September 30, 2010

Ex-Ferris, Baker Watts, Inc. General Counsel Did Not Fail to Properly Supervise Broker Fraudster, Says SEC Judge

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According to Securities & Exchange Commission Administrative Law Judge Brenda Murray, former Ferris, Baker Watts, Inc. general counsel Theodore Urban did not fail to reasonably supervise broker, Stephen Glantz, who has admitted to his involvement in a stock market manipulating scheme involving Innotrac Corp. stock. Murray says that Urban performed his job in a “thorough and reasonable manner” and that he was careful and objective.

Urban had been accused of allegedly abdicating his supervisory responsibilities by not responding to red flags related to the Glantz’s alleged misconduct even though prior to the broker’s hiring, he had already been flagged because of several customer complaints and his “questionable reputation in the industry.”

The SEC would later also find that Glantz had been involved in unauthorized, manipulative transactions of TC Healthcare, Inc. stock in February 2005. After pleading guilty to violations of Section 10(b) of the Securities Exchange Act of 1934, in 2007 he was sentenced to 33 months in prison and ordered to pay $110,000 in restitution

When determining whether Urban, who was Glantz’s supervisor, properly supervised him in a manner intended to prevent securities fraud violations, ALJ Murray noted that per the 1934 Securities Exchange Act, a person cannot be held liable for supervisory deficiencies if the proper procedures that should have detected and stopped the violations were applied and the person had no reasonable grounds to believe that the procedures were not being followed.

Related Web Resources:
SEC Judge Finds Investment Bank GC was not Negligent in Supervising Rogue Broker, The Blog of Legal Times, September 8, 2010

Judge: Former general counsel of Ferris, Baker Watts was not responsible for supervising broker convicted of securities fraud, Baltimore Sun, September 9, 2010

Broker Glantz charged with fraud in Innotrac stock scheme, Cleveland.com, September 4, 2007

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Posted In: Ferris, Baker Watts, Inc. , Financial Firms , SEC Enforcement , Securities Fraud

September 29, 2010

Wall Street Knew 28% of the Loans Behind Mortgage Backed Securities (MBS) Failed to Meet Basic Underwriting Standards

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Testimony and documentation provided to the Financial Crisis Inquiry Commission (FCIC) by Clayton Holdings, a due diligence company, revealed that as much as 28% of the loans failed to meet basic underwriting guidelines. According to the testimony given to the FCIC, only 54% of the loans met the lender’s underwriting guidelines and 28% were outright failures.

Unfortunately, about 40% of these bad loans went into securitized pools sold to investors. This information, provided to Wall Street banks, was ignored when they purchased these loans, then bundled into mortgage backed securities and sold to others. Furthermore, rating agencies Moody’s, Standard & Poor’s and Fitch, all charged with assessing the risks of securitized pools, ignored conclusive evidence that many of the loans failed to meet underwriting standards.

Loan originators profited, as did unscrupulous appraisers, then Wall Street firms and the rating agencies shared in the greed by packaging the overrated risky pools. The victims were unsuspecting investors, including individual investors, pension funds, municipalities and U.S. housing agencies, as well as overseas countries, banks and other foreign investors.

In the wake of this subprime mortgage fraud process and the collapse of the housing market, accusations of the chain of greed concerning mortgage backed securities (MBS) has now been confirmed: The toxic nature of the securities was known by Wall Street but simply ignored for the sake of profits.

In a related matter, Morgan Stanley accused of deceptive practices by the Massachusetts Attorney General by knowingly placing dubious mortgages into securitized pools. The facts in that case relied on Clayton reports of loan quality commissioned by Morgan Stanley. The firm settled for $102 million.

References:

Financial Crisis Inquiry Commission, www.fcic.gov

Raters Ignored Proof of Unsafe Loans, New York Times, Gretchen Morgenson; September 26, 2010

New Proof Wall Street Knew Its Mortgage Securities Were Subpar, Huffington Post, September 25, 2010

Attorney General of Massachusetts, www.mass.gov

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Posted In: Morgan Stanley , Mortgage Backed Securities

September 28, 2010

SEC Examining Whether Investment Advisers of Alternative Investment Funds Have Sufficient Due Diligence Processes in Place

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The SEC’s Office of Compliance Inspections and Examinations is checking the due diligence processes at investment advisers of private pools of capital. In a letter sent this month to the chief compliance officers of registered investment advisers that have alternative investment options in their portfolios, OCIE asked the CCOs to provide copies of the investment firm’s trade blotter, due diligence policies and procedures, compliance policies and procedures, the names of the staff that take part in the due diligence process, and the names of third parties that provide due diligence services.

OCIE also requested all marketing materials that are offered to existing and potential clients, as well as current financial records. The SEC wants to know how fund managers are managing any conflicts of interest while performing due diligence.

The probe comes nearly two years after Bernard Madoff’s Ponzi scam was discovered. Many of his investors became indirectly involved with the scheme through advisors that had invested in his funds.

In securities fraud lawsuits filed by some of the investors against their advisers, the plaintiffs contend that proper due diligence would have allowed the scam to be uncovered sooner. The SEC has also come under fire for failing to detect the scheme despite examining and investigating Bernard Madoff’s company on several occasions.

During this review, OCIE staff will visit the investment firms. They also want to meet with personnel knowledgeable about the due diligence process and with the firm’s investment committee head.


Related Web Resources:
SEC Scrutinizing Due Diligence Processes at Advisers of Alternative Investment Funds, US Law Watch, September 15, 2010

Office of Compliance Inspections and Examinations, SEC

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Posted In: Financial Firms , SEC Enforcement

September 27, 2010

Class Auction-Rate Securities Lawsuit Against Raymond James Financial Survives Dismissal

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In the U.S. District Court for the Southern District of New York, U.S. District Judge Lewis A. Kaplan has allowed some of the investor claims in the class action auction-rate securities lawsuit against broker dealer Raymond James Financial Inc. (RJF) and its broker-dealer subsidiary to proceed. This is the first ARS class action case filed since the auction rate securities market failed in 2008 to survive a dismissal motion. The case can now go to the discovery stage.

Kaplan, who had dismissed an earlier lawsuit in this case, let the plaintiffs move forward with their ARS case on the claim that Raymond James & Associates Inc. (RJA) violated antifraud provisions between November 2007 and February 13, 2008. A claim against RJF was allowed to proceed because of its “operational and management control” of RJA during this time. Other claims were dismissed.

Investors had filed the initial class action in April 2008 against RJA, RJF, and Raymond James Financial Services Inc. (RJFS), another Raymond James broker-dealer subsidiary. The plaintiffs contended that between April 8, 2003 and February 13, 2008, the two subsidiaries told financial advisers that ARS were extremely liquid, short-term investments that could work well for any investor with at least $25,000 and with as little as a week to invest. However, when the ARS market failed, over $300 million in ARS became illiquid. Per Kaplan, RJA sold $2.3 billion of ARS, underwrote $1.2 billion, and was the auction dealer for over $725 million.

ARS cases filed by individual investors have been faring better than class-action ARS lawsuits. Of the class-action and group complaints filed against some 19 underwriters and broker-dealers since the ARS market failed, Bloomberg.com reports that Citigroup, Deutsche Bank AG, and at least six other financial firms have managed to get the lawsuits thrown out by judges ruling that the complaints failed to meet pleading requirements. Some plaintiffs were told to refile their lawsuits and provide more details.

Raymond James Auction Rate Class-Action Fraud Suit Is First to Be Upheld, Bloomberg, September 8, 2010

Court Clears Lawsuit Against Raymond James, FA-Mag.com, September 9, 2010

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Posted In: Auction-Rate Securities , Class Action Lawsuits , Financial Firms , Raymond James

September 25, 2010

Increase of Structured Notes with Derivatives Sales Seduces Retirees, Reports Bloomberg

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According to Bloomberg, the sale of structured notes (also known as principal protected notes, or PPN) that come with derivatives to thousands of individual investors has driven up their sale by 58% to $31.9 billion through August. Unfortunately, investors are often lured into making such purchases without fully comprehending the risks, and this can result in significant losses. This year, the US Securities and Exchange Commission’s enforcement division began a group concentrated on investigating structured products.

Banks create structured notes products by bundling privately negotiated over-the-counter derivatives with bonds. Because the Commodity Futures Modernization Act excludes most trades between institutions from oversight, banks can sell OTC derivatives to individuals as long as they are put together with bonds into hybrid securities. Individual investors, even though they lack the background and knowledge to fully understand the risks involved, are targeted for these notes to increase banks’ profit margins. Also, because structured notes aren’t standardized, brokers are paid more to sell structured notes than they are for selling some of the other financial products.

Structured notes have grown in popularity since the Federal Reserve has maintained its target rate for overnight loans between banks at 0% to .25%. With US interest rates close to 0%, investors are buying up the bonds. Reverse convertible notes has paid 13% interest on average in 2010.

Granted, investors can obtain higher returns if their bets work out, and principal-protected notes and some of the other products are not as risky as stocks because sellers guarantee that investors won’t suffer losses if the market falls. However, because there are variables outside the scope of interest rate movements, investors can lose money. Institutional Risk Analytics Managing Director Christopher Whalen has said that structured notes will likely become the next investment bubble.

Retirees Duped by Derivatives With Structured Notes Sale Surge, Bloomberg, September 22, 2010

Structured Notes Becoming New “Investment Bubble” on Wall Street, says Institutional Risk Analytics Director, Stockbrokerfraudblog.com, August 12, 2010

Shepherd Smith Edwards & Kantas LTD LLP Investigates Claims for Purchasers of Structured Notes, GlobalNewswire, August 11, 2010

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Posted In: Reverse Convertibles , Senior Investors , Structured Products

September 24, 2010

10th Circuit Issues Split Decision on Fees to Gemstar-TV Guide International Inc.

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In a split decision, the U.S. Court of Appeals for the Tenth Circuit decided that while Gemstar-TV Guide International Inc. can collect fees spent in its defense of the Oklahom securities fraud complaint filed against the company and two ex-officers by a former executive, it cannot collect legal fees it incurred from its counterclaim against the plaintiff. The court said that while a separation agreement executed by the two parties does not allow the former executive to sue the company it also does not allow for fees to be awarded for counterclaims.

Ex-Gemstar-TV Guide executive Pamela McKissick had sued the company, its former chief financial officer Elsie M. Leung, and its former chief executive Henry C. Yuen in 2004. McKissick claimed that the defendants issued false and misleading statements that overstated company revenues and that this resulted in an artificially inflated stock price. McKissick says that because of this misconduct and other acts, her stock options became worthless. However, prior to exiting Gemstar in 2003, McKissick had consented to a Separation Agreement and Release that included a “no actions” provision that had her releasing all claims against the company unless a claim involved the enforcement of the SAR.

Gemstar submitted a motion for summary judgment claiming that the SAR prevented McKissick from filing the securities fraud lawsuit. Gemstar then counterclaimed saying that it should receive legal fees because her lawsuit violated the terms of the SAR.

The judgment was upheld on appeal in 2008, which was the same year that criminal charges were filed against Yuen for alleged securities fraud. Yuen had also been ordered by the US Securities and Exchange Commission to pay $22.3M in penalties, disgorgement, and interest to settle allegations that he played a role in Gemstar significantly overstating its revenues.

Summary judgment was awarded by the district court to Gemstar for both McKissick’s securities fraud case and the company’s counterclaim. McKissick appealed. Yuen and Leung filed a motion for legal fees. After the district court granted their fee request, McKissick added the issue to her appeal.

Related Web Resources:
McKissick v. Yuen, United States Court of Appeals, 10th Circuit

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Posted In: Texas Securities Fraud

September 23, 2010

Plan by FINRA and CHX to Re-Allocate Regulatory Tasks Approved by SEC

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The Securities and Exchange Commission has approved the Financial Industry Regulatory Authority and Chicago Stock Exchange Inc. proposed agreement to re-allocate certain regulatory duties that deal with firms that belong to the two self-regulatory organizations.

Under the plan, FINRA is to assume specific enforcement and examination functions for common members when the applicable CHX rules and FINRA rules involved are “substantially similar.” Also, with respect to certain federal securities laws and rules and regulations and as specified by the agreement, FINRA is to take regulatory responsibility for common members.

The SEC says the plan will cut down “unnecessary regulatory duplication” when common members are involved. While FINRA will take charge of certain responsibilities that the two SROs would otherwise have both performed, CHX will remain in charge of examination, surveillance, investigation, and enforcement when it comes to trading practices and activities in its marketplace. The latest agreement supercedes the one from 1977. It has no impact on CHX’s operations or its market oversight functions.

However, according to Securities Fraud Attorney William Shepherd, “Considering the abysmal job that these self-regulatory organizations (SRO’S) have done in regulating, for example, the lack of regulation of the Madoff securities firm, perhaps a little duplication would be perfectly acceptable!”

Related Web Resources:
SEC Approves Plan by FINRA, CHX To Re-Allocate Certain Regulatory Duties, BNA Securities Law Daily, September 13, 2010

FINRA

Chicago Stock Exchange

SEC

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Posted In: FINRA

September 21, 2010

Broker-Dealer Can Be Held Liable as Control Person if Ponzi Scammer is a Registered Representative, Says Eight Circuit

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According to the U.S. Court of Appeals for the Eighth Circuit, under federal securities law a broker-dealer can be liable as a control person if one of its registered representatives is involved in a Ponzi scam even if the scheme was channeled through a separate entity. The court issued its ruling in Lustgraaf v. Behrens last month. In making his decision, Judge Michael J. Melloy reinstated the investors’ control person claims against Sunset Financial Services Inc. and didn’t join the other circuits in making culpable participation by a defendant a requirement in a control-person liability action.

Melloy said that even though the Ponzi scheme didn’t take place through Sunset, the broker-dealer is the one that gave scammer Bryan S. Behrens access to the markets. Melloy says that Sunset had the duty to monitor Behrens’ activities. It was in 2008 that the Securities and Exchange Commission obtained a temporary restraining order against Behrens and National Investments Incorporated. The SEC accused Behrens of raising more than $6 million from some 20 investors through promissory notes. He and National Investments, which he controls, also are accused of falsely claiming that the high percentage of interest payable on the notes would come from the lending of investors’ funds to other people at a high interest rate when actually the assets belonging to newer investors were used to pay off current clients.

A number of the investors sued Behrens, Kansas City Life Insurance Company, and its wholly owned subsidiary Sunset. They argued that the defendants should be held liable for Behrens actions on claims of apparent authority, state and federal control-person liability, and respondeat superior.

In reversing the previous ruling, the court rejected the broker-dealer’s claim that under the 1934 Securities Exchange Act Section 20 no control person liability could come from Behren’s use of National, which is an entity unrelated to Sunset. The court, however, did affirm that the control person claims against Kansas City Life were lacking.


Related Web Resources:
LUSTGRAAF v. Behrens, Court of Appeals, 8th Circuit 2010

1934 Securities Exchange Act Section 20, SEC.gov, (PDF)

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Posted In: Financial Firms , Ponzi Scams , Sunset Financial Services Inc.

September 17, 2010

Securities Fraud Lawsuit Against Calamos Investments Filed on Behalf of Calamos Convertible Opportunities and Income Fund Shareholders

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Calamos Asset Management, Inc., the Calamos Convertible Opportunities and Income Fund (NYSE: CHI), Calamos Advisors LLC, current trustees, and one former Fund trustee are now the defendants of a putative class action securities complaint purportedly submitted on behalf of a class of common fund shareholders. The securities fraud lawsuit is alleging breach of fiduciary duty, the aiding and abetting of that breach, and unjust enrichment related to the redemption of auction rate preferred securities (ARPS) after the ARS market collapsed in 2008.

In the securities fraud lawsuit filed by Christopher Brown, Calamos Holdings LLC founder John Calamos Sr. is accused of allowing the investment firm and its management team to benefit from investors’ losses. Brown’s complaint is a refiling of a lawsuit filed in federal court last July. That complaint was withdrawn earlier this month and the claims resubmitted in state court.

Brown contends that Calamos and others were aware they were breaching their fiduciary duty when they let fund advisers benefit while investors sustained financial losses in the “multiple millions of dollars.” Brown wants all losses restored.

He claims that even as the ARS market failed, a burden was not placed on the Calamos Convertible Opportunities and Income Fund, which held auction market preferred shares. However, in June and August, Calamos managers allegedly redeemed some of the funds’ holdings, which were replaced with debt financing that was “less favorable.” Brown says that because this advanced the interests of the managers, the funds’ investment advisors and affiliates but not the interests of common shareholders, it was a breach of fiduciary duty.

Brown is seeking class-action status for any investors in the fund since March 19, 2008. He wants a judge to prevent Calamos trustees from earning fees from the fund or acting as advisers.

Related Web Resources:
Calamos Investments Statement on ARPS Lawsuit for Convertible Opportunities and Income Fund, Centredaily.com, September 15, 2010

Calamos founder sued by investor who claims bad fund management, Chicago Business, September 14, 2010


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Posted In: Auction-Rate Securities , Calamos Investments , Class Action Lawsuits , Financial Firms , Securities Fraud

September 16, 2010

Former DHB Industries CEO and COO Found Guilty of Nearly $200M Securities Fraud Scam

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After two months of deliberation, a jury has found Ex-DHB Industries CEO David Brooks and Ex-DHB Industries COO Sandra Hatfield guilty of committing securities fraud, insider trading, and obstruction of justice. The two defendants allegedly made close to $200 million as a result of their scam. The jury also found Brooks guilty of lying to auditors.

Prosecutors claimed that Brooks and Hatfield manipulated financial records to increase company earnings and profit margins. This resulted in the inflation of stock prices. The defendants are also accused of committing insider trading from when they sold over $72 million of their DHB stock in November 2004 and then another (approximately) $118 million of their shares the following month. The sales occurred as DHB’s stock price went up to over $20/share. Hatfield made over $5 million while Brooks realized over $180 million from the scheme.

Also, Hatfield and Brooks allegedly took part in a scheme to cover up the related party status of Tactical Armor Products, which Brooks’ wife was supposed to be running separate from DHB. In fact, Brooks wholly controlled TAP. According to the Federal of Bureau of Investigation’s New York Division Web site, profits from related party transactions were used to pay for over $16 million in Brooks’ personal expenses. He reportedly doctored internal DHB documents and created fraudulent multi-million dollar transactions to cover up the scheme and fool investors and auditors. Personal expenditures included plastic surgery for his wife, luxury vehicles, pills for his 100 racing horses, his family’s use of the company jet, and other charges.

The two defendants are each facing up to 25 years in prison.

Related Web Resources:
David H. Brooks, Founder and Former Chief Executive Officer of DHB Industries, Inc. and Sandra Hatfield, Former Chief Operating Officer, Convicted of Insider Trading, Fraud, and Obstruction of Justice: Defendants Reaped Nearly $200 Million Through Their Schemes, FBI, September 14, 2010

Body armor chief guilty of $190 million fraud: jury, Reuters, September 14, 2010

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Posted In: Investor Fraud , Securities Fraud

September 15, 2010

Whistleblower Sues Moody’s Investors Service for Defamation

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Ilya Eric Kolchinsky, a former Moody’s Investors Service executive, is suing the credit ratings agency for defamation. This is one of the first lawsuits involving a Wall Street company and an ex-employer that blew the whistle on it. Kolchinsky is seeking $15 million in damages in addition to legal fees.

Kolchinsky claims that Moody’s tried to ruin his reputation after he publicly talked about problems with its ratings model. Kolchinsky, who supervised the ratings that were given to subprime mortgage collateralized debt obligations (many of these did not live up to their triple-A ratings), testified before Congressional panels about his concerns. He addressed the potential conflicts that can arise as a result of the issuer-pay ratings model, which lets banks and borrowers that sell debt securities pay for ratings. He alleged securities fraud and claimed that the ratings agency placed profits ahead of doing their job. He also claimed that Moody’s lacked the resources to enforce its rules.

Kolchinsky contends that Moody’s began attacking him through the media and that the statements that the credit ratings firm issued have caused him to become “blacklisted by the private sector financial industry.” Moody’s suspended him last year. In his civil suit, Kolchinsky notes that he was attacked by the credit ratings agency even though it went on to adopt some of his recommendations.

The recently passed financial reform bill provides greater protections for whistleblowers while offering financial rewards for those brave enough to tell regulators about their concerns. However, it is unclear whether Kolchinsky’s complaint will benefit from the new law because his case involves alleged actions that occurred prior to the bill's passing.

Related Web Resources:
Former Moody’s Executive Files Suit, New York Times, September 13, 2010

Exec who blew whistle on Moody’s ratings sues for defamation, Central Valley Business TImes, September 14, 2010

Wall Street Whistleblowers May Be Eligible to Collect 10 – 30% of Money that the Government Recovers, Stockbroker Fraud Blog, July 29, 2010

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Posted In: Collateral Debt Obligation , Collateralized Mortgage Obligations , Credit Ratings , Credit Ratings Agencies , Moody's , Subprime Mortgage , Whistleblower Lawsuits

September 11, 2010

Goldman Sachs Permanently Exempted from Company Act Disqualification Provision, Says SEC

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The Securities and Exchange Commission has decided to permanently exempt Goldman & Sachs Co. from a 1940 Investment Company Act provision that would have disqualified the financial firm from serving as a principal underwrite. Goldman and several of its affiliates applied for exemption from ICA Section 9(a) after settling for $550 million SEC securities fraud charges that it made material misrepresentations related to the 2007 structuring and sale of derivative product connected to subprime mortgages.

Under the provision, a person cannot act as a principal underwriter or investment adviser for an investment firm if, due to misconduct, the party in question is enjoined from taking part in any practice or conduct related to the purchase or sale of any security. Goldman, in its application, noted that since the district court had barred it and its affiliates from violating federal securities laws moving forward, the provision would apply to disqualify them from giving advisory services to investment companies.

After granting the broker-dealer a temporary exemption in July, the SEC issued Goldman a permanent one. The SEC noted that the applicants’ behavior did not make it against the “public interest or protection of investors” to grant the permanent exemption.

Regarding the $550 million securities fraud settlement, which is the largest penalty that the SEC has ordered a financial firm to pay, Goldman was accused of misleading investors about a synthetic collateralized debt obligation as the housing market was collapsing. Investors suffered more than $1 billion in financial losses. The brokerage firm admitted that it provided incomplete marketing information for the product and has agreed to reform its business practices.

Related Web Resources:
Investment Company Act of 1940

Goldman Sachs, SEC Reach $550 Million Settlement, PBS News, July 15, 2010


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Posted In: Collateral Debt Obligation , Financial Firms , Goldman Sachs , Securities Fraud , Subprime Mortgage

September 10, 2010

Three Houston Men Accused of $103 Million Texas Securities Fraud Involving Life Insurance Scam that Victimized at Least 800 Investors

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In an indictment unsealed in federal court, Adley H. Abdulwahab, Christian M. Allmendinger, and David C. White were charged with running a life insurance scam and stealing $103 million from at least 800 investors in the United States and Canada. Their Texas securities scheme allegedly involved the sale of “bonded life settlements” that guaranteed 10-20% returns. All three men are principals of A&O Resource Management Ltd., which is based in Houston.

In the US, A & O is accused of using funds from investors in 37 states to purchase the investments. A life insurance policy is bought by a third party, while the policy owner receives a cash payout. Meantime, the buyer pays the premiums and when the insured passes away, is supposed to collect on the death benefits. However, the Texas State Securities Board does not believe that the bonds purchased by A & O gave investors the returns that they were promised.

According to US Attorney Neil H. MacBride, the defendants defrauded investors for personal gain. The three men are accused of making misrepresentations regarding A & O’s previous successes, office locations, and number of employees, its investment offerings’ risks, and its use and safekeeping of investor money. Abdulwahab and his co-conspirators allegedly made up sham transactions involving A & O selling to two shell corporations once state regulators started examining investor funds.

The three defendants are charged with conspiracy, securities fraud, mail fraud, and money laundering. The Justice Department is seeking the forfeiture of about $103 million from the men.

Related Web Resources:
Three Principals of A&O Entities Arrested and Charged for Their Alleged Roles in $100 Million Fraud Scheme, FBI Richmond, September 9, 2010
3 Houston Men Charged With Stealing $103 Million in Life Insurance Fraud, Bloomberg, September 9, 2010

Life Settlements or Viaticals should be Considered “Securities,” Recommends the SEC to Congress
, Stockbroker Fraud, August 5, 2010

Texas State Securities Board

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Posted In: Life Settlements , Texas Securities Fraud

September 9, 2010

Morgan Stanley, UBS, Wells Fargo, and Merrill Lynch Recruit Other Investment Firms’ Brokers

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UBS AG unit UBS Wealth Management Americas recently recruited Bank of America Corp.'s Merrill Lynch financial adviser Nina Hakim to join its Westfield, New Jersey office. Hakim, who reportedly managed $300 million in client assets and generated $1.5 million in commissions and fees, will now report to UBS branch Manager Erik Gaucher.

Another new addition to the UBS team is Morgan Stanley Smith Barney adviser Raymond Schmidtke, who will be based in Seattle, Washington. According to regulatory records, Schmidtke, was employed by Citigroup Inc. for over two decades and stayed at the MS joint venture for a year. He reportedly had close to $100 million in assets under management and $1 million in annual production. He now reports to UBS branch manager Shawn MacFarlan.

In other investment adviser news, a team of now former Wells Fargo Advisors advisers has joined Morgan Stanley Smith Barney. Francis Schiavetti and Ben Dembin’s base will be the Boca Raton, Florida office. The team reportedly manages $107 million in client assets and produces approximately $1.2 million in commissions and annual fees. The two men both were employed by Wells Fargo and predecessor firm Wachovia Securities before joining the Morgan Stanley Smith Barney team.

In August, the Financial Industry Regulatory Authority fined and censured Morgan Stanley $800,000 for not making public disclosures, which is required under the SRO’s rules that oversee research-analyst conflicts of interest. FINRA claims that the financial firm also did not comply with a key 2003 Research Analyst Settlement provision when it failed to disclose independent research availability in customer account statements. Every six months, for the next two years, Morgan Stanley must now review a sample of its research reports and certify that they are in compliance with FINRA’s rules.

Related Web Resources:
Hires Merrill Lynch, Morgan Stanley Brokers, Fox Business, August 24, 2010

Morgan Stanley Adds Team From Wells Fargo, Faces FINRA Fine, Investment Advisor, August 24, 2010

FINRA Fines Morgan Stanley $800,000 for Deficient Conflict of Interest Disclosures in Equity Research Reports and Public Appearances by Research Analysts, FINRA, August 10, 2010

Continue reading "Morgan Stanley, UBS, Wells Fargo, and Merrill Lynch Recruit Other Investment Firms’ Brokers" »

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Posted In: Financial Firms , Merrill Lynch , Morgan Stanley , Smith Barney - Citigroup , UBS , Wells Fargo

September 7, 2010

Charles Schwab & Co. Defendant in Class-Action Securities Fraud Lawsuit Filed on Behalf of Schwab Total Bond Market Fund Investors Over CMOs and Mortgage-Backed Securities

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A class-action securities complaint has been filed against Charles Schwab & Co. on behalf of investors that own Schwab Total Bond Market Fund (Nasdaq: SWBLX) shares that were purchased after May 31, 2007. The securities fraud lawsuit accuses Charles Schwab of causing the fund to deviate from its fundamental business objective, which was to track the Lehman Brothers U.S. Aggregate Bond Index, and of violating the California Business & Professions Code.

According to the plaintiffs’ legal representation, the defendant caused investors to suffer financial losses when it started investing in high-risk mortgage backed securities without letting shareholders know. Per the fund’s prospectus, Charles Schwab is supposed to obtain shareholder approval through a vote.

The plaintiffs contend that by investing 25% of the fund’s portfolio assets in high-risk, non-agency collateralized mortgage obligations (CMO’s) and mortgage-backed securities that were not part of Lehman’s US Aggregate Bond Index, Charles Schwab failed to stay true to its stated fundamental investment objective. They claim that this deviation led to tens of millions of dollars in shareholder losses because of the decline in the non-agency mortgage-backed securities value. According to their lawyers, the investors ended up experiencing a negative 12.64% in differential in total return for the fund compared to the Lehman Bros. U.S. Aggregate Bond Index from August 31, 2007 to February 27, 2009.

The investor plaintiffs are seeking restitution for all class members and for the return of management and other associated fees collected after the fund’s alleged deviation from its fundamental business objective.

Related Web Resources:
Class Action Lawsuit Filed Against Charles Schwab & Co., Star Global Tribune, September 7, 2010

Plaintiffs charge Total Bond Market Fund deviated from stated investment strategy, Investment News, September 7, 2010


Related Blog Stories Resources:
Schwab Must Pay SSEK Client $604,094 Over California Yield Plus Fund Investments, Says FINRA Arbitration Panel, Stockbrokerfraudblog.com, April 22, 2010

Securities Law Firm Shepherd Smith Edwards & Kantas LTD LLP Investigates Investor Claims Related to Short Term Bond Funds, Stockbrokerfraudblog.com, August 9, 2008

Continue reading "Charles Schwab & Co. Defendant in Class-Action Securities Fraud Lawsuit Filed on Behalf of Schwab Total Bond Market Fund Investors Over CMOs and Mortgage-Backed Securities" »

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Posted In: Charles Schwab , Class Action Lawsuits , Collateralized Mortgage Obligations , Financial Firms , Mortgage Backed Securities , Securities Fraud

September 4, 2010

Raymond James Loses Texas Auction Rate Securities Case and is Ordered by FINRA to Pay Couple $925K

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Raymond James and Associates Inc. and financial advisor Larry Milton must pay Rex and Sherese Glendenning $925,000, says a Financial Industry Regulatory Authority panel. The Texas securities case involved an auction-rate securities dispute. brokerage firm advisor Milton has been accused of misrepresenting that the ARS the couple invested in was extremely liquid.

The Glendennings opened their Raymond James (NYSE: RJF) account in 2008 right before the ARS market failed. They claim that Milton, who had invested $1.4 million of their funds in an ARS that consisted of sewer revenue bonds, did not tell them that there was an inherent possibility that the securities might fail. Instead, they allege, he lead them to believe that the ARS could be easily sold. You can imagine their dismay when Raymond James refused their request to repurchase the ARS at full value.

The Gleddenings are not the only ones that the broker-dealer has been ordered to compensate. In just the last two months, Raymond James has been ordered to buy back $3.5 million in ARS from investors. A FINRA panel ordered the brokerage firm to repurchase $2.5 million in ARS from investor Greg Merdinger, who claims that not only was he told that auction-rate securities were safe and very liquid (even more than market funds), but also he contends that no one apprised him that there was an illiquidity risk. Raymond James affiliates Raymond James & Associates Inc. and Raymond James Financial Services Inc. were ordered to make the ARS repurchase.

Related Web Stories:
FINRA: Raymond James must pay $925,000 to couple, Reuters, August 25, 2010

Raymond James faces $2.5 million payback ruling, Tampa Biz, July 26, 2010


Related Blog Posts:
Raymond James Ordered to Buy Back $2.5M in ARS by FINRA, Stockbrokerfraudblog.com, July 28, 2010

Raymond James and RBC Capital Markets Fined $1.4 Million in Total Over Improper Stock Lending Activities, Stockbrokerfraudblog.com, June 22, 2009


Continue reading "Raymond James Loses Texas Auction Rate Securities Case and is Ordered by FINRA to Pay Couple $925K " »

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

Posted In: Auction-Rate Securities , FINRA , Financial Firms , Raymond James , Texas Securities Fraud

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