Investor Lawyers Blog

FSC Securities Unit of AIG – A ‘Cozy’ Place for Fraud?

Published on: July 26, 2007 | by Shepherd Smith Edwards & Kantas, LLP

FSC created “an extremely cozy environment for a man bent on defrauding his customers,” said three NASD Securities Arbitrators, “management ineptness was broad” and the firm ignored red flags that the broker had “selling away” issues (using one’s status at a firm to aid in the sale of investments not approved by the firm).

FSC Securities of Atlanta, part of the AIG Financial Group, had warning when it hired broker Scott Hollenbeck that he had problems during his past employment, said a panel of three arbitrators in their award to several investors. During his past employment, they say, he even embezzled money from a church organization.

Hollenbeck was based in Kernersville, N.C. where he was employed by FSC for over 5 years, ending in 2002, not counting a 20 month hiatus. Not named in the arbitration claim, Hollenbeck faces charges over an alleged Ponzi investment scheme which reportedly took place after he left FSC and included the use of billboards.

Industry Group Wants to “Reform” – Not End – Abuse Prone B-Shares

Published on: July 26, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The Independent Directors Council (IDC) recently provided the Securities and Exchange Commission with a list of “reforms” regarding 12b-1 mutual funds, including that mutual fund directors should oversee the fees. The group claims that the fees are used to pay for advice and shareholder servicing, when the true use is to pay high comissions that can be hidden or obfuscated from investors.

In 2006, the mutual fund industry collected $11.8 billion in 12b-1 fees. The SEC sponsored a roundtable discussion on B-shares in June to discuss whether to do away with such shares. Seeking compromise, The IDC now suggests “clarification” of 12b-1 plans, improved disclosures to investors and send-it-to-committee type delay tactics – all intended to avoid the proposed end to the issuance of such shares.

Three decades ago Wall Street sought to compete with “no-load” mutual funds being sold directly by mutual fund companies. In 1980, it got help from Washington to create “B shares,” so-called because these are authorized under section 12-b of the Investment Advisors Act. While no front end load is paid to buy such shares, sellers are paid up front to sell the shares. Buyers are then charged fees each year for 5 years and, if they try to get our earlier, are charged a penalty for early withdrawal.

Merrill Lynch Ordered to Pay $1.6M to Former Broker for Ethnic Bias – But Will This Survive Appeal?

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

A NASD arbitration panel ordered Merrill Lynch & Co. Inc. to pay an Iranian former employee $1.6 million, for claims that his boss set him up to be fired after discovering his ethnicity. Merrill is currently defending a suit filed in court by another Iranian who has also accused the firm of discrimination.

In an unusually lengthy decision, the securities arbitration panel awarded Fariborz Todd Zojaji $400,000 in compensatory damages and $1.2 million in punitive damages. The arbitrators explained that Merrill Lynch defamed Mr. Zojaji in a required exit disclosure form (Form U-5), which “destroyed claimant’s ability to become employed in the securities industry.”

This language may cause the award to be undone, since it was recently determined that brokerage firms have total immunity for statements made in such disclosures. Yet, the standard for vacating arbitration awards is quite high and a court could let the decision stand if it determines the arbitrators could have decided the case for any other reason. It is also possible the arbitrators heard evidence that the derogatory statements made in the U-5 were stated orally or in writing elsewhere, thus not be protected by the privilege.

Wall Street Wars VII: SEC Chairman to RIAs – “Greetings” – A Regulator on Steriods?

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

As a review: Instead of charging commissions to sell investments and products to their clients, as do brokerage firms, investment advisors charge a small percentage to advise clients how to invest their money. Wall Street decided this would be a lucrative addition to their business, but did not want to owe a fiduciary duty (of good faith) to their clients as required by the Investment Advisors Act of 1940. They therefore had their politically appointed friends at the SEC exempt them from registering as advisors. This was called the “Merrill Rule.”

Investment advisors then cried foul and their largest association filed suit against the SEC. A few months ago, they won! After brooding for a few weeks but realizing the SEC had no power to exempt anyone from the law, the SEC’s Chairman decided not to appeal. Instead, the Wall Street-friendly former Congressman began his retaliation.

The SEC Chairman first, without waiting for others at the SEC, personally asked Congress to investigate certain practices of investment advisors. The SEC then sprung a hasty investigation of some investment advisors and soon reported only one had properly disclosed facts in its performance claims.

Citigroup’s Smith Barney Unit Ordered to Pay $50 Million over Widespread Fraud Charges

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

In one of its final regulatory acts before being folded into the NASD, the New York Stock Exchange’s regulatory unit has censured and fined Smith Barney $50 million over illegal trades, failures to supervise and record-keeping violations. The firm agreed to the sanctions without admitting or denying the charges.

The Smith Barney unit of Citigroup Global Markets Inc. will pay a fine of $10 million to the NYSE, and a fine of $5 million to the State of New Jersey, related to a “separate regulatory matter arising out of the same conduct.” An additional $35 million will be paid into a restitution fund to compensate victims.

The NYSE regulators say Smith Barney agreed to these huge sanctions to resolve charges related to a variety of fraudulent trading activities, including excessive trading, improper trading in mutual fund shares, improper trading in variable annuity mutual fund sub-accounts, illegal market timing trades, plus the firm’s failures to supervise and to maintain adequate books and records.

Morgan Stanley Last Again in Customer Satisfaction

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

Each year the research firm of J.D. Power ranks the largest brokerage firms based on customer satisfaction. This year’s survey polled 5,000 investors and asked them to rate factors such as the quality of their broker, account set-up, investment offerings, and investment performance. Similar polls are taken regarding airlines and other companies which serve the public.

For the second straight year, Morgan Stanley’s retail brokerage unit ranked 11th in customer satisfaction, which was last place in the poll. Highly publicized problems at Morgan Stanley, including a public uprising of high level executives, prompted the ousting of that firm’s CEO.

The management shake-up also included replacement of the head of Morgan Stanley’s retail unit, with James Gorman moving from Merrill Lynch to accept the position. Changes have been initiated by Gorman, including the release of almost 1,000 under-performing brokers and addition of several new products. While his efforts may be a work in progress, results so far have obviously been less than stellar.

As Wall Street Seeks to Lower the Bar, Investors Continue to Say They Value Ethics

Published on: July 21, 2007 | by Shepherd Smith Edwards & Kantas, LLP

It seems that Wall Street has convinced state and federal regulators, as well as Congress and Presidential candidates, that the regulatory bar must be lowered if we are to compete in the international securities market (or perhaps Wall Street’s donations have affected the judgment of these politicians). Yet, studies continue to show that most investors prize a company’s behavior over rich returns.

After the crash of 1929, and for over 70 years, our securities markets have been regulated by a network of federal and state securities laws. During that period, U.S. financial markets have thrived and becme the envy of the world. Conventional wisdom is that investors want to feel safe in investment waters – as shark free as possible. Yet, those on Wall Street, many of whom have proven themselves to be sharks, lobby regulators and lawmakers to attempt to win a “race to the bottom” in worldwide financial regulation.

Yet a recent study found, for example, that two-thirds of investors say they would sell their shares of a company that engages unethical but legal behavior-even if that behavior brought in higher returns. These results were found through poll research performed by Opinion Research Corp. for Pepperdine University’s Graziadio School of Business and Management.

What’s in a Title? Washington State Securities Regulators Want to Know

Published on: July 20, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Ever notice how impressive titles are thrown around in the field of investments? Just what, if anything, to these mean. The Washington State Securities Division has proposed that that anyone who uses a professional designation that connotes some type financial planning expertise should fulfill the requirements and register as an investment adviser.

The Washington Department of Financial Instututions “notes the growth in the use of professional designations which state or imply that a person has special expertise, certification or training in financial planning,” as quoted in a release by the North American Securities Administrators Association Inc. (NAASA).

The state therefore plans to clarify its rules to consider a person who uses such a professional designation as holding himself out as a financial planner. It would also prohibit the misleading use of other professional designations. Washington and other states have expressed the need to limit designations regarding advisors to senior citizens. Washington has now expanded its efforts to control the use of designations to protect investors of all ages.

Securities Class Action Filings Fall Dramatically

Published on: July 20, 2007 | by Shepherd Smith Edwards & Kantas, LLP

WIth securities class actions being dismissed at an alerming rate and charges being filed against high-profile securities class action attorneys, it’s not suprising that securities class action filings fell 42% in the first half of 2007. In fact, this is the fourth consecutive semi-annual drop in filings of such cases, according to the Stanford Law School Class Action Clearinghouse and Cornerstone Research.

The study group has propounded a variety of possible theories for the precipitous drop in securities class actions. One absolutely preposterous theory, unsupported by data, is that securities fraud has dropped because of prior settlements and fines. A spokesman from the Stanford group states: “Economic theory suggests these factors should lead to a decline in the incidence of fraud–exactly what we have seen occur since the middle of 2005.”

Another of the group’s questionable explanations for the decrease in securities class action filings is a “strong stock market” hypothesis. Under that hypothesis, decreased levels of class action filings correlate to a strong stock market with low volatility. Yet, historical data also does not support this hypothesis.

What’s in a Name? Ask the NASD

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

The NYSE and its former boss Dick Grasso were heavily criticized over salary and benefits to Grasso of well over $100 million. Many thought it unconscionable for the head of a self-regulatory body to earn that kind of money. For that reason, and so it could play ball in the international arena, the NYSE simply bribed all 5000+ members of the NASD $35,000 each to vote to take over its regulatory functions.

The National Association of Securities Dealers, Inc. is an association. Its members are securities dealers. Yet, it does not like its name and wants to change it. After all, it sounds strange for an association of securities dealers to be the primary regulator of securities dealers – too much like a fox in charge of a hen house.

The NYSE takeover seemed a perfect excuse to change the name. So a few folks at the NASD thought about names that would sound more like it was something other than an association of securities dealers. After not so careful thought, the NASD came up with “The Securities Industry Regulatory Authority”, or SIRA.