March 31, 2009

US Supreme Court Won’t Hear InfoSpace Founder's Appeal Requesting to Sue Attorneys and Stock Management Company for Allegedly Botching Insider Stock Trading Case

The US Supreme Court has decided not to listen to an appeal filed by InfoSpace founder Naveen Jain requesting that he be allowed to sue JP Morgan Securities and his former attorneys for allegedly mishandling an insider stock trading lawsuit.

What happened was that InfoSpace Inc. INSP shareholder Thomas Dreiling filed a derivative action against Naveen and his wife, InfoSpace cofounder Anuradha. Dreiling contended that they violated short-swing trading prescriptions that prevent corporate insiders from selling and buying or buying and selling company stock during a six-month period.

The federal court ruled in Dreiling’s favor and the Jains were ordered to pay $246.1 million in disgorgement. The lawsuit was eventually settled for $105 million.

The Jains, however, then sought to get the amount they were fined for participating in illegal short-swing transactions from their stock management company and their attorneys. He and his wife had accused the defendants for the language in his company’s initial public offering prospectus that contributed to such a healthy judgment against them. Their lawsuit alleged breach of fiduciary duty, negligence, malpractice, and equitable indemnity.

Since then, the lower courts, including the Washington Court of Appeals, have thrown out their lawsuit because federal law bars complaints that blame security companies for such trades. The appeals court, in affirming the initial dismissal, noted that an insider who violates Section 16B of the Securities Exchange Act cannot receive indemnification from others for any liability that results. While the state court acknowledged that the rule against indemnification might protect some securities professionals from the repercussions of their misconduct, Congress still wants corporate insiders to be held strictly liable for short-swing violations.

Related Web Resources:
Supreme Court turns down appeal from InfoSpace founder, Seattle Times/AP, March 9, 2009

InfoSpace

Supreme Court of the United States

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March 27, 2009

GM, Ford, Chrysler Retirees: Beware of Financial Advisors Seeking to Invest Your Severance!

About 7,500 General Motors workers have agreed to a buyout of early retirement incentives and leave, the company reported today. Chrysler has also agreed to extend its offers bo buy-out workers beyond tomorrow. This follows tens of thousands of other autoworkers workers who were in recent years persuaded to retire and retire early and receive large sums of money.

Unfortunately, many retiring persons have little if any experience in investing. Enter droves of salespersons hawking financial plans. In the past, strict laws and regulations were enforced regarding investors’ funds, especially retirement funds. As we have recently witnessed, securities regulators are apparently overwhelmed or incompetent. This has resulted in tragic results recently as retirees have not only lost their careers but also their only safety net.

For decades, Wall Street has blamed abuse of investors on a few “rogue” brokers. Now many believe it is Wall Street itself that is rotten to the core. In fact, the majority of financial advisors sincerely and diligently seek to serve their clients. Yet, many products they are told to sell are inappropriate, riddled with costs or just plain fraudulent. As well, too many of the worst of advisors attract unwary investors with false promises.

Victims of financial abuse are also often unaware they can recover undue investment losses according to the law. They must understand, however, that regulators “police” the industry, and write tickets when they catch the bad guys. In order to recover, victims almost always have to hire an attorney to represent them in court or securities arbitration.

Our law firm has represented thousands of investors, most who lost retirement funds, and many who are former autoworkers. If you or someone you know has lost retirement funds you feel were invested improperly, contact us today for a free consultation.

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March 26, 2009

First New York Securities LLC and Four Ex-Traders to Pay $435,000 in FINRA Sanctions Over Short Selling

First New York Securities LLC and four of its ex-traders have reached a settlement with the Financial Industry Regulatory Authority over allegations that they improperly covered short positions involving secondary offering shares, as well as engaged in associated oversight failures.

Per the FINRA settlement, First New York Securities LLC will pay $170,000 and disgorge $171,000. The former First Securities New York traders are to pay: $7,500 from Kevin Williams, $50,000 from Joseph Edelman, $30,000 from Michael Cho, and $30,000 from Larry Chachkes. By agreeing to settle with FINRA, the firm and its former brokers are not admitting to or denying the allegations.

FINRA says the trading addressed by the short selling case took place during a specific restricted period (usually five business days) when the Securities and Exchange Commission doesn’t allow for short sales to be covered with securities from secondary offerings and before the secondary offering is priced. This matter is addressed in Rule 105 of Regulation M.

The self-regulatory organization says that a 2005 probe found that the investment bank violated the rule related to five public offerings. The SRO says First New York Securities and its traders engaged in short selling during the period when they weren’t allowed to and covered short positions using shares from the offering. FINRA says that as a result, the firm and its four traders earned $171,504 and effectively got rid of their market risk.

FINRA also accuses the investment firm of neglecting to properly supervise its traders, as well as neglecting to establish proper supervisory procedures or to enforce such a system. The SRO also accuses First New York Securities of failing to maintain the proper books and records connected to the transactions that are being addressed.

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March 24, 2009

Associated Securities Ordered by Arbitrators to Pay $8.8 Million to Investors for Losses in APEX Equity Options Fund

Members of 16 different California households were sold shares of APEX Equity Options Fund which collapsed in August 2007. Collectively, these investors lost almost $9 million. They contacted an experienced securities law firm which advised them to jointly file a claim in Securities Arbitration through The Financial Industry Regulatory Authority (FINRA), formerly the National Association of Securities Dealers (NASD)

The investors claimed that Jeffrey Forrest of WeathWise LLC failed to properly advise them when selling the shares of the APEC fund. Because Forrest was licensed as a securities broker by Associated Securities, the claim in arbitration included claims against Associated, which is responsible to supervise the activities of its brokers.

Because of the large number of parties involved, hearings on the arbitration claim lasted for 12 days. After the conclusion of the hearings the three person arbitration panel deliberated, then rendered an award requiring the respondents to pay back these investors all of their losses of $8.8 million.

"This is a great result," said Securities Attorney William Shepherd. "The arbitrators followed the law and held the respondents fully liable for all damages to these investors. This arbitration panel also took seriously the duty of brokerage firms to diligently supervise those licensed through them. Firms are often content to receive income from clients advised by their broker but claim they are not responsible for their actions. Nor do securities laws recognize an independent contractor status for securities salespersons."


March 23, 2009

Houston Broker at Deutsche Bank Alex Brown Leaves Suicide Note Suggesting Clients Sue over Aravali Fund

Tales of the stock market crash of 1929 contain images of victims jumping from windows of Wall Street buildings. An eerily sign of the similarities to the current 21st Century crash may be the recent suicide of a despondent broker at Deutsche Bank Alex Brown Securities (Deutsche Bank), who left a note telling clients to contact a lawyer to seek recovery of losses.

A law suit, with Smith’s suicide letter attached, was soon filed by Bernard and Joan Spain, of Pennsylvania, and Lonnie Duncan, of California, trustee of the Duncan Family Trust. The initial paragraph of the letter states:

"Since you are reading this, I have just taken my life. It was necessary because the alternatives were totally unpalatable. I consider you a friend first and a client second. That said, I had a fiduciary relationship with you that charged me with putting your interest first. I can say that I always tried to do that. However, some of the investment recommendations that I chose did not work out the way I had anticipated. I regret that very much.”

According to the suit, clients of the late Russell Smith, a broker in the Houston, Texas, office of Deutsche Bank, were lured into moving more than $13 million in funds from FDIC insured and other high quality investments into what they were told was a “virtually risk-free” fund. The suit also names "Arthur Kreidel" as a representative in Deutsche Bank’s Houston office alleging that he assisted Smith to persuade the Spains and Duncan to invest as limited partners in the Aravali Fund, with Aravali Partners LLC as the fund’s general partner. [The firm reports an "Arthur Kieval" as its Houston Regional Executive in 2006]

The petition states that the Spains and Duncan were told they had a rare opportunity to invest in Aravali Fund which was previously available to institutions only. Smith and others met privately with these clients, including at expensive New York restaurants, explaining that the Aravali Fund had decades of success dealing in high quality municipal bonds. The fund, reportedly investigated by Deutsche Bank and its representatives, was described as “virtually risk free” was and recommended to them by Deutsch Bank, but it is now worthless.

The law suit, which also states that these investors were never provided with proper or complete information and documentation regarding the investment or its fees, also names the Aravali Fund, Aravali Partners LLC and its president, Mark Young. Deutsche Bank apparently claims it had no knowledge of the activities of its representatives as they sold the Aravali fund to these investors.

For additional information contact attorney Kirk G. Smith at the law firm of Shepherd Smith Edwards & Kantas LTD LLP.

March 22, 2009

Merrill Settles SEC Charges Over ‘Squawk Box’ Misuse for $7 Million

Merrill Lynch will pay $7 million to settle Securities and Exchange Commission administrative charges that the investment bank neglected to protect customers whose orders were transmitted over “squawk boxes.” The penalty is the second highest fine that the SEC has imposed for cases involving Section 15(f) of the 1934 Securities Exchange Act and Section 204A of the 1940 Investment Advisers Act violations. These statutes mandate that investment advisers and broker dealers implement procedures and policies that would keep employees from misusing nonpublic, material data.

The SEC says that from 2002 to 2004, a number of Merrill Lynch brokers at three branch offices let day traders, who did not work for the company, hear customers’ unexecuted orders as they were being broadcast over the internal intercom systems. The traders used the information to trade before Merrill’s institutional clients' orders were placed.

The SEC says Merrill did not have the procedures or polices to prevent employees from accessing the squawk boxes or to supervise them to make sure that they did not misuse customer order data. In addition to paying the penalty, Merrill Lynch says it will implement a number of measures to ensure that customer order data is protected any time it is sent over squawk boxes or other technologies used for their transmission.

U.S. Attorney for the Eastern District of New York had filed criminal charges related to the squawk box front-running activities against a number of Merrill employees, A.B. Watley Group Inc., and several individuals. While seven defendants were acquitted of nearly all the charges, they must go back to trial for a single count of conspiracy to commit securities fraud. Former Merrill stockbroker Timothy O'Connell was found guilty of witness tampering and issuing false statements.

Related Web Resources:
SEC Charges Merrill Lynch For Failure to Protect Customer Order Information on "Squawk Boxes", SEC, March 11, 2009

SEC Administrative Proceedings Against Merrill Lynch, Pierce, Fenner, & Smith Inc., (PDF)

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March 20, 2009

Wachovia Securities Must Pay Texas $4 Million for Auction-Rate Securities

The Texas State Securities Board has fined Wachovia Securities $4 million for misleading investors about auction-rate securities. The Wells Fargo & Co unit must also have completed buying back ARS from investor clients in Texas by June 30.

This is the final step in the auction-rate securities case against Wachovia in which a tentative settlement agreement was reached last year when Wachovia Securities agreed to pay back over $8.5 billion in ARS from investors throughout the US.

It is also part of Texas’s efforts to deal with problems related to securities. The nearly $4 million is Texas’s share of the $50 million penalty Wachovia said it would pay. Last December, the Texas State Securities Board issued a final order mandating that Citigroup pay the state $3.6 million for making misrepresentations to investors about the auction-rate securities.

According to the Texas order, Wachovia Securities created misconception when it told investors that ARS were like cash and could be retrieved at nearly any time. The order accused Wachovia and its registered securities agents of knowing that the ARS market was in trouble yet neglecting to provide investors with this information. Wachovia Securities is one of the registered securities dealers in Texas.

UBS Financial Services, Merrill Lynch, and Citigroup are among the large investment firms that reached similar billion-dollar settlements with state regulators and the Securities and Exchange Commission. The collapse of the auction-rate securities market in February 2008 left many investors with frozen ARS that they thought were going to remain liquid and safe.

Wachovia Securities Ordered To Pay Texas $4 Million In ARS Probe, CNNMoney.com, March 17, 2009

Texas State Securities Board

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March 19, 2009

Stifel Nicolaus Will Repurchase Auction-Rate Securities from Costumers Within Three Years

Stifel Financial Corp says that subsidiary Stifel Nicolaus & Co. Inc. will buy back all of its customers’ auction-rate securities in the next three years. This is a significant change from its initial offer to purchase 10% of the clients’ ARS holdings.

The ARS repurchase will occur in four stages:
• By June 30, 2009: $25,000 or 10% (whichever is greater).
• Before June 30, 2010, $25,000 or 10% (whichever is greater).
• Prior to June 30, 2011, $25,000 or 10% (whichever is greater).
• Prior to June 30, 2012, the balance of any outstanding ARS.

Employee accounts, however, are only eligible once the last phase of the enhanced plan begins.

Stifel CEO & Chairman Ronald J. Kruszewski says the plan reflects the proper balance between shareholder and client interests. He says the plan will give relief to its 1200 ARS clients and that about 40% of the accounts would be completely liquidated by the end of June 2009.

The repayment offer applies to ARS that are held by retail clients who purchased the securities through Stifel before the ARS market fell. In return, Stifel says it will take assignment of actionable legal claims by customers against the large players in the ARS market for the amounts it buys back. Stifel maintains that it would not have told its clients to purchase ARS if the key market participants had told the financial firm what they knew about the ARS market collapse.

Missouri securities regulator Secretary of State Robin Carnahan, however, is still concerned that this new offer is still not enough to guarantee that customers will get back all their funds. She noted that three years might be too long for many investors and she called on Stifel to guarantee that it would make its investors whole again.

Soon after Stifel’s announcement of its ARS repurchase plan, Carnahan filed a lawsuit against the St. Louis-based financial firm for misleading clients that had purchased ARS.

Related Web Resources:
Missouri's Carnahan files suit against Stifel, Forbes/AP, March 12, 2009

Stifel Financial plans 100 percent buyback of ARS, The Street.com, March 9, 2009

Missouri Secretary of State Robin Carnahan

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March 18, 2009

Madoff and Stanford Victims Can Claim Theft Losses as Tax Deductions, Says Internal Revenue Service

According to Internal Revenue Service Commissioner Douglas Shulman, investors who were defrauded by R Allen Stanford and Bernard Madoff can claim these theft losses as deductions when filing their taxes. The IRS announced these new procedures on Tuesday. These new IRS rules are applicable to victims of any Ponzi scam but the tax filings must be filed for the year 2008.

Theoretically, the investors would have been paying capital gains taxes if their investments had made profits. Now that it has been discovered that the profits were bogus, however, the IRS says that these same investors should be refunded those taxes.

Under the new guidance, investment losses incurred because of arrangements involving criminal fraud will be classified as theft losses instead of capital losses (usually capped at $3,000 annually). This will allow the victim to receive the larger deduction. For small businesses with $15 million in gross annual receipts, theft loss deductions can be carried back up to five years for 2008 returns instead of the usual 2-years. Also, fictitious income can also be claimed as theft losses.

Investors that file securities fraud lawsuits against Bernard Madoff because they were bilked by his multibillion-dollar Ponzi scam are allowed a 75% deduction for theft losses. Investors who don’t sue the 70-year-old investment advisor can obtain an immediate 95% deduction as soon as possible and seek to obtain the rest in the future if they don’t get back any of their monies. They could also take a deduction for investment income they thought they made.

Related Web Resources:
IRS Says Madoff Victims Can Claim Theft Losses, Bloomberg.com, March 17, 2009

IRS To Allow Madoff Victims To Deduct Theft Losses For 2008, Fox Business, March 17, 2009

Securities Investor Protection Corporation

Internal Revenue Service

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March 17, 2009

Despite Financial Market Volatility, Most Investment Advisors Are Telling Clients To Stick With Their Investment Plans

According to a TD Ameritrade Institutional survey, most investment advisers continue to tell their clients that now is a great time to invest in the financial market rather than encouraging them to cash out their investments in the wake of the financial crisis:

• 93% of investment advisers are not telling clients to cash out investments.

• Over 50% of these registered advisers believe now is the time to invest in equities.

• 43% of them are telling clients to increase their fixed income allocations.

• 53% are having clients increase cash allocations.

• 41% have dramatically increased their communications with clients so they can offer them reassurance.s


506 registered investment advisers participated in the survey. TD Ameritrade Institutional managing director of advisor advocacy and industry affairs Brian Stimpfl says that the results demonstrate how most advisors are staying committed to sticking with their clients’ investment strategies despite volatility in the financial market.

Shepherd Smith Edwards & Kantas LTD LLP Founder and Stockbroker Fraud Lawyer William Shepherd, however, had this to say: "When markets fell 20% or so by early September, brokers and financial advisors should have been listening to their clients carefully to learn the true nature of their risk-tolerances. When any investor expresses strong feelings about losses in an account the investment advisor must act to revise the client’s objectives. Several of our clients told their advisors they were losing sleep over their investments. Yet, instead of revising the clients’ investment objectives – and their investments – as required, the advisors adamantly told their clients not to sell. Now that these investors’ nightmares have come true, the advisors want to hide behind objectives marked on the old forms without taking responsibility for their reckless inaction.”


Related Web Resource:
FA Magazine
TD Ameritrade Institutional

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March 14, 2009

Morgan Keegan Settlement with Children’s Wish Fund Shows the Impact Recouping Investment Losses Can Have On The Little People

In 2007, Morgan Keegan settled an arbitration claim with the Indiana Children’s Wish Fund for an undisclosed amount. The charity had reported losing $48,000 in a mutual fund it had invested in with the brokerage firm.

The Wish Fund became involved in mortgage securities after a local banker persuaded the charity’s executive director, Terry Ceaser-Hudson, to invest money in a bond fund through Morgan Keegan. Ceaser-Hudson was put in touch with broker Christopher Herrmann. When she asked him about the risks of investing in the fund, she says he assured her that investing it would be as safe as investing in a CD or a money market account.

In June 2007, the Wish Fund invested nearly $223,000 in the fund. That week, two Bear Stearns funds collapsed.

Less than three weeks after investing the charity’s money in the Morgan Keegan fund, Ceaser-Hudson says she was surprised to see a $5,000 loss. As the bond fund’s net asset value fell in September, she ordered the sale of the stakes to be sold. She got back about $174,000 of the $223,000 she had invested on behalf of the Wish Fund—that’s a 22% loss in just three months. Ceaser-Hudson filed an arbitration claim against Morgan Keegan and accused Herrmann of breach of duty when he making an unsuitable recommendation to the Wish Fund.

It appears as if the Regions Morgan Keegan mutual fund board members, like many investment professionals, did not properly assess the risks that came with investing in mortgage securities. Most of the brokerage firm’s directors do not own shares in the bond funds that were devastated, which means that the majority of them were not impacted by their decline.

For a charity like the Children’s Wish Fund, however, the losses it incurred had been preventing nine sick children from having their wishes granted.

Related Web Resources:
The Debt Crisis, Where It’s Least Expected, New York Times, December 30, 2007

The Indiana Children's Wish Fund

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March 11, 2009

Moody’s Investors Can Pursue Securities Fraud Class Action Lawsuit Accusing the Credit Rating Agency of Falsely Claiming Independence

A US District Court judge says Moody’s Corp. investors can go ahead in part with a lawsuit accusing the credit rating agency of securities fraud. The class action lawsuit accuses Moody’s of claiming it was an independent body that impartially published accurate financial instrument ratings when such misrepresentations artificially inflated its stock price (until media reports about its compromised objectivity caused the value of its stocks to drop).

In the U.S. District Court for the Southern District of New York, Judge Shirley Wohl Kram said the plaintiffs sufficiently alleged that the credit rating agency’s statements over its independence were false. She did find deficiencies with other pleadings, however, including a failure to properly plead scienter against Michael Kanef, the group managing director of Moody’s US asset finance group, and Brian Clarkson, Moody’s chief operating officer. The court also approved the plaintiffs’ request that they be allowed to cure the pleading deficiencies.

The court also said that it did not consider Moody’s statements about its independence to be inactionable puffery. Moody had declared independence and made a list of verifiable actions it executed to make sure it continued to stay independent. However, other specifics, the court said, were not actionable, including statements about the meaning of structured finance securities or that its structured finance revenues came from legitimate business practices.

The court said that the plaintiffs’ class action case survives the defendants’ motion to dismiss the lawsuit.

Credit Rating Agencies
It is the job of credit rating agencies to help manage financial market risk. CRA’s are responsible for publishing creditworthiness evaluations about their clients. These evaluations not only help in the assessment of credit risk but they are important for regulation.

Related Web Resources:
Moody’s Must Defend Investor Suit Over Independence, Bloomberg.com, February 23, 2009

Shareholder lawsuit vs Moody's allowed to proceed, CNBC.com, February 23, 2009

Moody's

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March 9, 2009

UBS Sanctioned For Madoff-Related Losses by Luxembourg Financial Services Regulator

In Europe, the Luxembourg Commission de Surveillance du Secteur Financier (CSSF) has censured UBS’s Luxembourg-based branch for failing to execute due diligence and, as a result, allegedly allowing for the massive losses investors have incurred from the Bernard Madoff's $50 billion Ponzi scam. The Luxembourg financial service regulator is accusing Switzerland’s biggest bank of a “serious failure” in the way it managed a feeder fund that funneled assets to Madoff-related investments. Luxembourg’s CSSF is giving UBS three months to remedy the problems.

UBS, however, is disputing the CSSF’s claim that it violated its contractual obligation to clients. The investment bank says the Luxalpha fund was set up at the request of wealthy clients that wanted a tailor-made fund that would let them invest their assets with Bernard Madoff. UBS says these clients knew that it was not responsible for their assets' security.

Following news of the Madoff scheme and revelations that some French investors had allegedly lost billions of dollars because their investments were channeled to Madoff through Luxembourg-based mutual funds, the European Commission announced it would start investigating the way EU member states use the EU mutual fund regulatory regime (UCITS, which refers to Undertakings for Collective Investment in Transferable Securities).The EU also said that approval of a new regulatory regime will more than likely be delayed so more changes can be considered to ensure that investors are protected in the future from losses such as the ones that occurred with Madoff.

The French government accused UBS of lax supervision of mutual funds. French officials have also accused Luxembourg of being lax when it comes to EU mutual fund regulations. They've called on the EU to come up with stricter rules. Luxembourg, which has one of the EU’s mutual fund financial service sectors, disagrees with France’s accusations.

Madoff's scheme has resulted in massive losses for individual investors, institutions, world financial markets, politicians, charities, and many others.

Luxembourg regulator censures UBS over Bernard Madoff, Times Online, February 26, 2009

French investors to take legal action against banks over Madoff feeder funds, Times Online, January 14, 2009

Related Web Resources:
Feds say Bernard Madoff's $50 billion Ponzi scheme was worst ever, Daily News, December 13, 2008

Luxembourg's Commission de Surveillance du Secteur Financier

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March 7, 2009

Outcome of SEC Actions Appear to Favor Larger Broker-Dealers than Smaller Ones, Says Harvard Law School Study

The Securities and Exchange Commission may be “too close” to larger investment firms that they give them preferential treatment in SEC Actions, says a Harvard Law School study. One “tentative” explanation cited by the study is that SEC officials look to the larger broker-dealers—especially those located in New York—for future employment opportunities. The study also noted that the SEC was more likely to order smaller broker-dealers (than larger firms) to court, rather than merely slapping the firm with an administrative proceedings.

The Harvard study took a look at patterns the SEC exhibited when it enforced actions against investment firms in 1998, 2005, 2006, and Jan – April in 2007. Findings included:

• When large investment firms and smaller firms faced the same SEC violations for similar levels of harm, there was a 75% smaller chance that a big broker-dealer would have to go to court than one of its smaller counterparts.
• There was a 44% chance that employees from large broker-dealers would have to go to court to fight an SEC action, compared to a 73% possibility for employees of smaller broker-dealers.
• When facing SEC administrative proceedings, bigger firms were less likely to be banned from the industry. 25% of small firms defendants in such actions received permanent industry bans, compared to just 5% of large firm defendants.
• There did not appear to be a justifiable reason for why there was a disparity between the outcomes of SEC actions involving larger broker-dealers and smaller ones.
• However, both large and small firms were slapped with equivalent fines.

The study did not look at SEC enforcement actions in 1999 and 1920 because of worries the findings might be affected by the burst of the “dot.com bubble,” as well as the outcomes of SEC actions from 2008 that may have been impacted by the financial crisis.

Related Web Resources:
Securities and Exchange Commission
SEC Enforcement Actions

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March 5, 2009

Wells Fargo, Goldman Sachs, JP Morgan Chase, Citigroup, UBS Securities, Bank of America, Moody’s Investment Services, and Fitch Ratings are Among Defendants Sued On Behalf of Wells Fargo Certificate Investors for Alleged Securities Fraud Violations

The Boilermaker-Blacksmith National Pension Trust is suing a number of investment banks, credit rating agencies, and underwriters, including Wells Fargo, WFASC, Morgan Stanley & Co., Credit Suisse Securities (USA) LLC, Barclays Capital Inc., Bear Stearns & Co., Countrywide Securities Corp., Deutsche Bank Securities Inc., JPMorgan Chase Inc., Bank of America Corp., Citigroup Global Markets Inc., McGraw-Hill Cos., Moody's Investor Services Inc., and Fitch Ratings Inc., over allegations that they made false statements in the prospectus and registration statement for certificates that were collateralized by Wells Fargo Bank, NA. The lawsuit, filed on behalf of thousands of investors that bought the certificates from Wells Fargo Asset Securities Corp., accuses the defendants of violating the 1933 Securities Act by engaging in these alleged actions.

According to the securities fraud lawsuit, the defendants concealed from investors that Wells Fargo revised its underwriting practices in 2005 and became involved in high risk subprime mortgage lending. The complaint contends that WFASC and a number of defendants submitted to the Securities and Exchange Commision prospectus and registration statements representing that the mortgages were backed by certificates that were subject to specific underwriting guidelines for evaluating a borrower's creditworthiness. The plaintiffs contend that these prospectuses and registration statements were false because they neglected to reveal that the Wells Fargo-originated certificates were not in accordance with the credit, underwriting, and appraisal standards that Wells Fargo, per the companies, had supposedly used to approve mortgages.

The lawsuit also claims that because Wells Fargo decided to enter the subprime mortgage mortgage market in 2005, the investment bank had to take significant write-downs in 2008 because of its massive exposure to the subprime market and the WFASC certificates that these mortgages backed dropped significantly in value. The Boiler-Blaksmith fund reports that it lost about $5 million, which is more than half of what it invested.

Related Web Resources:
Read the Complaint

The Boilermakers National Funds

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March 3, 2009

SEC Freezes Assets of Westridge Capital Management, WG Investors, LP, WG Trading Company, LP, and Money Managers Stephen Walsh and Paul Greenwood Over Alleged Misappropriation of Up to $554 Million in Investor Funds

The Securities and Exchange Commission is accusing money managers Stephen Walsh and Paul Greenwood, along with their affiliated entities Westridge Capital Management, WG TRADING Company, LP, and WG Investors, LP, of orchestrating an investment fraud scam that has resulted in the misappropriation of some $554 million in investor assets.

According to the SEC, Greenwood and Walsh told investors that their money was going to be placed in a stock index arbitrage strategy, but instead, they used the funds to buy luxury cars, multi-million dollar residences, a horse farm and horses, rare collectibles, as well as pay for other personal expenses. The SEC has obtained an asset freeze against the two money managers and their affiliated entities.

The SEC’s complaint accuses Walsh and Greenwood, through their three affiliated entities, of violating the Securities Exchange Act of 1934, the Securities Act of 1933, and the Investment Advisers Act of 1940. The SEC is seeking a permanent enjoinment of the defendants from committing future violations of the federal securities laws and wants them to pay penalties, disgorgement of ill-gotten gains, and prejudgment interest.

Meantime, the US Commodity Futures Trading Commission filed charges against Walsh, Greenwood, and their affiliated entities, while the US Attorney’s Office for the Southern District of New York filed criminal charges against the two money managers, who have both been arrested.

Because a number of prominent consulting firms recommended the money managers and their affiliated entities to pension and endowment groups, these investors now stand to loose millions. Wilshire Associates, Mercer, and Cambridge Associates are three of the consulting firms that made such recommendations.

For example, the Sacramento County Employees' Retirement System made its multi-million dollar investment after Mercer highly recommended WG Trading and Westridge. Kern County Employees' Retirement Association in California and the Iowa Public Employees' Retirement System invested their money after Wilshire recommended Westridge.

Consulting firms play a huge role in the investment business. One reason is that they give advice to hundreds of institutional investors on where to place their money. The money managers they recommend can end up making millions of dollars, while the clients pay consulting firms either a small percentage of the assets invested or a flat fee for a contract lasting a number of years.


Related Web Resources:
Consultants Touted Firm Accused in Fraud, The Wall Street Journal, February 27, 2009

SEC Charges Two New York Residents For Misappropriating More Than $500 Million in Investment Scheme, SEC, February 25, 2009

Read the SEC Complaint (PDF)

Continue reading "SEC Freezes Assets of Westridge Capital Management, WG Investors, LP, WG Trading Company, LP, and Money Managers Stephen Walsh and Paul Greenwood Over Alleged Misappropriation of Up to $554 Million in Investor Funds" »