Investor Lawyers Blog

Why Regulators Have A Hard Time Charging Executives At Prominent Securities Firms

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

A recent investigation by the Senate regarding the handling of Morgan Stanley CEO John Mack in regards to an insider trading investigation sheds light on why regulators are never able to “nail” senior level executives at major securities firms.

Former SEC attorney Gary Aguirre alleges that he was let go after insisting that he interview John Mack in 2005. Mack, at the time, was about to become Morgan Stanley’s chief executive. According to Aguirre, his superiors were hesitant to challenge the soon-to-be head honcho, and the SEC dropped the insider trading case, which also involved Pequot Capital Management Inc., due to insufficient evidence last year.

SEC branch chief Robert Hanson, Aguirre’s former boss, has told the Senate that he knew that lawyers representing Mack would likely contact Hanson’s superiors. Hanson says he would not have minded going up against Mack, but that more preparation and work had been needed to keep Hanson’s superiors in the loop-although, apparently, SEC officials already knew what was going on.

Few Brokerages Disclose “Shelf Space” Agreement Details

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

The SEC is considering whether to change a rule that could require brokers to reveal whether they have “shelf-space” programs, which treats certain fund companies preferentially in exchange for payment by the fund. Its first point-of-sale disclosure rule had pushed for brokerage firms to reveal the actual amount that they received from fund companies that take part in shelf-space programs. Most brokerage firms, however, are still not abiding by this standard, usually only disclosing the amount that they receive from an agreement without naming the fund company involved.

Even though many brokerage firms are informing investors about any “shelf space” agreements they have with specific mutual funds, most of them are still not disclosing the terms of these agreements. Although brokers are not directly paid by the agreement, a shelf space deal can indirectly influence the sale. For example, according to Merrill Lynch & Co. Inc., funds that do “not enter into [shelf space] arrangements … are generally not offered to clients.”

Shelf space agreements can vary, although most of the bigger firms receive anywhere from 0.05% to 0.25% of sales or assets. Brokerage firms claim this money supports education, sales, and technology.

Raymond James Financial Services Is Fined $2.75 million By NASD

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

NASD says that it is fining Raymond James Financial Services $2.75 million for not adequately supervising more than 1,000 producing sales managers across the U.S between 2002 to 2004. NASD also permanently barred one of RJFS’s branch managers, Donna Vogt, for making unsuitable recommendations to retirement age and elderly customers regarding variable annuity purchases and mutual funds. Some of these transactions were deemed unsuitable because of their over-concentration in aggressive growth funds. She is also accused of making misleading statements when corresponding with customers, treating them as if they belonged to the same group regardless of financial status, age, objectives, and investment experience.

NASD says the St. Petersburg firm neglected to notice sales practice abuses because of its deficient supervisory system. Producing branch managers had to be their own supervisors-opening and approving new accounts, approving their own sales transactions, and checking their correspondence. Because of this, RJFS’s system for supervision was not in compliance with securities regulations and rules.

NASD also claims that RJFS does not have a proper system set up to properly oversee variable annuity sales. Only three exception reports have been used to screen variable annuity purchases, and transactions were not screened for suitability based on yearly income, net worth of the customer, concentration of variable annuity holdings as part of net worth, or investment experience. As a result, unsuitable recommendations by Vogt went unnoticed.

Recent Actions By The SEC Brings Up The Question: Is It On The Side of Individual Shareholders Or Does It Protect Accountants And Corporate Executives?

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

Securities and Exchange Committee Chairman Christopher Cox could lose the confidence of investors, and quite possibly, Congress, if he and the other appointed commissioners continue to pursue their chosen path of action.

The SEC has taken steps to reduce the chances of lawsuits being filed against auditing firms, corporations, and their executives, says the New York Times. The commission filed an amicus brief with the Supreme Court last week. In the brief, the SEC argued for an interpretation of the Private Securities Litigation Reform Act of 1995 that would make it more difficult for shareholder fraud suits to be successfully litigated.

While an appeals court has said that investors only have to show that “a reasonable person” could infer from the accusations (if proven true) that the executives named in a fraud suit acted with the intent to commit fraud, the SEC’s interpretation wants there to be evidence that there was a “high likelihood” of a defendant meaning to break the law.

Merrill Lynch Settles Class Action Lawsuits With Mutual Fund Investors Regarding Analyst Research And Internet Companies

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

Financial management and advisory company Merrill Lynch has settled three class action lawsuits involving 400 investors who claim that the company gave them misleading analyst information regarding Internet companies. The investors are buyers of mutual funds, and they will get about $40 million-6.25% of the original $645 million they had first requested in 2002. The damage amount that will be paid, however, is at the “higher end of the range of reasonableness of recovery in class actions securities litigation,” according to Southern District of New York Judge John F. Keenan who approved the settlement agreement He also says that the class has had an “overwhelmingly positive reaction” to the settlement that was reached.

The three lawsuits are among several class actions that Merrill Lynch has had to deal with since 2002, ever since New York’s then-Attorney General Eliot Spitzer investigated an alleged scheme by Merrill Lynch’s research division to publish misleading or bogus analysis regarding Internet stocks to increase investment banking business. The class action settlements reached earlier this month are the first ones to be approved in connection with the alleged wrongdoing.

Merrill Lynch paid the government $100 million over its alleged actions in 2002. Back then, the company also said it would immediately enact important reforms to further protect its securities research analysts from being influenced unnecessarily by investment banking.

NASD Warns Seniors About Selling Life Insurance Policies For Cash

Published on: February 14, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The NASD has issued an Investor Alert warning senior citizens regarding the risks that come with selling their life insurance policies for “senior settlements” or “life settlements”- transactions that are paid in cash.

In its alert, the NASD says that while life insurance policies can be liquidated for cash, the costs that come with receiving a life settlement can be high, while negatively affecting a person’s finances. In addition, it is not easy to know whether or not a person is getting a fair rate for his or her policy. Factors to consider when thinking about whether or not to sell a life insurance policy include evaluating transaction costs, the financial effect of the sale, and the price to be received for the settlement. The NASD warns that it doesn’t have jurisdiction over all life settlements-only those connected to variable policies. It therefore cannot deal with any complaints involving other kinds of life settlements.

What Is a Life Settlement and How Does It Work?

According to NASD, Banc of America Investment Services Inc. Agrees To Pay $3 Million For Failing To Comply With Anti-Money Laundering Requirements

Published on: February 13, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Banc of America Investment Services (BAI) Inc. says that it will pay $3 million in disciplinary charges for its alleged violation of anti-money laundering (AM) requirements.

The NASD says that BAI failed to acquire customer information for a number of high-risk accounts. It is also accusing BAI of failing to communicate sufficiently with its parent bank to make sure that BAI’S independent SAR (suspicious activity report) filing obligations were fulfilled. In addition, the NASD says that BAI did not properly investigate or pursue certain red flags, especially when its own clearing company had made repeated requests for additional information pertaining to certain account holders.

The NASD claims that BAI did not get the mandated additional information from customers who had 34 accounts involving trust and private investment corporations that were affiliated with one family and domiciled in the Isle of Man. The offshore accounts, collectively containing assets worth $79 Million to $93 Million, participated in multimillion-dollar wire transfers internationally.

Securities Officials In Massachusetts File Charges Against Bulldog Investors And Principal, Phillip Goldstein

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

The Massachusetts Division of Securities has filed an administrative complaint against Bulldog Investors General Partnership and the company’s principal, Phillip Goldstein. Bulldog Investors and Goldstein, as well as other individuals and firms, are being charged with offering unregistered securities for the purpose of selling them in Massachusetts.

The securities officials claim that the hedge funds allegedly failed to restrict prospective investors from accessing general advertising and offering content on their web site. The securities division says that while hedge fund offerings do not have to be registered with the Massachusetts Division of Securities, there are SEC guidelines for making private offerings online. This includes making sure that private offerings are password-protected so that only the potential investors that the issuer has assessed as sophisticated enough or properly accredited can view the materials. According to the complaint, Bulldog did not control access to the information, which “constitutes an unregistered, non-exempt public offering of securities in Massachusetts.”

Goldstein allegedly told the division that anyone who agreed to view the offering content online had to agree that the information was not a solicitation. The complaint however, claims that , “A disclaimer such as the one on the Bulldog web site does not constitute an appropriate or adequate control over a publicly accessible Web site that displays advertising and/or offering materials for securities.”

MBIA Inc. Will Pay $75 Million To Settle SEC Securities Fraud Charges

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

One of the largest municipal bond insurers in the country has agreed to pay $75 million to settle securities fraud charges. The charges were brought against MBIA Inc. by the SEC, the New York State Insurance Department, and NY Attorney General Andrew M. Cuomo.

In agreeing to pay the charge fees, the New York-based firm is not denying or admitting guilt. MBIA will pay $1 in disgorgement and a $50 million penalty-based on its agreement wit the SEC-the total will be put in a Fair Fund for investors. MBIA will also abide by a cease-and-desist order, as well as work with an independent consultant to look at specific transactions that MBIA took part in.

The firm will also pay $10 million in disgorgement fees to investors and $15 million in penalties to satisfy its agreements with the NY entities. It will also restate all earnings from 1998-2004.

Arbitration Panel Concludes that Former Gemstar CEO Must Pay Company $93.6 Million

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

A panel of arbitrators has found that the former chairman and CEO of Gemstar-TV Guide International Inc. breached warranties and representations that he made to the company. The arbitration panel is ordering Henry Yuen to pay $93.6 million in fees, damages, and back pay to Gemstar. According to the panel, Gemstar was within legal bounds to fire Yuen in April 2003, because of his misconduct relating to a corporate and management restructuring that took place in 2002. The panel also decided that Yuen is not entitled to the $39.9 million dollars he says that the company owes him because he was displaced as CEO and chairman due to the restructuring.

The ruling by the arbitration panel has rejected all of Yuen’s wrongful termination-related claims. This includes approximately $6.9 million in attorney’s fees that were given to the former CEO, some $6.1 million in salary paid to the former CEO since he was let go, and, for breaches of warranties and representation, approximately $80.6 million in damages. The panel also decided that it agrees with Gemstar’s claim that the Patent Rights Agreement between Yuen and the company will stay effective until 2010.

The judgment means that Yuen is not allowed to receive any more advancement of legal fees or indemnification for any matters related to his alleged misconduct. The panel also decided that Gemstar has the right to another judgment for costs and attorneys fees. The arbitrators will decide what this amount will be at a future date. In the meantime, Gemstar says it will pursue the amounts awarded to them from Yuen.