Investor Lawyers Blog

Order Banning Former Head of Bancshareholders of America from the Securities Industry Affirmed by the SEC

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

The order by an administrative law judge barring Bradley T. Smith, the former president of Bancshareholders of America Inc., from the investment adviser and broker-dealer industries has been affirmed by the SEC.

Since 2005, Smith has been under a federal court injunction related to private security offerings made by five of his companies. The injunction was imposed by the U.S. District Court for the Southern District of Ohio in connection to a case where the SEC has accused Smith of making false representations to investors regarding his use of offering proceeds to pay for personal and business expenses.

The court had also fined him $120,000 and held Smith severally and jointly liable with Scioto National Bank and Continental Midwest Financial Incorporated-there are aggregate disgorgement and prejudgment interests of more than $2 million. The ALJ judge then barred Smith from the industries in 2006.

Wachovia Brokerage Buying A.G. Edwards to Become Second Only to Merrill Lynch

Published on: May 31, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Wachovia Corporation agreed to acquire A.G. Edwards Corporation for $6.8 billion in stock. This will vault the company into the second-largest U.S. retail brokerage, behind only Merrill Lynch, with $1.1 trillion in client assets.

This transaction is the largest of the recent takeovers of regional brokerage firms, which are having difficulty fending off hiring of their representatives. Falling commissions in the industry have caused disruptions in sales staff.

For years there has been speculation over whether A.G. Edwards, a mostly employee-owned firm, could maintain its independence and raises new speculation about other large regional brokerages like Raymond James.

SEC Favors Companies Committing Fraud Over Investors As Shown by Its Recent Actions

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

The U.S. Securities and Exchange Commission granted Tenet Healthcare Corp. an unusual break: The company will be given protection against shareholder lawsuits even though it is being punished for fraud.

The SEC accused the largest publicly traded hospital chain of deceiving investors by failing to disclose a scheme to boost earnings. Tenet Healthcare neither admitted nor denied the allegations but agreed to pay $10 million to settle. Yet, the SEC waived a rule that says companies engaging in fraud lose a statutory shield that makes it difficult for shareholders to sue if forecasts made using the bogus earnings information prove wrong.

This decision is the latest used to demonstrate that SEC and its Chairman Christopher Cox, favors corporations at the expense of investors. During the past six months, the agency created to protect investors has repeatedly taken actually sides against investors after being lobbied by business groups. The SEC has even advised the U.S. Supreme Court to raise the bar making it more difficult for even the SEC to win its suits!

Survey Shows 43% of Investors Can Easily be Scammed

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

A large percentage of U.S. investors could be convinced to invest into a “guaranteed return” investment scam, according to a poll by “Money-Track,” a public-television series, and Investor Protection Trust, an investor education group.

The poll surveyed investors regarding eight basic investment principles, such as the definition of diversification and inquiring into to the background of financial professionals. When presented with questions to determine their fraud tolerance only 1% of the 1255 persons surveyed responded correctly on all eight principles.

Given investment swindle scenarios, such as the opportunity to invest into an options-trading system which guaranteed returns of at least 100%, 43% of investors responded indicating they would take the bait.

Former Head of Commodity Trading and Head Trader at Citibank Both Jailed for Inflating Profits

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

After his former boss was sentenced, a former head of American trading on the Citibank NA commodity desk was sentenced in May to 12 months and a day in prison and ordered to pay approximately $188,000 after pleading guilty to conspiring to falsify bank records and to commit wire fraud, said a U.S. Attorney for the Southern District of New York.

U.S. Attorney Michael Garcia said Charles Craig Gile schemed to inflate trading profits of the Citibank commodity desk by as much as $20 million during 2003 to increase his stature at the firm and make himself eligible for bonuses. Garcia added that Gile and David Becker, Head of Commodities Trading at Citicorp, understated the market risk and overstated the financial performance of Citibank’s commodity holdings that year. In March, Becker was sentenced to 15 months in prison.

Garcia said the defendants accomplished their scheme using various means, including inputting false data into computer models used to estimate the value of positions held by the commodity desk. Other false inputs were apparently made to artificially decrease the amount of risk being taken by the trading desk. The models therefore showed millions of dollars of artificially inflated profits for Citibank.

Disputes With Former Brokerage Firms and Brokers Must be Arbitrated

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

In two related decisions the a New York U.S. Bankruptcy Court determined that a failed broker-dealer must arbitrate (under the NASD Code of Arbitration) its differences with a former registered representative and the firm that hired him — even though the defunct firm is no longer is an NASD member — and that an arbitration agreement is even enforced when the party seeking recovery is in bankruptcy.

According court records, in 2000, M. Carleton Boothe went to work for NASD member firm Continental Broker-Dealer Corp. and received $300,000 he was to repay if he left the firm within five years other than through death or disability. Boothe resigned in 2004 and joined Gunnallen Financial Inc. Continental soon closed and was expelled from the securities industry.

After Continental was then thrown into bankruptcy, the bankruptcy court trustee for Continental sought to recover the unpaid balance of the note from Boothe and to obtain damages from Gunnallen Financial for claims including “raiding” its brokers and stealing its clients. Boothe and Gunnallen then sought to enforce certain arbitration agreements to move these actions from bankruptcy court to NASD arbitration. The bankrultcy court agreed.

According to Survey by Vestment Advisors Inc., Many Financial Advisers Knowingly Work Around Their Firms’ Compliance Rules

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

In a recent survey of financial services professionals, many financial advisers said that they knowingly skirted their companies’ compliance regulations and are tired of complying with a regulatory framework that seems to be growing more complicated.

100 financial services professionals were surveyed by Shorewood, Minnesota-based consulting and training firm for the financial services industry Vestment Advisors Inc. 71 of the respondents were registered representatives.

One survey participant said that everyone violates compliance rules on a daily basis because it was not possible to work in the securities industry without regularly violating an SEC or NASD rule Another participant said that it was unlikely that anyone had “never violated a compliance rule,” seeing that hundreds of rules existed.

Proposed Act Requires SEC Registration of Hedge Fund Advisers

Published on: May 28, 2007 | by Shepherd Smith Edwards & Kantas, LLP

U.S. Senator Charles Grassley has introduced legislation that would require most hedge fund advisers to register with the Securities and Exchange Commission. Called the Hedge Fund Registration Act, the bill closes a loophole created by the U.S. Court of Appeals (DC) when it struck down a 2004 SEC rule requiring most hedge fund advisers to register with the agency.

That ruling lets hedge fund advisers count the different funds they manage as just one client, rather than noting the number of investors who have purchased into each fund. Because of this, the majority of hedge fund advisers do not have to register with the SEC because they fall under the 1940 Investment Advisers Act exemption.

Senator Grassley says that if the bill were passed, only advisers with less than 15 clients would be exempt from registering. An adviser exempted from registration would also have to oversee less than $50 million and could not publicly “hold himself out” as an adviser.

Former Reagan Budget Head Stockman Charged With Securities Fraud

Published on: May 27, 2007 | by Shepherd Smith Edwards & Kantas, LLP

David A. Stockman was chief architect of President Ronald Reagan’s economic plan (a plan dubbed “voodoo economics” by George H.W. Bush). Stockman then became a high-profile Wall Street money man, but was indicted Monday on charges of conspiracy, securities fraud and obstruction of justice.

Stockman, 60, who faces the prospect of three decades in prison, is accused of defrauding investors and banks during his tenure as head of Collins & Aikman, a large auto-parts maker that descended into bankruptcy in 2005.

First elected to the House of Representatives at age 30, after serving only two terms in the House, Stockman was then named Reagan’s first director of the Office of Management and Budget. He was the highly visible spokesman for the “trickle-down” economic theory of the Reagan administration. However, private conversations over budget with a journalist caused Reagan to, as Stockman states, take him to the “woodshed”. He soon matriculated to the New York world of investment banking.

Citigroup, Merrill Lynch and Lehman Ex-Brokers Face Retrial in Eavesdropping Case

Published on: May 27, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Three former brokers of Citigroup, Merrill Lynch and Lehman Brothers face a second trial on charges they conspired to commit fraud by allowing day traders to eavesdrop on orders being discussed on investment firms’ internal “squawk boxes.” Four current and former executives at the day trading firm A. B. Watley Group will also be retried for their alleged roles in the scheme.

After a seven-week trail seven defendants including these former brokers were acquitted of securities fraud and other charges, but the jury deadlocked on the conspiracy charges opening the door to a retrial.

Prosecutors assert the brokers conspired to give Watley traders access to large orders broadcast over intercoms, or “squawk boxes”, in exchange for cash and commissions. The traders bought or sold stock ahead of the orders in anticipation of share-price swings, prosecutors say.