Investor Lawyers Blog

N.Y. Attorney General’s Office Sues UBS Financial Services, Inc.

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

The New York Attorney General’s Office is suing UBS Financial Services, Inc. for defrauding thousands of its customers. The lawsuit provides detailed information about a scheme where UBS moved clients from regular brokerage accounts to UBS’s “InsightOne” brokerage program, even though these investors were actually not well-suited for the program. UBS is a leading brokerage firm in the United States.

With InsightOne, brokerage customers had to pay an asset-based fee instead of a per-transaction commission. Asset-based fees, however, are not appropriate for investors who hardly ever trade securities or hold no-load mutual funds, a large amount of cash, or similar assets. UBS is being accused of falsely promoting InsightOne as being a brokerage program that offers personalized advice and other types of financial planning services.

Instead of discouraging investors who were inappropriate for InsightOne from joining the program, the N.Y. Attorney General’s Office says that UBS:

NASD Arbitration Panel Says Ameriprise’s Securities America Must Pay Retired American Airline Pilots Up To $9.3 Million

Published on: January 3, 2007 | by Shepherd Smith Edwards & Kantas, LLP

An arbitration panel for the NASD says that Ameriprise’s Securities America must pay up to $9.3 million to three retired American Airlines pilots who are accusing a broker of spending their retirement savings on mutual funds that had high fees and trading costs. A spin off from American Express Co., Amerprise Financial offers clients financial planning and advice. Securities America is an Ameriprise Financial Inc. subsidiary.

In an NASD ruling, broker Robert P. Gormly, Jr. and Securities America are both being held liable for $2.4 million in lawyer’s fees and $3.9 million in damages. In addition, Securities America must also pay $3 million in punitive damages.

According to the American Airlines pilots, Gormly (who had been affiliated with Securities America in Texas) had initially purchased products from the American mutual funds group, liquidated the funds between 1998 and 2003, and then directed the pilots’ money into more aggressive Rydex funds that he traded on a nearly daily basis.

SEC Files Lawsuit Against Hedge Fund Manager Over Pipe Trading Scheme

Published on: December 28, 2006 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission recently filed a lawsuit against Edwin Buchanan Lyon, a hedge fund manager, and seven funds known as the “Gryphon Partners” regarding their alleged role involving 35 PIPE (Private Investments in Public Equities) offerings and Canadian short sales. Lyon is the managing partner and chief investment officer of Gryphon.

A PIPE is the purchase of stock in a company by a mutual fund, investment firm, or other qualified investor at a reduced rate per share for the purpose of raising capital. There are two major kinds of PIPE: traditional and structured. A traditional PIPE is where stock, either common or preferred, is issued at a set price. A structured PIPE issues convertible debt. PIPEs are a popular financing technique because of their relative efficiency in terms of time and cost. A PIPE can offer liquidity to a company in need of funds.

According to the SEC, the defendants allegedly attempted to “improperly realize more than $6.5 million in ill-gotten gains… without incurring market risk.” Three of the ways the defendants allegedly did this was to 1) evade registration requirements related to at least 35 PIPE offerings, 2) make material misrepresentations to PIPE issuers, and 3) engage in insider trading.

Morgan Stanley Awards CEO John Mack $40 Million Bonus

Published on: December 27, 2006 | by Shepherd Smith Edwards & Kantas, LLP

This year, Morgan Stanley Chief Executive Officer John Mack was given the largest bonus ever for a Wall Street firm head. His company gave him $40 million after garnering its best profits yet in their 71-year history. As of December 12, the bonus was presented to Mack in options worth $4 million and $36.2 million in shares. His 2006 bonus was 44% larger than his bonus last year and nearly $2 million more than the total compensation received by Goldman Sachs Group Inc. CEO Henry Paulson in 2005.

Mack’s bonus comes 18 months after he rejoined the firm following the firing of former Morgan Stanley CEO Philip Purcell because of the company’s unimpressive performance. Upon being appointed CEO, Mack promised investors that he would improve the Morgan Stanley’s lowered stock price and increase the company’s profits. Morgan Stanley also gave over $57 million in company bonuses to several other Morgan Stanley executives.

This year, shares of Morgan Stanley have gained 43%, outpacing the 24% advantage of the Amex Securities Broker/Dealer Index. It is the second-biggest securities firm in the United States by market value. Morgan Stanley is also one of 12 financial firms that has been accused of allowing its interests to affect its stock reports. In one case, the investment banking firm agreed to pay a $125 million fine to the SEC-although the firm did not admit any wrongdoing-following accusations by luxury firm LVMH that Morgan Stanley treated Gucci-a Morgan Stanley client-preferentially by giving them favorable coverage.

SEC’s Enforcement Division To Redress Legal And Regulatory Violations

Published on: December 21, 2006 | by Shepherd Smith Edwards & Kantas, LLP

Addressing a legal gathering on December 1, Linda Thomsen, the director of the Securities and Exchange Commission’s Enforcement Divison says that the division plans to cover all areas regarding enforcement topics in the coming fiscal year, including:

· Misconduct in over-the-counter securities markets. This often involves fraud victims who are not able to afford their losses.

· Misconduct that affects retail investors.

For Securities Fraud, Theft, And Racketeering, Colorado Appeals Court Affirms Financial Adviser’s 100-Year Prison Term

Published on: December 19, 2006 | by Shepherd Smith Edwards & Kantas, LLP

The Colorado Court of Appeals has affirmed the 100-year prison term that was imposed on financial advisor Will Hoover for racketeering, securities fraud, and theft convictions. Hoover had received his original sentencing in 2004, after being convicted for operating a number of investment scams that led to investors losing some $15 million.

According to the appeals court, most of the charges against Hoover were related to the Agency Account of Will Hoover Co. Inc. and Bird Ventures LLC, which were his primary investment schemes.

Hoover had used Agency Account to collect investments between 1999 and 2003, promising investors that their money would be held at the Fleet Bank of Boston in a federally insured account where the money would accrue annual fixed returns that were higher than what investors could get on their own.

SEC Wins Liability Ruling V. 800America.com Inc. Principal

Published on: December 18, 2006 | by Shepherd Smith Edwards & Kantas, LLP

The SEC (Securities and Exchange Commission) was granted summary judgment in its action charging the principal of 800America.Com Inc., a supposed Internet retailing venture, with securities fraud and other violations. The judge, however, refused to impose penalties on Tillie Ruth Steeples (the principal) to the full extent wanted by the SEC. The liability ruling was issued at the U.S. District Court for the Southern District of New York. In addition to agreeing to and ordering the SEC’s disgorgement request of $2.7 million, the court agreed to impose a penny stock bar on Steeples, but only for five years following her time in prison.

In a reverse merger in July 1999, a publicly registered shell company called World House Entertainment issued 1 million shares of restricted common stock to acquire all of the outstanding common and issued stock of 800America Inc. The shell company was controlled by Rabi and Steeples. They renamed 800America Inc. to 800America.com Inc.

800America.com claimed to be an Internet retailer that sold clothes and connected customers with other Internet retailers. Its common stock was traded on the over-the- counter bulletin board and registered with the SEC.

Johnson Capital Management Inc. and Samaritan Asset Management Services Inc. Are Sued For Alleged Illegal Market Timing Scheme

Published on: December 15, 2006 | by Shepherd Smith Edwards & Kantas, LLP

The New York Attorney General’s Office has announced that Attorney General Eliot Spitzer, also now Governor-elect of New York, is filing a lawsuit against Samaritan Asset Management Services Inc., Johnson Capital Management Inc., and the principals of both companies for allegedly participating in a fraudulent mutual fund market timing scheme. The principals are Edward T. Owens and Michael A. Johnson, respectively. According to the lawsuit, all parties knew they were being deceptive by “flying under the radar” so they could avoid the monitoring systems geared toward detecting market timing in regard to mutual funds. The lawsuit is looking to enjoin the defendants from engaging in such deceptive practices and wants there to be a restitution of money for their fraudulent actions.

Johnson Capital, Samaritan, and their principals are believed to have been “piggybacking” their trades onto investment accounts of retirement plans that were customers of trust company and national banking association Security Trust Company (STC) and of varying the amount of each trade so the mutual funds wouldn’t notice.

In an October 22, 2001 email sent to Johnson Capital by an STC employee:

NASD and NYSE Group Inc. Move Toward SRO Merger

Published on: December 14, 2006 | by Shepherd Smith Edwards & Kantas, LLP

The NASD (National Association of Securities Dealers) and the New York Stock Exchange (NYSE) Group Inc. took a major step forward toward developing a consolidated, single, not-for-profit self-regulatory organization (SRO). They recently signed a historic letter of intent for the merger. Before the SRO can be created however, both parties’ memberships and the SEC have to approve the bylaw amendments. The SRO is expected to be up and running after the first quarter of 2007.

With a newly consolidated group working toward more efficient regulation, costs would be cut for broker-dealers because there no longer would be any duplicate oversight. There would also be one enforcement staff, one set of rules, and one set of examiners. Mary L. Shapiro, NASD chairman and chief executive officer, will be CEO of the organization. CEO of NYSE Regulation Richard G. Ketchum would remain in his position while also becoming the new SRO’s chairman of the board of governors.

An SRO is a nongovernmental organization that has been entrusted to regulate its own members. The purpose of the New SRO is to enhance regulatory efficiency and consistency, and millions of dollars are expected to be saved once the new operation is fully running.

For Investors, REIT’s Go Global

Published on: December 12, 2006 | by Shepherd Smith Edwards & Kantas, LLP

REIT Investors around the world can now take advantage of a global property boom in commercial real estate. Whereas several years ago, only six other nations, including the United States, allowed investors to invest in real estate investment trusts, there are now nearly 24 countries that either have established REITs or are structuring them.

REIT’s allow investors to become exposed to real estate without having to involve themselves in private investment outfits or direct ownership. Typically, real estate investment trusts own offices, apartments, and other kinds of commercial real estate, including warehouses, shopping malls, and hotels. Shareholders receive dividends based on 90% of all taxable income.

Examples of two countries that are developing REIT laws for investors: