Stock Broker Fraud Blog

Christopher Cox brought a sense of calm to the Securities and Exchange Commission after he became chairman. Rather than the split, partisan votes that had become the standard under the previous chairman, Mr. Cox has appeared to look for the widest support possible. Under Mr. Cox, every vote made on a proposed rule has led to a 5-0 decision.

Now, however, critics say that they are frustrated with Cox’s approach. They say that because Mr. Cox is constantly working toward consensus, the SEC may be progressing too slowly on certain key issues and that investors and Wall Street have ended up having no guidance on these topics.

This debate regarding Mr. Cox touches the core of some big questions regarding the role of an SEC chairman. A large question to consider is whether Mr. Cox should aim for changes that are contentious, even though they put off interest groups and colleagues, or whether he should generate less decisions that are unanimous but lasting.

Issues that still have no resolution include the creation of a policy regarding penalties against companies that do not correctly backdate stock options, changing the most controversial parts of the 2002 Sarbanes-Oxley law on corporate accountability, handling mutual-fund governance, and deciding whether shareholders should put their own election-related proposals on corporate ballots.

Mr. Cox’s supporters say that unanimous decisions lead to better rules, especially as decisions that are not unanimous are usually challenged and overturned. Some of his critics, however, say that big changes require outvoting the opposition and possibly offending people.

A big test of Mr. Cox’s consensus approach is the issue of whether or not shareholder should be allowed to place their own election-related proposals on corporate ballots. This could end up in shareholders nominating their director candidates and could increase the influence of shareholders.

Mr. Cox says a final vote on this issue will take place this year. This issue could be especially controversial, because it does not appear that there is room for compromise. While shareholder activists want this idea to push through, business groups are against the move.

One possible solution to this issue is to offer a compromise solution. The SEC is examining whether companies can resolve disputes with shareholders through arbitration instead of the court system. This could satisfy SEC Republicans and the SEC could offer them this option while offering Democrats the changes to the way that directors are nominated. The downside to this solution, however, is that both sides could end up alienated by it. Some people believe that this issue has no room for compromise, while others believe that giving shareholders nomination rights could lead to political battles involving special interest groups.

This matter has been an issue since 2003. Because of its controversial nature, however, it never became a formal rule and the issue lay unaddressed until last September when a federal appeals court said that the SEC needed to get clear on its stance. Mr. Cox promised to respond quickly, but the SEC has postponed making a proposal on more than one occasion.

Mr. Cox is the SEC’s 28th Chairman and has been in office since August 3, 2005. Since his tenure, Mr. Cox has made SEC enforcement the agency’s priority, and he has brought cases against stock options backdating, hedge fund insider trading, fraud against senior investors, online securities scams, and municipal securities fraud. He intends to leave the SEC after the next presidential election.

At Shepherd Smith and Edwards, our lawyers and staff members collectively have over 100 years experience in either the securities industry or the securities regulation. Our seasoned team is committed to helping investors across the country recoup their financial losses resulting from the inappropriate actions and decisions of stockbrokers and brokerages. For a free consultation, contact Shepherd Smith and Edwards online.

SEC Biography: Chairman Christopher Cox

Securities and Exchange Commission

A study released by the NASD Investor Education Foundation, in cooperation with AARP Foundation and WISE Senior Services, looks at why certain senior investors are more likely to become victims of investment fraud. The report is called “Off the Hook Again: Understanding Why the Elderly Are Victimized by Economic Fraud Crimes.”

Among the key findings:

*Investment fraud victims tend to be more financially literate than non-victims.
*Investment fraud perpetrators use different tactics to influence and defraud their senior targets. Tactics include fear, friendship, and intimidation.
*Fraud pitches are customized to match the victim’s psychological needs. Pitches can include sales pitches.
*Investment fraud victims usually rely on their own experience to make investment decisions. They also tend to be more positive about the future, even though they’ve usually experienced more life difficulties than non-victims.
*Investment fraud experiences often go unreported.

Researchers examined undercover tapes of fraud pitches. They also surveyed non-victims and victims to figure out what makes them different. The findings are being used to develop practical messages that will help increase fraud awareness.

The report is recommending increasing fraud prevention programs and financial literacy programs to include information about the effectiveness of persuasion tactics. The report is also recommending that seniors be encouraged to report investment fraud crimes to securities regulators. More research testing the effectiveness of persuasion education and further study of the resistance to persuasion are also being recommended.

Statistically, nearly 1/3 of all U.S. investors are senior investors. Senior investors are investors between the ages of 50 and 64. Approximately 5 million senior investors are the victims of investment fraud every year. Americans born between 1946 and 1964 are known as the baby boomer generation, and they have over $8.5 trillion in assets available to invest.

Shepherd Smith and Edwards has helped many senior investors who have been a victim of investment fraud recover their losses. Contact Shepherd Smith and Edwards for your free consultation.

Related Web Resources:

Remarks by Mary L. Schapiro Vice Chairman, NASD President, Regulatory Policy & Oversight, SEC Seniors Summit

States, SEC Work to Protect Elderly Investors, Senior Journal.com, July 12, 2006

NASD Investor Information

William S. Lerach, a prominent plaintiffs’ attorney, met with SEC staff members last week to try to convince the agency to support investor lawsuits filed against banks accused of helping corporate executives engage in fraud.

Recently, the U.S. Supreme Court agreed to hear a case that will look at the liability of secondary parties, including lawyers, bankers, and accountants, who did not say anything even though they knew that corporate officials were misleading shareholders. The case involves Charter Communications, a cable television provider, and is said to be the most important securities law case to reach the Supreme Court in twenty years. The decision could have major consequences and will affect investors’ ability to recover losses from companies that have engaged in fraud.

Trade groups that want to limit banks’ liability and consumer advocates that want to expand it are working to garner support for their sides. Both sides are also courting federal and state regulators.

Former agency officials and plaintiffs’ lawyers have expressed worries regarding a court brief related to another securities dispute that the agency turned in this year. The commission is considering industry-supported proposals that could decrease the number of shareholder lawsuits by encouraging investors to pursue arbitration as an alternative.

Note that “banks” includes “investment bankers” such as Merrill Lynch, Morgan Stanley, Smith Barney, etc. Once again, it is apparent that the SEC, which was formed and has a duty to protect investors, instead has as its agenda the goal to protect Wall Street and white collar criminals. Mr. Lerach is grandstanding here in order to shine a light on the SEC prior to its predictable action against investors. He knows – we all know – that he will get nowhere with these Bush appointees. Never has the phrase been more appropriate that “the fox has been put in charge of the henhouse!”

If you are an investor that needs an experienced law firm to help you recover your losses because you have been a victim of securities fraud, contact Shepherd Smith and Edwards today. Our firm has successfully helped thousands of investors over the years.

All Sides Seek SEC Support in Liability Case, Washington Post, April 21, 2007

Related Web Resources:

Set-Top Case Advances:U.S. Supreme Court To Hear Case Against Motorola and SA, CNN.com, April 7, 2007

Securities and Exchange Commission

6. The Continuation of Market Timing Cases
Market timing cases involving the SEC affected both sides of the trading desks. Those in charge of approving or facilitating market timing trades and as persons directly involved in market timing trades were singled out by the SEC, and significant monetary penalties were sometimes involved.

A. Bear, Stearns & Co, Inc. and Bear, Stearns, Securities Corp.
The SEC charged Bear, Stearns, & Co, Inc. and clearing firm Bear, Stearns Securities Corp. with market timing and late trading. The SEC said that BSSC was aware that it was processing late trades and that it knowingly gave priority customers deceptive trading devices so that mutual fund companies wouldn’t notice that market timing was taking place. The SEC also discovered that BSSC’s “timing desk” that was there to detect and prevent market timing actually helped clients engage in market timing activities.

Without denying or admitting to the SEC’s allegations, respondents agreed to stop engaging in future violations and pay $250 million in disgorgement and civil penalties. The also agreed to adopt procedures and policies that would improve compliance so future violations would not take place.

B. Security Brokerage Inc. and Daniel Calugar
Security Brokerage Inc (SBI) and Calugar settled a civil injunction action by the SEC accusing them of late trading and improper market timing between 2001 and 2003. Calugar is the former owner and president of SBI. The SEC said SBI created false internal records to cover up late trades. The commission accused Calugar of negotiating a “sticky asset” agreement with a mutual fund family involving the investment of hedge funds in return for market timing capabilities. SBI and Calugar did not admit or deny the allegations. Calugar, however, agreed to pay the $153 million penalties and disgorgement fine. He also consented to an entry blocking him from associating with any broker-dealer for at least one year and accepted a permanent injunction against future violations. SBI stopped being a registered broker-dealer in 2003.

C. Prudential Equity Group, LLC
The SEC charged four former Prudential Securities Inc. representatives with illegal market timing involving over 25 mutual funds. The respondents were accused of deceptive and fraudulent trading practices. PEG agreed to pay over $270 million in civil penalties and disgorgement.

D. Kenneth W. Corba and Stephen Treadway
Former PIMCO equity mutual funds executive Stephan Treadway was found guilty by a federal court of SEC’s charges that he engaged in breach of fiduciary duty, securities fraud, and other securities violations. Without admitting or denying the SEC’s findings, he agreed to pay $572,00 in penalties and disgorgement, as well as to a permanent injunction from future violations. He also agreed to being barred from associating with a broker-dealer and to not serve as a director or officer of an investment company for at least one year.

Corba, the former CEO of PEA Capital—the adviser of PIMCO—settled charges that he negotiated a “sticky asset” agreement allowing PIMCO Treadway to engage in market timing in return for long-term hedge fund and mutual fund investments.

7. Potential Fifth Amendment Privilege In NASD Proceedings
In two instances, the SEC put aside disciplinary actions made by the NASD after the former associated member firms and persons exercised their right against self-incrimination when responding to the NASD’s requests for information under Rule 8210.

In the case involving Frank P. Quattrone, who offered to provide information but not give testimony, the SEC set aside the NASD’s findings related to research analysts’ conflicts of interest and initial public offering spinning because the commission found that Quattrone had offered enough evidence to show there was a genuine issue of material fact related to whether NASD’s investigation was state action. The SEC also set aside NASD’s disciplinary action against him.

In the mater of Justine F. Ficken, a former general securities representative of Prudential Securities Inc. and Wachovia Securities LLC, the SEC set aside NASD’s disciplinary action against him, remanding further consideration. Ficken had refused to give testimony at on-the-record interviews concerning late trading and market timing. Ficken said he believed NASD acted as a state actor. The commission said its Quattrone opinion had not been issued when NASD took action and did not address the question of joint action as to whether it was a state actor. It also said Ficken could meet the burden for obtaining discovery and NASD needed to consider his discovery request.

8. Enforcement Action Against Outside Directors
The SEC filed enforcement actions involving financial reporting issues against eight former Spiegel, Inc. directors and officers. Three outside directors were involved in Spiegel’s decision to delay filing “required financial reports in order to avoid issuance by its outside auditor of a ‘going concern’ opinion.” Upon announcement of the actions, SEC’s Division of Enforcement Director, Linda Chatman Thomsen, said "Directors who keep important financial information from the investing public by purposely failing to file required financial reports will be sanctioned. Shareholders and investors deserve to know the unadulterated truth."

Two of the directors agreed to a permanent injunction from future violations and to a civil penalty of $100,000. The third director agreed to an administrative order to cease and desist causing or committing future violations of the federal securities laws’ reporting provisions.

9. City of San Diego Sanctioned
In an administrative proceeding, the SEC charged the City of San Diego with failing to disclose in five municipal bond offerings key details regarding specific pension and retiree health care obligations. It also accused the City of not revealing that it was intentionally underfunding its pension obligations to increase pension benefits and defer costs at the same time.

The SEC said the City either knew or was reckless if it didn’t know that it had made misleading statements and that the City violated certain sections of the Exchange Act and Rule 10b-5 thereunder. The City did not deny or admit to the SEC’s findings, but it did agree to cease and desist from future securities fraud violations and to work with an independent consultant to help “foster compliance” related to disclosure obligations.

10. First SEC Case Under the USA PATRIOT ACT
The SEC brought its first action under the USA PATRIOT Act when it sanctioned Crowell, Weedon, and Co. for failing to properly document its CIP (customer identification program).

The SEC found that Crowell opened about 2900 customer accounts but did not follow verification procedures as stated in its CIP. The SEC said that, instead, Crowell relied on its representatives' attestations that they had personal knowledge of the new customers. The SEC said Crowell violated record retention requirements and record-keeping rules. Crowell did not admit or deny the findings, but it did agree to cease and desist from any violations or future violations of Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-8 thereunder.

Shepherd Smith and Edwards represents investors who have lost investments because of the inappropriate actions of members of the securities industry. If you are one of those investors, contact Shepherd Smith and Edwards to schedule your free consultation. We have helped thousands of investors recover their losses.

The full, original article was originally published by the Bureau of National Affairs on April 9, 2007. You can also read the #1-5 Leading SEC Enforcement Developments on this Web site.

Related Web Resources:

Securities and Exchange Commission

BNA

1. Stop Options Backdating
More than 100 companies were investigated by the Department of Justice and the SEC because of an article published in the Wall Street Journal in March 2006. The newspapers had asked a finance professor to give it a list of companies that made stock option grants that led to large stock market gains. The Journal studied several of the companies on the list and found that several of the option grant patterns found could not have happened without backdating. The article resulted in one of the largest securities investigations ever. The DOJ and the SEC only filed a few backdating cases, including cases against Comverse Technology, Inc. and Brocade Communication Systems, Inc.

2. Corporate Civil Penalties Guidance
The SEC put out a statement in January 2006 that reaffirmed its commitment to issuing civil penalties against corporations. It also formally named the factors it looks at when determining whether to impose these penalties. Factors included the absence or presence of a direct benefit to the corporation because of the violation and the extent to which the penalty will “recompense of further harm” the victims. The SEC also named seven additional factors it would look at when deciding whether to issue a civil penalty: the extent the corporation in question cooperates, deterrence, degree of complicity within the corporation, extent of injury to victims, difficulty of detection, level of intent, and lack of or presence of remedial steps.

3. Court Opinions Which Suggested Cooperation Limits Between Criminal Authorities and the SEC
In U.S. V. Stringer, the district court dismissed the criminal indictment that charged three FLIR Systems, Inc. executives with securities fraud and conspiracy. The court said that the Department of Justice and the SEC deprived the defendants of their rights by pursuing parallel criminal and civil investigations before filing the indictment. The court said that the SEC did not properly warn the defendants of the DOJ’s involvement with the SEC’s investigation—which deprived them of their Fifth Amendment rights and due process. The court also said that the prosecution used the SEC to conduct its criminal investigation. The court accused the government of taking part in “deceit and trickery.” An appeal in front of the Ninth Circuit is pending.

4. Improper Investment Adviser Fee Arrangements
The SEC escalated its investigation of mutual fund fee arrangements. In September of last year, it filed a settlement administrative proceeding against third-party service provider BISYS Fund Services, Inc., which conducts back-office services and recordkeeping for mutual fund advisers.

The SEC determined that BISYS aided and abetted 27 mutual fund advisers in their defrauding of investors by entering into undisclosed side agreements that allowed advisers to use investors’ mutual fund assets to fund marketing expenses. Part of the administration fee was returned to investment advisers so they would continue retaining BISYS. BISYS provided third parties or the funds’ advisors with more than $230 million from its administrative fees. Mutual funds’ shareholders and trustees were not informed of these side agreements.

BISYS did not admit or deny wrongdoing. It did, however, paid $21.4 million (10 million in civil penalties, $9.7 million in ill-gotten gains, and $1.7 million in prejudgment interests. The money was put in a distribution fund to benefit those harmed by the improper fee arrangements.

5. Sanctions On Counsel for Negligence Upheld
The DC Circuit Court upheld the SEC’s sanctions against the bond counsel who issued a “tax-exempt” opinion regarding issuing municipal bond without a proper investigation first. The DC Circuit said that an issuer could, in theory, issue tax-exempt bonds with an interest of 4% and earn 5% by investing the proceeds in treasury bonds, gaining an immediate profit without risk. By law, however, the federal government limits arbitrage by mandating that municipal bonds undergo certain tests or give up their tax-exempt status.

In the case ruled on by the DC court, a school board issued the bonds. An investment banker, Ira Weiss, told the board that it could borrow money for capital projects for a number of years and keep the profits if it issued municipal bonds. Weiss said that the plan was legal, issuing an unqualified opinion on the tax-exempt status of the bonds. He drafted a nonarbitrage certificate that the board signed, but the DC court says the representations did not justify the counsel’s reliance. Although an administrative law judge ruled in favor of Weiss, the SEC found him negligent and ordered him to cease and desist violating certain sections of the Securities Act. They also made him pay a disgorgement fee. Weiss, the promoter, had used the possibility of arbitrage to make a transaction sale and did not provide the board with full information concerning the taxable IRS risks.

If you are an investor who has sustained financial losses because of the inappropriate actions of a member of the securities industry, contact Shepherd Smith and Edwards right away. While the SEC can force securities industry members to pay fines, it is up to an experienced law firm to help you recover your losses. Shepherd Smith and Edwards has helped thousands of investors get their money back.

#6-10 can be found on this Web site during the week of April 23, 2007. The full, original article was originally published by the Bureau of National Affairs on April 9, 2007

Related Web Resource:

Securities and Exchange Commission

BNA

Interests involving registered limited liability partnerships (RLLPs) are contracts within the federal securities laws’ meaning, according to the U.S. Court of Appeals for the 11th Circuit. The court reversed a ruling made against the Securities and Exchange Commission (SEC) for its enforcement action against two promoters and their company, Merchant Capital LLC.

According to the appeals court, the SEC filed an enforcement action against Merchant Capital LLC, Steven Wyer, and Kurt Beasley. The commission had alleged violations of the federal securities laws’ registration and antifraud provisions. Beasley and Wyre had established Merchant to take part in buying, reselling, and collecting charged-off consumer debt from financial institutions.

Merchant started raising money in 2001 by soliciting individuals to become partners in Colorado RLLPs that were eventually sold as freestanding entities. Although Merchant had organized 28 RLLPs with 485 partners, it did not reveal that the different partnerships existed. Its RLLPs ended up with more than $26 million in total capitalization.

Merchant was the managing partner of every RLLP. According to the court, even though the partnership materials indicated that partners would be able to actively participate in the business, they did not have much control over the partnerships. The court said that Merchant did not run the business successfully and knew that the partnerships were not performing well.

The SEC filed its action in November 2002, and Merchant agreed to a temporary restraining order that prevented it from selling more RLLP interests. The district court denied the SEC’s request for injunctive relief, civil penalties, and disgorgement, and ruled in favor of the defendants. The district court said that because RLLP interests were not investments, they were not securities. The court also said that securities fraud had not taken place.

The SEC appealed the decision, and the court partially reversed its ruling, while remanding and vacating further proceedings. The appeals court decided that the RLLP interests were investment contracts and therefore securities subject to federal securities laws. The court said the partners did not have the ability to “remove Merchant,” nor did they actually have the authority to approve purchases. In addition, the investors had no experience in debt purchasing and there would have been no alternative manager to Merchant—even if they were able to remove Merchant.

Regarding fraud claims by the SEC, the court found that the district court didn’t clearly err” when it found that the defendants’ return projections before June 2002 were not materially misleading. It also said the district court did not make a mistake by finding that the projections were made reasonably and in good faith. The appeals court, however, did find that the district court did err when it ruled that the projections made after June 2002 weren’t materially misleading.

The court also said that defendants made certain omissions and misrepresentations when marketing certain interests and that the district court made a mistake by reaching a different conclusion. The court therefore concluded that the case must be remanded.

If you are an investor who has experienced a financial loss because of misconduct by a member of the securities industry, contact Shepherd Smith and Edwards today. We have helped thousands of investors recover their losses. Your first consultation, if you contact Shepherd Smith and Edwards online, is free.

Related Web Resources:
SECURITIES AND EXCHANGE COMMISSION V. MERCHANT CAPITAL, LLC, STEVEN C. WYER, and KURT V. BEASLEY (PDF)

Read the SEC Complaint

Roel Campos, the Securities and Exchange Commissioner says that he is working on a campaign to create a simplified, prospectus-like disclosure document that would give investors clear, concise information about the performance and cost of their retirement plan assets.

Campos said it was a “given” that retirees would be on their own when managing their retirement funds because Corporate America was continuing to move away from defined benefit funds. Because of this, Campos said that retirees needed to obtain performance information so they could effectively manage their accounts. In order to do a good job managing their own investment funds, however, retirees need information about costs they are paying based on their investment decisions.

The retirement plans are subject to ERISA, and because of this, the SEC will be working with the Labor Department, which is in charge of administering the 1974 Employee Retirement Income Security Act, to implement the commission’s initiative.

Campos says that the initiative has two parts. The first one is a short-form prospectus for mutual funds instead of a complete prospectus. The second component will look at whether rule changes under ERISA should be made that would allow similar summary information to be made accessible to all retirement investors participating in mutual funds and other kinds of pooled investment vehicles sponsored by insurance companies and banks.

According to Campos, the Labor Department is committed to working with the SEC on these matters. After joint discussions, the commission will suggest that its summary prospectus be the framework for the summary disclosure document that will be utilized by all pooled retirement fund investors. If the DOL agrees, the SEC will work towards finalizing the summary prospectus. The DOL would also make its own rules. The ultimate purpose is to create a system that would allow retirees to have the information they need to successfully manage their retirement funds. Campos sees this as an ultimate “win-win for investors and for our entire capital markets system.”

This is interesting. The SEC wants to act as if they are doing something for elderly investors. What they are actually doing is the opposite by setting out the required information that has to be disclosed to investors – the “small print.” Brokerage firms can then exempt themselves from liability by placing this language in their investment information. If a firm places “warnings on a label,” it can later be argued the warning was not sufficient. However, if the government tells firms about what they have to say in the warning, then it cannot be later claimed the warning was insufficient. The current SEC directors, selected by the Bush/Cheney administration, are “owned” by Wall Street and are doing everything they can to help their friends.

Shepherd Smith and Edwards is a law firm dedicated to protecting investors by helping them recoup any losses incurred due to the misconduct of members of the securities industry. Shepherd Smith and Edwards offers a free, first consultation to all prospective clients who reach us via the Internet, so contact us today.

Employee Retirement Income Security Act — ERISA, US Department of Labor

U.S. Department of Labor

For Seniors, SEC.gov

An NASD Hearing Panel issued $100,000 in fines against Kenneth Pasternak, former CEO of Knight Securities, L.P. (now known as Knight Equity Markets, L.P.), and John Leighton, former head of the firm's Institutional Sales Desk, for supervisory violations in connection with fraudulent sales to institutional customers in 1999 and 2000.

In addition, Pasternak was suspended in all supervisory capacities for two years, while Leighton was barred in all supervisory capacities.

In March 2005, NASD's Department of Market Regulation charged Pasternak and Leighton with failure to supervise the firm's leading institutional sales trader, Joseph Leighton, who is John Leighton's brother. The NASD complaint also charged Pasternak with failing to establish and enforce a supervisory system designed to ensure compliance with federal securities laws and NASD rules.

In a 2-1 ruling, the panel found that Pasternak and John Leighton failed to supervise Joseph Leighton's trading activities. "For all intents and purposes, Joseph Leighton ran the Institutional Sales Department as he saw fit," the majority ruling says. "Pasternak, John Leighton, and Joseph Leighton each concluded that as long as the customers did not learn of the extraordinary profits Knight earned on their orders, there was no limit to the amount the firm could make on an institutional order."

The majority also found that Pasternak's response to numerous red flags was "woefully inadequate," that Pasternak and John Leighton "never questioned Joseph Leighton's activities or confirmed he was providing his customers with best execution and a fair price," and that the overall supervisory void "allowed Joseph Leighton to take advantage of his customers over a 21- month period by filling orders at prices that netted Knight unreasonably high profits."

In April 2005, Joseph Leighton agreed to a bar from the securities industry and a payment of more than $4 million to settle charges by the Securities and Exchange Commission (SEC) and NASD that he made millions of dollars in fraudulent trades with Knight's institutional customers. The SEC and NASD found that Joseph Leighton generated excessive profits by pricing trades with institutional customers in a manner contrary to customers' expectations and industry custom, and using deceptive trading practices to disguise both his pricing and the amount of Knight's profits.

In December 2004, Knight paid more than $79 million to settle SEC and NASD charges against the firm arising from Joseph Leighton's fraudulent and deceptive conduct.
More than $3.3 million of Joseph Leighton's monetary sanction and more than
$66 million of the firm's monetary sanction was paid into a Fair Fund established by the SEC to compensate investors harmed by Joseph Leighton's fraud.

Unless the matter is appealed to NASD's National Adjudicatory Council (NAC), or is called for review by the NAC, the hearing panel's decision becomes final after 45 days.

The Enron Corp. shareholders that are suing three big investment banks for their alleged roles in helping Enron hide its failing financial position have petitioned the U.S. Supreme Court to look at a ruling made by the U.S. Court of Appeals for the Fifth Circuit that reverses the certification of a single plaintiff case. The court had ruled on March 19 that while Enron had a duty to its shareholders, banks do not.

The appeals court concluded that the plaintiffs did not have a right to a presumption of reliance on the banks’ failure to reveal their alleged participation in the Enron controversy. It also ruled that the plaintiffs do not have a right to the presumption of reliance afforded by the “fraud-on-the-market” concept.

In their certiorari petition, filed by the University of California Regents on behalf of Enron shareholders, the plaintiffs say that the Supreme Court needs to review the case to resolve a “clear conflict” in the circuits and lower courts about the meaning of so-called “scheme liability.” They also said that the appeals court decision was not correct.

UC General Counsel Charles Robinson issued a statement saying that Enron shareholders were entitled to present their case at trial and that the plaintiffs believed the law was broad enough to include parties that engaged in deceptive conduct to purposely mislead investors.

Plaintiffs’ counsel William Lerach said that investment banks should be held accountable and that the fifth court’s ruling give other corporations permission to “commit fraud without consequences,” leaving investors without recourse.

Investors represented by the UC Regents include the Washington State Investment Board and the San Francisco City and County Retirement System. Defendants in the petition include Credit Suisse First Boston LLC, Pershing LLC, Merrill Lynch Pierce Fenner & Smith Inc., Credit Suisse First Boston (USA) Inc., Merrill Lynch & Co., Barclays Capital Inc., Barclays Bank PLC, and Barclays PLC.

Because of the Enron scandal, the university pension fund lost over $144 million. It oversees $71.5 billion in assets.

Shepherd Smith and Edwards represents investors who have lost money because of the inappropriate conduct and actions of members of the securities industry. If you are one of those investors, please contact Shepherd Smith and Edwards today for your free consultation.

University urges Enron class-action be reinstated, Pensions and Investments, April 5, 2007

Related Web Resources:

Enron

Enron on Trial, CNN.com

Washington, DC — The NASD today issued an updated Investor Alert warning investors - not brokers - about the risks associated with trading on margin. Since the release of a previous Alert on this topic in 2003, the amount of debt taken on by investors to buy securities has reached a record high of $321.2 billion in February 2007.

"We are concerned too many investors are unaware they could suffer substantial financial losses by using debt to purchase securities," said Mary L. Schapiro NASD Chairman and CEO. "By updating our Alert on this topic, we hope to remind investors not to underestimate the risks involved."

The Alert, Investing with Borrowed Funds: No "Margin" for Error, explains that investors who cannot satisfy margin calls can have large portions of their accounts liquidated under the market conditions at the time, favorable or unfavorable. That liquidation can result in substantial losses. Some of the risks associated with opening a margin account explained in the Alert are:

* Firms can force the sale of securities in accounts to meet a margin call.
* Firms can sell securities without contacting the account holder.
* Account holders are not entitled to choose which securities or other assets can be sold.
* Firms can increase margin requirements at any time and are not required to provide notice.
* Account holders are not entitled to an extension of time on a margin call.
* Account holders can lose more money than is deposited in a margin account.
* Account holders should ask whether they will automatically be placed in a margin
account and, if so, the rate of interest and what circumstances would trigger a margin loan.

It is interesting that the NASD should undertake to make such blanket statements about the lack of legal requirements on NASD members since court decisions over the years are split both for and against firms who treat margin borrowers in an unconscionable manner. Observers note that the NASD is prone to take such positions on behalf of its members, although its retulatory purpose is to protect investors.

Furthermore, many question why the NASD is not concentrating its efforts on requiring brokerage firms to discourage unsuitable borrowings. All NASD members must react to NASD Notices to Members, while the vast majority of investors have no knowledge or contact with NASD releases. It is clear that efforts to restrict member lending would have a far greater effect on solving the problem than the NASD's recent action.

Meanwhile, the NASD may be reluctant to take steps to address this problem because approximately $20 billion in margin interest is earned each year by NASD member firms, with very few losses incurrred. Thus, the NASD is avoiding any true effort to discourage borrowing and instead offering obscure warnings to investors while also making questionable statements to exonerate its members from liability.

For a second time, the U.S. District Court for the Southern District of New York told J.P. Morgan Chase &Co. shareholders that they cannot hold the investment bank responsible for securities fraud related to its alleged complicity in helping Enron cover up its true financial situation.

Judge Sidney H. Stein said the second amended complaint had the same flaws as the first complaint: The Enron shareholders, not the investment bank’s shareholders are the victims of Enron’s collapse and therefore the ones defrauded—if the allegations were borne out.

According to the plaintiffs, they became investors in JPM Chase because it was known for its financial discipline and integrity. The bank, however, was unlawfully helping and abetting Enron’s wrongful conduct. Its reputation suffered after its role in the Enron scandal was revealed.

The plaintiffs claim that JPM Chase defrauded its investors from November 1999 to July 2002 by concealing its role in the Enron fraud debacle. Enron was one of JPM Chase’s most lucrative clients. The investment bank also hid the fact that it created Mahonia Natural Gas Limited and Mahonia Limited, two shell companies that the bank used to give Enron billions of dollars in credit masked as revenue from prepaid commodities.

These transactions allegedly allowed Enron to cover up its debt so it wouldn’t have to appear on its balance sheet. JPM Chase allegedly was paid “exorbitant advisory fees” by Enron in exchange for its help. It also allegedly invested millions of dollars in one of Enron’s money-spinning partnerships that it used to “consummate various sham transactions” that was used to cover up the ownership risks of Enron’s assets.

The court said that both complaints were dismissed because they did not satisfy fraud pleading requirements. For example, while the second complaint showed new ways that JPM Chase issued misleading misrepresentations, the plaintiffs still did not show how these misrepresentations were just “non-actionable puffery.”

Also, the court said the amended complaint included charges connected to the bank’s less than complete due diligence when underwriting notes offerings by WorldCom Inc. and its helping and abetting of Enron’s misconduct. The court said that these were not relevant to the current action because they concerned WorldCom and Enron shareholders, not JPM Chase’s shareholders. It also noted that the investment bank’s failure to reveal the true nature of the Mahonia partnerships was not material and that JPM Chase’s deals with Enron had generated just $86 million over five years—just a fraction of the investment bank’s overall revenues during that time.

If you are investor that has incurred a financial lose because of the wrongful actions of an investment bank or another member of the securities industry, please call Shepherd Smith and Edwards today for your free consultation. We have a successful track record for helping investors recover their losses.

Related Web Resources:

Enron Suit Against JP Morgan Dismissed, Forbes.com, March 30, 2007

JP Morgan

At a time when The New York Stock Exchange is paying-off National Association of Securities Dealers members to take over its compliance responsibilities, private firms are seeking to reduce oversight evern further. For decades the securities industry has insisted its self-regulatory structure works best to protect the public. Yet, after massive fraud was discovered on Wall Street and billions lost by investors, instead of tighter reins on the industry oversight is shrinking.

The latest to reduce compliance may be Citigroup, now the largest financial firm on Wall Street, culminating with the amalgamation of Smith Barney and a number of other fiancial firms. According to the New Yok Times, after "a series of messy scandals", including questionable research and alleged participation in such failures as Enron and WorldCom, Citigroup increased its compliance efforts. Yet, in an article this week, the Times states that that firm is now poised to reduce oversight of its operations.

Under pressure from investors, Citigroup CEP Charles O Prince, III will soon to release plans for a cost-cutting overhaul. Prince's plan is reportedly to eliminate or reassign more than 26,000 jobs, or about 8 percent of the work force, as part of a broad effort to streamline the bank’s unwieldy global operations and get its costs under control. Citigroup’s consumer and investment banking businesses are expected to face severe cuts, but legal and compliance departments are likely to also take a hit, according to those who have been briefed on the plans.

Wall Street firms have not only managed to survive the rash of scandals, thanks to a friently court system, but have actually posted record profits. Meanwhile, while Citigroup has itself joined in the prosperity on Wall Street, its investors apparently beleive compliance is actually an "unnecessary evil". WIth less threat of regulation and lawsuits, perhaps Citigroup's gamble to reduce compliance will pay-off.

Citigroup officials insist that changes would be an effort to improve efficiency and coordination, not relax controls and that any effort to “optimize compliance” was distinct from the expense review. “We remain utterly committed to a strong control environment,” said Christina Pretto, a Citigroup spokeswoman. “It’s about getting things to work as efficiently and effectively as they can.” Observers note that one would hardly expect the firm to admit otherwise.

More recently, a series of rapid, huge eurobond trades by Citigroup bankers, referred to as a “Dr. Evil” trading strategy, roiled markets in Europe in August 2004. That fall, Citigroup’s private bank had a run-in with Japanese regulators over lax money laundering controls. For more than a year, Citigroup was banned by the Federal Reserve from making a big acquisition until its financial house was in order. Some suggest that the firms compliance has made it difficult to be competitive.

While Mr. Prince laid out a strategy to deliver internal and international growth, signs of progress on the financial front, so far, have been hard to find. In the face of growing investor pressure, Mr. Prince has cut back on some planned investment spending and placed a greater emphasis on acquisitions, including a $427 million purchase of the Bank of Overseas Chinese, based in Taiwan, that it announced yesterday.

But investors are also looking to see whether Mr. Prince can get the bank’s high costs in line. Alongside the expense review that Mr. Druskin is leading, Citigroup’s new chief financial officer, Gary L. Crittenden, is reviewing the company’s overall finances and operations.

The Commodity Futures Trading Commission filed enforcement actions in the U.S. District Court for the Southern District of New York March 22 against nine firms with names identical to or extremely close to those of legitimate firms and exchanges. The actions accuse the firms of fraud while soliciting customers to purchase commodity futures and options contracts (CFTC v. American Futures and Options Exchange, S.D.N.Y., No. 07-CV-2377, 3/22/07; AFTC v. International Energy Exchange, S.D.N.Y., No. 07-CV-2378, 3/22/07; CFTC v. New York Petroleum Option Exchange, S.D.N.Y., No. 07-CV-2379, 3/22/07; CFTC v. New York Options Exchange, S.D.N.Y., No. 07-CV-2376, 3/22/07).

The CFTC also stated that the defendants used misrepresentations on their Web sites to defraud the public out of millions of dollars. Customers were solicited to trade futures and options on energy and currency. In reality, however, the defendants actually invented phony exchanges and brokers to deceive clients.

Those charged--some of which share the names of legitimate firms--are New York Options Exchange (NYOEX); Tahoe Futures; International Energy Exchange (INTENX); Vitol Capital Management; New York Petroleum Option Exchange (NYPOE); HPR Commodities; American Futures and Options Exchange; Metro Financials; and American Futures and Options Trading Commission (AFOTC).

The allegations include that Tahoe, Vitol, HPR, and Metro leased the use of fax numbers with U.S. area codes to fool the public into thinking all the companies were America-based. INTENX, NYOEX, and NYPOE were touted as futures exchanges, and AFOTC as the industry's regulator. All are fictitious.

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. '

In its termination notice statement, MetLife said it seemed that Rosenberg violated policies related to speculative insurance sales and that he may have been an accessory to money laundering violations. MetLife also said that Rosenberg had been investigated internally for violating regulations that were related to investments.

Rosenberg filed a lawsuit alleging breach of contract, employment discrimination, libel, and other causes of action. He says that MetLife ignored what was considered a Hasidic lending practice—that a customer’s check could be drawn on an account that was not in his or her name and that it would not have to be considered a third-party payment.

A jury ruled against Rosenberg and the court dismissed the remaining allegations. Regarding Rosenberg’s libel claim, it says that statements made by MetLife in Form U-5 were absolutely privileged. Rosenberg filed an appeal, and the U.S. Court of Appeals for the Second Circuit requested the high court weigh in on the issue of privilege.

The state high court ruled in favor of MetLife, noting that although absolute privilege is usually reserved for communications by individuals engaged in a public function, it can also apply to “preliminary or investigative stages of the process, particularly where compelling public interests are at stake.”

The court said that the NASD is the biggest securities self-regulation organization subject to SEC oversight and that it has the authority to enforce the 1934 Securities Exchange Act requirements, in addition to being the main regulator for the brokerage industry. The court noted that investigating and adjudicating suspected SEC and NASD violations is one of NASD’s primary roles and that it is entitled to question individuals, examine documents, engage in disciplinary proceedings, and impose sanctions and fines.

The court said that Form U-5 plays an important role in NASD’s self-regulating process and must be filed by an employer within 30 days after an employee is terminated. Form U-5 is the first notice to NASD that a securities industry participant may have engaged in possible misconduct, which can then allow NASD to initiate a disciplinary action. Form U-5 also lets member firms investigate the backgrounds of employee candidates. The court therefore concluded that the interest of the public is served by the filing of Form U-5 and that statements made by an employer on the form are subject to “absolute privilege” in a defamation claim.

William S. Shepherd is an attorney who has represented stockbrokers in claims that brokerage firms have defamed them who claims this is a remarkable decision. "This is a very competitive business and firms often retaliate against brokers when they leave. Some firms even tell brokers 'we will bloody your U-5' as a threat to keep them from taking their clients to another firm. What this decision says is that brokerage firms can lie about brokers who leave a firm – simply defame them - and be immune from lawsuits. How can this be? It’s the golden rule: He who has the gold makes the rule!. Perhaps stockbrokers and others should start to consider whether the 'new breed' of judges is protecting their rights."

Please contact Shepherd Smith and Edwards if you have sustained a financial loss as an investor because of the inappropriate actions of a member of the brokerage industry. Your first consultation with Shepherd Smith and Edwards is free.

Related Web Resource:

Firms win absolute immunity for U-5s in New York, Investment News, April 2, 2007

Chaskie J. Rosenberg v. Metlife, Inc., Metropolitan Life Insurance Company, and Metlife Securities, Inc. (PDF)

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.

Berkowitz’s sales of USA Capital First Trust Deeds may violate federal and state securities laws, elder abuse laws, laws prohibiting fraud and breach of contract. If you have purchased first trust deeds through firms such as Financial West Investment Group or brokers such as David M. Berkowitz and have lost your investment as a result, please contact Shepherd Smith and Edwards today and we will provide you with a free consultation. Shepherd Smith and Edwards is a law firm committed to helping investors recuperate the investment losses they have incurred because of the unacceptable actions of stockbrokers and their firms. We have helped thousands of investors recover their losses.

Related Web Sources:
USA Capital bankruptcy information.

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.

In arbitration, no broad right of appeal exists, and a three-person panel (rather than a jury of peers) hears the case. One benefit, however, is that disputes can move a lot more quickly through the arbitration system then in a court of law.

Some critics say that the arbitration system has become a lot like the court system that it sought to replace. Others have questioned the system’s fairness, in light of the fact that an industry-affiliated arbitrator sits on each panel. Representatives for investors have voiced concerns that arbitrators that depend on brokerage houses for their salaries may find it difficult to remain impartial.

In addition, there is a falling win rate among investors involved in arbitration disputes. Just 42% of investors won cases in NASD arbitration last year. Also, winnings are often smaller than what an investor had initially claimed if the claim is made against a big firm—reports a new study. In a study that hasn’t been finalized yet, clients’ recovery rates against Morgan Stanley, Merrill Lynch & Co., and Smith & Barney was reportedly at just 10%. (However, indications are that clients who retain attorneys experienced in this area of the law recover at far higher rates.)

Many claims are not reviewed by an arbitration panel. Last year, 81% of customer claims were resolved by mediation or settlement. It is possible that the 19% of cases that do arrive in front of a panel are the ones that brokerage firms believe they stand a good chance at winning.

Shepherd Smith and Edwards is a law firm committed to representing investors who have incurred losses because of brokers and brokerage firms. We have helped thousands of investors recuperate investment losses. Our record against major brokerage firms, as well as smaller firms, is far greater than the reported averages Contact Shepherd Smith and Edwards online, and your first consultation is free.

Related Web Resource:

Arbitration and Mediation, NASD

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.

Now that the rule has been vacated, however, new rules need to be promulgated that conform to the court’s decision. The general counsel for the Securities Industry Financial Markets Association, Ira Hammerman, said that the SIFMA is urging firms affected by the decision to offer customers as much disclosure as is reasonable in light of the ruling.

This decision is important because brokerage firms are charging more and more clients based on a percentage of assets rather than commissions for each trade. While this sounds good, instead of “churning” accounts for commissions, brokerage firms are charging 1% to 2% on assets – which is 10% to 20% in 10 years! Often these firms just stick the clients into accounts managed by others who use computers to buy and sell stocks for thousand of clients at a time. The firms pay them a portion of the fee and then ignore what goes on.

An active broker who does nothing but gather assets can gather up a client per week, over 10 years, with an average of -say $100,000 – and thus have $50 million under management. This would produce $500,000 to $1 million dollars per year in gross commissions. All this is fine, except that the brokers often do nothing to truly watch over the needs of their 500 clients as they have promised and as is required.

The bottom line on this case is that brokerage firms such as Merrill Lynch wanted their brokers to be do all the things investment advisors do, but have them be exempt from the regulations concerning them. (Thus, this was called the “Merrill Lynch” Rule.) Primarily, Merrill Lynch and others did not want to have a statutory “fiduciary duty” to their clients. (A fiduciary duty is an affirmative duty to out their clients’ interest before their own.)]

This case determined that the brokerage firms have the same duties to their clients as financial planners do when they are acting as financial advisors, rather than just acting as discount brokerage firms, to make the orders that the clients place.

Shepherd Smith and Edwards is a law firm committed to protecting such clients and making sure that they don’t incur financial losses as a result of brokers not correctly fulfilling their fiduciary duties to them. We have helped thousands of investors recover their losses. Contact Shepherd Smith and Edwards today for your free consultation.

Related Web Resources:

Financial Planning Association v. Securities and Exchange Commission (Read the Decision)

US court strikes down SEC broker exemption rule, Reuters, March 30, 2007