financial Services, Inc. for defrauding thousands of its customers. The lawsuit provides detailed information about a scheme where UBS moved clients from regular brokerage accounts to UBS’s “InsightOne” brokerage program, even though these investors were actually not well-suited for the program. UBS is a leading brokerage firm in the United States.

With InsightOne, brokerage customers had to pay an asset-based fee instead of a per-transaction commission. Asset-based fees, however, are not appropriate for investors who hardly ever trade securities or hold no-load mutual funds, a large amount of cash, or similar assets. UBS is being accused of falsely promoting InsightOne as being a brokerage program that offers personalized advice and other types of financial planning services.

Instead of discouraging investors who were inappropriate for InsightOne from joining the program, the N.Y. Attorney General’s Office says that UBS:

NASD Arbitration Panel Says Ameriprise’s Securities America Must Pay Retired American Airline Pilots Up To $9.3 Million

Published on: January 3, 2007 | by Shepherd Smith Edwards & Kantas, LLP

An arbitration panel for the NASD says that Ameriprise’s Securities America must pay up to $9.3 million to three retired American Airlines pilots who are accusing a broker of spending their retirement savings on mutual funds that had high fees and trading costs. A spin off from American Express Co., Amerprise Financial offers clients financial planning and advice. Securities America is an Ameriprise Financial Inc. subsidiary.

In an NASD ruling, broker Robert P. Gormly, Jr. and Securities America are both being held liable for $2.4 million in lawyer’s fees and $3.9 million in damages. In addition, Securities America must also pay $3 million in punitive damages.

According to the American Airlines pilots, Gormly (who had been affiliated with Securities America in Texas) had initially purchased products from the American mutual funds group, liquidated the funds between 1998 and 2003, and then directed the pilots’ money into more aggressive Rydex funds that he traded on a nearly daily basis.