August 31, 2009

In Investment fraud Lawsuit Against Lehman Brothers, Goldman Sachs and Morgan Stanley, Court Grants Class Certification

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A District Court judge has granted class certification in the securities fraud lawsuit against Lehman Brothers, Morgan Stanley, and Goldman Sachs. The plaintiffs are accusing the broker-dealers of putting forth misleading analysts reports about RSL Communications Inc. for the purposes of maintaining or obtaining profitable financial and advisory work from RSL. Per Judge Shira Sheindlin, the class is to be made up of all parties that bought RSL Common stock between April 30, 1999 and December 29, 2000.

RSL investors, who are the plaintiffs, contend that the defendants artificially inflated the market price of RSL common stock, which injured them and other class members.

In July 2005, the court had certified a class that included anyone who had bought or acquired RSL equity shares between the dates noted above after determining that the plaintiffs had made “some showing” that Rule 23 requirements had been satisfied. The broker-dealer defendants appealed.

The US Court of Appeals for the Second Circuit vacated the class certification order and remanded the action for reconsideration. It’s decision in e Initial Public Offering Securities Litigation, 471 F.3d 24 had clarified class certification standards.

Two years later, pending the outcome In re Salomon Analyst Metromedia Litigation, the court issued a stay. Following its opinion, which held that market presumption includes securities fraud allegations against research analysts, the Court lifted the stay, allowing the plaintiffs to renew their motion for class certification. The court granted the motion and noted that the defendants have been unable to “rebut the fraud on the market presumption by the preponderance of the evidence on the basis that the analyst reports” are missing certain key pieces of information. Per their securities fraud claim, plaintiffs can therefore avail of the “fraud on the market presumption to establish transaction causation.”

The court said that the plaintiffs have succeeded in proving that loss causation can be proven on a “class-wide basis."

Related Web Resources:
Court OKs Class Cert. In Fraud Suit Against Lehman, Law360, August 5, 2009

U.S. District Court for the Southern District of New York (PDF)

Continue reading "In Investment fraud Lawsuit Against Lehman Brothers, Goldman Sachs and Morgan Stanley, Court Grants Class Certification" »

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Posted In: Broker Fraud , Goldman Sachs , Lehman Brothers , Morgan Stanley

August 27, 2009

Monex Deposit Company Cannot Compel Investors to Resolve Consumer Investment Dispute in Arbitration, Says Appeals Court

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Yesterday, the California Court of Appeals reversed a trial court's ruling that the plaintiffs who had filed an investment fraud lawsuit against Monex Deposit Company had to go through arbitration instead because of the mandatory arbitration provisions that were included in the investors’ contracts. Per Monex's arbitration provisions, three arbitrators from JAMS were to participate in the proceedings. Also, the provisions prohibit the joinder or consolidation of claims.

While the trial court sided with Monex’s motion to compel arbitration, the appeals court said that the provisions were unconscionable and therefore could not be enforced. It found that the court—not the arbitrator—should decide whether arbitration provisions are enforceable. The court said that Monex’s arbitration provisions failed to “clearly and unmistakably” reserve to the arbitration panel the matter of whether the provisions are enforceable. It also noted that because arbitrators charge healthy fees for their services, there exists a conflict of interest whenever they are asked to make a decision about arbitrability.

The California appeals court called Monex’s arbitration provisions substantively and procedurally unconscionable—especially considering that calling for a panel of three JAM arbitrators would cost $9,600/day, with each party sharing in the cost.

Because Monex contracts don’t allow for joinder or consolidation of claims (a prohibition that the court says the company doesn’t justify or explain), each plaintiff would have to take part in a separate arbitration and pay at least $20,800 in fees for a four-day session. The court speculated that such restrictions and financial consequences may be intended to discourage customers from exercising their rights.

The court says that since Monex’s entire arbitration clause is now void, the plaintiffs can pursue their claims in court.

The enforceability of mandatory arbitration clauses in consumer contracts is an issue that’s been generating a lot of attention lately. In July, the Minnesota Attorney General settled its lawsuit against the National Arbitration Forum. The complaint accused NAF of being a little too friendly with the credit card industry even though it oversaw numerous credit card disputes as a supposedly “neutral” party. To settle the allegations, NAF said it would stop handling consumer credit arbitrations by July 24. A couple of days later, the American Arbitration Association says it was following suit until new guidelines are set up.

Shepherd Smith Edwards & Kantas LTD LLP would like to offer you a free consultation to discuss your investment fraud case. Contact our securities fraud law firm today.

Related Web Resources:
Monex Deposit Co.
California Court of Appeals

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Posted In: Arbitration

August 26, 2009

Brokerage Firm Amerivet Securities Inc. Sues FINRA for Alleged Misconduct

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Amerivet Securities Inc. has filed a complaint suing the Financial Industry Regulatory Authority. The brokerage firm wants to figure out whether the self-regulatory organization’s failed to regulate large financial institutions and took part in “reckless” investment strategies. In the District of Columbia superior court, Amerivet Securities argued that it needed access to the SRO’s records and books to determine whether misconduct did occur, resulting in investment losses last year and certain executive compensation practices within FINRA. In a letter dated July 31, FINRA refused to turn over the documents.

Amerivet says that between 2005 and 2008 FINRA failed to supervise and regulate Lehman Bros. Inc., Bear Stearns & Co., Bernard L. Madoff Investment Securities Inc., Merrill Lynch & Co., Stanford Financial Group, Sky Capital Holdings LLC., and its other larger member firms. The brokerage firm is also accusing FINRA of recklessly pursuing investment strategies that were extremely risky and not appropriate for the “preservation of capital.” The SRO’s purchase of $862 million in auction-rate securities was one risky venture that the plaintiff cited as an example. In 2008, FINRA reported losses the equivalent of 26.5% of its investment portfolio—that’s $568 million.

Amerivet says it believes that FINRA invested with Bernard Madoff and either suffered losses or may have “clawback” claims related to their investments with him. The plaintiff says that if FINRA had been doing its job properly, the SRO would have exposed and stopped Madoff’s ponzi scam rather than becoming one of its victims.

Amerivet says that FINRA, like NASD, overpays its senior executives. For example, after NASD and NYSE Regulation Inc. merged to become FINRA in 2007, NASD chairperson Mary Schapiro’s income allegedly increased by 57%.

Amerivet made its claim per Section 220 of the Delaware General Corporation Law.

Amerivet Complaint Against FINRA Alleges Madoff Investment, NoQuarterUSA.net, August 25, 2009

Read the Complaint (PDF)

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Posted In: Amerivet Securities Inc. , FINRA , Financial Firms

August 21, 2009

Will Two Former Credit Suisse Group AG Brokers Convicted of Securities Fraud Get More Lenient Sentences Because of Industry’s “Culture of Corruption?”

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A federal judge says that when sentencing former Credit Suisse Group AG brokers Eric Butler and Julian Tzolov, he will consider the fact that they committed their securities fraud crimes while working in the securities industry's “culture of corruption.” He also asked defense and government attorneys to touch upon this issue when they submit their sentencing recommendations.

Earlier this week, a jury found Butler found guilty of conspiracy and securities fraud for his involvement in an alleged scheme to mislead investors about auction-rate securities so that higher commissions could be generated. Butler faces a maximum 45 years in prison.
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According to the government, Butler and Tzolov changed securities’ names on communications with investors so that clients wouldn’t find out that federally guaranteed student loans were not backing their investments. Instead, they put the funds in riskier products that were connected to ARS. Investors lost close to $1 billion when the ARS market collapsed.

Butler’s attorney, however, says the failed market, not his client, is at fault for the investors' losses. Butler plans to appeal the verdict.

Tzolov was arrested last month in Spain. He was under house arrest in New York City in May but fled the country. Tzolov pleaded guilty to securities fraud, conspiracy, visa fraud, wire fraud, and bail-jumping charges. Tzolov then testified for prosecutors in the criminal case against Butler.

While commenting on these recent developments, Ann Woolner, on Bloomberg.com, noted that just because federal regulators weren’t paying attention to misconduct on Wall Street doesn’t make it okay for brokers to lie to their clients—it just makes it easier for them to not get caught. She also commented that while people don’t die from white collar crimes, securities fraud can cause a great deal of suffering for investors who were robbed.

While the two former Credit Suisse brokers shouldn’t be punished because of the shortcomings within the securities industry, the “culture of corruption” argument shouldn’t be the reason to shorten their prison sentences. Just because everyone’s doing it doesn’t make it okay.

Related Web Resources:
Wall Street ‘Corruption’ Might Buy Crook a Break: Ann Woolner, Bloomberg.com, August 21, 2009

Broker Convicted in Auction-Rate Case, Wall Street Journal, August 19, 2009

Former Wall Street broker pleads guilty to fraud, MSNBC, July 22, 2009

Continue reading "Will Two Former Credit Suisse Group AG Brokers Convicted of Securities Fraud Get More Lenient Sentences Because of Industry’s “Culture of Corruption?” " »

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Posted In: Auction-Rate Securities , Broker Fraud , Credit Suisse , Financial Firms

August 20, 2009

Wachovia Securities Ordered by Pennsylvania Securities Commission to Repurchase $325 Million in Auction-Rate Securities

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Wachovia Securities, LLC and related entities will offer to refund $324.6 million in auction-rate securities from Pennsylvania investors. The Pennsylvania Securities Commission announced the ARS repurchasing agreement on August 11. Wachovia must also pay the commonwealth a $2.52 million assessment for the part the broker-dealer played in the ARS market.

According to Robert Lam, the commission chairperson, Wachovia failed to properly supervise its agents that dealing with investors over the sale of auction-rate securities, as well as engaged in business practices that were “unethical or dishonest.” Commissioner Steven Irwin said Wachovia sold and marketed ARS as liquid investments even though they were long-term investments that were involved in a complicated auction process. The auction-rate securities market failed in 2008.

Right before the ARS market went downhill, over 1,300 Pennsylvania retail investors held ARS that they had purchased from Wachovia. Now, the broker-dealer will repurchase the ARS.

The Pennsylvania commission is investigating other firms over any alleged misconduct committed that caused investors to get stuck with frozen ARS that they had been told were liquid, similar to cash. The commission has made it clear that they will not allow members of the securities industry to take part in dishonest or unethical business practices.

Wachovia sold more than $12.8 billion in ARS to investors throughout the US. Securities regulators in different states have pushed for Wachovia and other brokerage firms, such as Wells Fargo, Citigroup, Bank of America, and UBS to buyback the frozen auction-rate securities that investors were left with after the market dropped. Broker-dealers are accused of misrepresenting ARS to clients and that despite knowing that the market was about to collapse continuing to sell ARS to investors.

Related Web Resources:
Pennsylvania Securities Commission Orders Wachovia to Refund Over $300 Million to More Than 1,300 for Auction Rate Securities, Earth Times, August 11, 2009

Wachovia to Buy Back $325 Million in ARS, Wall Street Journal, August 11, 2009

Continue reading "Wachovia Securities Ordered by Pennsylvania Securities Commission to Repurchase $325 Million in Auction-Rate Securities" »

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Posted In: Auction-Rate Securities , Financial Firms , Wachovia

August 19, 2009

FINRA Bars Ohio Broker Accused of Stealing $90,000 Inheritance from Two Sisters from the Securities Industry

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Richard Wood, an Ohio broker, has agreed to be barred from the securities industry for allegedly committing broker misconduct. According to the Financial Industry Regulatory Authority, the broker, working for American General Securities Inc., allegedly stole the $90,000 that a client had left to two of her nieces.

FINRA says that Wood helped liquidate the estate in 2006. He then suggested that the nieces, who are sisters, open a brokerage account and invest in bonds. He was to oversee their investments. Instead, he allegedly misappropriated the money and told the sisters to issue their checks to STL Financial, Inc., an entity that he alone controlled rather than an actual brokerage firm.

The self-regulatory organization claims that Wood gave each of the sisters a bogus account number to a brokerage account that didn’t exist. He also allegedly put together more than one false customer account statement when one of the sisters became suspicious.

FINRA says Wood used the funds. He did eventually return some of it to one of the sisters. The firm would later reimburse the other sister for her investment losses.

FINRA Enforcement Chief Susan L. Merrill says that Wood was in “egregious breach of ethical standards” when he stole money from the sisters and came up with documents that were bogus to make the two women think that he was taking care of their investments.

By agreeing to settle the case, Wood is not denying or admitting to the SRO’s allegations against him.

Our stockbroker fraud law firm is determine to make sure that our investor clients recover the losses that they’ve suffered due to broker fraud.

Related Web Resources:
FINRA Bars AGSI Broker for Misappropriating $90,000 Inheritance From Two Sisters, FINRA, August 11, 2009

FINRA Bars Broker for Stealing Sisters' Inheritance, FA-Mag, August 11, 2009

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Posted In: Broker Fraud , Financial Firms

August 17, 2009

After District Court Dismisses Texas Securities Fraud Against Billionaire Mark Cuban, SEC Appeal Can Now Move Forward

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Last week, the U.S. District Court for the Northern District of Texas dismissed the Texas securities fraud charges that the Securities and Exchange Commission had filed against billionaire Mark Cuban. The SEC had asked the judge to close the case after deciding not to file an amended complaint against the Dallas Mavericks’ owner. The court’s ruling now makes way for the SEC to consider whether to appeal the decision.

The SEC is accusing Cuban of engaging in insider trading. Cuban found out from the chief executive officer of Mamma.com that the company was going to raise money via a PIPE deal or public entity or a private investment. Cuban, who owned a 6.3% stake (600,000 shares) in the company, verbally said he wouldn’t tell anyone about the PIPE offering and then sold his whole stake in the company right before the PIPE deal became public knowledge. As a result, the SEC says that Cuban prevented himself from losing $750,000 when company’s stock dropped.

The SEC had filed its Texas insider fraud trading lawsuit against Cuban based on the “misappropriation theory.” In United States v. O'Hagan in 1997, the US Supreme Court ruled that a defendant is in violation of the antifraud provisions of the 1934 Securities Exchange Act if he or she “misappropriates” confidential information for trading purposes and breaches the duties of confidentiality and loyalty.

The SEC’s Rule 10b5-2 was put in place in 2000 to clarify what that duty entailed. In Cuban's case, the duty of confidence or trust exists when a person agrees to keep information confidential.

The district court presiding over the SEC securities fraud lawsuit against Cuban, however, said that the defendant would have misappropriated the information if, in addition to promising to keep what he knew confidential, he had agreed that he wouldn't trade based on the information that was given to him. However, the judge agreed with the defense that Cuban never promised that he wouldn’t trade. His legal representatives say there was no reason for him to abstain from trading.

Related Web Resources:
SEC Won't File Amended Complaint Against Mark Cuban, The Wall Street Journal, August 12, 2009

SEC Files Insider Trading Charges Against Mark Cuban, SEC, November 17, 2008

Related Web Resources:
Mamma.com

The SEC Complaint (PDF)

The Mark Cuban Weblog

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Posted In: Insider Trading , Texas Securities Fraud

August 15, 2009

SEC Seeks Legislation Allowing It to Pursue Securities Regulators After Their Resignation

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On July 29, the House voted by voice to approve a bill that clears away any confusion regarding the Security and Exchange Commission’s authority to go after individuals accused of violating federal securities laws while working for a self-regulatory organization (New York Stock Exchange, Financial Industry Regulatory Authority, etc.) even if they are now employed elsewhere.

Rep. Kevin McCarthy (R-Calif) had introduced H.R. 2623 last May. McCarthy says that the bill doesn’t broaden the SEC’s authority, but it does eliminate any questions about whether the agency can pursue “formerly associated persons” that are no long working for the SRO. McCarthy noted that there are “loopholes” in the 1934 Securities Act that let employees at certain organizations get out of being held accountable just by resigning.

The change also would make it obvious that the SEC can pursue former employees of registered clearing agencies, government securities broker-dealers, and the Municipal Securities Rulemaking Board.

In the past, Congress has attempted to grant the SEC this authority. Although the Securities Act of 2008 contained an identical provision that the House passed by voice vote on suspension, this did not make it through the Senate Banking Commission. That bill also suggested that the SEC be given the authority to issue monetary fines in cease-and-desist proceedings, as well as during litigation.

Rep. Barney Frank (D-Mass), who also chairs the House Financial Services Committee, made a motion to pass H.R. 2623 on suspension of the rules.

McCarthy says that Congress needs to codify the scope of the SEC’s authority of “formerly associated persons” of various entitites, including SRO’s, so that the courts can hear these cases rather than dismissing them because there is no statutory authority. McCarthy says it became clear that this kind of legislation was necessary in 2007 when the SEC accused Sal Sodano of failing to enforce compliance with the 1934 Securities Act. Sodano had been the CEO and chairman of the American Stock Exchange at the time the allegations were said to have taken place but by 2005 he had resigned from the Amex post. According to an administrative law judge, the law allowed the SEC to sanction former employers that had worked for different entities, but not an ex- SRO director or officer.

Related Web Resources:
House Passes Legislation Allowing SEC to Sanction Former SRO Officials, Financial Crisis Update, July 31, 2009

HR 2623, Washington Watch

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Posted In: SEC , SEC Enforcement

August 12, 2009

UBS AG and Merrill Lynch Collectively Fined $250,000 by FINRA for Closed-End Fund Actions

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UBS Financial Services Inc. has agreed to be fined $100,000 and Merrill Lynch, Pierce, Fenner & Smith Inc. has consented to a $150,000 fine, says the Financial Industry Regulatory Authority, for alleged supervisory failures that resulted in the inappropriate short-term sales of closed-end funds that were bought at initial public offerings for the funds. By agreeing to settle, the broker-dealers are not deny or admitting to the FINRA charges. They are, however, consenting to the findings.

FINRA also announced that it was suspending five Merrill Lynch brokers for 15 days. Each of them must pay a $10,000 fine for allegedly making fund recommendations that were unsuitable for investors.

Merrill Lynch brokers that FINRA has sanction include:

• Kenneth C. Iwelumo (his clients lost about $563,000)
• Joseph Miller (approximately $130,000 in client losses)
• Ronald Kemp (about $411,000 in customer losses)
• Michael Kizman (about $210,000 in losses)
• John Ong (about $350,000 in client losses)

The investigation into the activities of a number of former UBS brokers is ongoing.

Closed-End Funds
Closed-End Funds are investment companies that sell a fixed number of shares during an initial public offering. These sales come with built-in sales charges. The CEF’s at issue came with a 4.5% sales charges and a 30-90 day penalty bid period after the IPO. If a client sold the CEF that had been purchased at the IPO during this time period, the broker would lose the commission.

FINRA says that both broker-dealers knew that CEF’s bought at IPO’s are more appropriate for long-term investments and that because of the sales charges that come with their purchases, it is inappropriate to engage in the short-term trading of CEF’s. FINRA claims that Merrill Lynch and UBS did not have the proper supervisory procedures and systems in place so that brokers couldn’t and/or wouldn't make such unsuitable CEF sales.

FINRA also says that both broker-dealers failed to warn supervisors about the potential issues that could result from such activity and did not properly train registered individuals. Due to this improper supervision, brokers for Merrill and UBS recommended that certain clients engage in short-term sales of CEF’s bought at IPOs without fully understanding the financial ramifications these recommendations would have on their clients’ finances.

FINRA is concerned about brokers who convince customers to buy CEF’s during their IPO’s and then wait until after the penalty bid period is over to recommend that clients sell the CEF’s—usually at a loss. These brokers then recommend that clients use the proceeds from the sale to purchase more CEF’s at initial public offerings.

FINRA Fines Merrill Lynch, UBS for Supervisory Failures in Sales of Closed-End Funds; Customers Get More Than $5 Million in Remediation, FINRA, July 28, 2009

Merrill, UBS Are Fined in Closed-End-Fund Case, The Wall Street Journal, July 29, 2009

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Posted In: Broker Fraud , Broker-Dealers , Financial Firms , Merrill Lynch , UBS

August 10, 2009

SEC Says Prime Capital Services, Inc. Defrauded Elderly Investors in Florida with “Free” Lunch Seminars and Unsuitable Variable Annuity Sales

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The US Securities and Exchange Commission is accusing broker-dealer Prime Capital Services Inc., income tax preparation business Gilman Ciocia Inc., and seven individuals of defrauding senior investors in Florida. The agency claims that the two companies, as well as the individuals named, allegedly used “free” lunch seminars that resulted in the sales of unsuitable variable annuities and, on occasion, millions of dollars in commission.

Robert Khuzami, the SEC Enforcement Director, called the free lunches “bait” for the scam. Elderly investors who are persuaded to purchase unsuitable financial products frequently are never able to fully recover their financial losses, which can severely deplete their retirement savings.

In addition to cease and desist proceedings against the respondents, the SEC is seeking remedial action, including civil penalties and disgorgement. According to the attorney representing PCS, Gilman, PCS President Michael P. Ryan, CCO Rose M. Rudden, one of the registered representatives, and one of the supervisors, the conduct under question occurred in the late ‘90’s and 2000’s and has been remedied for some time. The respondents plan to defend themselves against the charges.

SEC investigators say the senior investment fraud scam occurred between November 1999 and February 2007 and that during appointments conducted with seminar participants, PCS representatives either left out important information or made misrepresentations about variable annuities. For example, PCS representatives are accused of telling investors they would have unrestricted access to the money they invested but did not tell them that there would be substantial charges if they withdrew their money early.

The SEC claims that representatives’ commissions when selling variable annuities was 6%. Their commission on other investment products was just 3%. The agency also claims that Ryan and a number of supervisors neglected to implement PCS’s supervisory procedure to identify when misconduct was occurring, as well as prevent broker misconduct from happening.

Related Web Resources:
Read the SEC's Order (PDF)

“Free-Lunch” Seminars Still Baiting Seniors, Retirement Income Journal, July 15, 2009

Continue reading "SEC Says Prime Capital Services, Inc. Defrauded Elderly Investors in Florida with “Free” Lunch Seminars and Unsuitable Variable Annuity Sales" »

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Posted In: Broker Fraud , Financial Firms , Prime Capital Services, Inc. , Senior Investors , Variable Annuities

August 7, 2009

Merrill Lynch & Co. Sued Over Auction-Rate Securities by Teva Pharmaceutical Industries Ltd. and Seneca Gaming Corp.

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On Wednesday, Teva Pharmaceutical Industries Ltd. sued Merrill Lynch & Co., a Bank of America Corp. unit. The pharmaceutical company’s securities fraud lawsuit accuses the brokerage firm of making misrepresentations that resulted in its purchase of $273 million in ARS. Merrill Lynch underwrote the securities that Teva bought. A day later, Seneca Gaming Corp. filed its own lawsuit against Merrill Lynch. The complaint is over a $5 million tranche of ARS backed by mortgages that the company had purchased.

While the agreements that brokerage firms have reached with regulators generally require that the former buy back auction-rate securities from small companies, individual investors, and nonprofits, the broker-dealers are only required to work with bigger investors or try their best to help them deal with their illiquidity issues. As a result, some large investors are taking matters into their own hands by filing securities fraud claims and lawsuits. These investors include Bankruptcy Management Solutions Inc., Braintree Laboratories, Ocwen Financial Corp. Ashland Inc., and Texas Instruments. Other large companies will likely follow suit.

For the large investors that are undecided on what action to take regarding their frozen ARS, it is important from them to realize that more financial losses are likely.
Shepherd Smith Edwards & Kantas LTD LLP founder and securities fraud attorney William Shepherd notes, “Our law firm is handling a number of substantial ARS claims for large investors with funds that have been frozen for more than a year. Some have suffered consequential damages as a result. Other clients have sold and sustained large losses or will face such losses if and when they do sell. Many investors simply seek to unlock their funds as soon as possible. Our legal fee arrangements differ depending upon these circumstances.”

Related Web Resources:
Merrill Lynch Sued By Teva, Seneca Gaming Over ARS Sales, CNN, August 6, 2009

Will Their Be An Onslaught of ARS Litigation?", Law 360

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Posted In: Auction-Rate Securities , Bank of America , Financial Firms , Merrill Lynch

August 6, 2009

Bank of America Agrees to settle SEC Charges of Merrill Lynch Bonuses for $33 Million But Judge Blocks Settlement

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Although Bank of America has agreed to settle charges by the Securities and Exchange Commission that the broker-dealer misled investors about Merrill Lynch bonuses worth billions of dollars, a federal judge is withholding approval for the $33 million penalty. The U.S. District Court for the Southern District of New York Judge Jed S. Rakoff has scheduled a hearing for Monday to discuss the matter.

Without denying or admitting to the charges, Bank of America had consented to pay the amount. The SEC has accused Bank of America of failing to notify investors about plans to pay top Merrill executives $5.8 billion in bonuses for the 2008 fiscal year. Regulators say that instead, the brokerage firm told investors that year-end performance bonuses were not going to be given out.

It wasn’t until February when New York State Attorney Attorney General Andrew Cuomo accused Merrill Lynch of secretly issuing the rewards to its executives before its merger with Bank of America that news of the bonuses was revealed. Investigators also found out Merrill had bumped up the date of its end-of-year bonus payments and that Bank of America had let Merrill pay the bonuses to its executives.

Scott Silvestri, a Bank of America spokesperson, says the settlement is a “constructive conclusion” to the dispute. The SEC’s charges against Bank of America is the first case that the federal government has brought against a financial firm that has been closely linked to the ongoing financial crisis.

There are, however, critics who are not satisified with the settlement. The Washington Post quotes Rep. Dennis J. Kucinich (D-Ohio) of criticizing the settlement amount. The head of the House Oversight and Government Reform subcommittee noted that it pays in America to commit a corporate crime. Former SEC chief accountant Lynn Turner expressed disappointment that no executives were charged with any wrongdoing.

Bank of America has complained that federal regulators pressured the broker-dealer to make the deal with Merrill, which was in financial trouble at the time.

Related Web Resources:
Judge Blocks BoA Settlement, Washington Post, August 6, 2009

Judge raps $33m bank bonus fine, BBC, August 6, 2009

Bank of America Pays $33 Million to Settle Merrill Bonus Charges, Washington Post, August 4, 2009

Continue reading "Bank of America Agrees to settle SEC Charges of Merrill Lynch Bonuses for $33 Million But Judge Blocks Settlement" »

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Posted In: Bank of America , Financial Firms , Merrill Lynch

August 4, 2009

Next Financial Ordered to Pay One Million Dollars for Supervisory Deficiencies that Led to Texas Securities Fraud

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FINRA says NEXT Financial Group Inc. has agreed to a one million dollar fine for its alleged failure to properly supervise a number of client accounts and over 100 office of supervisory jurisdiction (OSJ) branch managers. The managers are in charge of overseeing sales and trading activities for branches and brokers. As a result of the alleged inadequate supervision, FINRA says that broker misconduct was able to take place, resulting in Texas securities fraud.

FINRA charges that between 1/05 and 11/06, the broker-dealer allowed its OSJ branch managers supervise to themselves. Even when NEXT Financial Group implemented a new Regional Manager supervisory system, FINRA says that this too continued to prove unreasonable for at least another year. Each month, three regional managers who were unable to adequately access client suitability data were in charge of reviewing thousands of transactions.

FINRA mandates that firms appoint at least one principal to set up, maintain, supervise, and enforce “a system of supervisory control policies and procedures.” FINRA says that because of Next Financial’s inadequate procedures and policies, the broker-dealer failed to notice that excessive markdowns and markups on corporate bond trades and the churning of customer accounts were taking place. Investors ended up losing some $768,000, FINRA contends. The funds have been reimbursed.

NEXT Financial Group’s former chief operating officer and chief compliance officer Karen Eyster has agreed to sanctions for failing to fulfill her obligations as a supervisor. FINRA fined her $35,000. She also has to undergo 15 hours of supervisory training and serve a 2-month suspension as a principal.

Also, FINRA says that the broker-dealer’s systems and procedures regarding variable annuity exchanges were unreasonable and did not give enough guidance about what needed to be looked at when making variable annuity exchange recommendations to clients.

By agreeing to settle, the broker-dealer and Eyster are not admitting to or denying the charges that FINRA has made against them.

Related Web Resources:
FINRA Fines NEXT Financial Group $1 Million for Supervisory Failures That Led to Churning of Customer Accounts, Excessive Commissions, FINRA, July 22, 2009

NEXT fined $1 million for churning accounts, Chron.com, July 22, 2009

Continue reading "Next Financial Ordered to Pay One Million Dollars for Supervisory Deficiencies that Led to Texas Securities Fraud " »

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Posted In: Financial Firms , Next Financial , Texas Securities Fraud

August 3, 2009

FINRA Permanently Bars Former Broker for Stifel, Nicolaus & Co. Inc and AXA Advisors For Ponzi Scheme

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The Financial Industry Regulatory Authority has permanently barred a former Stifel, Nicolaus & Co. Inc. and AXA Advisors broker from operating. Kenneth George Neely has admitted to running a ponzi scheme involving clients of both broker-dealers, as well as friends, family members, and fellow church members.

According to federal regulators, Neely acted fraudulently when he induced at least 25 clients to take part in the “St. Louis Investment Club” and invest in “St Charles REIT. Both the investment club and the real estate investment trust are bogus.

To cover up the Ponzi scheme, Neely had investors issue payments to his wife in $2,000 and $3,000 increments so that banks wouldn’t get suspicious when funds were turned into cash. He also created bogus invoices that looked like official ownership certificates for REIT purchases. These certificates listed names of a “President” and a “Secretary" who were both fictitious. Neely promised investors that their investments would be taken care of.

For example, he promised one friend a high return rate on a bogus St. Charles REIT investment. The friend had invested $154,000. Neely would end up returning $10,000 to this person and using the rest of the funds to pay for some of his own personal expenses and debt.

He also persuaded a fellow church member to invest $35,000. He promised a 5% return rate. Small interest payments later dried up and Neely used the balance for his personal spending.

Neely improperly utilized over $600,000 of his investors’ assets. He converted over half the amount to his own use and returned about $300,000 to some investors.

It wasn’t until FINRA spoke with the St. Louis broker about his bogus real estate investment trust that he stopped collecting funds. AXA terminated his employment after he admitted what he'd done to FINRA.

FINRA enforcement chief Susan Merrill says that it is disturbing that in addition to taking advantage of clients at the brokerage firms where he’d worked, Neely also exploited relatives, friends, and acquaintances and took their “hard-earned savings.”

FINRA Permanently Bars Broker Operating Ponzi Scheme Involving Customers of Broker-Dealers, FINRA, July 27, 2009

Former AXA broker barred by FINRA for Ponzi scheme, Reuters, July 27, 2009


Continue reading "FINRA Permanently Bars Former Broker for Stifel, Nicolaus & Co. Inc and AXA Advisors For Ponzi Scheme" »

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

Posted In: AXA Advisors , Broker Fraud , Financial Firms , Ponzi Scams , Stifel, Nicolaus, & Co. Inc.

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