May 29, 2009

Texas Securities Fraud: Court Grants SEC's Request to Freeze Defendants’ Assets Following $40 Million Investment Scam

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The U.S. District Court for the Northern District of Texas has issued an order granting the Securities and Exchange Commission’s request for an asset freeze against Excel Lease Fund, Inc. and its owner, Benny L. Judah. Both are accused of being involved in a $40 million Texas securities fraud scheme that affected hundreds of investors.

In the consent order, the defendants did not admit to or deny the SEC’s allegations. Judah, a Texas business person, also agreed to an injunction barring him and any of his entities from issuing securities. He has control over 78 Texas businesses and plays a leadership role in almost 50 of them.

The SEC says that beginning January 2006, the defendants made a high-yield debenture offering to investors, while telling them that their money would go toward a number of “legitimate business” uses, including helping to retire a series of earlier debentures. The agency contends that Judah actually used the funds for non-Excel business purposes, as well as for his personal use. Investigators say at least $5 million of the funds may have been lost through day trading.

In addition, the SEC is accusing the defendants of overstating by at least 30% the value of assets behind the debentures, neglecting to disclose about $20 million in related-party loans to other Judah-owned companies, and overstating Excel’s assets through the use of some $15 million in bogus lease contracts. The SEC wants to obtain permanent injunctions, fines, and disgorgement against the defendants.

Over the years, our Texas securities fraud lawyers have helped many investment fraud victims recoup their losses.

Related Web Resources:
Benny L. Judah and Excel Lease Fund, Inc., SEC.gov, April 21, 2009

Feds freeze assets of Lubbock businessman Benny Judah, NewsChannel11, April 22, 2009

Read the SEC Complaint (PDF)

Continue reading "Texas Securities Fraud: Court Grants SEC's Request to Freeze Defendants’ Assets Following $40 Million Investment Scam" »

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Posted In: Texas Securities Fraud

May 28, 2009

Lawsuit against Fisher Investments a possible indicator that more investment lawsuits and arbitration claims against financial advisers may be in the works

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Earlier this month, our securities fraud law firm published a blog post about a $1.2 million arbitration claim filed against Fisher Investments by a couple accusing the investment adviser of breach of fiduciary duty. Fisher Investments head Ken Fisher called the allegations “nonsense.”

He also brushed off claims made in an investment adviser lawsuit, this one filed in Houston federal court by investor Maurine Ford. The plaintiff contends that Fisher Investments is responsible for substantial losses sustained by a living trust that the firm began managing for her in June 2008. Before then, Lighthouse Capital Management LLP of Houston managed the trust. That is, until Fisher Investments purchased the client assets.

According to Ford’s complaint, the asset allocation in the trust’s account when it was transferred to Fisher Investments was 27% cash, 41% equities, and 32% fixed income. She contends that Fisher Investments recommended that the plaintiff reallocate the portfolio so that 100% would be invested in equities.

The $1.2 million investment advisor arbitration claim, filed in Georgia by Michelle and Brent Murphy, accuses Fisher Investments of keeping nearly 100% of the senior couple's investments in equities despite the market collapse that was taking place.

Mr. Fisher maintains that both cases against his firm are going to hit concrete walls. He has called the lawyers handling both cases “incompetent” and said that the clients “will be sorry in the end” for paying for legal fees when they end up empty-handed.

In response to Fisher’s claims, Stockbroker Fraud Attorney William Shepherd says, “While it is true that attorneys not accustomed to handling investors’ claims are indeed not competent to handle such cases, Mr. Fisher may discover that all lawyers are not incompetent in this area of the law. Investors who hire a legal team that has handled hundreds – or even thousands - of claims by investors, such as our firm, very well may surprise Fisher. We look forward to providing him with that learning experience.” Mr. Shepherd is the founder of securities fraud law firm Shepherd Smith Edwards & Kantas LTD LLP.

Following the majority of past market collapses, investors were most likely to try recouping their investment losses from broker-dealers and stockbrokers. Industry experts, however, are anticipating that this time around, investors may also seek to get their money back by filing lawsuits and arbitration claims against liable financial advisers.

Related Web Resources:
Lawsuits against Fisher Investments may lead to other adviser litigation, Investment News, May 17, 2009

Fisher Investments Hit with $1.2 Million Arbitration Claim by Senior Investors Alleging Breach of Fiduciary Duty, Stockbrokerfraudlawyer.com, May 14, 2009

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Posted In: Financial Advisers , Fisher Investments

May 27, 2009

Merrill Lynch Life Agency to Pay Illinois Division Of Insurance $18 Million Over Funeral Trust Scam Allegations

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Merrill Lynch Life Agency Inc. will pay $18 million to the Illinois Division of Insurance to settle the state’s investigation into the investment firm’s involvement with a trust fund overseen by the Illinois Funeral Directors Association. The trust was supposed to cover funeral costs for about 49,000 consumers that had prepaid for funeral contracts. The $18 million will be placed in a special fund and will be used to offset losses by association members when delivering on their funeral contract commitments to consumers.

Merrill Lynch & Co. Inc, between 1986 and 1999, had marketed and sold tax-exempt variable universal life insurance policies as investments within the pre-need trust. Unfortunately, in 2007, the trust imploded, and its value dropped from over $300 million to approximately $250 million.

The Illinois Department of Financial and Professional Regulation then conducted a probe into the trust and discovered that the funds’ trustees had used the policies as investments within the trust. Also state comptroller Dan Hynes is asking the association to account for $10 million that trustees allegedly obtained from the trust as excess management fees.

According to state regulators, Merrill Lynch Life registered representative Edward L. Schainker, who served as the association’s investment advisor, recommended and sold over 300 policies to its members. The policies were to offer tax-exempt investment returns. Merrill Lynch’s life insurance division put forth 120 policies and received over $32 million in premiums that were invested in bonds and stocks that over the years have dropped in value and placed the trust’s solvency at risk.

Schainker is accused of violating Illinois insurable-interest laws and of failing to determine whether his investment plan could provide the needed revenue to cover trust liabilities. The Illinois secretary of state’s office has suspended his broker’s license and the state’s insurance division is seeking to revoke Schainker’s insurance license. He also has been ordered to pay civil penalties of $100,000.

By settling, Merrill Lynch Life is not admitting to the allegations made by the state of Illinois.

Related Web Resources:
Merrill Lynch to pay $18 million to halt state probe into funeral trust fund, Chicago Tribune, May 20, 2009

Illinois slams Merrill Lynch Life to the tune of $18M for funeral trust scam, Investment News, May 21, 2009

Illinois Funeral Directors Association

Illinois Department of Financial and Professional Regulation

Continue reading "Merrill Lynch Life Agency to Pay Illinois Division Of Insurance $18 Million Over Funeral Trust Scam Allegations" »

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Posted In: Financial Firms , Merrill Lynch

May 25, 2009

VSR Financial Services Settles FINRA Claim Over Improper Securities Sales Made to Senior Investors

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VSR Financial Services, an investment firm, has agreed to pay $10.3 million to settle a FINRA claim that it failed to properly supervise two ex-brokers accused of improperly selling risky investments to 249 customers. The agreement ends the litigation brought by the investors, many of them retirees, against VSR and its two ex-brokers, Rebecca Engle and Brian Schuster.

Although a number of securities fraud lawsuits have been filed against Schuster, Engle, and VSR, most of the investment fraud victims opted to pursue their cases through arbitration because the terms of their investment agreements prevented them from filing lawsuits. The claimants have accused the former VSR brokers of selling them investments that were inappropriate and high-risk.

The majority of investors who were defrauded say that because they were already either retired or about to retire, they had wanted to place their money in investments that were conservative and low risk. Instead, they claim that Schuster and Engle made high-risk investments for them, selling them securities in Royal Palm Capital Group and American Capital Corp while failing to explain the risks involved. Schuster and Engle allegedly promoted these investments as “mini Berkshire Hathaways” and “can’t miss” opportunities when the companies were actually startups that had limited operating histories. According to criminal complaints and court documents, the investment fraud victims lost at least $20 million.

Engle and Schuster have been charged with eight felony counts of securities fraud. They worked together a number of times between 2000 and 2007 and have also been affiliated with Wachovia Securities LLC and Capital Growth Financial LLC. More arbitration claims against the other companies they’ve been associated with are pending.

Employer to pay $10M, CayCompass.com, May 24, 2009

VSR Financial Services settles securities claims, Kansas City, May 20, 2009

Continue reading "VSR Financial Services Settles FINRA Claim Over Improper Securities Sales Made to Senior Investors" »

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Posted In: FINRA , Securities Fraud , VSR Financial Services

May 22, 2009

Texas Securities Fraud: Ex-Dallas Football Player Charged with Alleged Involvement in $24 Million Investment Scheme

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Earlier this month, in U.S. District Court for the Northern District of Texas, ex-Dallas Cowboys football player Michael Kiselak and three other defendants were charge for their alleged involvement in a $24 million investment fraud scheme. The US Securities and Exchange Commission is suing the defendants, which include Kiselak, who is now a money manager, his Texas-based investment firm Kiselak Capital Group LLC, Jeffrey Sykes, and Gemstar Capital Group Inc, a venture capital company.

According to the SEC, Kiselak, acting on behalf of KCG, obtained about $24 million from 14 investors. However, the SEC says that the former professional football player misrepresented the way the funds would be invested, promised inflated returns, and failed to tell investors that his company would receive a 35% performance fees on any profits from trades. The SEC is also accusing Kiselak of telling investors that his company made a 2.25% month profit trading Treasury bills when he actually invested more than 90% of their funds in Gemstar.

KCG reportedly gave the SEC a brokerage statement showing that as of the end of March 2009, Gemstar had more than $23 million in segregated accounts that it was holding for KCG. The SEC contends, however, that the actual amount was closer to $20 million, and the funds had not been segregated to benefit KCG’s investors. The SEC now says that as of May 9, the amount in the account is about $19 million. As of May 12, KCG reportedly could not account for approximately $7 million of the investors' funds.

The SEC is seeking permanent injunctions, disgorgement of ill-gotten gains, prejudgment interest, civil money penalties, and the appointment of a receiver to take charge of both firms’ assets. Judge John McBryde has frozen the defendants’ assets and granted a temporary restraining order.

Now a registered broker, Kiselak was a Dallas Cowboys football player from 1998 to 2000.

Related Web Resources:
Ex-Dallas Cowboy Defrauded Fund Investors, SEC, Bloomberg.com, May 12, 2009

SEC sues former Dallas Cowboys player Michael Kiselak and his financial firm, WFAA, May 12, 2009

Continue reading "Texas Securities Fraud: Ex-Dallas Football Player Charged with Alleged Involvement in $24 Million Investment Scheme" »

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Posted In: Texas Securities Fraud

May 21, 2009

Wells Fargo Sued Over ARS Sales by California Attorney General for $1.5 Billion

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California Attorney General Edmund G Brown, Jr. is suing Wells Fargo Investments LLC, Wells Fargo Institutional Securities, and Wells Fargo Brokerage Services for $1.5 billion. Brown is accusing the Wells Fargo affiliates of violating state securities laws and misleading California investors with false statements about auction-rate securities.

According to the California Attorney General’s securities fraud lawsuit, the Wells units engaged in fraud and deception to sell the securities, neglected to properly train and supervise the agents that sold the ARS, marketed the securities to investors that shouldn’t have been investing in them, and regularly misrepresented the securities when marketing them.

Brown says that nearly 40% of the ARS that the Wells defendants sold are owned by Californians. ARS investors included individuals, non-profits, small businesses, and others that were never fully informed about the risks of investing in theses securities.

ARS sales pitches by Wells Fargo representatives reportedly continued even though there were warnings as early as 2005 from the Financial Accounting Standards Board and others that auction-rate securities should not be considered cash-like equivalents. In November 2007, a Wells Fargo Bank's Trust Department reportedly sent a memo warning against buying ARS.

Following the collapse of the $330 billion ARS market in February 2008, some 2,400 Californians, who were told that their ARS were liquid like cash, were unable to access their investments that ranged in worth from $25,000 to millions.

Brown says he is suing the Wells units because unlike Citigroup, UBS, Wachovia, and Merrill Lynch, the affiliates have not been able restore the securities’ cash value. The California Attorney General wants Wells Fargo to restore the securities’ value, disgorge any associated profits, and pay civil penalties at $25,000/violation.

Wells Fargo Chief Executive Officer Charles W. Daggs says the investment bank is disputing the claims made in the California Attorney General’s lawsuit. He also noted that Wells was among the first in the investment bank industry to voluntarily give clients with frozen securities significant liquidity. Daggs says that since April 2008, these clients have been able to access 90% of their ARP holdings’ par value via non-recourse loans with favorable rates.

Related Web Resources:
Calif. AG sues Wells Fargo for $1.5 billion, News Daily, April 23, 2009

Read the Attorney General's Complaint Against Wells Fargo (PDF)


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Posted In: Financial Firms , Wells Fargo

May 19, 2009

More Problems at the SEC: Who Regulates the Regulator?

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The Securities and Exchange Commission has come under fire once more over its ability to regulate the parties under its watch. This time, the accusations are over possible incidents involving its own employees engaging in misconduct and abuse. These allegations don’t come at a good time for the SEC, which has already been accused of failing to effectively regulate investment firms, failing to prevent Bernard Madoff’s $50 billion ponzi scam, and failing to stop the some of Wall Street’s biggest investment banks from failing.

One allegation, reported in the Washington Post, accuses SEC Deputy Secretary Florence Harmon of using her position at the agency to “intimidate and influence” a Morgan Stanley broker because she disagreed with the way the firm was handling her mother’s account. She allegedly told a bank executive that the broker should have “Googled her” before talking to her. The broker reported Harmon’s behavior to Morgan Stanley and to investigators.

Harmon has reportedly told the SEC that the only reason she identified herself as an SEC employee is because she felt that the broker was making incriminating statements. The SEC’s inspector general has called Harmon’s alleged misconduct a potential violation of agency rules. While the inspector general didn’t name Harmon, another official confirmed that she was the regulator involved in the incident. The inspector general recommended disciplinary action and possible dismissal. Harmon continues her work as a regulator for the SEC.

Another probe accuses a number of SEC enforcement attorneys of trading United Health Group and Citigroup stocks, as well as other companies’ stocks, at about the same time that the SEC began investigating the firms. The SEC employees involved did not properly report the trades, which they are required to do, per agency rules. Still another investigation accuses a leading SEC official of committed perjury, in court and in writing, when talking about attempts to stop short-selling.

The issue of whether the SEC is able to properly deal with possible violations by its own employees—let alone those committed by the members of Wall Street that it regulates—has been under debate for months. US Senator Charles Grassley says the SEC needs a better compliance system to discourage employee misconduct and allow the public to feel confident that incidents of misbehavior aren’t systemic issues.

Meantime, SEC Inspector General H. David Kotz is also recommending new protections to prevent such abuses. In a report he wrote about the suspicious stock trades by SEC employees, which the Washington Post obtained through the Freedom of Information Act, Kotz noted that the agency’s lack of a proper compliance system makes it hard to make sure that staff members don’t also engage in insider trading.

The SEC says it is working on improving its current compliance policies. New changes are to include the hiring of a chief compliance officer, the installation of a computer system that will report trades made by SEC employees, and the clarification of its rules.

Related Web Resources:
Watchdog Digs Into Conduct At SEC, Washington Post, May 17, 2009

Florence Harmon Named Deputy Secretary, SEC, November 7, 2006

H. David Kotz Named New Inspector General at SEC, SEC, December 5, 2007

Continue reading "More Problems at the SEC: Who Regulates the Regulator? " »

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Posted In: SEC

May 17, 2009

Goldman Sachs Reaches $60 Million Settlement with Massachusetts Over Subprime-Mortgage Loans

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Massachusetts Attorney General Martha Coakley has announced a $60 million settlement with Goldman Sachs over the alleged role the investment bank played in the subprime mortgage crisis. While Goldman did not originate the loans, it played a role in their securitization. Coakley has been conducting a nationwide probe targeting investment banks that knew certain loans were high risk but still opted to write them, as well as underwrite securities from these loans. Coakley says that state courts are in agreement that a number of these loans were destined to fail from the start.

Massachusetts will use $50 million of the settlement to help 714 Massachusetts homeowners with mortgages that are either delinquent or still performing. The money, however, won’t go toward helping homeowners whose homes have already foreclosed. The other $10 million will go to the state.

Among the terms of the settlement:

• Goldman has consented to principal write-downs of 25% to 30% for first mortgages and upward of 50% for second mortgages if owners want to sell or refinance their homes.

• A homeowner who is significantly delinquent will have to make manageable payments toward mortgages until they are able to sell or refinance.

• If a homeowner cannot sell his or her home, Goldman will help qualified borrowers to refinance and provide other solutions so that they don’t have to foreclose.

• Homeowners that have loans with Goldman entities and those that Litton Loan Servicing LP has serviced will receive immediate help.

By agreeing to the settlement, Goldman is not admitting to or denying wrongdoing. This is the first settlement, however, where an investment bank has been held to task for its role in the subprime lending crisis. Up until this point, prosecutors were only targeting the sources of the subprime loans and not the parties that put together the loans and presented them to investors.

Related Web Resources:
Massachusetts settles with Goldman Sachs, UPI, May 11, 2009

Goldman Sachs, Massachusetts reach settlement on mortgage securities, LA Times, May 12, 2009

Attorney General Martha Coakley

Continue reading "Goldman Sachs Reaches $60 Million Settlement with Massachusetts Over Subprime-Mortgage Loans" »

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Posted In: Financial Firms , Goldman Sachs , Subprime Mortgage

May 14, 2009

Fisher Investments Hit with $1.2 Million Arbitration Claim by Senior Investors Alleging Breach of Fiduciary Duty

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A senior couple has filed a $1.2 million arbitration claim against Fisher Investments for allegedly neglecting to fulfill its fiduciary duty to them. According to Georgia residents Michelle and Brent Murphy, the investment advisory firm invested too much of their $2.5 million portfolio into stocks last year—nearly 100% in equities—even when it knew the market was failing.

Fisher Investments started handling the couple’s investments in 2007. The Murphy’s securities arbitration lawyer says that Fisher Investments neglected to properly diversify his clients’ portfolio, which should have been done considering that the two of them are retired and need fixed-income investments. He says that he will be filing more claims against Fisher Investments.

Responding to the claim, Fisher Investments chief executive Ken Fisher called it “nonsense,” says his firm acted appropriately, and he vowed to teach the couple’s attorney an unforgettable lesson.

Fisher Investments is one of the biggest US investment advisory firms. It has 37,648 accounts and $28 billion in client assets.

When hearing about Fisher’s response to the Murphys' arbitration claim, Shepherd Smith Edwards & Kantas LTD LLP founder and securities fraud lawyer William Shepherd responded, “The attitude of a claim as 'nonsense' is typical for financial firms. Sadly, regulators reinforce this attitude with inaction and occasional slaps on the wrist. The only route to justice for investors is to hire an experienced securities law firm and file an arbitration claim. Our firm has represented thousands of investors nationwide in arbitration including against the most powerful financial firms. It will be my pleasure to teach Mr. Fisher a lesson he will not forget!”

Related Web Resources:
Couple slaps a feisty Ken Fisher with $1.2M arbitration claim, Investment News, May 12, 2009

Senior Investment Fraud News & Alerts, North American Securities Administrators Association

Continue reading "Fisher Investments Hit with $1.2 Million Arbitration Claim by Senior Investors Alleging Breach of Fiduciary Duty" »

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Posted In: Arbitration , Financial Firms , Senior Investors

May 12, 2009

Morgan Keegan & Co’s Regions Financial May Face SEC Charges Over Improper Auction-Rate Securities Sales

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Regions Financial Corp, a Morgan Keegan & Co brokerage unit, says the US Securities and Exchange Commission may file a civil proceeding against it over charges that the firm allegedly engaged in the improper sale of auction-rate securities. The regulator filed a “Wells Notice” against Morgan Keegan in March. The notice means that a civil proceeding could be next. It also gives Morgan Keegan the opportunity to prepare a defense.

The SEC is examining the degree to which Morgan Keegan revealed to its clients the risks associated with investing in the auction-rate market and whether the firm sold a huge amount of that debt even when its ability to support the auction had declined.

Morgan Keegan is purchasing back the ARS it sold to clients. According to Morgan Keegan spokesperson Kathy Ridley, the investment firm has already gotten back $28 million in ARS.

Our securities fraud lawyers at Shepherd Smith Edwards & Kantas LTD LLP are working with numerous clients on claims against Morgan Keegan and Regions Financial over failed auction-rate securities investments, as well as investor claims involving these Morgan Keegan Bond Funds:

• RMK Strategic Income Fund (RSF)

• RMK Advantage Income Fund (RMA)

• RMK Multi-Sector-High Income Fund (RHY)

• RMK High Income Fund (RHM)

• RMK Select High Income Funds: C (RHICX), I (RHIIX), and A (MKHIX)

• RMK Select Intermediate Bond Funds: A (MKIBX), C (RIBCX), I (RIBIX)

The collapse of the $330 billion auction-rate securities market left many investors unable to sell auction-rate debt that they were told were safe to invest in and that were the liquid equivalent of cash. Since then, many investors have come forward complaining that they were misled about the risks tied to investing in the market.

Regions Financial unit may face SEC charges, Reuters, May 11, 2009

Regions Financial says Morgan Keegan unit received 'Wells notice', The Birmingham News, May 12, 2009

Continue reading "Morgan Keegan & Co’s Regions Financial May Face SEC Charges Over Improper Auction-Rate Securities Sales" »

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Posted In: Broker-Dealers , Financial Firms , Morgan Keegan

May 10, 2009

Centaurus Financial Slapped with $175,000 FINRA Fine for Failing to Protect Confidential Client Info

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The Financial Industry Regulatory Authority says it is fining Centaurus Financial Inc. because the firm failed to protect customers' confidential information. The California-based company must notify brokers and affected customers of the breach and give clients a year of free credit monitoring. Also as part of its settlement with FINRA, Centaurus has agreed to entry of the SRO’s findings. It will also certify with the SRO that its systems and procedures comply with privacy requirements. Centaurus, however, is not denying or admitting to the FINRA charges.

FINRA says that from April 2006 to July 2007, Centaurus neglected to make sure that the computer firewall, password system, and username for its computer fax server were providing the necessary protections. As a result, FINRA contends that persons that lacked the proper authorization were able to gain access to images stored on the faxes that included account numbers, social security data, personal information, and other sensitive, confidential client information.

An unauthorized party was even able to use Centaurus’s fax server to run a “phishing” scheme in July 2007. The scam was intended to fool computer users into giving out their personal information, including credit card information, banking data, passwords, and usernames. Over a 3-day period, 894 unauthorized logins by 459 unique IP addresses occurred after a file simulating a known Internet auction site was loaded to CFI’s fax server.

Phishing Scams
These schemes are designed to persuade recipients to reveal personal account data. For example, a target might be sent a Web site link or an attachment via email that asks for confidential personal and financial data. The sender or the Web site involved may appear to be legitimate but is actually illegal.

FINRA says that following the “phishing" incidents, Centaurus sent to some 1,400 clients and their brokers letters about the incident but that what they told them was misleading. The SRO contends that rather than admit that the breach of confidentiality occurred because the firm’s protections were inadequate and, as a result, unauthorized logins occurred, Centaurus reported that only one person had unauthorized access to the client information found on the server and that that data was not openly accessible.

Related Web Resources:
FINRA Fines Centaurus Financial $175,000 for Failure to Protect Confidential Customer Information, FINRA, April 28, 2009

Recognize phishing scams and fraudulent e-mail, Microsoft, September 14, 2006

Continue reading "Centaurus Financial Slapped with $175,000 FINRA Fine for Failing to Protect Confidential Client Info" »

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Posted In: Broker Fraud , Broker-Dealers , Centaurus Financial , FINRA

May 6, 2009

Ex-Citigroup Banker Among Six Defendants the SEC is Charging with $6 Million Insider Trading Scam

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Last week, the Securities and Exchange Commission charged six people, including ex-Citigroup Global Markets’ investment banker Maher Kara and his brother Michael Kara, with taking part in a multimillion-dollar insider trading investment scam that involved tipping others about upcoming merger deals. The Karas were indicted in a California district court. Other defendants include Zahi Haddad, Emile Jilwan, Karim Bayyouk, and Bassam Salman. Except for Salman, all of them allegedly made between $82,000 to $2.3 million, with Maher Kara making over $1.5 million. The SEC wants to the defendants to pay fines, disgorgement, and other relief.

The SEC says that from at least April 2004 to April 2007, Maher Kara told his brother on numerous occasions about deals that were pending involving Citigroup clients in the health care industry. Michael Cara would then buy options and stock in at least 20 companies involved in the Citigroup deals and would give the information to relatives and friends in Illinois and California who would also trade before the deals occurred.

Scam participants reportedly made the most money from trading in Biosite right before an announcement was made in March 2007 that the medical testing company was being acquired. Following the public disclosure, stock price in Biosite increased by more than 50% and Michael Kara and six tippees allegedly made over $5 million in illegal profits.

Two other tippees have agreed to disgorge their illegal profits to settle the SEC allegations. Nasser Mardini disgorged $291,000, while Joseph Azar disgorged $118,000 and will pay a fine. Both are not denying or admitting wrongdoing by settling.

Related Web Resources:
SEC charges former Citi banker with insider trading, Reuters, April 30, 2009

SEC Charges Wall Street Investment Banker and Seven Others in Widespread Insider Trading Scheme, SEC.gov, April 30, 2009

Continue reading "Ex-Citigroup Banker Among Six Defendants the SEC is Charging with $6 Million Insider Trading Scam" »

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Posted In: Citigroup , Financial Firms , Insider Trading

May 5, 2009

Customer Who Filed Motion to Vacate Arbitration Award is Ordered to Pay Sanctions for Frivolous Arguments

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An Illinois federal court has ruled in line with the Seventh Circuit and says it will impose sanctions on a party that tried to get an arbitration award vacated because he only put forth frivolous arguments. The case is Halim v. Great Gatsby's Auction Gallery, Inc.

Cameel A. Halim purchased items via an auction that Great Gatsby's Auction Gallery had put together. Halim eventually sued the gallery. He claims that the items he bought were not as they had been described in the catalog. Per their agreement, the parties went into arbitration.

The arbitrator had told the parties to cooperate in good faith when discovery disputes were first brought before him. The arbitrator would go on to refer the parties to the earlier order as the disputes ensued.

The arbitrator denied the claims made by Halim, who then tried to get the award vacated. Gatsby responded by filing a confirmation motion and a motion for sanctions because it contended that Halim’s motion was frivolous and therefore violated the Federal Rules of Civil Procedure’s Rule 11.

Halim presented two arguments for his motion. He said the arbitrator acted in manifest disregard of the law by (1) not resolving a discovery dispute when he told the parties to turn back to the earlier order and (2) by not issuing a reasoned award. The court said these arguments were frivolous.

The court also imposed sanctions on Halim after determining that there was no evidence to support his contentions. Halim has been ordered to reimburse Gatbsy’s legal fees from when it had to move for sanctions and oppose the motion to vacate.

Congress is currently considering a bill to prevent companies from forcing arbitration of consumer disputes by using arbitration agreements contained in contracts. However, Wall Street's influence will likely cause securities arbitration to be exempted from the bill.

The best way to ensure a successful outcome when you are involved in a case that is being disputed through securities arbitration is to retain the services of Shepherd Smith Edwards & Kantas LTD LLP. We have helped thousands of investors recover losses resulting from improper sales transactions.

Related Web Resources:
Read the Memorandum Opinion filed on February 15, 2007 (PDF)

Great Gatsby's Auction Gallery, Inc.


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Posted In: Arbitration

May 3, 2009

Former Stockbrokers From Citigroup, Lehman Brothers Holding, and Citigroup Among Defendants Convicted for Conspiracy Related to “Squawk Box” Securities Fraud Scam

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Six people have been convicted for conspiracy to commit securities fraud in a scheme involving the abuse of “squawk boxes.” The defendants convicted include former Citigroup/Smith Barney and Merrill Lynch broker Kenneth Mahaffy, former Lehman Brothers employee David Ghysels Jr., former Merrill broker Timothy O’Connell, former AB Watley Group Inc. president and vice chairman Robert F. Malin, and former AB Watley employees Keevin H. Leonard and Linus Nwaigwe.

During the trial, the government established that O’Connell, Mahaffy, and Ghysels regularly gave confidential data regarding customer orders to day traders at Ab Watley, E*Trade Professional Trading, and Millennium Brokerage. They did this using “squawk boxes" at Citigroup, Merrill, and Lehman.

The broker defendants are accused of leaving their phones off the hook and placing them next to squawk boxes so that the day traders could hear the client orders as they were called out. In return for the data, the day traders paid the defendants commissions from “wash trades” that came through brokerage accounts that the day traders had set up with the defendants. The day traders made money by before the large orders that were announced on the squawk boxes were executed. The day traders also would sell short a particular security after a large sell order for that same stock was announced on the squawk box.

The defendants are facing up to 25 years in prison, a fine, five years’ supervised release, and restitution. All of the men are free on bail until their July 31 sentencing hearing and they’ve been asked to give up their passports.

This is the second trial against the defendants. All of them were acquitted of 20 securities fraud charges during a previous trial in 2007. The jury had deadlocked on a number of the charges. For this second trial, federal prosecutors decided to charge the six defendants solely with conspiracy to commit securities fraud.

Shepherd Smith Edwards & Kantas LTD LLP and stockbroker fraud attorney William Shepherd has this to say: “Note that only the little guys on Wall Street go to jail while the fat-cats get big bonuses.”

Related Web Resources:
‘Squawk Box’ Jury Finds Brokers Guilty of Conspiracy, Bloomberg.com, April 22, 2009

Six Convicted In Squawk Box Illegal Trading, NorthCountryGazette.com, April 23, 2009

Squawk Box, Investopedia

Continue reading "Former Stockbrokers From Citigroup, Lehman Brothers Holding, and Citigroup Among Defendants Convicted for Conspiracy Related to “Squawk Box” Securities Fraud Scam " »

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Posted In: Securities Fraud

May 1, 2009

SEC Enforcement Action Holding Southwest Securities Broker Accountable for Market Timing is Affirmed by 5th Circuit

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The US Court of Appeals for the Fifth Circuit is affirming the Securities Exchange Commission’s enforcement action against Southwest Securities broker Scott Gann who is accused of engaging in market timing activities that violated certain funds’ restrictions. The 5th circuit’s decision affirms a lower court’s ruling in favor of the SEC.

In 2002, Scott Gann and George Fasciano, both employees of Southwest Securities Inc, designed a plan for Haidar Capital Management and Capital Advisor that would allow them to trade mutual funds by engaging in market timing. The two men agreed to share the commissions.

The court says the two men studied the fund companies' rules and requirements regarding market timing and that everyone involved was aware that the trades would have to take place “under the radar” so block notices wouldn’t be sent to them. The two men then opened up 21 accounts for nine HCM affiliates—each one had the same investors.

Trading for HCM started on Feb 10, 2003. SWS was issued a block notice 15 days later. Fasciano and Gun then switched the identifier number that was being used so they could keep trading.

They made 2,500 trades over a seven-month period in 56 companies mutual funds. They were sent 69 block notices.Their trades had an aggregate value of $650 million. Gann made about $56,640.67.

The SEC filed its enforcement action against the two men in 2005 and contended that the trades violated Section 10(b). Without admitting to wrongdoing, Fasciano settled.

The district court found that Gann had made material misstatements with the intent to deceive and had violated Section 10(b) and Rule 10b-5. The court ordered Gann to disgorge his profits from the HCM trades and pay a penalty of $50,000. The court also further enjoined him from future violations. This was affirmed by the appeals court.

In the 5th Circuit Court, Judge Jacques Wiener Jr. said that Gann failed to make a factual showing to show that the district court clearly made a mistake when it ruled in favor of the SEC and found that Gann violated the 1934 Securities Exchange Act Section 10(b).

While the court notes that market timing is not against the law, there are a number of mutual fund companies that do not allow this type of activity. Brokers who engage in market timing will occasionally get “block notices” from funds to let them know that they’ve gone against the fund’s restrictions, as well as bar certain accounts controlled by the broker from future trades.

Related Web Resources:
Southwest Securities to Pay $10 Million, and Three Present or Former Managers to Receive 12-Month Supervisory Suspensions, in Settlement of Administrative Proceedings Based on Southwest Securities and Managers' Failure to Supervise Registered Representatives Who Committed Fraud, SEC.gov, January 10, 2005

Market TIming, Investopedia

Isn't market timing illegal?, SteadyClimbing.com

Continue reading "SEC Enforcement Action Holding Southwest Securities Broker Accountable for Market Timing is Affirmed by 5th Circuit" »

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

Posted In: Market Timing , SEC Enforcement , Texas Securities Fraud

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