Investor Lawyers Blog

NASD Form U-5 Notice of Termination Statements Are ‘Absolutely Privileged,’ Says A Divided New York Court of Appeals

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

A Federal Appeals Court in New York reversed prior decisions and decided that statements in a NASD Notice of Termination Form U-5 are subject to absolute privilege from defamation actions. The Securities Industry and Financial Markets Association claim the ruling is a victory for investors and that firms will now be encouraged, rather than discouraged, from offering investors full disclosure regarding a broker that has participated in any wrongful actions. Yet, observers believe it is the brokerage industry itself that won a victory.

In Judge Victoria A. Graffeo’s opinion, the court discussed that Chaskie Rosenberg was hired as a financial services representative in 1997 for defendant Metropolitan Life Insurance Company’s All-Boro agency. Based in Brooklyn, the agency served members of the local Hasidic Jewish community. Most of its employees were also Hasidic Jews.

MetLife performed an agency audit in 1999 because the agency accepted third-party checks to pay for life insurance policy premiums. Following another audit, MetLife shut the agency down and moved employees to a different office. Rosenberg was let go after a third audit by MetLife. ‘

Purchasers of USA Capital First Trust Deeds May Have Been Defrauded

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

USA Capital Mortgage Company, a Las Vegas company, filed for bankruptcy last year listing approximately three-quarters billion dollars in debts to creditors. Most of this is owed to investors who purchased mortgage trust deeds and/or unit trusts which contained trust deeds. Apparently there were a number of brokerage firms involved, with an office of Financial West Investment Group, a California Based securities firm, at the center of the controversy.

According to court documents filed by Financial West in Clark County, Nevada, hundreds of investors may have been defrauded by the sale of unsuitable securities, some victims of elder abuse. The documents allege that David M. Berkowitz, a former registered representative of Financial West, sold mortgage/trust deed securities issued by USA Capital Mortgage Company; USA Capital Realty Advisors, LLC; USA Capital Diversified Trust Deed Fund, LLC; USA Capital First Trust Deed Fund, LLC; and USA Securities, LLC. When the companies then filed for bankruptcy, some investors were left wondering what will happen to their life savings.

Berkowitz was permitted to resign from Financial West Group in July of 2006 amid an “investigation of sales practice violations related to the sales of first trust deeds and trust deed funds,” according to documents made available by the National Association of Securities Dealers. According to the NASD’s “BrokerCheck” Report, Mr. Berkowitz has sixteen customer disputes recorded, eleven of which are still pending, consisting of claims of unsuitable investment recommendations, failure to supervise, breach of fiduciary duty, churning, misrepresentation and breach of contract. In addition, NASD records show that at least ten customers have filed complaints against Berkowitz for his sales of USA Capital First Trust Deeds.

Is the Arbitration System Stacked In Favor Of Brokerage Firms and Against Investors?

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

After the U.S. Supreme Court decided to let brokerage firms make customers sign arbitration agreements, a lot of people thought that this was a faster, less expensive alternative than letting investors take their claims to courts. Recently, however, what seemed like a good way to resolve disputes between brokers and investors has come under close scrutiny.

Certain regulators and lawmakers are now saying that the system needs to be reviewed. According to William Galvin, the Massachusetts Secretary of the Commonwealth of Massachusetts, the arbitration side of disputes need to be fairer and not “stacked against” investors.

These kinds of concerns are taking on a new importance in the wake of the upcoming consolidation of the NYSE Group Inc.’s New York Stock Exchange and the National Association of Securities Dealers.

Court Rules That SEC Exceeded Authority With Decision Regarding IAA Exemption

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

The U.S. Court of Appeals for the District of Columbia Circuit ruled last week that the U.S. Securities and Exchange Commission went beyond its authority to promulgate a rule exempting broker-dealers that offer investment advice to clients with fee-based accounts from regulation under the 1940 Investment Advisers Act.

The SEC had adopted the Investment Adviser/Broker-Dealer Rule, IAA Rule 202(a)(11)-1 in 2005, but the ruling was subsequently challenged by the Financial Planning Association. The court ruled in the FPA’s favor, citing exemptions, such as the broad definition of the term “investment adviser.” The court also said that the rule failed to meet certain requirements for an exemption to be consistent with the IAA. In addition, Judge Judith Rogers noted that the U.S. Congress had already addressed this “precise issue at hand.”

This is the third time in less than 12 months that the court has ruled against the SEC. Merril Hirsch, the FPA’s chief attorney said the ruling was a significant victory for consumers. He also said that any uncertainty resulting from vacating the rule was nothing compared to the uncertainty created by the broker-dealer rule.

SEC Charges Two Former In-House Enron Attorneys With Violating Securities Laws

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

The U.S. Securities and Exchange Commission filed a complaint on Wednesday against Rex Rogers, the former associate general counsel at Enron, and Jordan Mintz, the former general counsel for Enron’s finance group, with civil violations of securities laws because of omitting or fudging regulatory filing disclosures.

The SEC alleges that Mintz engaged in fraud by arranging the murky disclosure of Enron’s repurchasing of a power plant in Brazil from an LJM partnership that was run by former Enron finance chief Andrew Fastow. The SEC claims that Mintz knew that LJM had bought the plant with the understanding that it would sell it back to Enron and that this wiped out the sale’s legitimacy.

Mintz is also accused of delaying the closure of the resale for a number of months until after Fastow had sold his interest in LJM Partnerships so that Enron wouldn’t have to reveal that the deal was done with an Enron officer. Rogers is also being charged with not disclosing all the details of this deal.

U.S. Senator Durbin Wonders Whether Smaller Budget Can Satisfy the Commodity Futures Trading Commission’s Urgent Needs

Published on: March 29, 2007 | by Shepherd Smith Edwards & Kantas, LLP

At a hearing discussing the budgetary needs of the Commodity Futures Trading Commission, Senator Richard Durbin voiced concerns that President Bush’s 2008 budget request for the CFTC would not be enough to meet the regulatory agency’s key needs to allow it to function effectively. Durbin, the chairman of the Senate Appropriations Financial Services and General Government Subcommittee, also said that he was worried that staffing problems and older computer systems at the CFTC could negatively affect is ability to supervise the surging derivates industry.

At the hearing, Durbin addressed CFTC Chairman Richard Jeffrey, telling him that he had observed agency’s problems with developing technology to keep up with market changes and its struggles with staffing levels. Durbin said that he believed the agency needed the right tools to enforce the laws.

Jeffrey has complained that agency’s staff size had dropped over the past several years and its computers had become out of date, even as trade volume has increased. He said the $116 million request by President Bush-18 million more than what Congress had allotted to the agency for fiscal year 2007-would help “modestly increase our capabilities in certain areas,” but that this amount of financial support needed to be seen as a beginning, not the end attempt, to addressing certain problems the agency had been experiencing.

Enron Litigation Continues With Actions by Stockholders and Regulators of Accounts.

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

As class actions against investment firms face dismissal, attorneys for investors plan to go forward with claims for individual shareholders against those same firms. After the U. S. Court of Appeals for the Fifth Circuit decided that cases in Houston against Merrill Lynch and other investment banking firms could not go forward as class actions, the door was left open for victims of Enron stock fraud to file their own claims in court or arbitration against these investment firms.

The class actions stopped the clock for filing individual claims against the defendants until appeals are completed. Also, through the class actions substantial information was learned regarding the role of these investment firms in the Enron debacle.

Meanwhile, that same Court of Appeals affirmed a district court’s order allowing Texas accounting regulators to gain access to confidential discovery material in the Enron Corp. shareholder litigation (Newby v. Enron Corp., 5th Cir., No. 05-20462, 3/16/06). The massive amounts of discovery material related to the Enron litigation led to a stipulation by parties that discovery be housed on a Web site. The district court overseeing the litigation issued a confidentiality order covering the deposition transcripts and other material, barring disclosure except to parties, their counsel, witnesses, a depository administrator, a court-appointed mediator, and a few others.

Goldman Sachs Affiliate Agrees To Pay $2 Million in Fines and Penalties Over Short-Sale Scheme Charges by NYSER and the SEC

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

NYSE Regulation Inc. and the Securities and Exchange Commission say that a clearing affiliate and prime broker of Goldman Sachs Group will pay $2 million in fines and penalties over its alleged role in an illegal short-sale trading scheme that was executed by Goldman Sachs customers through their accounts with the brokerage. Goldman Sachs Execution and Clearing, LP has not admitted to or denied any wrongdoing by agreeing to the censure. They are, however, agreeing to cease and desist from future violations.

The SEC charges that firm customers unlawfully sold securities short right before public offerings of the companies’ securities. It is accusing Goldman of violating the rules that mandate that brokers must mark sales short or long, while restricting stock loans on long sales. Both NYSER and SEC say that if Goldman had proper procedures in place, it would have discovered via its own records this illegal activity by its customers. Two Goldman customers have already settled SEC charges connected to their alleged participation in these activities.

SEC Chairman Christopher Cox told the U.S. Chamber of Commerce on the day of this announcement that the commission and its senior staff members are very concerned about abusive naked short-selling. He admitted that Regulation SHO had not properly addressed these issues and that the commission will now eliminate the regulation’s grandfather provision. Cox said that naked short-selling was connected to settlement and clearance systems and that the SEC would use technology to further deal with this issue. He said the action against Goldman was important.

New Regulations, Filed By The Massachusetts Securities Division, Define Credentials Standards For Advisors To Senior Investors

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

William Francis Galvin, the Massachusetts Secretary of the Commonwealth, says that his office has set up new standards for advisers using credentials implying that they are experts when it comes to senior investors.

According to Galvin, the state of Massachusetts is charging two Massachusetts annuity salesmen with using unethical and dishonest practices when marketing annuities to seniors: Michael Mark Delmonico and John Christopher Huck.

Delmonico is accused of presenting himself as an unbiased and objective financial advisor to seniors, but allegedly was actually trying to sell high-commission annuities that were often not suitable for senior investors. He has denied the charges. Also charged in the complaint was Workman Securities Corp. and company officials Robert Vollbrecht and Paul Maxa for failing to properly supervise Delmonico.

More Good News for Morgan Stanley! Record Earnings, a Jury Verdict Overturned and a Slap on the Wrist by Regulators.

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

Morgan Stanley shared in the earnings boom for Wall Street Firms as it reported earnings for its latest quarter of $2.56 Billion, a 29% increase over a year ago.

The investment giant is also celebrating a victory in the Florida courts, having convinced an appeals court to throw out an $1.58 Billion jury award against it for its mis-handling of a 1998 merger between Coleman Company with Sunbeam Corporation.

Morgan Stanley had faced an uphill fight in that case because it failed to honor a court order to produce e-mails sought by lawyers for the plaintiffs. Frustrated by the delays, Palm Beach County trial judge Elizabeth Maass issued a ruling that the Morgan Stanley and Sunbeam conspired to defraud the plaintiff and presented the case to the jury to establish the damages. Morgan Stanley had in 2005 set aside $360 million of reserves for the case expecting the jury verdict to be reduced. That will presumably will then be added to the firm’s current earnings.