Investor Lawyers Blog

Coalition of Former Enron Shareholders Asks the SEC for Help In Holding Banks Accountable for Their Role in Enron’s Fraud Scheme

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

A coalition of consumer and labor groups that are plaintiffs in the shareholder litigation against Enron Corp. say that they are asking the Securities and Exchange Commission to talk to the U.S. Supreme Court on their behalf.

The University of California is a lead plaintiff in the case, and its attorney, Christopher Patti, says the shareholders deserve to have their case presented during trial before the Supreme Court. He also said that he felt that the law was broad enough so that parties, such as financial institutions that were active, key, and consenting participants in the Enron fraud case and had intentionally engaged in deceptive conduct to purposely mislead investors, could be included.

On May 8, a group of Enron shareholders that claim that the energy trading giant allegedly defrauded them sent a letter to the SEC asking it to file an amicus brief with the high court explaining why banks and other parties took part in Enron’s fraudulent scheme and should be held accountable.

U.S. Senators Push For The End of Mandatory Arbitrations

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

U.S. Senator Robert Casey of Pennsylvania has joined the efforts of two other U.S. Senators, and others, to persuade the SEC to lift the requirement mandating arbitration when there is a security dispute. Senator Casey expressed his opinion earlier this week at the yearly public policy conference hosted by the North American Securities Administrators Association Inc. (NASAA) of Washington. Mr. Casey said he would use his position as a Banking Committee member to push the SEC on this matter.

Senator Russ Feingold of Wisconsin and Senator Patrick Leahy of Vermont had written a letter to the SEC just last week requesting that mandatory arbitration in securities disputes be banned.

Currently, most investors are required to sign agreements mandating that they take their disputes to an NASD-operated arbitration system. NASAA has asked the U.S. Congress to consider letting investors bring their disputes to the courts.

NASD Fines Two Fidelity Brokerage Subsidaries $400,000 for Distributing Misleading Sales Literature Regarding Systematic Investment Plans Sold to Military Personnel

Published on: May 10, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The NASD announced this week that it fined two Fidelity brokerage firms $400,000 for preparing and distributing misleading sales literature promoting Systematic Investment Plans, which were sold primarily to U.S. military personnel. Issuance and sales of new systematic investment plans after these were prohibited by Congress last fall.

The NASD found that between January 2003 and January 2006, the two firms violated NASD advertising rules by preparing and distributing misleading sales literature. From May 2003 through January 2006, the Fidelity firms prepared and distributed a brochure entitled “Time is Money” that included misleading performance claims about its “Destiny Plans”. According to “mountain charts” contained in the brochures, these plans significantly outperformed the S&P 500 Index over a 30-year period. Yet, during the most recent 10- and 15-year periods-the time frame most relevant to current and prospective investors – Destiny Plans substantially underperformed the S&P 500 Index.

The brochures also showed average annual total returns for 1, 5 and 10 years as well as the life of the Plan, without showing comparable returns for the S&P 500 Index. This also created the misleading impression that the plans outperformed the S&P 500 Index when instead that index significantly outperformed the plans.

SEC Orders Morgan Stanley to Pay $7.9 Million for Failing to Provide “Best Execution” on Client Trades

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

Morgan Stanley & Co. Inc., the world’s second largest securities firm, will pay $7.9 million for its failure to provide best execution to certain retail orders for over-the-counter securities, the Securities and Exchange Commission announced today. Morgan Stanley embedded undisclosed mark-ups and mark-downs on certain retail OTC orders processed by its automated market-making system and delayed the execution of other retail OTC orders, for which Morgan Stanley had an obligation to execute without hesitation.

“By recklessly programming its order execution system to receive amounts that should have gone to retail customers, Morgan Stanley violated its duty of best execution and defrauded its customers,” said Linda Chatman Thomsen, Director of the regulator’s Division of Enforcement. “Best execution is a fundamental duty of a broker- dealer,” Thomsen, added. “Morgan Stanley violated its duty” and committed fraud by setting-up its order-execution system “to receive amounts that should have gone to retail customers.”

The company began overcharging clients after embedding undisclosed fees on some trades when it adopted a new computer system to handle transactions in 2001, the SEC said. The lapses affected more than 1.2 million transactions valued at about $8 billion from 2001 through 2004. A Morgan Stanley trader stumbled onto the problem in December 2004 when unusually high trading in a company’s stock generated a $400,000 profit within a few minutes, the SEC said. The trader alerted his supervisor, and by that afternoon a technician pinpointed the programming “error”.

Is the Stock Market Boom Really a Bust?

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

Stock market cheerleaders these days sound as inebriated as New Year’s Eve drunks on Y2K. Too bad their hangovers have apparently affected their memories since 1/01/2000.

Since that date, over 88 months or more than two-thirds of a decade have passed by, yet the Dow Jones Average Industrial Average and the Standard and Poor’s index of 500 stocks have barely moved an inch. Imagine an S& P stock unit, consisting of fractional shares of each stock in the index, costing in dollars the value of the S& P index. On the first day of 2000, that unit would have been worth $1,469.25. At the end of April, 2007 it was worth $1,482.37.

Measured by these widely recognized yardsticks, if your retirement portfolio was invested only into blue-chip stocks and if you did not spend a dime, the portfolio you held at the birth of the Millennium has finally recovered its losses. After suffering the slings and arrows of anxiety and despair, you finally broke even. But is even this any cause for celebration?

State Securities Registration Laws Will No Longer Apply to Nasdaq Capital Market Listed Securities

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

When state securities regulators led by Elliot Spitzer of New York exposed a shocking level of crime and fraud on Wall Street, corporations and securities firms stepped up their campaign to gut state securities laws and the powers of state regulators. These special interests had already convinced Congress to forbid class action claims for securities fraud under state laws.

Meanwhile, many are accusing the SEC, with its commissioners all appointed by the President, of pandering to those same special interests. Despite its purpose to protect investors, the Securities Exchange Commission (SEC) has taken numerous actions to reduce its own restrictions and has taken positions on numerous court cases which are contrary to the interests of investors.

In its latest action, the SEC announced May 3 that, beginning May 24, securities listed on the Nasdaq Capital Market will be exempt from state “blue sky” registration requirements.

Former Morgan Stanley Compliance Officer And Her Husband To Plead Guilty For Involvement In Insider Trading Scheme

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

Randi Collotta, an Ex-Morgan Stanley compliance officer and attorney, and her husband, Christopher Collotta, are slated to plead guilty on May 10, 2007 for their involvement in one of the largest insider trading schemes to take place on Wall Street since the 1980’s.

Randi Collotta is accused by U.S. prosecutors of informing her husband and Marc Jurman, a Florida broker, of deals that were pending, including Adobe Systems Inc.’s $3.4 billion buy of Macromedia Inc. and the $2.1 billion acquisition of Argosy Gaming Co. by Penn National Gaming Inc.

The charges against the couple are part of U.S. prosecutors’ crackdown against Morgan Stanley employees that are accused of involvement in insider trading. 13 people have been charged in separate schemes that took place over a 5 year period and generated the participants over $15 million in illegal profits.

A Warning on Risk in Securities backed by Commercial Mortgages

Published on: May 7, 2007 | by Shepherd Smith Edwards & Kantas, LLP

In the wake of the collapse of the subprime residential mortgage market, the leading bond rating agencies are beginning to crack down on what they see as risky lending practices in commercial real estate as well.

Like residential loans, commercial mortgages are pooled and packaged into bonds that are sliced up into portions carrying different degrees of risk. According to Moody’s, there were $769.6 billion in commercial mortgage-backed securities at the end of last year, representing 26.1 percent of all outstanding commercial mortgages, including apartment buildings.

The agencies that rate these securities have issued warnings in the past, but last month they sounded a new note of urgency, saying that for the first time they would adjust their ratings to reflect their concerns.

Ex-Morgan Stanley Client Services Representative Stole Proprietary Information About Hedge Funds, Says U.S. Attorney Michael Garcia

Published on: May 7, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Ronald Peteka, a former Morgan Stanley & Co. client services representative, was arrested last month. According to Michael Garcia, the U.S. Attorney for the Southern District of New York, Peteka allegedly stole proprietary information about hedge funds from Morgan Stanley while working with one of the brokerage firm’s consultants for the information technology department. The consultant, named Ira Chilowitz, who was in charge of establishing secure computer connections between prime brokerage clients and Morgan Stanley, pled guilty early this year to four felony counts connected to the allegations against Peteka.

Among the list of allegedly stolen items is the names of all of Morgan Stanley’s major brokerage hedge fund clients, as well as the formulas that were used to figure out the rates paid by them for specific services. This list, according to Garcia, could be of great value to Morgan Stanley’s competition. Garcia said both Chilowitz and Peteka conspired to misappropriate this list.

The U.S. Attorney said that when Chilowitz pled guilty, he confessed that the reason he stole the list was because he anticipated that it could possibly help both him and Peteka gather new business for a consulting company they had planned on setting up together.

Securities and Exchange Commission Charges Ex-Portfolio Manager With Failing To Disclose Personal Stock Transactions

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

Geoffrey Brod, a former Aeltus Investment Management LLC portfolio manager has been charged by the SEC with concealing personal stock trades held by mutual funds that he was overseeing. The SEC is also charging him with falsifying internal reports. According to the SEC, Brod’s wrongful activities are in violation of his company’s ethics, as well as the antifraud and reporting provisions of the 1940 Investment Company Act.

SEC rules mandate that Brod turn in quarterly and yearly reports of personal securities transactions to Aeltus, which mandates pre-clearance of all portfolio managers’ securities trades, prohibits short-term trades, allows no more than 30 securities trades in a quarter, and requires both a 60-day holding period and a yearly certification of code compliance.

Brod is said to have actively taken part in personal, short-term trading in public company stocks. He had access on a regular basis to mutual fund holdings and their transactions in securities that were traded publicly. His method of trading, says the commission, required a very short-term trading pattern, and his holding period lasted about two to seven days. He engaged in about 3,5000 personal trades.