Investor Lawyers Blog

Should Brokerage Firms Continue to Vote Their Clients Shares Without Permission, Including for Corporate Directors?

Published on: June 11, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Few stockholders realize that when their shares of stock are held at a brokerage firm that firm can vote their shares without a “proxy”. Thus, if an investor owns 100 shares of XYZ stock held at ABC brokerage firm, without the investors permission, ABC firm can cast the investors vote in annual meetings of XYZ, including for XYZ’s directors.

At a recent meeting at the SEC on the long debated issue, Catherine R. Kinney, president and chief executive officer of the New York Stock Exchange, announced that the NYSE has agreed to amend its rules to eliminate broker discretionary voting, but only in the election of directors. There is no proposal to stop brokerage firms from voting their clients’ shares, without permission, on other matters.

A NYSE rule states that brokers may vote on “routine” proposals if the beneficial owner of the stock has not provided specific voting instructions to the broker 10 days before the voting date. “Routine” proposals have been interpreted to include such important votes as election of directors. The proposed change will consider election of directors as “non-routine.” The change was previously proposed but revised to exclude such voting by mutual funds.

California Can Not Require Higher Standards for NASD Arbitration

Published on: June 11, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The California Supreme Court and a U.S. Court of Appeals have both determined that securities arbitration standards do not violate the California Constitution. The courts have instead decided that The Federal Arbitration Act preempts (is superior to) California’s ability to govern securities arbitration.

Rapidly growing arbitration is forcing consumers to, often unknowingly, forego their right to go to court. To protect its citizens from injustices in arbitration the California legislature passed legislation in 2001 ordering the California court system to create ethical standards for commercial arbitrators. Comprehensive standards were then created regarding arbitrators, including disclosure and conflict-of-interest checks.

The NASD’s Arbitration Code is not consistent with these new standards and the NASD refused to make adjustments to comply with the California requirements. It instead sued members of the California court system in federal court seeking a ruling that California could not set standards regarding securities arbitration. In November 2002, the US Court dismissed the lawsuit holding the US Constitution barred the suit in federal court.

SEC Says It Has No Jurisdiction To Review NASD Action Against Sky Capital

Published on: June 11, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission says that it will not grant Sky Capital LLC’s request that the agency review the NASD’s action against the firm. The commission says it lacks the proper jurisdiction.

Sky Capital became an NASD member in 2002 following initial denials by the NASD and appeals made to its National Adjudicatory Council. Sky Capital says staff members at the NASD used several delay tactics during the application process and were prejudiced against the firm’s CEO because he had problems in the past with both substance abuse and regulatory issues.

Sky Capital also says that NASD got in the way of plans to acquire assets belonging to The Thornwater Company, LLP. It says that NASD did this by placing restrictions on Thornwater and then later lifting those restrictions. And while it approved another Sky Capital acquisition-this time of a broker-dealer in Florida-it did so only after a significant delay.

Former Wood River Partners LP Hedge Fund Manager Pleads Guilty to $88 Million Securities Fraud Scheme

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

John H. Whittier, a former hedge fund manager and the founder of Wood River Partners LP and its offshore company in the Cayman Island, has pled guilty to carrying out a securities fraud scheme that cost investors $88 million. Whittier had been charged with four counts of securities fraud for his part in the scheme that mislead investors into thinking that he was keeping risks minimal while pursuing a broad and diverse investment strategy when in fact, he was doing the opposite.

He knowingly failed to make the mandatory public filings that would have revealed his concentrated holdings with one stock. In addition, after acquiring 80% of Endwave Corp’s common stock, he hid any interest earned by not making beneficial-ownership disclosures to the SEC. He also placed 80% of his U.S. hedge fund’s $127 million portfolio in Endwave, instead of placing the money in different investments as he had promised investors. He had vowed that only 10% of the fund’s money would be invested in an one stock.

Aside from owning the hedge funds in the U.S. and abroad, Whittier also owned and controlled a capital management company, which served as the investment adviser to the funds.

Annuity Sales Fraud of Seniors is Growing, Says the NASD

Published on: June 6, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The National Association of Securities Dealers has issued an “Investor Alert” warning of a rise in deceptive sales practices in the sale of annuities to senior citizens

The NASD also states that consumer confusion about annuities has also risen. “This is due, in part, to questionable or deceptive sales practices employed by companies and agents looking to take advantage of uninformed consumers,” it adds.

An “annuity” is defined in the release as “a contract in which an insurance company makes a series of income payments at regular intervals in return for a premium or premiums you have paid.”

North Cove Ventures LLC and Former Connecticut State Senator DiBella Found Liable For Aiding And Abetting Fraudulent Investment Scheme

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

A federal jury has found former Connecticut State Senator William A. DiBella and consulting firm North Cove Ventures LLC liable for aiding and abetting a fraudulent investment scam.

The scheme involves former Connecticut State Treasurer Paul Silvester, who had invested $75 million in state pension funds with private equity firm Thayer Capital Partners. The former state treasurer allegedly fixed it so that Thayer would pay Mr. DiBella a percentage of the investment even though he didn’t do anything to warrant being paid.

The SEC says that in November 1998, Silvester asked Thayer to hire DiBella. The private equity firm allegedly consented to the hire and paying DiBella the percentage fee even though he did no work for it. Silvester allegedly added at least another $25 million to the pension fund’s investment just to get a larger fee for DiBella, who ended up receiving nearly $375,000.

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.