Investor Lawyers Blog

Wrap fees? Beware of “investment professionals” who say they only charge a percent or two!

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

In a letter to his Berkshire Hathaway shareholders entitled “How to Minimize Investment Returns,” Warren Buffett points out that between December 31, 1899 and December 31, 1999, the Dow rose from 66 to 11,497. That’s a 17,400% gain! Thus, a hundred dollars invested into a Dow portfolio during the 20th century would have grown to $17,500!

Yet, that’s an annual compound return over 100 years of only 5.3%, said Buffet while adding that, if only 1% per year is paid in management fees, nearly 20% of the profits would go to the money manager.

Building on Mr. Buffets warning: If a $100 investment was made the last day of 1899 and managed for 1%, it would COMPOUND at a net rate of only 4.3%. Thus, the portfolio would have grown to only $6,736 during the century that followed. The fee would have cost great-gramps over $10,000, leaving him with a little over one-third what he would have without “professional help”.

Morgan Stanley is Fined $500,000 for Faulty Oversight

Published on: June 22, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The New York Stock Exchange’s regulator group says that Morgan Stanley must pay $500,000 for not overseeing a group of brokers that had recommended unsuitable transactions for accounts belonging to the guardians of injured children and to retirees. The guardian accounts were for children, 10 to 18 years of age, who received medical malpractice settlements after being injured at birth or as a child.

NYSE regulation started investigating the brokerage firm about three years ago. Disciplinary action has been taken against two brokers, while two other brokers and a branch manager were also investigated for misconduct.

The branch manager investigated in the case is believed to have known that there were court-ordered trade restrictions for the guardian accounts but did not tell staff members about them. The court had only authorized the guardian accounts to invest in Treasury strips and bonds. Commissions and fees were to remain low, which they did not.

News Flash: Brookstreet Securities Closes its Doors

Published on: June 22, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Today was “Black Friday” for Brookstreet Securities, as it closed for business. The firm’s 650 independent contractor brokers have been terminated, says Stanley Brooks, President of the firm. Brookstreet clients are left in limbo, many with huge losses in their accounts.

As reported earlier this week, Brookstreet Securities Corp, based in Irvine, California, told its agents that “disaster” had struck and it was in eminent danger of folding. The e-mail communication (previously posted on this site) claimed this was as a result of mark-downs on collateralized mortgage obligation securities (CMOs) by Fidelity’s National Financial Services (NFS), which cleared trades and maintained accounts for Brookstreet.

Some of Brookstreet’s clients report that their accounts continued to fall in value this week. Yet, if they attempted to do anything NFS told them they must to talk to their (Brookstreet) broker, but their broker was not answering the phone. Meanwhile, Some of these clients’ margin accounts slipped into the “red”, meaning not only have these investors’ funds disappeared but NFS now claims the investors owe it money!

Defendants Ordered to Pay $14 Millions Over Alleged Prime Bank Scheme

Published on: June 22, 2007 | by Shepherd Smith Edwards & Kantas, LLP

A U.S. District Court in Indiana entered a permanent injunction against several defendants charged by the SEC over their alleged involvement in a $32 million prime bank scheme. They were also ordered to pay $14 million in disgorgement, plus other sanctions

The SEC issued a release saying these defendants, including First National Equity LLC, P.K. Trust & Holding Inc., Worldwide T&P Inc. and several individuals, had raised approximately $32 million using while using misrepresenting and omissions to sell interests in a purported system to trade of various financial instruments, including notes.

Shepherd Smith and Edwards is a securities law firm which represents investors nationwide in claims against investment firms. To learn whether our firm can assist you or your firm, contact us to arrange a free confidential consultation with one of our attorneys.

Will Brookstreet Securities Be Wiped Out by a CMO Debacle?

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

Claims are being filed and steps are being taken toward a class action to assist investors recover their losses after Brookstreet Securities reportedly advised its 500 brokers via E-mail that “disaster” had struck which could soon close the firm! Text of the firm’s internal e-mail is as follows:

“Disaster, the firm may be forced to close…

“Today, the pricing system used by National Financial has reduced values in all Collateralized Mortgage Obligations. Many of those accounts were on margin and have suffered horrendous markdowns and unrealized as well as realized losses.

Wall Street Wars: When Investment Advisors Sued the SEC and Won Did They ‘Tug on Superman’s Cape?’

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

As discussed in earlier stories on this blog, the SEC was challanged by an investment advisors association in court for exempting Wall Street brokerage firms from liability under laws governing investment advisors, despite the fact that the brokerage firms were performing identical services.

The investment advisors won their suit a few months ago, ending the “Merrill Rule”, which had strangely been championed by the SEC, a 75 year old govenment agency created to protect investors. The SEC Chairman then personally, and not on behalf of the SEC, asked Congress to end “soft dollar” arrangements for investment advisors which he said were being abused.

It its latest ComplianceAlert letter to chief compliance officers of registered firms, the SEC has highlighted numerous areas of noncompliance, including performance advertising deficiencies “discovered” during a SEC review of several registered investment advisers.

Merrill Lynch Seizes $400 Million of Assets from a Bear Stearns Managed ‘Subprime’ Hedge Fund for Failing to Meet Margin Calls

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

A hedge fund managed by Bear Stearns that takes both bullish and bearish positions in subprime loans has been hit heavily by conditions in that market. Some of the fund’s assets were held at Merrill Lynch, on margin. When the equity in the fund dropped, Merrill issued margin calls.

The hedge fund reportedly began with about $600 million in investor capital, $40 million of that from Bear Stearns and its executives, then borrowed $6 billion from Wall Street lenders, including Merrill, Goldman Sachs, Bank of America and Deutsche Bank.

As the fund’s assets lost market value, the Bear Stearns managers scrambled to sell hundreds of millions of dollars in assets to satisfy demands for cash and assets from creditors to stave off liquidation of the fund. The managers auctioned almost $4 billion in mortgage bonds, and attempted to present a 30-day plan to sell more assets, but was unable to persuade Merrill to refrain from seizing assets.

PBHG Investors Harmed By Fraudulent Market Timing To Receive $73 Million

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

The Securities and Exchange Commission says that investors who were affected by the fraudulent market timing in the PBHG Funds will receive $73 million. This is the second of three disbursements to be made from the Pilgrim Baxter Fair Fund.

Pilgrim Baxter & Associates, Ltd. was the investment adviser for PBHG Funds during the time when the fraudulent market timing took place. By the time the third disbursement is made, 384,000 investors affected by this fraud scheme will have been paid.

The Fair Fund came about because of the SEC enforcement actions charging the PBHG Funds of “unlawful market timing” by Harold J. Baxter, Gary L. Pilgrim, and Pilgrim Baxter & Associates Ltd. The charges against PBA for allowing certain investors to market time were settled three years ago when PBA agreed to the fine of $90 million in civil penalties and disgorgement (although PBA did not deny or admit guilt). It also agreed to put into place mutual fund governance and compliance reforms.

NASD Says Citigroup To Pay $15.2 Million For Misleading BellSouth Retirees

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

Citigroup Global Markets Inc is being charged $3 million by NASD to settle charges connected to misleading materials it allegedly gave Bellsouth employees during retirement meetings and seminars held in North Carolina and South Carolina. NASD also says that Citigroup has to pay over 200 ex-Bellsouth employees $12.2 million in restitution. The latter comes came from a civil class action involving Smith Barney, which had tried to get the case dismissed under SLUSA.

NASD says that Citigroup neglected to properly supervise certain brokers located in Charlotte, North Carolina that used the misleading sales materials during numerous meetings with BellSouth Corp. employees. The materials made “exaggerated and unwarranted projections of future earnings” and did not elaborate on the related risks of making certain investments.

Following these presentations, over 400 BellSouth employees opened more than 1100 accounts via these brokers. Many of their investors had retired early from BellSouth and had less than $350,000 in savings. Many of them cashed out their 401(k) accounts and pensions and invested these funds with the Citigroup brokers.

Wall Street Wars: SEC Chairman’s “Payback” to Investment Advisors?

Published on: June 16, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Last year, money managers directed a billion in dollars of their clients’ funds in hidden commissions to Wall Street investment firms, says SEC Chairman Christopher Cox. These “soft”dollars” are purportedly for research and other services. Instead, the funds are made available to the money managers who often use these for “lavish trips, theater tickets, and fancy meals,” Cox added.

In these “soft dollar” transactions, clients of investment advisers pay an extra five cents or so per share which is credited to cover costs of research and other services of the firm handling the transaction. A nickel per share may seem small, but on tens of billions of total shares traded becomes a huge amount. Those paying these costs include investors into mutual funds, pension funds, and 401(k) plans.

Laws impose a “fiduciary duty” on money managers to protect their clients’ interests, even over their own. Yet, a “safe harbor” was enacted in 1975 which allows the managers and brokerage firms to “bundle” research and other services with executions and not be liable for violating duties to their clients, including the duty to shop for the best execution price.