April 30, 2008

Ex-Southwest Brokers Found Liable for Concealing Market Timing Trades

The U.S. District Court for the Northern District of Texas says that two ex-Southwest Securities Inc. brokers acted fraudulently when they purposely tried to circumvent policies designed to prevent market timing trades. The Securities and Exchange Commission had brought the case against the two men.

The brokers were aleged to have violated Act’s Section 10(b) and Rule 10b-5.

The court also found one culpable under the act’s antifraud provisions and ordered him to disgorge $56,640.67 in commissions. The court also ordered a $50,000 civil penalty and granted the SEC’s request for injunctive relief.

The SEC’s complaint alleges that one of the brokers opened Southwest Securities accounts to engage in market trading for Haidar Capital Management and Capital Advisor ("HCM"). He then allegedly asked the other broker, who did not have a license to trade mutual fund shares, to be his partner.

The two men allegedly received a “block notice” after attempting to place the first market timing trade for HCM. They received more block notices after making more trades.

They allegedly responded by adopting a new branch office number and using several broker numbers. Witnesses say that there is no legitimate reason to use multiple broker numbers and they often are an attempt to conceal an investor’s identity so that he or she can keep trading.

According to the court, the non-licensed broker may have contacted the mutual funds prior to making any trades, but “he acted with scienter, that is, he had the intent to deceive or defraud the mutual funds in which he traded on behalf of HCM."

If you are a victim of investment fraud or broker misconduct, contact Shepherd Smith and Edwards today for your free consultation with an experienced stockbroker fraud lawyer.

Related Web Resource:

Read the SEC Complaint

April 28, 2008

AARP Financial Inc. Survey Says Investors Find Financial Lingo “Technical and Confusing”

An AARP Financial Inc. survey says that many U.S. investors make investment errors and miss out on opportunities to invest because they find financial jargon confusing, technical, and hard to understand. GfK Custom Research North America of New York interviewed 1,203 adults by phone for the survey.

Findings included:

*Over 52% of respondents said they made an investment mistake because they did not understand or were confused about the investment.

*Over half of the participants surveyed say that they do not read financial information because they can’t understand it.

*Two-thirds of the survey participants say they would rate the financial services industry’s ability to explain investing and savings with a C, a D , or an F grade.

*Survey respondents said the two most common investment mistakes that they’ve made included waiting too long to invest and failing to invest.

*41% of the participants that they didn’t find financial services information to be very helpful.

AARP Chief Investment Officer Richard Hisey said the survey results showed a clear failure to communicate.

The stockbroker fraud law firm of Shepherd Smith and Edwards represents victims of investor fraud and broker misconduct. Contact Shepherd Smith and Edwards today.


Related Web Resources:

AARP Financial Inc. Survey Finds: When it Comes to Financial Jargon, Americans are Befuddled, PR Newswire, April 2008

AARP FInancial

April 24, 2008

NASAA Says State Regulators Continue To Investigating Auction-Rate Securities Problems Affecting Investors

The North American Securities Administrators Association announced that a number of its members are continuing to probe complaints about auction-rate securities (ARS). They are also coordinating efforts to help investors whose money was placed by brokers in these complex investment products get access to their funds.

An ARS Task Force, comprised of state securities regulators from Massachusetts, Illinois, Florida, Missouri, Georgia, New Jersey, New Hampshire, Texas, and Washington all working in their individual jurisdictions, is investigating these ARS-related complaints.

NASAA President Karen Tyler, also North Dakota's securities commissioner, says that regulators will seek the proper remedies to any violation. Tyler says that task force members are focused on determining whether any broker violations, including omission and misrepresentation, took place during the point of sale. She also stressed the securities regulators’ commitment to making sure that investors can access their funds.

In the wake of the subprime mortgage, many investors that were told that ARS were similar to money market accounts or making cash deposits now cannot touch their money because of ARS trade failures.

ARS Task Force head Bryan Lantagne says that many investors are have complained that they did not know that brokers had placed their money in auction-rate securities or, if they were aware that they had invested in ARS, they were not notified of the liquidity risks.

In New York, Attorney General Andrew Cuomo has subpoenaed 18 securities firms and banks to determine how brokers market ARS to investors. The companies subpoenaed include UBS AG, Merrill Lynch, Citigroup, Inc., JP Morgan Chase and Co., and Goldman Sachs Group.

Shepherd Smith and Edwards represents victims of investor fraud. Your first consultation with us is free.


Related Web Resources:

Credit Crisis Backlash as States Probe Auction-Rate Securities, IBTimes.com, April 18, 2008

New Trouble in Auction-Rate Securities, NY Times, February 15, 2008

April 21, 2008

U.S. Representative Barney Frank Calls on SEC to Widen Investigation of Improper Trading Rumors Surrounding Bear Stearns’s Stock

U.S. Representative Barney Frank, the chairman of the House Financial Services Committee, is calling on the Securities and Exchange Commission to expand its probe into whether any improper trading in investment banks’ shares has recently taken place. He wants the SEC to determine whether the rumors of misconduct are being circulated to drive certain investment banks, such as Bear Stearns, out of business.

In a letter addressed to SEC Chairman Christopher Cox, Frank noted that there had been an “unusually high level of short-selling activity” in Bear Stearns stock right before the company fell apart. He also noted that similar trading in the stocks of other large investment banks has occurred.

Frank cited concerns that some of this trading may be orchestrated by market participants that are trying to bring the share prices down. Frank is calling on the SEC to investigate trading activity of stocks in all the big investment banks.

Other companies that have been heavily shorted recently include Citigroup, Washington Mutual, Wachovia, Wells Fargo, CIT Group, and Countrywide.

Bear Stearns executives say that short-sellers are part of the reason the firm collapsed. They also blame circulated false rumors as a reason that customers abandoned the investment bank, which resulted in its liquidity crisis.

Short-sellers borrow shares and sell them in the hopes that the stock will fall. They can then purchase the shares at a lower price, return them to the lender, and keep the difference. To increase the speed of short-selling, traders are allowed to find someone who will say they have the shares to lend them out. This allows traders to lie and say they have the trade.

A few weeks ago, the Financial Industry Regulatory Authority (FINRA) issued a warning to broker-dealers and others under its supervision, stating that it would not tolerate the intentional spreading of false rumors or the “engaging in collusive activity to impact the financial condition of an issuer.”

Our stockbroker fraud lawyers at Shepherd Smith and Edwards represent clients throughout the United States that are the victims of investor fraud. Contact Shepherd Smith and Edwards today and ask for your free consultation.

Related Web Resources:

Get Shorty, Forbes.com, April 7, 2008

Frank Letter to Cox Short Sales of Bear Stearns and Other Investment Bank Stock, House Committee on Financial Services, April 4, 2008


April 17, 2008

Ex-Assent LLC Broker Pleads Guilty to Concealing Insider Trading Activities

In the U.S. District Court for the Southern District of New York on April 10, ex-Assent LLC registered broker Samuel Childs pled guilty to a conspiracy charge to commit securities fraud, wire fraud, and commercial bribery for agreeing to receive $100,000 in exchange for concealing insider trading activities from Assent senior executives. In court, Childs, 35, announced that he was 100% guilty.

This case is part of a broader criminal probe involving 13 people that have pled guilty to a massive insider trading scheme involving data they acquired from Wall Street brokerage companies. Defendants included ex-employees from Morgan Stanley, UBS AG, Bear Stearns Co, and Bank of America Corp.

The Justice Department says that one of the defendants, former UBS Securities executive Mitchel Guttenburg, had sold nonpublic data prepared by UBS stock analysts to another defendant, trader David Tavdy.

Tavdy and David Glass, also a defendant, then used an Assent account to execute trades and earn illegal profits. Data regarding UBS analysts’ upgrades and downgrades were used for hundreds of transactions that netted over $17.5 million.

Childs found out about their illegal activities and agreed to receive $100,000 in exchange for not reporting them. He had received just $30,000 before his arrest.

Childs’s sentencing will take place in July. As part of his plea agreement, he will likely face up to two years in prison and be ordered to give up the $30,000.

If you believe that you have been the victim of securities fraud, contact the stockbroker fraud law firm of Shepherd Smith and Edwards for your free consultation to discuss your investor fraud case.


Related Web Resources:

Broker pleads guilty in U.S. trading case, Washington Post, April 10, 2008

A 13th Plea in Insider Case, Wall Street Journal, April 10, 2008


Related Web Resources:

Trading on Tips About UBS Research Analyst Upgrades and Downgrades and About Morgan Stanley Client Merger Deals Netted Defendants More than $8 million, New York.FBI.gov, March 1, 2007

Assent LLC

April 15, 2008

Schwab YieldPlus Fund Investors File Securities Class Action Lawsuit Alleging Marketing Misrepresentation in Funds’ Offering Documents

A class action law suit has been filed on behalf of those who bought Schwab YieldPlus Investor Funds Investor Shares and Schwab YieldPlus Funds Select Shares against the Schwab Corporation, the underwriter and investment adviser connected to the funds, and several Schwab officers and directors. However, many smart investors are instead seeking greater recovery by filing their own cases.

The investor plaintiffs in the class action claim the defendants misled them when they provided false statements about the funds’ lack of diversification and the degree to which the funds were exposed to subprime-backed securities. The plaintiffs say that the funds—marketed as a safe alternative to money market funds—actually had more than half of its fund assets invested in the mortgage industry.

The funds are down significantly. Through March 26, The Schwab YieldPlus Investor Fund (SWYPX) has fallen 17% , while the Schwab California Tax-Free YieldPlus Fund (SWYCX) has dropped by 9% . Investors say that the defendants were in violation of Section 11 of the Securities Act of 1933 when they misrepresented the funds to investors, marketing them with the goal of looking for high current income coupled with minimum share price changes.

Anxious investors left the Schwab YieldPlus Investor Fund when it dropped by about 3.6% in 2007. Fund assets reportedly fell from $13.5 billion in June 2007 to $2.5 billion last month. Fund managers must now sell bonds at depressed rates.

The Schwab California Tax-Free YieldPlus Fund (SWYCX)’s assets are down from $1.1 billion in mid-2007 to under $600 million this March. The source of the significant drop is attributed to its investments in variable-rate bonds connected to the London Interbank Offering Rate (LIBOR) index, which has fallen as liquidity has disappeared.

While the class action suit may result in some recovery for victims, many investors are aware that such cases often result in recovery of only "pennies on the dollar" for investors. Thus, those with any significant loss may obtain a far better result by filing their own claims in securities arbitration.

The investor fraud law firm of Shepherd Smith and Edwards represents investor clients that have lost money because those in the securities industry have engaged in misrepresentation, omissions, unsuitability, overconcentration, churning, failure to supervise, failure to execute trades, breach of promise/contract, breach of fiduciary duty, negligence, margin account abuse, registration violations, or unauthorized trading. Contact Shepherd Smith and Edwards for your free consultation to discuss your case.


Related Web Resource:

Schwab YieldPlus Fund

April 14, 2008

Ameriprise Settles Lawsuit Alleging That Six of Its Financial Advisers Forged Customer Signatures

Ameriprise Financial says it will pay $3.8 million to settle a lawsuit with New Hampshire regulators accusing six of the company’s financial advisers of forging the signatures of at least 96 customers.

The signatures were allegedly forged to make it seem that certain financial plans had been delivered when in fact they had not been sent. The New Hampshire regulators say that the advisers did this to make it appear is if their sales numbers were higher than their actual figures.

Out of the settlement, $333,948 will reimburse investors and $250,000 will cover legal and investigation expenses.

New Hampshire says that Ameriprise failed to report the forgeries that took place from the company’s Portsmouth office. Advisers allegedly used the code phrase that they were ‘taking a 10-minute trip to Kennebunkport' to indicate that they were going to forge papers.

By agreeing to settle, Ameriprise is not admitting to or denying the allegations. The company has disciplined three of the six advisers and let go of two others. The sixth adviser resigned during the probe.

Ameriprise says that it has put new preventive procedures in place, such as requiring original client signatures and taking aggressive action if violations occur again.

The investment fraud law firm of Shepherd Smith and Edwards is dedicated to helping investor fraud victims across the US recover their losses. Contact Shepherd Smith and Edwards today and ask for your free consultation.


Related Web Resources:

Ameriprise settles New Hampshire forgery case, Reuters, April 9, 2008

Ameriprise Settles Forgery Case, The Wall Street Journal, April 10, 2008

Ameriprise Financial Inc.

New Hampshire Securities Regulation

April 10, 2008

16 State Farm Entity Representatives Settle FINRA Test-Taking Sanctions

The Financial Industry Regulatory Authority announced that 16 current and-ex State Farm VP Management Corp. registered representatives have settled charges of alleged misconduct regarding FINRA’s Continuing Education Requirements for taking tests. FINRA says that the representatives have agreed to fines ranging from $5,000 to $10,000 and suspensions from 30 days up to six months in length. One person agreed to a ban from working as a principal.

FINRA says that 9 of the 16 representatives were supervisors that allowed or directed subordinates to take State Farm's 'Firm Element' proficiency test for them. One supervisor told a subordinate to take the test for other reps. The other six registered representatives that settled were the ones that took the test for others.

The SRO says State Farm did not know about the misconduct and self-reported after it discovered that there were irregularities taking place in one of its regions. State Farm began investigating the incidents. It then expanded its probe nationally and reported its findings to FINRA.

The Firm Element portion of the mandatory two-part test, which is administered by FINRA, other SROs, and the Securities Industry/Regulatory Council on Continuing Education, requires that firms give registered employees who deal with clients, and their supervisors, the proper training that covers the areas of new products, risk disclosure, sales practices, and new regulatory requirements and concerns.

State Farm’s 2005 Firm Element test, according to FINRA, requires each test-taker to log onto an "internal, computer-based system" by inputting their user ID and password. The subordinates that engaged in the alleged misconduct are accused of using their supervisors’ user names and passwords to take the test for them.

By admitting to the charges and settling them, the respondents are not admitting to or denying the allegations.

The investment fraud law firm of Shepherd Smith and Edwards represents investors that have lost money because of the negligence or misconduct of a securities industry member. Contact Shepherd Smith and Edwards today.


Related Web Resources:

FINRA Fines, Suspends 16 State Farm Representatives for Test-Taking Irregularities in the Firm’s Continuing Education Program, Business Wire, March 6, 2008

FINRA and the Securities Industry Continuing Education Program, FINRA

State Farm Companies

April 8, 2008

Rogue Fidelity Investment Adviser’s Prison Sentence is Vacated Due to Improper Application of “Identity Theft Enhancement”

The U.S. Court of Appeals for the Third Circuit says that a district court improperly applied an “identity theft enhancement” when calculating the prison sentence of Bryan Hawes, a rogue investment adviser who had pled guilty to two counts of mail fraud. As a result, Judge Marjorie Rendell vacated Hawes’s 6 ½ year prison sentence and remanded for sentencing.

Hawes is the owner and president of Financial Management Advisory Services (FMAS) and Financial Management Services (FMS) Inc. He is also a registered investment adviser. He became an authorized representative for Fidelity Investment Advisors Group in 1997.

According to the court, Hawes defrauded his investment adviser clients. Rather than fulfill the agreements he made to buy annuities for them, he would either keep the money or buy annuities but later liquidate them for his personal use.

Hawes covered up his theft by generating false statements, making it appear as if the accounts contained larger balances, and submitting these reports to clients.

In 1998, Hawes convinced a number of clients to transfer their assets into products that were offered by Fidelity. From 1998 to until 2002, clients regularly received account statements from Fidelity and Hawes. The statements that Hawes provided through FMAS matched the account balances on statements provided by Fidelity.

In 2002, however, Hawes reportedly went into his clients’ accounts without their consent and changed the addresses to which Fidelity was supposed mail their account statements—in many instances, he provided his own office address.

He then told clients that Fidelity was not issuing paper account statements anymore and that his company, FMAS, would be responsible for generating these statements for them.

Hawes then started transferring client funds into his own account. He also transferred funds from one client to another so the thefts would go undetected. FMAS continued to issue account statements that falsely overstated the value of clients’ Fidelity accounts.

In 2003, Hawes’s mother discovered that he had been stealing money from her and her husband, who had just died. She threatened to report him unless he paid her back. He took $125,000 from other clients to repay her.

Hawes’s fraud scheme was discovered later that year. He pleaded guilty two counts of mail fraud in 2004 and was sentenced to 78 months in prison and a 3-year supervised release. He was ordered to pay invest clients $2,276,565.31 in restitution.

Hawes appealed his sentence on the grounds that the district court made a mistake when it applied a two-level identity theft enhancement to his base level offense because he had changed his clients' addresses. On March 27, the appeals court agreed that Hawes’s conduct did not merit this enhancement.

Shepherd Smith and Edwards represents victims of investor fraud in arbitration and litigation.


Related Web Resources:

Final Passage of H.R. 1731, the Identity Theft Penalty Enhancement Act, SSA.gov, June 29, 2004

Read the SEC Complaint

April 4, 2008

The Association For Financial Professionals Wants SEC Chairman Cox To Push Harder For Reform Of Credit Rating Agencies

The Association for Financial Professionals is calling on Securities and Exchange Commission head Christopher Cox to use the SEC’s authority to push for the reform of the credit rating agencies.

In a letter from the AFP, CEO Jim Kaitz urged Cox to use the authority that Congress granted the SEC with the Credit Rating Agency Reform Act of 2006, which gives the SEC permission to hold the agencies accountable for providing timely and accurate ratings.

SEC Director of Trading and Markets Erik Sirri has said, however, that although the SEC can hold credit rating systems accountable for their ratings, it does not have the authority to interfere with the way that agencies assign ratings, which is a key issue that is impacting the current subprime mortgage market crisis.

The AFP, made of 16,000 financial professionals, wants the SEC to tackle the abusive and unfair practices that negatively affect the legitimacy of the credit rating system.

Sirri says the SEC is developing rules that could address the prohibition or disclosure of conflicts of interests at the agencies and the need to have different ratings for structured financial products and corporate securities. The SEC is also thinking about removing references to credit rating agencies from its own rules (there are more than 30 references) so market participants won’t rely on the agencies as much.

SEC based on the SEC’s examination of the nine SEC-registered credit-rating agencies or nationally recognized statistical rating organizations (NRSROs).

The securities fraud lawyers at Shepherd Smith and Edwards have more than a century of combined experience in securities law and the securities industry. We have helped thousands of victims of investor fraud recoup their losses.

Related Web Resources:

AFP Urges SEC to Fully Exercise Oversight Authority Over Credit Rating Agencies, PRNewswire, March 24, 2008

List of Credit Ratings Agencies, DefaultRisk.com

Association for Financial Professionals

April 3, 2008

Two Brazilian Nationals Indicted For Alleged Involvement In $50 Million Telemarketing Scheme

Two Brazilian nationals have been indicted on money laundering and other charges related to an alleged $50 million international penny stock scam that took money from many international investors.

The two defendants, Marcos Macchione and Rodrigo Molina, face charges of money laundering, conspiracy, and participating in illegal financial transactions. The two men reside in Florida and are being charged in connection with their involvement with the US part of the securities scam. A Florida jury handed out the indictment in the U.S. District Court for the Southern District of Florida.

Doron Mukamal, the alleged leader of the telemarketing securities scam, was also arrested. He lives in Brazil, as do his 17 partners, employees, associates, and money launderers that were also arrested.

Asian and European investors were the primary victims of the scam. Mukamal and his team offered them the opportunity to buy nearly worthless stocks in U.S. micro-cap companies for much more than the penny stocks’ actual value.

The investors were told to pay an advance fee to cover escrow costs, taxes, and other services. This fee is not normally required for transactions that are legal.

Once the advance fee was received, the bogus broker-dealer would disappear. When investors contacted these fictitious brokers to find out what happened to their money, they were notified that warrants (that did not actually exist) or the rights to buy more shares held by the victims had been found. The bogus brokers would then try to persuade their targets to shell out even more money.

Mukamal and his team constructed Web sites that made it appear as if they were legitimate securities brokers. They also made up names of fictitious broker dealers, stole the identities of real U.S. brokers, fabricated false government entities that could confirm their broker-dealer’s legitimacy, and used U.S. phone numbers so that investors would think that the broker-dealers were located in the United States.

Our stockbroker fraud lawyers at Shepherd Smith and Edwards have helped thousands of investors recover their financial losses. Contact Shepherd Smith and Edwards to schedule your free consultation.


Related Web Resources:

U.S., Brazilian Law Enforcement Dismantle $50 Million Securities Fraud Organization, PRNewswire.com, March 20, 2008

What Is Penny Stock Fraud?

April 2, 2008

ARS Failures at Brokerage Firms So Bad Even Their Own Association is Critical!

The Financial Industry Regulatory Authority (FINRA) conjures thoughts of jack-booted cops looking to “perp-walk” those who take advantage investors. Yet, FINRA is just the new name of the National Association of Securities Dealers. The NASD was, and FINRA is, a non-profit organization of all securities dealers, with a structure similar to a country club, which fines or expels those who embarrass its membership.

Yet, even FINRA is critical of its members for mishandling auction rate securities (ARS). For example, in a press release, FINRA acknowledges that “Investors who purchase ARS are typically seeking a cash-like investment that pays a higher yield than money market mutual funds or certificates of deposit.” This confirms, despite objections by firms, that investors believed they were getting liquid instruments, not 20 to 30 year obligations or even “no maturity” preferred shares

"If you need your money in a hurry, loss of liquidity is a financial hardship," states John Gannon, FINRA's Senior Vice President for Investor Education. "We want investors who have been affected by the recent auction failures to know what options are available to them."

FINRA then mentions alternatives for “ARS investors who cannot liquidate their holdings because of failed auctions,” including (1) continue to hold; (2) sell in the secondary market; (3) borrow on margin; and, (4) liquidate other investments.

After stating that most ARS investors sought liquidity, it is strange that FINRA would recommend holding the securities. Importantly, recommending the holding of such securities to one who needs liquidity, violates FINRA’s own Rules of Fair Practice regarding unsuitability! While investors can not sell until there is a market, liquidation when possible may indeed be the only option for victims.

Selling in the secondary market, when possible, is the second option and should strongly be considered by ARS holders! The law holds that victims can recover losses from those who misrepresent securities to them, but the law also says victims must “mitigate” losses as soon as possible. As with any other investment, if you would not buy an investment at a price, you should not hold it for the same reason. Also, When others think the market can only get better with time it is usually best to run for the hills!

FINRA is not enthusiastic about “borrowing on margin,” stating that “[s]ome firms are offering to lend customers money to help them meet their cash flow needs. Be aware that the interest rate charged on these loans may exceed the yield you're getting on the underlying security. Also, borrowing against a tax-exempt security may cause you to lose the ability to deduct some or all of the margin loan interest from your taxes.”

We also note that margining illiquid and troubled securities is in itself quite dangerous, and that firms are charging lucrative interest rates to those who are victims of that firm’s own bad acts concerning ARS securities.

FINRA adds: “You might also consider selling other securities in your portfolio. When weighing this option, be sure to consider factors such as the total transaction costs you would incur, whether the sale would trigger adverse tax consequences and how the liquidation would impact the balance of your portfolio.” FINRA fails to mention that selling other securities at depressed prices can create even greater damages than in the ARS which are the source of the problem.

Moreover, FINRA fails to mention that anyone with legal problems should contact an attorney, before making statements to brokerage firms or regulators who share such information with brokerage firms. Ever heard this? “You have a right to an attorney” and “anything you say can and will he held against you in a court of law.” Did you wonder why the person then keeps talking? Sending a complaint to a firm or a regulator without an attorney is - well - exactly the same thing!

The securities law firm of Shepherd, Smith, Edwards and Kantas LTD LLP has for decades handled claims by investors worldwide against brokerage and other financial firms. We are currently working on claims for both institutional and individual investors whose funds are now locked into ARS securities. Contact us to arrange a free, no obligation consultation with one of our attorneys regarding your situation or if you wish to receive our weekly newsletter regarding ARS securities.

LINK TO ARTICLE ON ARS SECURITIES: (Our firm does not endorse the opinions or statements of of the article's author.)

ARC and ARP Securities: How Wall Street Brokerage Firms May Have Defrauded Their Clients Out of Billions Overnight Trading, February 24, 2008 (Author’s name withheld by request)

April 1, 2008

Merrill Lynch Sues Insurer for Failing to Honor Claims Opening Door to Mysterious "Swaps" Market

Merrill Lynch & Co. has publicly opened the door to what many believe could be an even larger problem to the credit markets than the widely publicized sub-prime mortgage debacle - the little understood and sledom discussed "swaps" market.

Perhaps the world’s most high-profile financial firm, Merrill - itself a frequent complainer about lawsuits – has filed a monster of a suit in a New York court against bond insurer Security Capital Assurance Ltd. (SCA). Merrill Lynch sued the insurer alleging it failed to honor seven contracts promising to cover losses on $3.1 billion in "credit swaps," after which SCA filed a countersuit against Merrill for $28 million. .

Merrill claims SCA walked away from signed insurance contracts guaranteeing Merrill against losses. SCA counterclaims that Merrill broke a stipulation in one of the contracts which entitles SCA to terminate all the agreements and collect damages. (Perhaps Merrill is getting a taste of what many us have experienced: an insurance company happy to collect premiums but which later relies on a technicality to avoid payment.)

Under the contracts, SCA says it was granted "control rights" over the CDOs, meaning it had control over decisions affecting the investments. SCA alleges that "Merrill Lynch made the decision to blatantly ignore its prior commitments,” when, in a “rushed campaign” to dump risk from its books, Merrill Lynch promised such control rights to others.

Yet, some believe the greater importance of this suit is that it reveals the tip of the iceberg regarding the exposure of the world’s financial institutions to the multi-trillion dollar “swaps” market. The swap contracts in question were agreements to cover missed payments on collateralized-debt obligations, but an untold amount of “swaps” agreements outstanding cover more possibilities and circumstances than most of us can imagine!

Because the “swaps market” is almost totally unregulated and involves agreements eerily similar to those engineered at Enron, few publicly venture a guess as to the gravety of the exposure to the financial markets should such swap agreements simply began to unwind.

The law firm of Shepherd Smith Edwards & Kantas LTD LLP is committed to assisting investors to recover losses in their accounts at securities firms. If you or someone you know is a victim of securities fraud, contact us today to arrange a free confidential consultation with one of our attorneys.

April 1, 2008

UBS Securities, Bank of America, and Merrill Lynch Among Firms Subpoenaed In Massachusetts Auction-Rate Market Sales Probe

Massachusetts Secretary of the Commonwealth William Galvin is subpoenaing Merrill Lynch, Pierce, Fenner, & Smith Inc., UBS Securities, and Bank of America Investments because it wants information about the companies’ involvement in selling auction-rate market securities to retail investors. The companies are all registered Massachusetts broker dealers. Galvin issued the subpoenas on behalf of the Massachusetts Securities Division.

The division wants to determine whether the firms followed proper procedures in letting Massachusetts investors know of the possibilities that their investments could become illiquid. The state is also trying to determine what role big investment banks played in causing the auctions to fail and whether the investments sold to retail investors were suitable.

Many of the investors that bought auction market securities cannot get their money because the securities are frozen. Small business owners and individual investors have been especially hurt by the failures in the auction market because of the subprime mortgage collapse.

Galvin says he is not investigating why the securities are frozen but whether the investment firms were in compliance with their sales practices and in disclosing the necessary information to investors.

In February, Galvin subpoenaed Calamos Financial Services, Blackrock Financial Management, Pioneer Investment Management, Nuveen Asset Management, MFS Investment Management, John Hancock Advisers, Allianz Global Investors, Evergreen Investment Management, and Eaton Vance for information about the asset management companies’ dealings with closed-end funds following the auction failures in the auction-rate securities market.

The stockbroker fraud law firm of Shepherd Smith and Edwards is committed to helping investors recover losses brought about by securities fraud. Contact Shepherd Smith and Edwards today to request your free consultation.


Related Web Resources:

Galvin issues subpoenas in debt securities probe, Boston.com, March 28, 2008

Another Kick in the ARS, CFO.com, February 22, 2008

Massachusetts Securities Division