August 28, 2008

2nd Circuit Reinstates TIAA-CREF Enterprises Inc. Faces Negligence and Breach of Fiduciary Duty Claims

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TIAA-CREF Enterprises Inc. is once more facing claims of negligent misrepresentation and breach of fiduciary duty following the US Court of Appeals for the Second Circuit's reinstatement of the claims. The appeals court, however, did affirm the District Court’s decision to dismiss the 1934 Securities Exchange Act Section 10(b) and New York fraud claims.

Per the court’s account, plaintiff Vera Muller-Paisner filed the lawsuit against TIAA-CREF Enterprises Inc. and other entities. Mueller-Paisner was the executrix of the estate belonging to a woman named Mary Engel, who had purchased a fixed annuity from the defendants for about $1.2 million. The annuity was to pay Engel $8,000 each month until her death.

Engel would have recovered the purchase price in 12 years, but she
died six months after buying the annuity and had only collected $48,000. Muller-Paisner discovered that most of Engel’s assets had been used to buy the annuity. This made it impossible for the executrix to dispose of the decedent’s estate, per Engel's will.

While the district court had dismissed the entire lawsuit, this month, the appeals court affirmed part of that ruling and reversed it in part.

The 2nd circuit says it dismissed common law fraud and federal securities claims because the plaintiff did not sufficiently allege both a scienter and that there had been a materially misleading misstatement or omission. The appeals court, however, also ruled that Muller-Paisner's allegations were enough to withstand any motions to dismiss the negligence and breach of fiduciary duty claims. It noted, among the plaintiff’s allegations, claims by the defendants that they have the resources and system in place to help customers buy the best options available to them that will maximize their income and allow them to support their post-retirement lives.

Related Web Resources:

TIAA-CREF Brokerage Services

Charitable Planning

US Court of Appeals for the Second Circuit

Continue reading "2nd Circuit Reinstates TIAA-CREF Enterprises Inc. Faces Negligence and Breach of Fiduciary Duty Claims " »

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Posted In: Broker Fraud , Senior Investors

August 27, 2008

Investigation Underway of Asset Management Fund's ("AMF") Ultra Short Fund (AULTX) and the Role of Shay Asset Management

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When investors placed funds in The Ultra Short Fund (Nasdaq: AULTX), managed by The Asset Management Fund ("AMF"), they believed their funds were safely on the sidelines in a money market alternative. Later surprised by substantial losses in this fund, many now seek legal representation.

On its website, AMF describes itself as a no-load mutual fund complex managed by Shay Assets Management, Inc., a privately-held investment adviser registered with the Securities and Exchange Commission ("SEC"). The AMF Funds are distributed by Shay Financial Services, Inc., a member of FINRA and SIPC. Shay Asset Management's corporate headquarters are located in Chicago, Illinois.

The Ultra Short Fund's objective is listed as "current income with a very low degree of share-price fluctuation." However, the fund has declined more than 15% year to date. For investors seeking modest income and very low degree of price fluctuation, such losses are unacceptable, said Kirk G. Smith, a partner of the law firm Shepherd Smith Edwards & Kantas LTD LLP (SSEK).

According to public disclosures the Fund was heavily invested in Adjustable Rate Mortgages ("ARMs"), specifically "hybrid ARMs" and "LIBOR ARMs." Considering the credit crunch over the past year, investors question why they were led to believe their funds were invested into a low-risk conservative fund while the fund's managers were investing the assets into esoteric high-risk products such as hybrid ARMs? Furthermore, the fund did not begin to register its serious decline until May of this year, more than a year after the start of the upheaval in the financial markets.

"My law firm is currently assessing the legal position of those who invested in this fund," said Smith, "we have represented investors in more than 1,000 cases over the last 18 years and recovered over $100 million for our clients." He adds that "SSEK is unique because our team of attorneys, consultants and staff has more than 100 years of combined experience in the securities industry and in securities law."

SSEK represents clients in Federal and state courts and in arbitration through the Financial Industry Regulatory Authority (FINRA), the American Arbitration Association (AAA) and in private arbitration actions. Those seeking additional information on The Ultra Short Term Fund and similar investments should contact SSEK to arrange a free consultation with experienced securities attorney Kirk Smith.

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Posted In: Mutual Funds

August 26, 2008

Charles Schwab, Fidelity, and Other Downstream Brokerages are Subpoenaed as NY Attorney General Cuomo's Auction-Rate Securities Probe Expands

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As part of his widening investigation into the auction-rate securities market collapse, New York Attorney General Andrew M. Cuomo has subpoenaed Charles Schwab, Fidelity, E*Trade Financial, TD Ameritrade, Oppenheimer & Co., and other ‘downstream’ brokerages that sold the securities to clients even if they did not underwrite them.

The Regional Bond Dealers Association had told Cuomo, in an August 15 letter, that entities that sold ARS to its clients but had nothing to do with managing their issuance should not be made to repay clients back at par illiquid the way financial services firms, such as Citigroup Inc., Morgan Stanley, Wachovia Corp, JP Morgan Chase and Co, UBS AG, and Goldman Sachs Group Inc., are now required to do, so per their settlements with federal and state regulators. The RBDA says downstream brokerages did not know that ARS were illiquid, rather than “highly liquid cash equivalents” that many Wall Street firms presented them to be.

The NY AG Special Assistant Benjamin Lawsky, however, says that the downstream brokerages’ culpability will depend on what their probe reveals. He says the NY AG’s probe has already discovered some “disturbing facts” that contradict the downstream brokerages’ claims of innocence.

Federal and state regulators have maintained that financial firms told their clients that ARS were highly liquid and easily redeemable at auctions. The ARS auctions started failing in February, which made it impossible for investors to sell their securities. Many investors have been unable to recoup their investments since then.

Related Web Resources:

Read the RBDA's August 15 letter to NY Attorney General Cuomo and SEC Chairman Cox (PDF)

Auction-rate securities probe expands to nearly 40 brokerages, Los Angeles Times,
August 22, 2008

Regional Bond Dealers Association

NY Attorney General Cuomo's Office

Continue reading "Charles Schwab, Fidelity, and Other Downstream Brokerages are Subpoenaed as NY Attorney General Cuomo's Auction-Rate Securities Probe Expands" »

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Posted In: Auction-Rate Securities

August 25, 2008

NY Attorney General Coumo Estimates that Wall Street Firms Have Only Agreed to Repurchase 18% of ARS Securities

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The nearly $35 billion in auction-rate securities-related frozen debt that Wachovia Corp, Citigroup Inc, JP Morgan Chase & Co, UBS AG, and Morgan Stanley have agreed to repurchase consists of less than 18% of the $200 billion that New York Attorney General Andrew Cuomo says is outstanding. Charities, individuals, and small businesses are the ones expected to benefit from the repurchase agreements made with the Wall Street firms.

Meantime, corporate finance officers that also purchased auction-rate securities because banks had marketed the securities to them as safe investments have not been offered the same commitment. Only Wachovia and UBS have agreed to buy back securities from institutional investors—Wachovia has set its date in June 2009, while UBS said it would begin repurchasing frozen securities from institutions starting June 2010. Google Inc, United Parcel Service Inc., and Texas Instruments Inc. are among the companies that have taken significant markdowns on over $32 billion in auction-rate securities holdings.

During the press conference announcing that Morgan Stanley & JP Morgan agreed to buy back $7.5 billion of the auction-rate securities, Cuomo said that he was making it a priority to return the money of retail investors. He also said that institutional investors needed “to be fairly compensated.” He and other state securities regulators have called on Wall Street firms to help institutional investors convert their securities into cash.

However, the settlements reached could worsen the situations for companies with debt. If banks buy back the securities from individual investors and end up selling the securities at reduced rates, companies may have to mark down their portfolios even more.

Related Web Resources:

Attorney General Cuomo Announces Settlements with JP Morgan and Morgan Stanley to Recover Billions for Investors in Auction Rate Securities, OAG.NY.US

Cuomo Snubs Treasurers in Auction-Rate Debt Rescue, Bloomberg.com, August 21, 2008

Continue reading "NY Attorney General Coumo Estimates that Wall Street Firms Have Only Agreed to Repurchase 18% of ARS Securities" »

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Posted In: Auction-Rate Securities

August 22, 2008

Arbitration Claims for Consequential Damages on Auction Rate Securities (ARS)

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After months of uncertainty and delays, investors in Auction Rate Securities continue to receive conflicting news about their situation. While some investors may have access to funds in the near future, many have been severely damaged by this debacle and the delays. In settlements with regulators several firms were forced to acknowledge such “consequential damages” by investors

A special arbitration program is currently being designed to determine claims for “consequential damages” in which some firms have agreed not to contest their own liability. The arbitrations will be conducted through the Financial Industry Regulatory Authority (FINRA), formerly the National Association of Securities Dealers (NASD).

What is FINRA Arbitration?

When opening brokerage accounts, virtually all investors sign agreements requiring them to arbitrate any dispute with their investment firm through FINRA Arbitration. Thus, all that will change in the special ARS arbitration process is the procedure to be used.

For example, rather than a panel of three arbitrators, one of which is an "industry" arbitrator, a single "public" arbitrator will decide the ARS cases. However, investors may chose FINRA’s existing three arbitrator process if the decision of one person is feared as too unpredictable.

Not all details on the special arbitration process for ARS claims have been determined. The Securities Industry and Financial Markets Association (SIFMA) and the Public Investors Arbitration Bar Association (PIABA) continue to battle over procedural and other issues regarding ARS arbitrations.

Lay-Down Case?

Some may believe that, because investment firms can not deny that the ARS investment was misrepresented, investors can not lose. However, investors must demonstrate how they were damaged, how much they were damaged, that such damages are not speculative and how being locked in the auction rate securities caused these damages. In fact, a precedent exists which demonstrates the difficulty which may be involved in winning ARS arbitration claims.

In the 1980's, Prudential Securities sold limited partnership investments to thousands of investors which regulators later determined were misrepresented. Prudential agreed to a settlement in which it agreed to a "special arbitration" process through NASD Arbitration. Although Prudential was not allowed to dispute its misrepresentations, the results of these arbitrations varied greatly: Some investors recovered damages, but few recovered the amount they sought and many received nothing at all.

Consequential Damages?

Examples of ARS "consequential damages" could be losses sustained when frozen funds caused a business transaction to be terminated, when funds were unavailable for inventory purchases or when other business losses were caused by frozen capital. Large investors who sustained income losses from ARS securities which reset to very low or zero interest rates should insist on being reimbursed.

Individual investors may have sustained consequential damages over are a delay in a home purchase resulting in a substantially higher rate of interest on their mortgage for years to come. One investor claims that medical procedures were delayed because of lack of liquid funds. Meanwhile, lost profits because of the inability to purchase other securities, et cetera, may be more difficult to prove.

Legal Representation?

Since 2000, approximately 5,000 claims are filed each year by investors in securities arbitration through FINRA and its predecessors. Statistics demonstrate that investors who retain experienced securities attorneys fare far better than those with inexperienced attorneys or who attempt to proceed with no attorney at all.

The law firm of Shepherd Smith Edwards & Kantas, LLP specializes in recovering investment losses for institutions and individuals nationwide. Our attorneys and staff have more than 100 years of brokerage and legal experience. Contact us today for a free no-obligation consultation with one of our attorneys.

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Posted In: Auction-Rate Securities

August 21, 2008

FINRA Rolls Out New Arbitration Process for Auction-Rate Securities Claims

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The Financial Industry Regulatory Authority says it has set up an arbitration process designed to resolve claims involving auction-rate securities. Parties now have the option to have their claims reviewed by an arbitration panel with members that are not connected with any firm that may have recently sold the securities.

FINRA says the process was developed following the system it set up for Citigroup’s settlement with the Securities and Exchange Commission. Earlier this month, Citigroup Inc. reached an agreement with state and federal regulators to redeem $7.3 million in illiquid auction rate securities that retail investors had purchased, as well as pay $100 million in fines. The agreement was to settle charges over misconduct related to sales practices.

FINRA Dispute Resolution President Linda Fienberg says it is only fair that all investors with auction-rate securities claims be given the opportunity to resolve their disputes in the same way. She said that FINRA would work hard to put the process in place so that claims wouldn’t be delayed unnecessarily. Persons that since January 1, 2005 have sold auction-rate securities, worked for a company that sold the securities, or supervised the selling of the securities cannot be on the panels.

FINRA Creates Process for Arbitrations Involving Auction Rate Securities, Marketwatch.com, August 7, 2008

Citigroup Returning $7 Billion To Auction-Rate Securities Investors, Courant.com, August 8, 2008

FINRA

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Posted In: Arbitration , Auction-Rate Securities , FINRA

August 20, 2008

State Street Sued Over Allegations of Misrepresentation Related to Mortgage-Backed Securities

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Massachusetts plumbing and air conditioning supply company F.W. Webb Company is suing State Street Bank and Trust Company, State Street Global Advisors (SSgA), and CitiStreet. F.W. Webb is accusing the defendants of misrepresenting a bond fund as a low risk 401k-investment option, when in fact, the SSgA Yield Plus Fund was invested in mortgage-based securities.

FW Webb says the investment option had been represented on more than one occasion as being similar to a money market portfolio but with better returns. FW Webb alleges that beginning in 1996, State Street changed its investment strategy for the Yield Plus account so that there was an emphasis on lower-quality securities that were accompanied by greater risks.

The lawsuit contends that the Yield Plus Fund create a level of risk that was inappropriate and not in line with the stated investment goals of the Massachusetts company's 401K Plan or the objectives of a traditional money market fund. The complaint contends that the fund dropped dramatically in mid-2007 because of its overexposure to low-quality assets and securities that were high in risk.

CitiStreet, which has provided FW Webb with investment management and recordkeeping and administrative functions since 2000, is also a defendant in the suit. FW Webb say that any instability related to the Yield Plus Fund was never an issue that CitiStreet or State Street brought to its attention, which gave the plumbing and air conditioning supply company no reason to question whether the fund should be included in its 401K Plan.

The lawsuit also noted that the decision to move the Yield Plus Fund into mortgage-backed investments during 2005-2007 occurred during a time when defaults of the subprime mortgages had skyrocketed and subprime lenders were dealing with insolvency. The SSgA Yield Plus Fund’s Board of Directors decided to liquidate the fund as of May 31, 2008.

Related Web Resources:

F.W. Webb sues State Street and CitiStreet over alleged misrepresentation, PatriotLedger.com, August 20, 2008

FW Webb Company

State Street Corporation

CitiStreet

Continue reading "State Street Sued Over Allegations of Misrepresentation Related to Mortgage-Backed Securities" »

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Posted In: Financial Firms , Mortgage Backed Securities , State Street Bank and Trust Company

August 19, 2008

Bank of America Did Not Warn Small Investors About Auction-Rate Securities Crisis

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Documents reveal that Bank of America told the state of California as early as late last year that there were problems brewing with the auction-rate securities market. The country’s largest retail banking firm, however, failed to warn smaller investors about potential trouble and continued selling the investments without providing any warning to these clients.

In its presentation to the California’s treasurer last year, Bank of America warned the state of a “significant dislocation” in the auction-rate securities market, as well as a drop in demand for the bonds. It also informed the State that corporate clients had engaged in "significant year-end selling" of the investments. The Boston Globe obtained a copy of Bank of America’s presentation to California, as well as the presentation of other investment banks.

Bank of America is the eighth-biggest issuer of auction-rate securities. It is one of the few brokerage firms that has yet to announce a settlement with state regulators related to the collapse.

The retail banking firm told The Boston Globe that its presentation to the state of California did not talk about the liquidity issues that would end up being at the center of the auction-rate securities collapse earlier this year. Upon closer scrutiny, however, Bank of America's presentation appears to indicate the possibility of the market shutting down.

Prior to the market collapse, California had some $1.4 billion in outstanding auction-rate securities. Fortunately, the state’s treasurer paid attention to the warnings it received from Bank of America and other investment advisers. By May 23, it had refinanced all except for $100 million of its auction-rate bonds.


Related Web Resources:

Bank of America subpoenaed on auction-rate securities, derivatives, BizJournals.com, August 8, 2008

Investors sue Bank of America over auction rate securities, Bizjournals.com, July 18, 2008

Continue reading "Bank of America Did Not Warn Small Investors About Auction-Rate Securities Crisis" »

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Posted In: Bank of America

August 15, 2008

SEC Charges Former AG Edwards and Bank of America Broker With Misappropriating $1.3 Million from Customers

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The Securities and Exchange Commission has filed a complaint charging Brent S. Lemons, a former AG Edwards Inc. and Bank of America Investment Services Inc. stockbroker, with misappropriating over $1.3 million from at least three clients. He allegedly used the money to pay off his gambling debts.

The Commission is accusing Lemons of violating Section 10(b) of the Securities Act of 1934 and Rule 10b-5 there under. The SEC says that Lemons, who managed the financial affairs of certain customers, had clients sign brokerage and bank documents in blank. The former stockbroker allegedly then told them he would use the documents to liquidate securities in their accounts and reinvest any proceeds in instruments that were higher yielding.

The SEC is seeking a permanent injunction against Lemons, as well as disgorgement with prejudgment interest and a civil penalty. He also faces criminal charges related to his alleged misconduct.

Broker Misconduct
It is wrong for a stockbroker to misappropriate investor funds for personal use. If you have lost money because of broker misconduct, our stockbroker fraud lawyers can help you determine whether you have grounds to file a claim to get your money back.

Examples of common claims involving broker misconduct:

• Unsuitability
• Misrepresentation
• Overconcentration
• Omissions
• Churning
• Failure to Supervise
• Failure to Execute Trades
• Breach of Fiduciary Conduct
• Breach of Contract
• Negligence
• Breach of Promise
• Margin Account Abuse
• Unauthorized Trading
• Registration Violations

Related Web Resources:

SEC Charges Brent Lemons, Former Registered Representative From Tyler, Texas, With Fraud, SEC.gov

Read the SEC Complaint (PDF)

Continue reading "SEC Charges Former AG Edwards and Bank of America Broker With Misappropriating $1.3 Million from Customers" »

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Posted In: Broker Fraud

August 13, 2008

Claims Continue over MasterShare - Prudential Securities’ Deferred Compensation Plan

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Prudential Securities has been plagued by claims over its deferred compensation plan, known as MasterShare. A number of former representatives have filed claims and recovered damages.

Started in 1999, MasterShare allowed Pru employees to deduct up to 25 percent of their gross pay to purchase discounted shares of a stock index fund. This discount had the effect of a company match of the funds deducted. Yet, the plan also provided that if the employee left the firm early he or she not only forfeited the company's “match” but also the portion withheld from his or her check!

With the threat of forfeiture of a substantial portion of the employee’s pay, some representatives claim they became hostages of Prudential. One former broker trainee says the firm promoted the plan as a pension plan and that he was “strongly encouraged” to join with the further suggestion that those not participating were perceived as “transients”.

Pru faced a number of claims by ex-employees over the MasterShare program but was at first successful in fighting these. The firm relied on New York Labor Law which stated that employers can make deductions from employees’ wages that “are expressly authorized in writing by the employee and are for the benefit of the employee.” It also avoided claims under ERISA while noting that “the existence of the identical forfeiture provision did not stop six judges on the New York Court of Appeals from unanimously holding” the plan is valid under New York Labor Law.

But in late 2005 the tables began to turn when a panel of three securities arbitrators awarded almost $2 million to Robert J. Ostrowski, a former retail broker who had worked for over 41 years for Prudential Securities. The arbitrators also ordered Mr. Ostrowski's Form U-5 to be amended to state that he was terminated "without cause on July 25, 2001," while also ordering Prudential to pay the hearing costs of $15,000.00.

The following year, an arbitration panel ruled in favor of another former Prudential broker, Charles J. Hazlett. The arbitration Award states that “Prudential breached the MasterShare Agreement and shall pay to [Hazlett] compensatory damages in the amount of $243,045.22, plus interest …”

That same year, other arbitrators considered a claim by former agent Frederick J. O’Meally against Prudential and Wachovia Securities, which had merged. Included in the claim was $2 million of assets allegedly forfeited in O”Meally’s MasterShare account, plus $1.3 million in damages for other claims. Prudential never officially submitted to the arbitration and was dismissed by agreement, but the arbitrators ordered Wachovia, Prudential’s sister firm, to pay O’Meally the entire $3.3 million.

Since 1990, the securities law firm of Shepherd Smith Edwards & Kantas LTD LLP has represented clients, including registered persons, in claims against securities brokerage firms. Those who have dispute with their firm or former firm can call for a free confidential consultation with one of our attorneys. (Note: Law firms that represent investment firms are usually prevented by conflict from representing others in disputes against those firms.)

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Posted In: Financial Advisers , Prudential , Wachovia

August 12, 2008

Seven Mutual Fund Horror Stories for Investors!

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A recent Morningstar article outlines seven mutual fund horror stories. In addition to the Legg Mason Value Fund (symbol LMVTX) and Schwab YieldPlus Fund (symbol SWYPX) and the Regions Morgan Keegan funds, which are the subject of stories we have reported recently, several other hard-hit mutual funds are discussed.

For example, the Eaton Vance Greater India fund (symbol ETGIX) has lost over 44%! The article, found in the Morningstar Fund Investor's "Annual Guide on Where Not to Invest", reminds investors to be especially wary of international funds, particularly those focusing on securities issued in China and India.

Also mentioned in the report is the Kinetics Market Opportunities fund (symbol KMKNX) which has lost over 30% this year. While this same fund gained 34% the previous year, its very narrow focus made it particularly susceptible to volatility. Large holdings of NASDAQ, CME, NYSE, and Legg Mason caused the fund to plummet.

Nor were bond funds exempt. For example, despite a falling interest rate environment, the Oppenheimer Rochester National Muni (symbol ORNAX) is down 1more than 20% in the past year. While the fund had performed well in the previous decade, apparently because of tobacco related bonds, the funds parameters left it wide open to downside risk when the climate reversed.

Finally, the author mentions Touchstone Large Cap Value fund (symbol TLCAX) which is down almost 30% this year and 52% for over the past 12 months! In this fund heavy weighting in financial shares is the culprit. Reportedly, the fund manager exacerbated the situation by attempting to do some “bottom-fishing” and the fund's large exposure to mortgages backfired. Top holdings Fannie Mae (FNM) and Freddie Mac (FRE) along with Wachovia (WB) and Washington Mutual (WM) also contributed to the fund’s woes. Non-financials Ford Motor (F), Centex (CTX) and Motorola MOT did not help.

Those who have suffered substantial losses in mutual funds and other investments should contact the stockbroker fraud law firm of Shepherd Smith Edwards & Kantas LTD LLP today. With no obligation you can discuss with one of our attorneys whether we may be able to assist you to recover your losses.

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Posted In: Mutual Funds

August 11, 2008

Mutual Funds Misrepresented as Safe: SSgA Yield Plus, Fidelity Ultra-Short Bond (FUSFX) & Regions Morgan Keegan Select High Income (MKHIX)

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Just as auction rate securities were sold by most investment firms as safe alternatives to money market funds which paid a higher rate, so also were a number of mutual funds. Packaged and sold as ultra-short term bond funds and a safe haven for funds which were to be secure and assessable, many of these funds were really invested into high-risk and or potentially far from liquid assets.

Three of these funds are the SSgA Yield Plus fund, which was liquidated in June, the Fidelity Ultra-Short Bond (symbol: FUSFX), and Regions Morgan Keegan Select High Income (symbol MKHIX). All three, it has been learned, were actually actually “junk bond” funds. As problems in the credit markets surfaced over the past year, these funds have lost up to 80% of their value

The portfolios of these funds had structured debt instruments tied to subprime mortgages and other assets that do not trade frequently. This prevented the volatility of the assets from being properly reflected, consequently masking the risks of investing into the funds. The recent changes in the values have greatly altered the risk parameters, but too late for those invested in the funds who have sustained significant losses.

Thus, much as the bond credit rating agencies have proven to be failures in assessing the risks of investments, so also have volatility indices such as Morningstar failed to properly demonstrate the risks of certain investments in which price changes are difficult to determine. As well, all such measurements are “backward-looking” reminding us that past performance is no guarantee of future events.

However, the question may be why were such flaws in the rating systems not properly disclosed to investors either by the funds or the companies which rank the funds.

The lesson to be learned by those doing the calculations is that thinly traded or complex securities have risks that can escape detection for years. Unfortunately, the lesson to be learned by investors, those who have actually paid the price, is that an old maxim applies: “Figures may not lie, but liars figure.”

If you have lost in these or other investments contact the stockbroker fraud law firm of Shepherd Smith Edwards & Kantas LTD LLP. WIth no obligation, one of our securities attorneys will discuss with you whether we may be able to assist you in recovering your losses.

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Posted In: Mutual Funds

August 10, 2008

Connecticut Attorney General Sues Moody’s, McGraw Hill, & Fitch Over Municipal Bond Issues

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Connecticut Attorney General Richard Blumenthal has filed a lawsuit against Fitch Inc., Moody's Corp., and McGraw-Hill Companies. He is charging them with deliberately giving lower credit ratings to bonds issued by public entities, such as municipalities, in comparison to corporate and other kinds of debt.

Blumenthal says that by purposely giving artificially low credit ratings to municipalities, taxpayers have been forced to unnecessarily incur millions of dollars in higher interest rates and bond insurance. The lawsuit is part of a probe into bond insurers, credit rating agencies, and related entities and their potential violations, including those involving consumer protection and antitrust.

The Connecticut AG says that the state is holding the defendants responsible for “millions of dollars that have been illegally exacted from the state’s taxpayers.” The lawsuit, filed in coordination with Department of Consumer Protection (DCP) Commissioner Jerry Farrell, Jr., accuses the agencies of violating the Connecticut Unfair Trade Practices when they purposely left out or misrepresented material facts that lead bond issuers to buy bonds at higher interest rate.

Moody’s, Fitch, and McGraw Hill say they will combat the charges against them. McGraw-Hill, Standard & Poor’s parent company, claims that the state of Connecticut is using the lawsuit to dictate the kind of bond rate it gets. Moody says it will push to get the case dismissed.

The way that credit rating agencies deal with municipal bonds was addressed earlier this year in a letter sent to executives at Standard and Poor’s, Fitch, and Moody’s. Sent by the state treasurers of 11 US states, including Connecticut and California, and a number of municipal officials, the letter called on the firms to change their municipal bond rating system so it better reflects the bonds’ default risks. The treasurers say this would save municipalities billions of dollars in interest costs.

Credit-rating agencies sued by AG, ConnPost.com, July 30, 2008

Read the Complaint (PDF)

Department of Consumer Protection, Ct.gov

Ct Ag Richard Blumenthal

Continue reading "Connecticut Attorney General Sues Moody’s, McGraw Hill, & Fitch Over Municipal Bond Issues" »

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Posted In: Credit Ratings Agencies

August 9, 2008

Securities Law Firm Shepherd Smith Edwards & Kantas LTD LLP Investigates Investor Claims Related to Short Term Bond Funds

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SSEK law firm, which specializes in investor claims, is investigating compliants over the liquidity and security of so-called "ultra-short term" bond funds. Because these funds were sold as cash alternatives, any loss of principal is not acceptable. Recently, investors have experienced subtantial losses on a number of these funds, including:

SSgA (STATE STREET) Yield Plus Fund: Investors have accused this fund of violating Federal Securities laws. Usually considered a diversified portfolio with high quality credit and debt securities, and “sophisticated credit analysis” and decisions made by a team of investment professionals, the Fund was actually heavily invested in high-risk mortgage-related securities and mortgage backed securities.

Fidelity Ultra-Short Bond Fund: Investors claim that they were told the fund’s goal was to seek a high level of current income that was in line with preserving capital. The plaintiffs’ litigation, however, allege that such statements were misleading and false because the fund failed to properly disclose that it was heavily invested in high risk mortgage-backed securities.

Evergreen Ultra Short Bond Fund: According to recent litigation, investors bought shares because they were told that the fund’s investment goal was to “provide current income consistent with the preservation of capital and low principal fluctuation.'' Statements such as these are now being called misleading and materially false because the fund used a high-risk strategy (which it did not reveal to investors) that resulted in realized losses of about 18%.

Charles Schwab YieldPlus Funds -- Schwab YieldPlus Select, Schwab California Tax Free YieldPlus, Schwab YieldPlus: Charles Schwab has been accused of violating industry regulations and state securities laws when it allegedly mislead investors about the fund’s underlying risks. All three Schwab funds’ losses have been magnified by mass redemptions.

Oppenheimer Rochester National Municipals: Although not technically an ultra short term bond fund, this high-yield municipal bond can experience short-term volatility. These kinds of bonds are thinly traded and investors could suffer when the bonds are sold into an unreceptive marketplace.

Related Web Resources:

Shepherd Smith Edwards & Kantas LTD LLP Investigate Short Term Bond Funds, PrimeNewswire.com

Shepherd Smith Edwards & Kantas LTD LLP


Continue reading "Securities Law Firm Shepherd Smith Edwards & Kantas LTD LLP Investigates Investor Claims Related to Short Term Bond Funds " »

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Posted In: Bond Dealers , Charles Schwab

August 8, 2008

FINRA Pilot Program Offers Up All-Public Arbitration Panel to Hear Investor Claims

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Citigroup Global, Merrill Lynch, Wachovia Securities, UBS, Charles Schwab, and Morgan Stanley have volunteered to participate in a Financial Industry Regulatory Authority pilot program that would allow investors to have their cases heard by a panel consisting of three public arbitrators. Currently, investors have the option of having their cases dealt with by a panel made up of two public arbitrators and one non-public arbitrator.

Investors that choose to participate in the pilot plan and the firm they have filed a claim against will be given the same three arbitrator lists that those involved in regular arbitration proceedings would receive. The parties can strike the same number of names from the lists and rank according to preference the names of arbitrators they are willing to have on the panel. Parties participating in the pilot can cross out the names of all non-public arbitrators.

Except for Charles Schwab, all of the firms will submit 40 arbitration cases annually for the duration of the two-year program. Schwab will refer 10. However, the decision of whether to avail of this new panel model will be left to the investor. The pilot is available for eligible claims filed after October 6.

The program’s results will be assessed, including who decides to participate in the pilot, who decides to avail of an all-public panel, the duration of the hearings, and the outcomes of both pilot and non-pilot claims. FINRA CEO Mary Shapiro says the pilot “better serves and protects the interests” of investors.

“This is really a political move," says Securities Arbitration attorney WIlliam Shepherd. "An outcry from consumer advocates has resulted in a bill Congress to make ‘pre-dispute arbitration’ clauses in consumer contracts un-enforceable. Some lawmakers want investors to be included as consumers protected by the bill.

"Wall Street brokerage firms are lobbying hard to exempt themselves from this mandatory arbitration ban," adds Shepherd. "Despite its name, FINRA is the former National Association of Securities Dealers, a non-profit corporation owned by brokerage firms. FINRA is attempting to show Congress it is willing to reform securities arbitration rather than end it. Doing away with the ‘industry arbitrator’ is one of the so-called reforms it is proposing.”


Related Web Resources:

Test Lets Investors Pick Form of Arbitration Panel, The Wall Street Journal, July 25, 2008

FINRA to Launch Pilot Program to Evaluate All-Public Arbitration Panels, BusinessWire.com, July 24, 2008

FINRA

Continue reading "FINRA Pilot Program Offers Up All-Public Arbitration Panel to Hear Investor Claims" »

Posted by Shepherd Smith Edwards & Kantas LTD LLP | | Email This Post

Posted In: Arbitration , FINRA

August 7, 2008

Pluris Valuation Survey Finds Auction-Rate Securities Write-Downs Totaling $2.1 Billion

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In its most recent survey of auction-rate securities holders, Pluris Valuation Advisors LLC found that 281 out of 460 public companies have taken write-downs on auction-rate securities worth $2.1 billion (a total par value of $32.2 billion). However, the remaining 179 companies still have to file 10-Q second quarter reports, and Pluris estimates that approximately 100 more companies will take impairments this month.

The filings with write-downs have increased from 40% to about 80%. The increasing write-downs signify a definite trend, but there is no consistency in the size of discounts, which have ranged from 98% to close to 0.

The survey also provides information about write-downs by audit-firms. For example, Deloitte and Touche, LLP’s fraction with write-down was 77% with an average 7% discount, KPMG write-down was 80% with a 13%average discount, Ernst & Young’s fraction-write down was 83%, with a 12% average discount. PricewaterhouseCoopers average discount was 12% with a fraction with write-down of 93%.

Pluris Valuation Advisors says that overall, the data from the survey indicates that all holders have not realized the full impact resulting from the loss of liquidity of the auction-rate securities market.

Auction-Rate Securities
Auction-rate securities include corporate bonds, municipal bonds, and preferred stocks with interest rates or dividend yields that re-set periodically through auctions. Prior to the crisis in 2008, the ARS market grew to over $300 billion. Many investors were told that ARS were “equivalent to cash,” and have been dismayed that they have been unable to access their money since the market collapse.


Related Web Resources:

Pluris ARS Holders Survey, Plurisvaluation.com

Types of Auction-Rate Securities, Plurisvaluation.com

Continue reading "Pluris Valuation Survey Finds Auction-Rate Securities Write-Downs Totaling $2.1 Billion" »

Posted by Shepherd Smith Edwards & Kantas LTD LLP | | Email This Post

Posted In: Auction-Rate Securities

August 4, 2008

Massachusetts Slaps Merrill Lynch with Auction-Rate Securities Fraud-Related Charges

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The Massachusetts Secretary of the Commonwealth has filed securities fraud-related charges against Merrill Lynch for allegedly promoting the sale of auction rate securities while providing misleading information about market stability.

According to Secretary William Galvin, Merrill Lynch aggressively sold ARS to investors while telling research analysts to downplay market risks in its reports until the moment the company had to pull” the plug on its auctions.” The majority of auctions failed a day later. Galvin says that Merrill Lynch’s investors had no idea that potential trouble was brewing with their investments until it was too late for them to take action.

Galvin is also accusing Merrill Lynch of pressuring its research analysts, who are supposed to be neutral, into redacting or rewriting any reports that did not profile ARS positively. His complaint alleges that Merrill Lynch made approximately $90 million from the auction-rate securities market between 2006 and 2007. He wants Merrill Lynch to “make good” on the sales of the securities by making restitution to investors that sold their securities at below par.

Merrill Lynch issued a statement expressing disappointment that Massachusetts had filed its complaint. The company maintains that its advisers sold ARS because they thought that the securities would provide a higher return to investors.

Last week, Merrill Lynch said it would sell over $30 billion in toxic mortgage-related assets at a huge loss to help alleviate its own debt issues. A question to consider is whether Merrill Lynch, a large investment firm known for its powerhouse brand, can recoup its once solid reputation.


Related Web Resources:

Secretary Galvin Charges Merrill Lynch with Fraud in Auction Rate Securities Dealings (The Complaint)

Massachusetts sues Merrill Lynch over auction securities, USA Today, August 1, 2008

Merrill Lynch

Continue reading "Massachusetts Slaps Merrill Lynch with Auction-Rate Securities Fraud-Related Charges " »

Posted by Shepherd Smith Edwards & Kantas LTD LLP | | Email This Post

Posted In: Auction-Rate Securities , Merrill Lynch , Securities Fraud

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