October 31, 2008

SEC Failed in Its Oversight of Bear Stearns, Says Inspector General

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The Securities and Exchange Commission's Office of the Inspector General says the agency failed to fulfill its mission in the oversight of Bear Stearns. Inspector General David Kotz says not only did the SEC neglect to order the company to cut back on risk taking, but it missed possible “red flags” leading up to JP Moran Chase & Co.'s purchase of the faltering investment bank.

Kotz’s report says that despite identifying the risks that would lead to the sub-prime mortgage crisis, the SEC staff did not exert its influence to mandate that Bear Stearns add a potential market collapse scenario to its list of possible risks.

Kotz is accusing the SEC of not making any efforts to make Bear Stearns raise money or lower its debt. He is also criticizing the agency for allowing internal audits, rather than external audits, at Bear Stearns.

Also in his report, Inspector General Cox accuses the agency of not doing anything to find the shortcomings in Bear Stearn’s risk management of mortgages and failing to avail of opportunities to prod management at Bear Stearns to deal with problems. He says the SEC should have taken more time to evaluate Bear Stearn’s 2006 annual report and get additional information from the investment firm, which would have required the company to reveal more information about its mortgage portfolio to investors.

The SEC’s division of trading and markets disagrees with Kotz’s findings and claims that that the report began with incorrect assumptions and arrived at unrealistic and inaccurate conclusions that were not practical. SEC Chairman Christopher Cox says that, if anything, the SEC’s failures occurred because the agency had not been given enough authority to oversee the investment banks and that Kotz’s report affirms this.

The sale of Bear Stearns and Merrill Lynch & Co, Lehman Brothers Holding Company’s bankruptcy, and the filings by Goldman Sachs Group Inc. and Morgan Stanley to become bank holding companies means that the SEC is no longer overseeing any large investment firms. While the agency will continue reviewing broker-dealer businesses, it is terminating its oversight program of independent investment banks’ parent companies.

Related Web Resources:

SEC Watchdog Faults Agency in a Bear Case, Wall Street Journal, October 11, 2008

SEC Office of Inspector General

Bear Stearns, A Division of JP Morgan

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Posted In: Bear Stearns , SEC Enforcement

October 30, 2008

Former UBS AG Co-General Counsel David Aufhauser Agrees to Settle Insider Trading Charges for $6.5 Million

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The New York Attorney General’s Office says it has reached a $6.5 million settlement agreement with former UBS AG co-general counsel David Aufhauser over insider trading charges. Aufhauser is also a former general counsel for the Treasury Department.

In the complaint, Attorney General Andrew Cuomo accused Aufhauser of selling his personal auction-rate securities holdings because of inside information he received regarding UBS’s crumbling auction-rate securities market.

Among other allegations included in the complaint, which the New York Attorney General filed in New York State Supreme Court on July 24, 2008:

• A UBS executive received an e-mail on December 14, 2007 from the company’s chief risk officer discussing potential problems with ARS.
• This same UBS executive then sent an email to his financial advisor saying that he wanted to get out of the ARS market.
• AT this executive’s request, the financial advisor sold $250,000 of ARS.
• Cuomo’s complaint identifies Aufhauser as the executive and accuses him of violating New York’s Section 352-c of the General Business Law when he allegedly used insider information to commit securities fraud.
• The complaint also alleges that Aufhauser was in breach of a duty owed to the source of the insider information.

As part of his $6.5 million settlement with New York State, Aufhauser’s payments will include his $6 million UBS discretionary incentive compensation and another half a million dollars. The former UBS attorney is also barred from the industry for two years and cannot practice law or serve as an officer or a director of any public company in the state off New York for two years.

The New York Attorney General’s complaint against Aufhauser is part of Cuomo’s ongoing probe into the ARS market collapse.

Related Web Resources:
Ex-UBS Counsel to Pay $6.5 Million to Settle Auction-Rate Trading Case, NY Times, October 8, 2008

Ex-UBS general counsel settles insider trading case, Newsday, October 8, 2008

Office of the Attorney General, State of New York

Continue reading "Former UBS AG Co-General Counsel David Aufhauser Agrees to Settle Insider Trading Charges for $6.5 Million" »

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Posted In: Insider Trading , Securities Fraud , UBS

October 28, 2008

NASAA and AARP Launch “Free Lunch Seminar Monitor Program” to Protect Seniors From Investment Fraud

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The North American Securities Administrators Association and the AARP are inviting senior investors to take part in their “Free Lunch Seminar Monitor program.” Both organizations say the program will give investors a chance to report any unscrupulous promoters of inappropriate investments to security authorities in their state.

According to statistics, 80% of senior investors (age 60 and above) were invited to attend at least one free investment seminar over the last three years. Three out of five elderly investors received six or more invitations to these free seminars.

The free lunch seminar invitations usually indicate that seniors who attend will be fed a free, expensive lunch while they listen to information about how to invest and manage their money during retirement.The Financial Industry Regulatory Authority and federal and state securities regulators, however, say that these lunches are actually sales presentations, which consist of 50% “misleading” or “exaggerated” advertising claims and 25% unsuitable investment recommendations.

Last year, the SEC and securities regulators released their joint findings pertaining to “free lunch” seminars, including:

• The lunch seminars, while touted as “educational,” were actually held with the purpose of opening new investor accounts and (eventually) selling investment products.

• 59% of firms that oversaw the free seminars exhibited weak supervisory practices.


“Free Lunch Seminar Monitor Program”
Investors who would like to be part of the Free Lunch Seminar Monitor Program can bring a checklist (see below) to the lunch seminar with questions about the presenters and the products being promoted. The information from these forms will allow state securities regulators to determine whether the promoters and the information they are presenting are in compliance with securities laws and regulations.

The program gives investors an opportunity "fight back" against the promoters of these "free seminars" and gives securities regulators another way to protect seniors from investment fraud.

AARP and NASAA Launch “Free Lunch Seminar Monitor” Program, AARP.org

Become a Free Lunch Seminar Monitor, AARP

"Free Lunch" Investment Seminar Examinations Uncover Widespread Problems, Perils for Older Investors, SEC.gov, September 10, 2007


Related Web Resources:
What to Listen for Checklist, AARP.org (PDF)

North American Securities Administrators Association

"Free Lunch" Investment Seminars—Avoiding the Heartburn of a Hard Sell, FINRA

Continue reading "NASAA and AARP Launch “Free Lunch Seminar Monitor Program” to Protect Seniors From Investment Fraud" »

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Posted In: NASAA , Senior Investors

October 23, 2008

SunTrust Investment Services to Pay $700,000 Fine to Settle FINRA Charges of Excessive Commission and Supervisory Violations Involving Fee-Based Brokerage Business

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The Financial Industry Regulatory Authority has announced that SunTrust Investment Services Inc. has agreed to pay a $700,000 fine to settle allegations that it engaged in supervisory violations involving its fee-based brokerage business and charged excessive commissions on low-priced stocks. By agreeing to settle, the investment firm is not admitting to or denying the charges.

SunTrust terminated its Portfolio Choice accounts, which were fee-based accounts, in 2006. The charges by FINRA involve the period between November 2002 and December 2005 when SunTrust opened more than 2,644 Portfolio Choice accounts without properly evaluating whether the accounts were the appropriate fit for customers. According to FINRA, SunTrust neglected to properly monitor the Portfolio Choice accounts to make sure that they continued to be the appropriate account choice for clients.

FINRA found that at least 36 Portfolio Choice accounts that did not engage in any trades for at least eight quarters—yet these accounts were charged more than $129,000 in fees during the last four quarters. FINRA also says that a number of SunTrust Portfolio Choice clients paid an asset-based fee and transaction commission on the same assets.

FINRA was able to identify over 900 incidents when SunTrust neglected to exclude a customer asset that was purchased with a commission from the asset base that is used to determine the account fee. The error resulted in customers being charged twice, leading to about $437,500 in commissions and excess fees for SunTrust clients.

FINRA also accused the investment firm of acting inappropriately when it let a number of customers keep their accounts and pay for them even though they had not traded for years. Between January 2002 and September 2, 2005, FINRA says SunTrust did not establish a supervisor system that could make sure that registered representatives would charges clients fair commissions on securities transactions. The firm used an automated commission system that charged commission of more than 5% when low quantities and/or low-priced stocks were sold or purchased. Because of this, some clients were billed excess commissions nearing $100,000 in total.

Also as part of its settlement, SunTrust said it would certify that it returned $713,362 in interest and fees to clients that were affected by the alleged violations. FINRA says it took this voluntary refund into account when assessing its fine against SunTrust.


Related Web Resources:

SunTrust Investment Services

FINRA

Continue reading "SunTrust Investment Services to Pay $700,000 Fine to Settle FINRA Charges of Excessive Commission and Supervisory Violations Involving Fee-Based Brokerage Business " »

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Posted In: FINRA , SunTrust Investment Services Inc.

October 22, 2008

Banorte Securities International, Ltd. Agrees to $1.1 Million Fine Over Charges It Recommended Class B Mutual Fund Shares Instead of Class A

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Banorte Securities International, Ltd. has agreed to a $1.1 million fine to settle charges that it recommended to customers that they buy Class B off-shore mutual fund shares even though they would have benefited more financially by buying Class A shares. The Financial Industry Regulatory Authority announced the settlement agreement last week.

By agreeing to settle, Banorte is not admitting to or denying the charges. The company also agreed to a plan that would address more than 1,400 transactions involving accounts in over 300 customer households.

Banorte had been accused of having inadequate supervisor systems to oversee the sales of off-shore mutual fund shares, including guidelines that failed to properly advise registered representatives that Class A share purchases eligible for front-end loans were more affordable than Class B Shares.

According to FINRA enforcement head Susan L. Merrill, firms are obligated to consider all share classes and pricing features that would most benefit a customer—regardless of whether or not that clients resides in the United States or abroad. The majority of Banorte’s customers reside in Mexico. Merrill also said that firms must take all relevant factors into considerations when making mutual fund recommendations to clients.

Class A Shares
These shares come with a front-end sales charge and lower ongoing fees that are asset-based.

Class B Shares
While these shares usually do not come with a front-end sales fee, their asset-based fees are usually higher than Class A Shares’ fees.

FINRA alleges that during 2003 until May 2004, the majority of Banorte mutual fund sales involved Class B shares even though investing in Class A Shares could have resulted in higher returns for clients.

Related Web Resources:

FINRA Fines Banorte Securities International $1.1 Million for Improper Sales of Class B Mutual Fund Shares, FINRA, October 16, 2008

Banorte Securities International, Ltd.

FINRA Fines Banorte $1.1 Million

Continue reading "Banorte Securities International, Ltd. Agrees to $1.1 Million Fine Over Charges It Recommended Class B Mutual Fund Shares Instead of Class A" »

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Posted In: Banorte Securities International , FINRA , Mutual Funds

October 20, 2008

Securities Fraud Law Firm Shepherd Smith Edwards & Kantas LTD LLP Investigates Ray Londo, Londo Financial Group, and Linsco Private Ledger For Improper Lending/Borrowing of Client Funds

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Securities fraud attorneys at the stockbroker fraud law firm of Shepherd Smith Edwards & Kantas LTD LLP are investigating claims for clients of Ray Londo, Londo Financial Group, and Linsco Private Ledger (LPL). The firm is asking any clients of Ray Londo that lent him or anyone else in his company money to call (800) 259-9010.

According to the Financial Industry Regulatory Authority, Ray Londo was fired from LPL this year because of his failure to abide by company policy related to borrowing from or lending money to clients. FINRA registered representatives are not supposed to borrow money from clients or accept checks issued directly to a broker.

FINRA Rule 2370
FINRA Rule 2370 says that the borrowing or lending of money between customers and registered representatives is strictly forbidden except for when:

1) The broker-dealer has a written policy that allows for this kind of borrowing under specific circumstances.

2) At least one of the conditions must be met:
• The customer is an immediate family member of the representative or someone that the rep provides with material support.
• The loan is made available either to a financial institution that provides crediting, financing, or loans or a person that extends credit as part of his or her line of work.
• The registered individual and customer are both registered persons with the same member of the firm.
• The lending arrangement came about because of a personal relationship with the customer (outside of the broker-customer relationship) that made the loan possible.
• The customer and registered representative have a lending arrangement stemming from a relationship that is separate from the broker-customer relationship.


Related Web Resources:

Shepherd Smith Edwards & Kantas LTD LLP Investigates Claims for Clients of Londo Financial Group, Ray Londo and Linsco Private Ledger (LPL), Marketwatch.com, October 17, 2008

2370. Borrowing From or Lending to Customers, FINRA

LPL Financial

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Posted In: FINRA , LPL Financial , Londo Financial Group

October 16, 2008

Securities and Exchange Commission Sues Five World Group Securities Brokers For Persuading Clients to Refinance Homes With Subprime Mortgages

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This month, the US Securities and Exchange Commission filed a civil lawsuit against five World Group Securities brokers for allegedly pushing investors into refinancing their homes with subprime mortgages. The SEC is accusing the mortgage brokers of taking advantage of the clients’ lack of education, modest financial means, and poor fluency in English to fraudulently sell them unsuitable securities—primarily variable universal life policies.

Because most of the investors who were persuaded to purchase the securities lacked the funds or income to do so, the defendants allegedly persuaded them to come up with the money through the refinancing of their fixed-rate mortgages into subprime adjustable-rate negative amortization mortgages. The brokers received compensation from the securities sale and the mortgage refinancings.

The defendants in the case are Guillermo Haro, Jesus Gutierrez Kederio Ainsworth, Angel Romo, and Gabriel Paredes. The Commission says that the brokers violated the antifraud provisions of the securities laws.

The SEC says the men misrepresented the returns the investors would get back from the securities, the nature and liquidity of the variable universal life policies, and the new mortgages’ terms, as well as failed to reveal key facts to the investors. The Commision's complaint also accuses the brokers of falsifying customer account forms and placing inaccurate securities sales information on order tickets.

The SEC calls the men’s actions and their willingness to allow their clients to risk the potential loss of their homes “egregious” conduct that will not be tolerated. The Commission is seeking disgorgement, injunctions, and financial fines against the defendants.

If you are a victim of investor fraud, it is important that you find out about the legal remedies available to you.

Commission Charges Five Registered Representatives with Fraudulent Sales of Unsuitable Securities Funded Through Subprime Mortgage Refinancings, SEC, October 3, 2008

World Group Securities brokers charged with fraud, Bizjournals.com, October 13, 2008


Related Web Resource:

Subprime Mortgage, Investopedia

Continue reading "Securities and Exchange Commission Sues Five World Group Securities Brokers For Persuading Clients to Refinance Homes With Subprime Mortgages" »

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Posted In: SEC Enforcement , Subprime Mortgage , World Group Securities

October 15, 2008

Goldman Sachs Applies for New York Bank Charter

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Goldman Sachs is applying for a New York bank charter. The application is one of the steps the New York-based investment bank is making in its move to become a commercial bank.

Goldman’s competitors, Bank of America, Citigroup, Morgan Stanley, and JP Morgan Chase are banks that have a national charter, which allows banks to open branches in different states without needing to apply for separate charters in each state. Having a New York charter, however, will not prevent Goldman Sachs from opening branches outside the state.

Goldman’s move to obtain a state charter is a sign that the company may not want a consumer-oriented business that operates on a national level. Rather than focusing on retail banking services, the firm will likely concentrate on managing rich people's assets.

New York Superintendent of Banks Richard H. Neiman says Goldman’s application affirms that both the state and national banking systems are “alive and well.” Meantime, New York Governor David Peterson said Goldman’s decision reflected the state’s ability to “effectively regulate” banks.

In regards to Goldman’s state bank charter application, Stockbroker Fraud Attorney William Shepherd, who is the founder of securities fraud law firm Shepherd Smith Edwards & Kantas LTD LLP had this to say:

“Isn't it interesting that Goldman Sachs decided to become a bank after the bailout plan was passed, but—apparently—does not intend to become a "real" bank. Isn't it also interesting that the bailout plan was just changed to provide capital to "banks.”

It is curious that the handful of banks selected to receive taxpayer funds includes Goldman Sachs. Finally, is it any coincidence that the mastermind of the bailout plan is "Hank" Paulson, former chief of Goldman Sachs? Oh, I failed to mention that the person chosen by Paulson to oversee the bailout plan is a former vice president of … none other than Goldman Sachs.”

Goldman Sachs Seeks New York Bank Charter, New York Times, October 13, 2008

Goldman applies for N.Y. charter, Money.CNN.com, October 14, 2008


Related Web Resource:

Goldman Sachs

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Posted In: Goldman Sachs

October 14, 2008

FINRA Orders Charles Schwab to Pay $542,340 Over Short-Term Bond Fund Investor Claim

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Earlier this month, a Financial Industry Regulatory Authority panel found Charles Schwab Corp. liable for $542,340 in an investor claim against the company over its YieldPlus short-term bond fund. This case is one of numerous individual arbitration and class action lawsuits against the San Francisco-based investment firm because of the fund.

The Schwab YieldPlus Fund had assets worth over $13 billion last year, but the fund suffered major losses this year because of mortgage-backed securities. At the end of last week, the fund’s assets were worth $432 million.

In this latest arbitration claim, investor Jeffrey Nielson accused Schwab and representative Darin Beckering of purposely misleading him when he purchased the ultrashort-bond fund because they did not fully disclose the extent to which the fund would be exposed to the subprime-mortgage market. Nielson also claims he was never informed that the Schwab YieldPlus Fund was a proprietary fund.

The fund has experienced a more than 30% drop this year. In another claim against Schwab related to its short-term-bond fund, the firm was ordered to pay $18,425 for losses. The YieldPlus Fund has resulted in a $16 million charge for the firm this year because of client complaints and arbitration claims.

Shepherd Smith Edwards & Kantas, LLP is a stockbroker fraud law firm that represents numerous clients with claims against Schwab related to the misrepresentation of its YieldPlus Fund. Its founder, Securities Fraud Attorney William Shepherd says the firm is in talks with dozens of other investors who purchased Schwab YieldPlus shares.

Related Web Resources:

Bond fund costs Schwab more than $500,000, InvestmentNews.com, October 10, 2008

Schwab YieldPlus Fund, Schwab.com

Financial Industry Regulatory Authority

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Posted In: FINRA , Schwab Corporation

October 7, 2008

Wisconsin School Districts Sue Royal Bank of Canada and Stifel Nicolaus and Co. in Lawsuit Over Credit Default Swaps

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Five school districts in Wisconsin are suing Stifel Nicolaus & Co., Inc. and Royal Bank of Canada (RBC) for losses incurred after the bank and brokerage firm sold the districts “Credit Default Swaps,” (also called “CDS" or complex credit derivatives) worth $200 million resulting in some $150 million in losses. The school districts claim that the bank and brokerage firm told them that the CDS investments were safe even though they knew otherwise.

The school districts involved in the lawsuit include Kimberly Area School District, Kenosha Unified School District, School District of Waukesha, Whitefish Bay School District, and West Allis – West Milwaukee School District. They are seeking full recovery of their money. Attorney Robert Kantas of the stockbroker fraud firm law firm Shepherd Smith Edwards & Kantas LTD LLP is representing the school districts.

The districts’ lawsuit accuses Royal Bank of Canada and Stifel Nicolaus of either negligently or purposely misrepresenting the investments and withholding key information. The plaintiffs’ complaint names specific times when they were told that “15 Enrons” would need to happen before the districts would be affected, none of the CDO’s had sub-prime debt, and the investments were “safe” and “conservative.” The districts later found out that some of the CDOs they purchased included leases, home equity loans, commercial mortgage loans, residential mortgage loans, credit card receivables, auto finance receivables, and other debt obligations.

The school districts say that government legislation had encouraged them to set up investment funds to pay for certain liabilities, such as pensions and employee wages. The investment funds were supposed to lessen the financial burden on taxpayers. The districts claim that the legislation made them easy targets for banks, brokerage firms, and investment advisers.

Related Web Resources:

Wisconsin schools sue RBC for losses, Financial Post, October 1, 2008

School Lawsuit Facts

Royal Bank of Canada

Stifel, Nicholaus and Co.

Shepherd Smith Edwards & Kantas LTD LLP

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

Posted In: Credit Default Swaps (CDS)

October 6, 2008

2004 SEC Vote that Changed Net Capital Rule May Have Played a Role in Current FInancial Crisis

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A recent New York Times article about the current US financial crisis refers to an April 28, 2004 meeting involving members of the Securities and Exchange Commission.

During the meeting, the SEC members considered an urgent request made by large investment banks for an exemption from an old regulation limiting the amount of debt that their brokerage units could take on. The exemption would release millions of dollars that were in reserve as a cushion against the brokerage units’ investment losses. The released funds could then be used by a parent company to invest in credit derivatives, mortgage-backed securities, and other instruments.

Although one commissioner, Harvey J. Goldschmid, had questions the consequences of such an exemption, he was reassured that only large firms with assets over $5 billion would be able to avail of the exemption. Market regulation head Annette L. Nazareth, who would later be appointed and serve as an SEC commissioner until January 2008, told the commission that the new rules would allow the commission to forbid companies from engaging in high risk activities. Another SEC commissioner, Roel C. Campos, supported the exemption, albeit with “fingers crossed.”

Following a 55 minute discussion that was not attended by many people, a vote was called. The unanimous decision changed the net capital rule—designed to be a buffer during tough financial times. In loosening these rules, the agency also decided to depend on investment companies’ computer models to determine an investment's risk-level. This essentially left the task of monitoring investment risks to the banks themselves.

One man—Indiana software consultant Leonard D. Bole—loudly disagreed with this approach, noting that the firms’ computer software would not be able to predict certain kinds of market turmoil. His letter to the SEC, sent in January 2004, never received a response.

Once the firms availed of the rule change, the ratio of borrowing compared to their overall assets increasing dramatically. While examiners were aware of potential problems related to risky investments and a heavier dependence on debt, they virtually ignored the warning signs while assuming that the firms had the discipline to regulate themselves and not borrow too much.

The SEC, which was now finally able to monitor the large investment banks’ riskier investments, never fully availed of this advantage. Seven people were given the task of monitoring these companies, yet their department currently does not have a director. And not one inspection has been completed since SEC Chairman Christopher Cox reorganized the department some 18 months ago.

The commission formerly ended its 2004 program last month, acknowledging its failure to anticipate problems that have resulted with Bear Stearns and the four other large investment banks. Cox says it is now obvious that “voluntary regulation does not work.” Critics of the SEC, however, say the commission has fallen short with its enforcement efforts in recent years.

If you have lost money during the financial crisis because of broker-dealer misconduct or mismanagement, there are legal remedies available to you.


Related Web Resources:

Agency’s ’04 Rule Let Banks Pile Up New Debt, New York Times, October 2, 2008

SEC

Continue reading "2004 SEC Vote that Changed Net Capital Rule May Have Played a Role in Current FInancial Crisis" »

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Posted In: SEC Enforcement

October 2, 2008

Almost 7,000 Broker-Dealers from FSC Securities, AIG Financial Advisors, and Royal Alliance Associates Will Be Part of AIG Advisor Group Sale, Says Source

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A source in investment banking who is choosing to remain anonymous says that the futures of nearly 7,000 financial advisors and registered representatives responsible for generating some $1.3 billion in fees and commissions in 2007 will be decided by American International Group Inc’s large scale asset sale. Details of the sale could be announced as early as Friday by new AIG head Edward Liddy.

Published reports also say that AIG New York is thinking of selling over 15 business lines to repay the federal government for an $85 billion emergency loan.
AIG Advisor Group is made up of FSC Securities Corp, AIG Financial Advisors Inc., and Royal Alliance Associates Inc.

The unnamed source is also predicting that Liddy will retain the services of a Wall Street company to conduct a quiet auction for the broker-dealers and that aggressive bids from different firms, including Raymond James and LPL Financial are likely. According to other sources and recruiters, the Financial Services Network of San Mateo, California, which is one of the largest advisor groups affiliated with FSC Securities, could end up with LPL or one of its subsidiaries.

In an interview with the Wall Street Journal last month, AIG Chairman and CEO Liddy said that he expects the company will emerge from its current financial turmoil. Liddy was appointed to his new post two days after the federal government’s loan, intended to keep AIG from bankruptcy.

Related Web Resources:

AIG Sale Decided in Weeks, says Chief, CourierPress.com, September 20, 2008

Another Bailout: Government Lends AIG $85 Billion, NPR.org, September 17, 2008

AIG Advisor Group

Continue reading "Almost 7,000 Broker-Dealers from FSC Securities, AIG Financial Advisors, and Royal Alliance Associates Will Be Part of AIG Advisor Group Sale, Says Source" »

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Posted In: Miscellaneous

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