August 31, 2010

Former Bank of America CEO Denies Allegations of Securities Fraud During Merrill Lynch Acquisition

Kenneth D. Lewis, Bank of America’s former chief executive, says that New York Attorney General Andrew Cuomo’s securities fraud allegations in connection with the bank’s merger with Merrill Lynch are without merit. Lewis is accused of purposely withholding information from the shareholders who approved Bank of America’s acquisition of Merrill.

In his filing with the state supreme court, Lewis claims that Cuomo’s securities lawsuit places blame “where it does not belong.” Lewis contends that all decisions he made regarding the acquisition were done in “good faith” and with the shareholders’ best interests in mind.

Cuomo’s securities fraud complaint charged BofA, Lewis, and ex-CFO Joe Price of concealing from shareholders the fact that Merrill brought with it billions of dollars in debt. The NY Attorney General contends that the information was withheld so that the shareholders would approve the merger between the two financial institutions. He also has accused the defendants of exaggerating the degree of Merrill’s losses so that federal help would be provided through the Troubled Asset Relief Program.

Price and BofA are also denying Cuomo’s allegations.

The SEC made similar allegations against BofA last year but did not charge any individuals. The SEC and the bank settled the securities charges for $150 million. United States District Judge Jed S. Rakoff, who had turned down the previous settlement agreement of $33 million between the two parties because he considered the amount too low and a breach of “justice and morality," approved this one.

Related Web Resources:
Bank of America’s Ex-Chief Denies Fraud Charges, NY Times, August 20, 2010

BofA, executives deny Cuomo charges, Herald Online, August 20, 2010

Judge Rakoff "Reluctantly" Accepts Bank of America Settlement With SEC, Business Insider, February 22, 2010

Cuomo Sues Bank of America, Even as It Settles With S.E.C., The New York Times, February 4, 2010

NY State Attorney General Andrew Cuomo


Related Blog Stories:
Bank of America Merrill Lynch to Settle UIT Sales-Related FINRA Charges for $2.5 Million, StockbrokerFraudBlog, August 22, 2010

Bank of America To Settle SEC Charges Regarding Merrill Lynch Acquisition Proxy-Related Disclosures for $150 Million, StockbrokerFraudBlog, February 15, 2010

August 30, 2010

Zions Direct Inc. to Pay $225K for FINRA Securities Fraud Charges Related to CD Auctions

The Financial Industry Regulatory Authority has ordered Zions Direct Inc., Zions Bancorp's (ZION) brokerage unit, to pay $225,000 to settle securities fraud allegations that it failed to disclose conflicts of interest in online certificate-of-deposits auctions. According to the SRO, from February 2007 to November 2008, the Utah broker-dealer failed to make public in its online CD auctions that Liquid Asset Management took part in auctions to retail investors.

FINRA contends that if LAM hadn’t been involved some bidders could have had higher yields in some auctions. Instead, they may have received lower yields.

Zions Direct began “generally” disclosing LAM’s involvement in November 2008 but still failed to mention the relationship between Zions-affiliated banks and the customers that took part in the auctions and any potential conflicts of interest. Issuing banks may have benefited from LAM's involvement because they otherwise might have ended up paying higher yields on the CDs bought through the auctions.

FINRA also contends that the brokerage firm sent “exaggerated” and “misleading” ads to current and potential customers that promised CD yields that were not realistic and published market clearing yields on its Web site without adequately disclosing that the figures did not typically reflect the closing yields of auctions. According to FINRA acting enforcement chief and executive vice president James Shorris, investment firms have to tell prospective clients and customers about material information related to their services and products.

By agreeing to settle the securities fraud case, Zions Direct is not admitting to or denying the charges. It has, however, agreed to an entry of FINRA’s findings.

Related Web Resources:
Zions Fined $225,000 For Insufficient Disclosure In CD Auctions, Wall Street Journal, August 25, 2010

FINRA Fines Zions Direct $225,000 for Failure to Disclose Potential Conflict of Interest in its Online CD Auctions, FINRA, August 25, 2010

Continue reading "Zions Direct Inc. to Pay $225K for FINRA Securities Fraud Charges Related to CD Auctions" »

August 29, 2010

Combatting Elder Financial Fraud: SEC, NASAA, & FINRA Update Their Best Practices to Protect Senior Investors

The Financial Industry Regulatory Authority, the Securities and Exchange Commission, and the North American Securities Administrators Association have updated their 2008 report regarding financial firms’ best practices when serving elderly investors. The security regulators remain committed to making sure that seniors are given a “fair market” with responsible sales practices and suitable products. The 2008 report, called “Protecting Senior Investors: Compliance, Supervisory and Other Practices Used by Financial Services Firms in Serving Senior Investors,” gave investment firms steps they could take to improve their procedures and policies when working with senior clients.

The 2010 addendum concentrates on several categories, including:
• Effective communication.
• Better employee training regarding issues that specifically affect seniors.
• Establishing internal processes to deal with issues that arise.
• Surveillance, supervision, and compliance reviews that focus on seniors.
• Making sure investments offered to elderly investors are appropriate for them.

The SEC is also tackling regulatory measures related to financial products that target retirees and seniors. Last month, the SEC put out a staff report suggesting that Congress define life settlements as securities to make sure that investors receive protection under federal securities law. Also, in an attempt to enhance target date fund disclosures, the SEC recently proposed rule amendments.

Regulators report that there are nearly 40 million people in the US that belong to the age 65 and older age group. By 2050 that number is expected to hit 89 million.

It is important that the necessary steps are taken protect seniors from elder financial fraud. With their retirement funds, elderly seniors are at risk of becoming the target of securities fraud. As MetLife (MET) Mature Market Institute notes, elder financial abuse “has been called the ‘crime of the 21st century.” She noted for every dollar lost, the victims often suffer related financial losses resulting from health issues and stress.

Related Web Resources:
Protecting the Elderly From Financial Fraud, Minyanville, June 16, 2010

SEC, NASAA, FINRA Update Best Practices for Serving Seniors, Wealth Manager, August 13, 2010

Read the 2008 Report (PDF)

Continue reading "Combatting Elder Financial Fraud: SEC, NASAA, & FINRA Update Their Best Practices to Protect Senior Investors" »

August 27, 2010

Investors File Texas Securities Fraud Lawsuit Against Ernst & Young

A group of investors that lost over $17 million after a Plano-based hedge fund that promised low risk investments collapsed are suing Ernst & Young for Texas securities fraud. Parkcentral Global sold the two funds involved.

According to the Houston securities fraud complaint, although E & Y was auditing Parkcentral, the audited financial statements never warned investors that they were in financial trouble. Investors quickly lost every cent they invested even though they were promised that placing their money in Parkcentral would preserve capital. Parkcentral, which is now-defunct after losing over $2.6 billion, used to be run by affiliates of former presidential candidate H. Ross Perot

The plaintiffs contend that not only did E & Y make false representations that it fairly audited Parkcentral, but also it failed to fulfill its role as “watchdog” for investors. They are accusing E & Y of Texas securities fraud, fraud, negligent misrepresentation, and conspiracy.

Earlier this month, one of the plaintiffs, Brown Investment Management, L.P., won a Delaware Supreme Court case requiring that Parkcentral Global disclose the identity of its investors, which means that their names could also be added to the Houston securities case. Other current plaintiffs include Thomas R. Brown Family Private Foundation, SBS Ventures LLC, and MBB Ventures LLC. They are seeking actual and punitive damages.

Related Web Resources:
Ernst & Young Facing Securities Fraud Lawsuit in Houston Over Failed Hedge Fund, Digital Journal, August 26, 2010

Ernst & Young Sued by Investors in Parkcentral Funds, Bloomberg BusinessWeek, August 26, 2010

Delaware Supreme Court Says Hedge Fund Investors Are Entitled to Ownership List, Securities Technology Monitor, August 25, 2010

Other Recent Texas Securities Fraud Stories on Our Blog Site:
Texas Securities Fraud Incidents on the Rise, Say State Officials,, August 18, 2010

Dallas Billionaire Brothers Charged with Texas Securities Fraud,, July 31, 2010

Continue reading "Investors File Texas Securities Fraud Lawsuit Against Ernst & Young" »

August 25, 2010

HSBC Securities to Pay $375K to Settle FINRA Allegations that It Recommended Unsuitable Collateralized Mortgage Obligations to Retail Clients

HSBC Securities has agreed to pay $375,000 to settle Financial Industry Regulatory Authority charges that it recommended the unsuitable sale of inverse floating rate collateralized mortgage obligation to retail clients. The SRO is also accusing the investment bank HSBC of inadequate supervision of the suitability of the CMO sales and failure to fully explain the risks involved in CMO investments to clients. The investment bank has already reimbursed clients $320,000.

Per FINRA, six HSBC brokers made 43 unsuitable inverse floater sales to “unsophisticated” retail clients. Even though HSBC requires that a supervisor approve all retail clients sales larger than $100,000, 25 of the sales were larger than this amount. 5 resulted in $320,000 in losses for clients. According to FINRA executive vice-president and acting enforcement chief James S. Shorris, the clients’ financial losses could have been prevented.

FINRA contends that HSBC brokers were not given enough training and guidance about the risks involved with CMOs. They also were not specifically told that inverse floaters were only suitable for investors with high-risk profiles.

FINRA also says that HSBC was not in incompliance with a rule requiring brokerage firms to offer specific educational collateral prior to a CMO sale to anyone that is not an institutional investor. FINRA says that not only did HSBC’s registered representatives not know that they were required to offer this material, but also the brochures that were offered did not meet content standards regarding required educational information.

By agreeing to settle, HSBC is not admitting or denying the allegations.
Related Web Resources:
FINRA Fines HSBC $375,000, On Wall Street, August 19, 2010

FINRA fines HSBC for unsuitable sales of CMOs, Banking Business Review, August 20, 2010


Collateralized mortgage obligation, SEC

Continue reading "HSBC Securities to Pay $375K to Settle FINRA Allegations that It Recommended Unsuitable Collateralized Mortgage Obligations to Retail Clients " »

August 24, 2010

John Gardner Black Responds to Stories Recently Published Concerning His Role in an SEC Securities Fraud Action.

On August 19, 2010, along with other news sources, we published a story regarding investment fraud victims of John Gardner Black. Mr. Black subsequently protested that ours and other stories published concerning him were inaccurate.

Below are the inaccuracies he reports, verbatim, regarding ours and apparently other publications which concern him. We do not purport to have confirmed the accuracy of Mr. Black's response at this time, but felt it fair to publish the corrections he claims should be made.

1.) I did not plead guilty to securities fraud. If I had, do you really think the SEC would have reinstated me? My guilty plea was to not informing my customers of the liquidation value of securities they did not own.

2.) The $61.3 million in restitution was paid. I already have a court order stating it was paid. The motion was for disgorgement. All my clients were made whole.

3.) The earnings rate of 14% was stipulated by the government in 2000 after a thorough investigation by the US Attorney's Office

4.) It was the government that stated that I did not take any money from my clients

5.) It was the trustee, Mr. Thornburgh, that stated the profits in my company that went to the clients in 1997 was over $20 million. That money came from the 14% earnings rate versus a 5% payout rate

August 23, 2010

Investors Seek Recovery of Losses in Oppenheimer Champion Income Fund, Oppenheimer Rochester National Municipal Bond Fund and Nuveen High Yield Municipal Bond Fund

Oppenheimer Champion Income Fund (OPCHX; OCHBX; OCHCX; OCHNX; OCHYX) plummeted 82% overall making it the worst performing taxable high yield bond fund of 2008. The investors believed they were in a conservative high yield fund when in fact they were exposed to illiquid derivatives and high risk mortgage backed securities. The collapse eliminated approximately $2 billion over the course of 15 months.

Investors who purchased this fund were clients of UBS, Citigroup Smith Barney, Wachovia, Linsco Private Ledger LPL, Merrill Lynch, UBS, ING, and Stifel Nichols among others. Many investors who were sold conservative high yield bond funds were shocked to learn that they had losses of 40% to 80% of their principal. With slightly higher risk than a CD, this gave investors a one to two percent higher rate of return. Now, these conservative investors will need nearly 5 years of income just to recover. Meanwhile due to the inverse relationship between interest rates and bonds, high quality bonds have risen in value.

The Oppenheimer Rochester National Municipal Bond Fund (ORNAX; ORNBX; ORNCX) lost approximately 60% of its $4 billion in assets. The fund violated its investment ratio in illiquid securities and failed to disclose risk factors associated with the overconcentration of municipal bonds that could become illiquid quickly.

The Nuveen High Yield Municipal Bond (NHMAX; NHMBX; NHMCX; NHMRX) suffered losses of 40% in 2008. The fund invests around 80% in bonds rated BBB or below and was the reason for the decline.

Continue reading "Investors Seek Recovery of Losses in Oppenheimer Champion Income Fund, Oppenheimer Rochester National Municipal Bond Fund and Nuveen High Yield Municipal Bond Fund" »

August 22, 2010

Bank of America Merrill Lynch to Settle UIT Sales-Related FINRA Charges for $2.5 Million

Bank of America Merrill Lynch has agreed to settle for $2.5 million Financial Industry Regulatory Authority allegations that it did not provide "sales charge discounts" to clients with eligible unit investment trusts purchases. By agreeing to settle, the broker-dealer is not admitting to or denying the charges. Of the $2.5 million, $2 million is restitution and $500,000 is a fine.

A unit investment trust is an investment company that holds a fixed portfolio of securities while offering redeemable units from that portfolio. The units have a fixed date for termination. UIT sponsors usually offer sales charge discounts called “rollover and exchange discounts”—usually offered to investors that use redemption or termination proceeds from one unit to buy another—and “breakpoint discounts”—based on the purchase’s dollar amount—to investors.

Since March 2004, FINRA has made it clear that investment firms must have procedures in place to make sure that clients get their UIT discounts. The SRO contends, however, that until May 2008, Merrill Lynch did not provide brokers or their supervisors with such guidance and neglected to tell clients when they were eligible for a UIT discount. This went on between October 2006 and June 2008 and many clients were overcharged for their UIT purchases.

FINRA also accused Merrill Lynch of distributing client presentation that contained sales information about UITs that were “inaccurate and misleading,” causing clients to believe that they were only eligible for a UIT discount if UIT proceeds were used to buy a new UIT from the same sponsor.

Related Web Resources:
BofA Merrill Lynch to Pay $2.5 Million in FINRA Matter, ABC News, August 18, 2010

Merrill Lynch to pay $2.5M in sales charge case, Business Week, August 18, 2010

Other Merrill Lynch Stories on Our Web Site:
Bank of America To Settle SEC Charges Regarding Merrill Lynch Acquisition Proxy-Related Disclosures for $150 Million, StockbrokerFraudBlog, February 15, 2010

Merrill Lynch Must Pay $26 million to States to Resolve Charges of Failure to License Associates, StockbrokerFraudBlog, December 22, 2009

Continue reading "Bank of America Merrill Lynch to Settle UIT Sales-Related FINRA Charges for $2.5 Million " »

August 19, 2010

Investment Fraud Victims of John Gardner Black May Be Due Tax Refunds

John Gardner Black, who spent three years in prison after pleading guilty to 21 counts of securities fraud, two counts of false documents, and three counts of mail fraud in 2001, says he doesn’t think that he should have to pay $61.3 million in restitution.

Prosecutors had accused Black of investing approximately $233 million for about 48 school districts while using a risky investment that Pennsylvania law doesn’t allow for school districts. Black hid from his clients both the transfers to the high risk investments and the $71 million loss when the investments’ value declined.

Black is now contending that he was prosecuted based on a Securities and Exchange Commission determination that he “materially” overstated the assets’ value by providing the school districts’ investments’ security. Last year, however, the SEC and the Financial Accounting Standard Board ended up adopting the same valuation method that he’d applied during the 90’s. Black is arguing that because he was sanctioned for “unethical” business practices that are now sanctioned, the court order that he pay $61.3 million for ill-gotten gains should be set aside.

Black applied a similar argument when he went to the SEC asking that it lift the lifetime ban preventing him from taking part in the investment industry. Although Black is still not allowed to associate with investment companies or investment advisers, he can once again associate with dealers, brokers, and municipal-securities dealers. He has, however, lost his appeals to have the criminal conviction against him overturned.

As a victim of investment fraud, you may be entitled to tax refunds.

Related Web Resources:
Fraud says he shouldn't have to pay restitution to his victims, Pittsburgh Live, August 18, 2010

Related Court Document (PDF)

Continue reading "Investment Fraud Victims of John Gardner Black May Be Due Tax Refunds" »

August 18, 2010

Texas Securities Fraud Incidents on the Rise, Say State Officials

According to state authorities, there are more Texas securities schemes happening than ever before. One of the reasons for this is that many investors are looking for opportunities to make money during these tough economic times as they try to rebuild their savings. Securities officials are working hard to combat these investment schemes.

The Texas State Securities Board says that it took about 2,177 law enforcement actions during fiscal year 2009—up significantly from the 949 administrative and criminal actions it took in 2008. Now, after the recent BP oil spill, there have been scammers who have tried to persuade investors to invest in “new technology” that can stop similar disaster from happening. Also, State Securities Commissioner Denise Voigt Crawford says precious metal-related schemes are currently popular because gold prices are at a high. According to the, other leading Texas investors traps include:

• Life settlements
• Gas schemes
• Oil scams
• Exchange-traded funds
• Foreign exchange trading schemes
• Affinity fraud
• Green scams
• Undisclosed conflicts of interest
• Unsolicited online offers (via email, Twitter, Facebook, other social media)
• Private deals

People who want to retire and need financial security are among those at high risk of becoming victims of Dallas securities fraud. Crawford suggests that investors contact her office to make sure that a financial adviser is properly licensed.

It is important that you do your own due diligence find out more about a particular financial opportunity before investing your own money. For example, not only can you check with the Texas State Securities Board to find out whether a securities dealer or investment adviser is in fact registered, but also you can go onto the Financial Industry Regulatory Authority Web site to find out more about a broker-dealer or broker.

Texas authorities see rising investment scams in a soft economy, Statesman, August 14, 2010

Texas State Securities Board



Continue reading "Texas Securities Fraud Incidents on the Rise, Say State Officials" »

August 16, 2010

Oppenheimer Champion Income Fund Resulted In Significant Financial Losses for Investors from Citigroup, UBS, Merrill Lynch, and Other Large Financial Firms

If you are an investor who suffered losses because you invested in the Oppenheimer Champion Income Fund, do not hesitate to contact our securities fraud law firm to request your free case evaluation. Unfortunately, many investors were not apprised of the risks they were taking on when they placed their money in these high risk, very illiquid derivatives. Many of these securities victims were clients of large brokerage firms, such as UBS, Citigroup Smith Barney, Wachovia, Linsco Private Ledger LPL, Merrill Lynch, UBS, ING, Stifel, and Gun Allen.

Thousands of investors were led to believe, via the prospectus, the financial advisers, and the marketing collateral, that the Oppenheimer Champion Income Fund was a high income fund that wasn’t much riskier than a high income fund peer group or a conservative high income fund. Unfortunately, this was not the case at all, and many investors ended up sustaining major losses when the fund lost 79.1 for the 2008 calendar year.

Oppenheimer Champion Income Fund
Hoping that commercial mortgage-backed securities would rally, the fund had placed a large bet in high risk derivatives, such as credit default swaps and mortgage backed securities—not to mention total-return swaps in 2006. Unfortunately, this is not what ended up happening.

In September 2008 alone, credit default swaps declined by $238 million. It was during this time that the fund sold credit default swaps on beleaguered companies, including Tribune Co., Lehman Brothers Holdings Inc., General Motors Corp, and American International Group Inc. The fund also raised its gamble on mortgage-related bonds that, with defaults rising, started to fail.

Hundreds of millions of dollars has reportedly been lost, and the fund’s investors have not been the only ones to suffer financial losses. Over 10% of the fund was held by other OppenheimerFunds offerings, including funds that bundled a number of the firm’s products together.

Related Web Resources:
Oppenheimer Champion Income Fund, MorningStar

FINRA Arbitration and Mediation

Continue reading "Oppenheimer Champion Income Fund Resulted In Significant Financial Losses for Investors from Citigroup, UBS, Merrill Lynch, and Other Large Financial Firms" »

August 12, 2010

Structured Notes Becoming New “Investment Bubble” on Wall Street, says Institutional Risk Analytics Director

Bloomberg recently reported on a report by Institutional Risk Analytics Managing Director Christopher Whalen. According to the former Federal Reserve Bank of New York official, structured notes are about to become the “next investment bubble.” Whalen is the one who predicted a little over three years ago that the mortgage-backed securities market was going to collapse. Now, he says that investment firms are applying the same “loophole” that allowed auction-rate securities and collateralized debt obligations to be sold over-the-counter.

Structured notes are derivatives packaged with bonds. Their value comes in part from bets on interest rates. Accredited buyers purchase them through private deals, while the public can buy them in trades. says that structured note sales to individual investors in this country has gone up 72% to $29.6 billion in the last year.

As with ARS, the firms originating these illiquid structured notes are not obligated to “show clients a low-ball bid” or create markets in these OTC structured assets. Whalen says that even as the larger financial firms are making it appear that they are abiding by the new Dodd-Frank law (which does not allow proprietary trading and limits private-equity fund investments), they are now concentrating on structured assets that are based on Treasury bonds, corporate debt, or nothing at all.

Whalen says that it is the individual investors that will lose money on structured notes when the benchmark interest rates go up. Among the the other reasons why structured notes worry Whalen:

• They come with high risk yields.
• They are not regulated.
• They frequently come with minimal disclosure.

According to Whalen, there are already two hedge funds set up for when the rates start to rise and “distressed” retail investors will want to sell.

Individual and institutional investors that believe their financial losses are a result of broker-dealer misconduct or misleading information should explore their legal options.

Related Web Resources:
Structured Notes Are Wall Street's `Next Bubble,' Whalen Says, Bloomberg, August 9, 2010

Chris Whalen Gives 6 Reasons Why The Next Bubble Will Be In Structured Notes, Business Insider, August 10, 2010

Institutional Risk Analytics

Obama Signs Dodd-Frank Reform Bill, Journal of Accountancy, July 21, 2010

Continue reading "Structured Notes Becoming New “Investment Bubble” on Wall Street, says Institutional Risk Analytics Director" »

August 10, 2010

UBS Ordered to Pay Auction-Rate Securities Investor Kajeet Inc. $81 Million

A Financial Industry Regulatory Authority arbitration panel has ordered UBS Financial Services Inc. to pay investor Kajeet Inc. $80.8 million for failed auction-rate securities. The brokerage firm disagrees with the decision and intends to file a motion to have the claim vacated.

Although Kajeet had only invested $8 million in ARS through UBS, the company, which markets cell phones for kids, contends that because its securities were frozen, a “domino effect” resulted and it ultimately lost $110 million. Also, Kajeet was forced to significantly cut its 60-person work team and it lost a key distribution deal with a national retail chain.

UBS had previously resolved ARS-related charges with an agreement that it would pay a $150 million fine and buy back $18.6 billion of the securities. The brokerage firm was one of a number of broker-dealers that agreed to repurchase over $60 billion in ARS from investors because they had allegedly misrepresented the securities as safe investments. When the $330 million ARS market froze in February 2008, UBS had over $35 billion in ARS that were held by some 40,000 customers.

Our securities fraud lawyers continue fight for clients’ right to recover their losses from the ARS market collapse. We want to remind you of the special arbitration procedure that has been set up to allow clients with frozen ARS that couldn’t access their funds to claim “recovery of consequential damages.” The procedure does not allow investment firms to contest liability claims that are based on the argument that brokers issued misrepresentations when they caused investors to think that reselling the assets would be easy.

Related Web Resources:
UBS to Pay $81 Million in Auction-Rate Case, The Wall Street Journal, August 5, 2010

FINRA arbitrators order UBS to pay $81 million, Reuters, August 4, 2010

August 8, 2010

CIT Group Inc, Prudential Financial Inc., and GMAC Inc. Looked to Retirees for Debt Financing When They Lost Access to Credit Markets

As the credit markets started to close for over a dozen companies, including Prudential Financial, CIT Group, and GMAC Inc., the firms began to get their funding for debt financing from retirees—reports Bloomberg in an August 2009 article. For example, between December 2007 and 2008, CIT sold $827 million of debentures created specifically for individuals at a time when the credit market was experiencing “disruptions,” the global economy was falling apart, and the company’s credit ratings were experiencing downgrades. One analyst, David Hendler, says that the financial firms engaged in a “pump-and-dump scheme in a bear market” and that they chose to “offload risk” without having to field too many questions.

Although the retail bond market usually lets companies sell debt at lower yields than what institutional investors call for, the notes can trade at higher relative yields when a company starts to lose its fortune. There is also a lack of liquidity that occurs. This can make it hard for senior investors—especially if their savings are tied into the smaller issues. It didn’t help that late last year CIT, a 101-year-old commercial lender, filed for Chapter 11 bankruptcy after a US bailout and debt exchange offer failed and its funding dried up.

Also, while some debentures—specifically, CTI InterNotes—came with “survivor’s options” that lets an issuer repurchase them at par after the owner passes away, the Internote issuers are entitled to limit how much can be exercised each year through the option to the greater of 2% of the outstanding principal amount or $2 million. Ex-US Securities and Exchange Commission head Arthur Levitt has described this type of financing as an “affinity-type” approach that focuses on the elderly.

The Financial Industry Regulatory Authority has been investigating whether the risks were adequately disclosed to investors or whether securities fraud occurred.

Related Web Resources:
CIT Debt Sold to Widows Has Fine Print Pimco Resists,, August 21, 2009

CIT Files Its Bankruptcy Plan, The Wall Street Journal, November 3, 2009

Continue reading "CIT Group Inc, Prudential Financial Inc., and GMAC Inc. Looked to Retirees for Debt Financing When They Lost Access to Credit Markets" »

August 5, 2010

Life Settlements or Viaticals should be Considered “Securities,” Recommends the SEC to Congress

The Securities and Exchange Commission staff report is recommending that the US Congress define life settlements as securities to make sure that investors of these types of transactions receive federal securities law protection. The SEC says there are several benefits to making such an amendment to securities laws:

• This would clarify life settlements’ status under federal securities law, which would allow the federal government and the states to deal with them in a more consistent manner.
• Life settlement market intermediaries would then fall under the regular framework of the Financial Industry Regulatory Authority and the SEC.
• FINRA and the SEC would have clear authority to police the life settlement market, which could help detect securities fraud and discourage financial abuses.

The Life Settlements Task Force prepared the report, which notes “inconsistent regulation of participants” in the life settlements market and that pools of life settlements and individual transactions “would benefit” from “baseline standards of conduct to market participants.” SEC staff is also recommending that the commission:

• Urge Congress and state officials to think about regulating life expectancy underwriters in a more consistent and significant manner.
• Tell staffers to make sure that providers and brokers are meeting legal standards of conduct.
• Have staff members look for the development of a life settlement securitization market.

It was just in early July that US Senator Sen. Herb Kohl released a General Accountability Office report that found that the inconsistent regulation of life settlements create several challenges:

• Some police owners in certain states are not as well-protected.
• Some individual investors may have a hard time getting enough information about their investments and the risks that may be involved.
• Because laws across states are not consistent, this can pose a problem for some providers and brokers.

Related Web Resources:
SEC Releases Report of the Life Settlements Task Force, SEC, July 22, 2010

Sen. Kohl Says GAO Report Supports Tougher Settlement Regs
, LexisNexis, August 2, 2010

Read the Life Settlement Task Force Report (PDF)

Continue reading "Life Settlements or Viaticals should be Considered “Securities,” Recommends the SEC to Congress
 " »

August 3, 2010

Citigroup Settles Subprime Mortgage Securities Fraud Claims for $75 Million

For $75 million, Citigroup will settle federal allegations that it failed to disclose that its subprime mortgage investments were failing while the market was collapsing. This is the first securities fraud case centered on whether investment banks fairly disclosed their own financial woes to shareholders.

Unlike the Goldman Sachs case, which resulted in a $550 settlement and involved allegations that the investment bank misled investors, Citigroup is accused of misleading its shareholders. This also marks the first time the SEC has filed securities fraud charges against very senior bank executives for their alleged roles in subprime mortgage bonds.

The SEC contends that Citigroup failed to reveal the true nature of its financial state until November 2007. Just that summer the investment bank told investors that it had about $13 billion of exposure to subprime mortgage related-assets that were declining in worth. However, Citigroup left out about $43 billion of exposure to similar assets that bank officials thought were very safe.

Key evidence against Citigroup centers on an announcement that it prepared for investors that cautioned that the quarter was likely going to be one of lower earnings in the fall of 2007. However, the investment bank did not reveal its full subprime exposure. Former Citigroup investor relations head Arthur Arthur Tildesley Jr., who has agreed to pay an $80,000 fine over allegations he omitted key information in the shareholder disclosures, is accused of preparing the statement. Former chief financial officer Gary L. Crittenden, who has settled the SEC case against him for $100,000, recorded the audio message to investors.

The government was eventually forced to bail out the investment bank. Citigroup is not admitting to or denying the charges by consenting to settle. Now, however, the investment bank has to defend itself from private shareholder complaints.

Related Web Resources:
SEC Charges Citigroup and Two Executives for Misleading Investors About Exposure to Subprime Mortgage Assets, SEC, July 29, 2010

Citigroup Pays $75 Million to Settle Subprime Claims, NY Times, July 29, 2010

Citigroup agrees $75m fraud fine, BBC News, July 29, 2010

Continue reading "Citigroup Settles Subprime Mortgage Securities Fraud Claims for $75 Million" »