Investor Lawyers Blog

Securities America Fined $15 Million for Luring Retirees Using Exaggerated Promises

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

The NASD fined Omaha, Neb.-based Securities America Inc. a total of over $15 million for luring 32 long-term employees of Exxon Corporation into early retirement using false promises of high returns. The NASD stated that supervisors at Securities America largely ignored such actions by its registered representative who has been charged with violating securities regulations.

The NASD is focusing much of its enforcement resources on brokers and investment firms specializing in retirement planning services. The NASD’s chief counsel of the New Orleans region said retirement-age workers are extremely vulnerable to retirement planning investment scams. In many cases, the workers have little financial sophistication, but huge portfolios of assets that must be invested for post-employment purposes.

Employees of large companies such as Exxon are tempting targets for unscrupulous brokers touting inflated predictions of earnings to generate huge fees for the brokers. The target employees are able to “rollover” their retirement accounts, sometimes worth over a million dollars, to banks or brokerage firms. Often these workers hive little or no experience in investing and must rely entirely upon an investment advisor. This problem will grow as the baby boom generation retires.

Credit Suisse Employee Arrested in Insider Trading Scheme

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

A employee of the Global Energy Group of Credit Suisse was arrested and charged for his role in an alleged scheme using material nonpublic information on nine merger transactions involving Credit Suisse clients to obtain over $7.5 million in profits. The Securities and Exchange Commission also brought charges against the country head of investment banking at the Pakistan-based Faysal Bank.

Prosecutors said the Faysal Bank agent traded on tips about forthcoming announcements on acquisitions of publicly traded companies Northwestern Corp., Energy Partners Ltd., Veritas DGC Inc., Jacuzzi Brands Inc., Trammell Crow Co., Hydril Co., Caremark Rx Inc., John H. Harland Co., and TXU Corp. Credit Suisse advised either the target company or the acquiring entity in transactions involving each of those companies, they said.

Based on tips from the Credit Suisse employee, the Pakistani banker allegedly purchased securities in advance of a public disclosure, then quickly sold the securities once the public disclosure of an acquisition was made. Through dozens of transactions, including trades in an offshore account, the alleged scheme netted more than $7.5 million in profits, prosecutors charge.

Barclays Bank and its Former Trader to Pay Over $11 Million To Settle SEC Insider Trading Claims

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

Barclays Bank PLC and a former proprietary trader for Barclays’ U.S. Distressed Debt Desk agreed to pay a total of $11.69 million to settle Securities and Exchange Commission charges they traded on inside information received while on the creditors committees for six bankrupt companies. Neither admitted or denied the SEC’s claims.

The SEC filed an action in a U.S. District Court in New York claiming the bank and its former agent illegally traded millions of dollars of bond securities while aware of material nonpublic information received through six bankruptcy creditors committees. The six bankrupt debtors were Galey & Lord Inc., Pueblo Xtra International Inc., Desa International Inc., Archibald Candy Corp., Conseco Inc., and United Airlines.

The SEC charged that, for example, the defendants made 82 illegal trades in notes and other securities of United Airlines. In some instances “big boy letters” were issued, but neither Barclays nor its trader ever revealed the inside information to the counterparties, according to the SEC. (A “big boy letter” is an agreement in which the buyer of securities agrees not to sue the seller while acknowledging the seller may possess confidential information the buyer does not have.)

“High Yield” Investment Scam Costing Investors Over $50 Million Results in Conviction of Four

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

A federal jury in Denver found four participants guilty of securities fraud and other charges in connection with a “high-yield investment scheme” in which hundreds of investors lost $56 million.

Norman Schmidt, of Denver was found guilty of conspiracy to commit securities fraud, mail fraud, and wire fraud in addition to money laundering. Charles Lewis, of Littleton, Colo., was found guilty of conspiracy, mail fraud, wire fraud, securities fraud and money laundering. George Alan Weed, of Benton, Ill., was convicted of mail fraud, wire fraud, and securities fraud, and Michael Duane Smith, of Colbert, Wash., was convicted securities fraud. Schmidt is seeking appeal.

Two others have pleaded guilty in the scheme: Janice McClain Schmidt, of Denver, sentenced to nine years in prison, and George Beros of Shaker Heights, Ohio, who awaits sentencing. One other alleged participant in the fraud, Peter A. W. Moss, was indicted but is apparently in the United Kingdom. The U.S. Attorney’s Office is attempting to extradite him.

Should Brokerage Firms Continue to Vote Their Clients Shares Without Permission, Including for Corporate Directors?

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

Few stockholders realize that when their shares of stock are held at a brokerage firm that firm can vote their shares without a “proxy”. Thus, if an investor owns 100 shares of XYZ stock held at ABC brokerage firm, without the investors permission, ABC firm can cast the investors vote in annual meetings of XYZ, including for XYZ’s directors.

At a recent meeting at the SEC on the long debated issue, Catherine R. Kinney, president and chief executive officer of the New York Stock Exchange, announced that the NYSE has agreed to amend its rules to eliminate broker discretionary voting, but only in the election of directors. There is no proposal to stop brokerage firms from voting their clients’ shares, without permission, on other matters.

A NYSE rule states that brokers may vote on “routine” proposals if the beneficial owner of the stock has not provided specific voting instructions to the broker 10 days before the voting date. “Routine” proposals have been interpreted to include such important votes as election of directors. The proposed change will consider election of directors as “non-routine.” The change was previously proposed but revised to exclude such voting by mutual funds.

California Can Not Require Higher Standards for NASD Arbitration

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

The California Supreme Court and a U.S. Court of Appeals have both determined that securities arbitration standards do not violate the California Constitution. The courts have instead decided that The Federal Arbitration Act preempts (is superior to) California’s ability to govern securities arbitration.

Rapidly growing arbitration is forcing consumers to, often unknowingly, forego their right to go to court. To protect its citizens from injustices in arbitration the California legislature passed legislation in 2001 ordering the California court system to create ethical standards for commercial arbitrators. Comprehensive standards were then created regarding arbitrators, including disclosure and conflict-of-interest checks.

The NASD’s Arbitration Code is not consistent with these new standards and the NASD refused to make adjustments to comply with the California requirements. It instead sued members of the California court system in federal court seeking a ruling that California could not set standards regarding securities arbitration. In November 2002, the US Court dismissed the lawsuit holding the US Constitution barred the suit in federal court.

SEC Says It Has No Jurisdiction To Review NASD Action Against Sky Capital

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

The Securities and Exchange Commission says that it will not grant Sky Capital LLC’s request that the agency review the NASD’s action against the firm. The commission says it lacks the proper jurisdiction.

Sky Capital became an NASD member in 2002 following initial denials by the NASD and appeals made to its National Adjudicatory Council. Sky Capital says staff members at the NASD used several delay tactics during the application process and were prejudiced against the firm’s CEO because he had problems in the past with both substance abuse and regulatory issues.

Sky Capital also says that NASD got in the way of plans to acquire assets belonging to The Thornwater Company, LLP. It says that NASD did this by placing restrictions on Thornwater and then later lifting those restrictions. And while it approved another Sky Capital acquisition-this time of a broker-dealer in Florida-it did so only after a significant delay.

Former Wood River Partners LP Hedge Fund Manager Pleads Guilty to $88 Million Securities Fraud Scheme

Published on: June 8, 2007 | by Shepherd Smith Edwards & Kantas, LLP

John H. Whittier, a former hedge fund manager and the founder of Wood River Partners LP and its offshore company in the Cayman Island, has pled guilty to carrying out a securities fraud scheme that cost investors $88 million. Whittier had been charged with four counts of securities fraud for his part in the scheme that mislead investors into thinking that he was keeping risks minimal while pursuing a broad and diverse investment strategy when in fact, he was doing the opposite.

He knowingly failed to make the mandatory public filings that would have revealed his concentrated holdings with one stock. In addition, after acquiring 80% of Endwave Corp’s common stock, he hid any interest earned by not making beneficial-ownership disclosures to the SEC. He also placed 80% of his U.S. hedge fund’s $127 million portfolio in Endwave, instead of placing the money in different investments as he had promised investors. He had vowed that only 10% of the fund’s money would be invested in an one stock.

Aside from owning the hedge funds in the U.S. and abroad, Whittier also owned and controlled a capital management company, which served as the investment adviser to the funds.

Annuity Sales Fraud of Seniors is Growing, Says the NASD

Published on: June 6, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The National Association of Securities Dealers has issued an “Investor Alert” warning of a rise in deceptive sales practices in the sale of annuities to senior citizens

The NASD also states that consumer confusion about annuities has also risen. “This is due, in part, to questionable or deceptive sales practices employed by companies and agents looking to take advantage of uninformed consumers,” it adds.

An “annuity” is defined in the release as “a contract in which an insurance company makes a series of income payments at regular intervals in return for a premium or premiums you have paid.”

North Cove Ventures LLC and Former Connecticut State Senator DiBella Found Liable For Aiding And Abetting Fraudulent Investment Scheme

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

A federal jury has found former Connecticut State Senator William A. DiBella and consulting firm North Cove Ventures LLC liable for aiding and abetting a fraudulent investment scam.

The scheme involves former Connecticut State Treasurer Paul Silvester, who had invested $75 million in state pension funds with private equity firm Thayer Capital Partners. The former state treasurer allegedly fixed it so that Thayer would pay Mr. DiBella a percentage of the investment even though he didn’t do anything to warrant being paid.

The SEC says that in November 1998, Silvester asked Thayer to hire DiBella. The private equity firm allegedly consented to the hire and paying DiBella the percentage fee even though he did no work for it. Silvester allegedly added at least another $25 million to the pension fund’s investment just to get a larger fee for DiBella, who ended up receiving nearly $375,000.