June 30, 2011

$750,000 Arbitration Award Against Stone & Youngberg LLC Confirmed by District Court

A district court has confirmed an arbitration panel’s $750,000 award to the Kay Family Revocable Trust in its securities case against Stone & Youngberg LLP. The trust sustained financial losses when its money was invested in the FutureSelect Prime Advisor II, which had most of its capital invested with Ponzi scam mastermind Bernard Madoff.

In its arbitration claim, Kay Family Revocable Trust claimed that S & Y failed to perform its requisite due diligence before recommending that the trust invest in the fund. S & Y rejoined with the argument that the trust had not succeeded in proving a causal link between the Madoff scheme and any alleged lack of due diligence. S & Y also argued it shouldn’t have to be responsible for the harm that the Trust suffered as a result of Madoff’s financial fraud. The brokerage firm even pointed to a federal district court ruling of a professional malpractice claim that concluded that “a simple ‘but for’ relationship between the claimed negligence and the injury” will not back up a finding of legal causation. S & Y also cited a decision by a federal appeals court that said it was up to a securities fraud plaintiff to prove that the loss it sustained was a foreseeable outcome of the alleged misrepresentation.

The U.S. District Court for the Northern District of California, however, concluded that the panel’s decision to confirm the award in favor of the investor and against S & Y was not manifest disregard of the law, but rather the application of the law to the facts the way it found them.

STONE & YOUNGBERG, LLC v. KAY FAMILY REVOCABLE TRUST UAD 02-07-90 FBO LENORE BLEADON UNDER TRUST A, Leagle.com, June 22, 2011

Stone & Youngberg, LLC v. Kay Family Revocable Trust UAD 02-07-90 FBO Lenore Bleadon Under Trust A, Justia Dockets, January 13, 2011


More Blog Posts:

Houston Securities Arbitration: FINRA Panel Orders Penson Financial Services, Inc. to Pay Boushy North Investments, Ltd. $500,000, Stockbroker Fraud Blog, June 11, 2011

District Court Wants to Know Why FINRA Arbitration Panel Denied Freecharm Ltd.’s Securities Fraud Claim Against One Atlas Financial Group LLC, Stockbroker Fraud Blog, June 11, 2011, May 31, 2011

Raymond James Must Pay $925,000 Over Auction-Rate Securities Dispute, Institutional Investor Securities Blog, September 1, 2010

Continue reading "$750,000 Arbitration Award Against Stone & Youngberg LLC Confirmed by District Court" »

June 29, 2011

Morgan Keegan Settles Subprime Mortgage-Backed Securities Charges for $200M

According to the SEC, FINRA, and state regulators, Morgan Keegan & Company and Morgan Asset Management have consented to pay $200 million to settle subprime mortgage-backed securities-related charges. Also agreeing to pay penalties over their alleged misconduct are Morgan Keegan comptroller Joseph Thompson Weller and ex- portfolio manager James C. Kelsoe Jr.

The two men were accused of causing the false valuation of subprime mortgage backed securities in five Morgan Asset Management-related funds. Per the SEC’s administrative order, Kelsoe directed the fund accounting department to arbitrarily execute price adjustments to the fair values of certain portfolio securities. These adjustments disregarded the lower values for the same securities that outside broker-dealers provided as part of the pricing process. Kelsoe’s directives and the actions that were taken as a result would sometimes cause Morgan Keegan to not price the bonds at current, fair value.

The SEC also says that Kelsoe screened and affected at least one broker-dealer’s price confirmations. That broker-dealer had to provide interim price confirmations that were below the value that the funds were valuing certain bonds at but greater than the initial confirmations that the broker-dealer meant to provide. The interim price confirmations allowed the funds to not mark down the securities’ value to reflect current fair value. Kelsoe is also accused of getting the broker-dealer to withhold price confirmations in certain instances where they would have been significantly lower than the funds’ current valuations of the relevant bonds. The SEC says that Kelsoe fraudulently kept the Navs of funds from being reduced when they should have gone down when the subprime securities market deteriorated in 2007.

Of the $200 million, Morgan Keegan must pay a $75 million penalty to the SEC, $25 million in disgorgement, and $100 million to a state fund that would then pay investors.

Morgan Keegan to Pay $200 Million to Settle Fraud Charges Related to Subprime Mortgage-Backed Securities, SEC, June 22, 2011

Morgan Keegan Entities to Pay $200M In Settlement Over Subprime MBS Valuations, Law 360, June 22, 2011


More Blog Posts:
Morgan Keegan Ordered by FINRA to Pay RMK Fund Investors $881,000, Stockbroker Fraud Blog, April 24, 2011

Morgan Keegan & Co. Inc. Must Pay $250K to Couple that Lost Investments in Hedge Fund with Ties to Bernard L. Madoff Investment Securities, Stockbroker Fraud Blog, March 16, 2011

Morgan Keegan to Pay $9.2M to Investors in Texas Securities Fraud Case Involving Risky Bond Fund, Stockbroker Fraud Blog, October 6, 2010

Continue reading "Morgan Keegan Settles Subprime Mortgage-Backed Securities Charges for $200M" »

June 28, 2011

JP Morgan Chase Agrees to Pay $861M to Lehman Brothers Trustee

A bankruptcy settlement has been reached between JP Morgan Chase & Co. and the trustee of Lehman Brothers. Per the agreement, JP Morgan will pay $106 million in securities and $755 million in cash—that’s $861 million. This will go to the customers of the now defunct Lehman Brothers Holding. The settlement comes after a two-year probe by trustee James Giddens in the Securities Investor Protection Act liquidation proceedings.

Lehman Brothers Holdings Inc., which is Lehman Brothers Inc.’s parent company, filed for bankruptcy in 2008. JP Morgan served as its clearing bank. Some 125,000 customers have filed claims worth about $180 billion total, of which about $130 billion are resolved. The claims that are left include those involving Lehman Brothers Holdings, Lehman Brothers International, and a number of hedge funds. JP Morgan and Lehman Brothers Holdings are still involved in two multibillion-dollar lawsuits.

Per court papers, the majority of the trustee’s claims against JP Morgan come from securities that the bank held but failed to liquidate following the collapse of Lehman brothers. While JP Morgan did not agree with all of the trustee’s findings, they consented to turning over the majority of the funds to resolve the dispute.

Lehman Brothers Holdings claims that JP Morgan Chase abused its role as a clearing house firm when it forced the former to surrender $8.6 billion in cash collateral. Lehman believes that if it could have held on to the funds, it wouldn’t have needed to file for bankruptcy and that even if it still had to shut down, it could have done so in a more orderly fashion.

Judge Clears $861 Million J.P. Morgan-Lehman Settlement, Wall Street Journal, June 23, 2011

JP Morgan to Pay Lehman Brokerage $861 Million in Bankruptcy Court Settlement, FNN, June 23, 2011

Securities Investor Protection Act , US Courts


More Blog Posts:
UBS Financial Services Fined $2.5M and Ordered to Pay $8.25M Over Lehman Brothers-Issued 100% Principal-Protection Notes, Institutional Investors Securities Blog, April 12, 2011

UBS to Pay $2.2M to CNA Financial Head for Lehman Brothers Structured Product Losses, Stockbroker Fraud Blog, January 4, 2011

Lehman Brothers Lawsuit Claims Its Bankruptcy Was In Part Due to JP Morgan Chase’s Seizure of $8.6 Billion in Cash Reserves, Stockbroker Fraud Blog, June 14, 2011


Continue reading "JP Morgan Chase Agrees to Pay $861M to Lehman Brothers Trustee" »

June 27, 2011

Texas Securities Fraud: Planmember Securities Corp. Registered Representatives Accused of Improperly Selling Life Settlement Notes

Brokers Kris Bradford Rhoden and Jimmy Wayne Freeman Jr. are accused of Texas securities fraud and of bilking investors of millions. The two registered representatives allegedly took part in the improper sale of life settlement notes. They are also accused of lying to their employer, PlanMember Securities Corp, about the sales. Now, Texas State Securities Board says the two men are facing $100,000 fines and license revocation.

Between June 2008 and February 2009, the two men allegedly sold note agreements that were supposedly backed by life insurance policies and a 10% simple-interest return guarantee over five years. They also are accused of selling an Immediate Income Investment Plan, which was purported to have been backed by life insurance policies and a five-year, fixed biweekly income account. National Life Settlements LLC, which was shut down by Texas securities cops in 2009 after it sold $30M in bogus promissory notes, was the issuer both products. (A judge later ordered that the investors it defrauded get back about $20 million.)

Now, state regulators are saying that Rhoden and Freeman did not comply with PlanMember's supervisory procedures, which doesn’t allow private-securities transactions and requires that the broker-dealer approve any securities transactions occurring outside the regular course of business. The two brokers allegedly told Planmember on their compliance questionnaire that they did not sell such products. They are also accused of using their personal email accounts to let PlanMember clients know about the investments, as well as of failing to update their U-4 forms in a timely manner to show that they were marketing the life settlement notes.


Related Web Resources:

Corpus Christi investment advisers face license hearings, fines, Caller.com, June 24, 2011

Two reps could lose securities licenses for selling life settlement notes, Investment News, June 24, 2011

Texas Stockbroker Fraud


More Blog Posts:

Texas Lawyer Pleads Guilty to Involvement in Alleged $100M Life Settlement Scheme, Stockbroker Fraud Blog, December 7, 2010

Three Houston Men Accused of $103 Million Texas Securities Fraud Involving Life Insurance Scam that Victimized at Least 800 Investors, Stockbroker Fraud Blog, September 7, 2010

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


Continue reading "Texas Securities Fraud: Planmember Securities Corp. Registered Representatives Accused of Improperly Selling Life Settlement Notes" »

June 25, 2011

Mortgage-Backed Securities Lawsuit Against Bank of America’s Merrill Lynch Now a Class Action Case

Merrill Lynch, a unit of Bank of America Corp. (BAC) is now the defendant of a class action securities fraud lawsuit filed on behalf of at least 1,800 investors. A federal judge certified the class status, which involves all investors in mortgage-backed securities that were sold beginning February 2006 through September 2007.

The named plaintiffs of the MBS lawsuit are the Connecticut Carpenters Annuity Fund, the Wyoming state treasurer, Mississippi Public Employees’ Retirement System, the Connecticut Carpenters Pension Fund, and the Los Angeles County Employees Retirement Association. The investors are accusing Merrill of misleading them in the offering documents for $16.5 billion of certificates.

While including yourself as a class action plaintiff may seem like an easy way to recoup your losses, Shepherd Smith Edwards & Kantas LTD LLP founder and stockbroker fraud attorney William Shepherd says, “On average, victims with securities class action claims usually get back a net recovery of about 8% of their losses.” Such claims often face numerous obstacles. Also, only federal securities claims can be brought in class action cases, and these can be challenging to prove. “Some securities class action complaints end up settled but with the terms favoring the defendants and with large fees going to the investors’/victims’ attorneys,” notes Shepherd. Many consider the investor class the losers when such a case is concluded. ** It is important, however, to note that our securities fraud law firm has no information at this time to suggest that this is going to be the result in this matter.

One alternative you should explore is filing your own, individual claim. While many securities class action cases have very short “opt out” dates, if you “opt out" of the class in a timely manner, you can file an individual case ( claims under state law are often easier to prove). Our securities fraud law firm has represented many investors who have done both.

Merrill Must Face Class Action Over Mortgage Securities, Bloomberg, June 20, 2011


More Blog Posts:

Ambac Financial Group, Insurers, and Bank Underwriters to Pay $33M to Settle Securities Lawsuits Alleging Concealed Risks Related to its Bond-Insurance Business, Stockbroker Fraud Blog, May 18, 2011

Number of Securities Class Action Settlements Reached in 2010 Hit Lowest Level in a Decade, Says Report, Stockbroker Fraud Blog, March 31, 2011

Class Action Plaintiffs Dispute Bank of America’s $137M Settlement with State Attorney Generals Over Municipal Derivatives, Institutional Investor Securities Blog, December 31, 2010

Continue reading "Mortgage-Backed Securities Lawsuit Against Bank of America’s Merrill Lynch Now a Class Action Case" »

June 24, 2011

Bill Funding SEC at $1.185B for Fiscal Year 2012 Approved by House Committee

The House Appropriations Committee has voted to approve an appropriations bill to bill fund the Securities and Exchange Commission for fiscal year 2012 at $1.185 billion. The appropriations level is equivalent to what the SEC was given for FY 2011. However, it is $222 million less than what the White House requested for the next fiscal year. The bill also would bar the funding of the SEC’s “reserve fund,” which the committee believes would work as a “slush fund” for the SEC for programs that Congress has not approved.

According to committee chairman Rep. Hal Rogers (R-Ky.), the House Appropriations Committee has taken steps to funding for programs that are “ineffective and unproven” and stop taxpayer money from going toward waste and redundancy. The committee, however, also reports that it continues to be troubled by the way the SEC handles its funds and is “reticent” to give the commission more funding until it deals with the efficiencies noted in the Boston Consulting Group's (BCG) report, which recommends important structural and operational improvements at the Commission. It remains worried about the SEC’s ability to successfully handle Ponzi scams and has concerns that a proposed rulemaking to register municipal advisors may be too broad.

Says Shepherd Smith Edwards & Kantas LTD LLP Founder and Securities Fraud Attorney William Shepherd, “At one time, the SEC was one of the few agencies that actually produced revenues for our government (along with the IRS and the Interior Department, which leases federal minerals, etc.). It seems to me that this agency could be self-funding again if it simply imposed heavy fines for actions such as short-selling rule violations. An interesting statement by the committee is ‘we have cut funding for ineffective and unproven programs.’ Judging by the SEC’s recent performances, why would this not include virtually all the Commission's programs”?

Appropriations Committee Approves Fiscal Year 2012 Financial Services Appropriations Bill, US House of Representatives Committee on Appropriations, June 23, 2011


More Blog Posts:

Impartiality of SEC Report by Boston Consulting Group Questioned by Key House Republicans, Institutional Investors Securities Blog, March 30, 2011

SEC Needs to Keep a Closer Eye on FINRA, Says Report, Stockbroker Fraud Blog, March 15, 2011

MSRB Seeks Public Comment on New Fiduciary Duty Rule for Municipal Advisors, Institutional Investors Securities Blog, February 21, 2011


Continue reading "Bill Funding SEC at $1.185B for Fiscal Year 2012 Approved by House Committee" »

June 23, 2011

“Poohster” Consultant Found Guilty of Insider Trading

Winifred Jiau, a Fremont, California consultant, has been convicted of insider trading and conspiracy. The network consultant was accused of selling technology company secrets to hedge fund traders for hundreds of thousands of dollars. The trial against Jiau was the first one involving an expert network firm. Primary Global Research in Mountain View employed her.

Expert networks reportedly connect hedge fund mangers and “consultants,” who are usually insiders at publicly traded companies, for a price. At least seven people linked to PGR have been charged with insider trading crimes.

According to Manhattan US Attorney Preet Bharara, Winnie Jiau exploited friends at public companies so she could get and then sell insider information. Noah Freeman, the government’s central witness and an ex- SAC Capital Advisors hedge fund portfolio manager who has pleaded guilty to his involvement, testified that she gave him illegal stock tips. He says that not only did he and his co-conspirators pay her $120,000 annually, but also she expected them to give her presents, which included iPhones, gift certificates, and lobsters. Those who paid her off received reaped substantial rewards. One hedge fund manager says that the tips he received were usually more “accurate” and “detailed” than any source and that the insider information allowed him to make $5 million to $10 million.

Some of Jiau’s hedge fund clients reportedly called her “the Poohster” after Winnie the Pooh, the fictitious bear that is always looking for a honey pot. Also, she reportedly used the code word “sugar” in emails and instant messages to refer to her payoffs. She called her tipsters “cooks" and her tips “recipes.”

Related Web Resources:
Expert Network Consultant is Convicted in Insider Trading Case, NY Times, June 20, 2011

Bay Area inside trader, Winifred Jiau, convicted, SF Gate, June 21, 2011



More Blog Posts:

Day Trader Pleads Guilty to Securities Fraud Charges Related to Insider Trading Scam, Stockbroker Fraud Blog, May 25, 2011

Motion to Dismiss SEC Lawsuit Accusing Dallas Billionaire Brothers of $500,000 Securities Fraud Denied, Stockbroker Fraud Blog, April 1, 2011

Guilty Plea for Financial Adviser Who Used UBS Tips in $1M Healthcare Insider Trading Scheme, Stockbroker fraud Blog, January 28, 2011

Continue reading "“Poohster” Consultant Found Guilty of Insider Trading" »

June 21, 2011

Texas Minister Pleads Guilty to Involvement in $7.2M “White Hat Guys” Securities Fraud that Bilked Thousands of Petro America Corporation Investors in the US and Canada

According to the US Attorney for the Western District of Missouri Beth Phillips,two ministers, a Waco, Texas minister and the other from Kansas City, Kansas, have pleaded guilty to participating in a $7.2M security fraud scheme that caused thousands of investors in Canada and the US to sustain losses. The investors had purchased shares in Petro America Corporation, which was reputed to have $284 billion in assets, including gold mines.

The two men are Texas minister Joseph Harrell and Kansas Minister Edward D. Halliburton. They pleaded guilty to conspiracy to commit securities fraud and wire fraud. They also admitted that they and others conspired together to obtain money through the bogus sale of the stock and the issuing of misrepresentations and omissions. Both men made almost $400,000 from the stock sales, selling millions of shares despite knowing that both Kansas and Missouri had put out cease and desist orders forbidding the sale of unregistered Petro stock.

Harrell, who acted as Petro America’s CFO, was affiliated with Ministers Alliance, of which Halliburton was President. The alliance was comprised of about 15 ministers who promoted and supported Petro American, sold shares to congregants, and called themselves the “White Hat Guys.” They even conducted weekly in-person meetings at a Denny’s and took part in regular calls with hundreds of investors in many US states.

Harrell, who sold stock to at least 90 investors reportedly laced many of his sales pitches with religious wording and claimed that Petro was a blessing from God. He has admitted to knowing that the company was fraudulent. He acknowledges giving investors information that was not complete and also misleading. Harrell said he agreed to sell the stock because he wanted to make a profit. According to the Justice Department, even as he was bilking investors and renting cars at $423/week, he was availing of food stamp benefits and Social Security disability.

Related Web Resources:

Texas minister's scam had him living the high life -- while collecting food stamps, June 17, 2011

Kansas City, Kansas and Texas Ministers Plead Guilty to Securities Fraud Conspiracy, Infozine, June 15, 2011

Related Web Resources:
Texas Foreign Currency Trader and Developer of “Alpha One” Convicted of Securities Fraud, Stockbroker Fraud Blog, June 15, 2011

District Court in Texas Decides that Credit Suisse Securities Doesn’t Have to pay Additional $186,000 Arbitration Award to Luby’s Restaurant Over ARS, Stockbroker Fraud Blog, June 2, 2011

Texas Securities Commissioner's Emergency Cease and Decease Order Accuses Insignia Energy Group Inc. of Misleading Teachers, Stockbroker Fraud Blog, May 23, 2011


Continue reading "Texas Minister Pleads Guilty to Involvement in $7.2M “White Hat Guys” Securities Fraud that Bilked Thousands of Petro America Corporation Investors in the US and Canada " »

June 20, 2011

Morgan Stanley, Barclays, and Merrill Lynch Lose ‘Hot News’ Misappropriation Case Against Theflyonthewall.com Inc. in Appeals Court

The U.S. Court of Appeals for the Second Circuit has reversed a lower court’s ruling and decided that under New York law, Theflyonthewall.com Inc., an online financial news service, may not be held liable for disseminating the equity research recommendations found in reports of plaintiffs Barclays Capital Inc., Morgan Stanley & Co. Inc., and Merrill Lynch Pierce Fenner & Smith Inc. The appeals court’s Judge Robert D. Sack concluded that federal copyright law preempts the ‘Hot News’ misappropriation claim.

The financial firms’ reports contain research about public companies, their securities and business prospects, and their respective industries. The reports summarize these findings, which often include recommendations about holding, selling, and buying the subjects’ securities. The firms give clients and prospective ones these reports before the US securities markets open daily as an “informational advantage.”

The plaintiffs accused Fly, which has managed to get a hold of these recommendations and issue them before the brokerage firms had given them to the public or before the exchanges that the securities are traded have opened, of copyright infringement. Concurring with the plaintiffs, a lower court then barred the news service from both infringing on the copyrighted aspects of the brokerage firms’ research reports and publishing their recommendations until after the New York Stock Exchange opened.

Now, however, the appeals court is saying that “a firm’s ability to make news… does not give rise to a right for it to control who breaks the news and how.” The court reversed and remanded the earlier claim and told the district court to dismiss the brokerage firms’ misappropriation claim under New York law.

Related Web Resources:

Theflyonthewall.com Inc.

Read the district court's opinion (PDF)

Brokerages Lose in Appeals Court On N.Y. ‘Hot News’ Misappropriation Claim, BNA Securities Law Daily, June 20, 2011


More Blog Posts:

Mortgage-Backed Securities Lawsuit Against Bank of America’s Merrill Lynch Now a Class Action Case, Stockbroker Fraud Blog, June 25, 2011

China-Based Hackers Broke into Morgan Stanley Network, Reports Bloomberg, Stockbroker Fraud Blog, February 28, 2011

Dismissal of Lone Star’s $60 Mortgage-Backed Securities Texas Fraud Action Against Barclays is Affirmed by Federal Appeals Court, Stockbroker Fraud Blog, January 17, 2010

Continue reading "Morgan Stanley, Barclays, and Merrill Lynch Lose ‘Hot News’ Misappropriation Case Against Theflyonthewall.com Inc. in Appeals Court" »

June 16, 2011

Securities Fraud: Mutual Funds Investment Adviser Cannot Be Sued Over Misstatement in Prospectuses, Says US Supreme Court

In a 5-4 ruling, the US Supreme Court placed specific limits on securities fraud lawsuits this week when it ruled in Janus Capital Group v. First Derivative Traders, No. 09-525 that the mutual funds investment adviser could not be sued over misstatements in fund prospectuses. Justice Clarence Thomas, who wrote for the majority, said that only the fund could be held liable for violating an SEC rule that makes it unlawful for a person to make a directly or indirectly untrue statement of material fact related to the selling or buying of securities.

The fund and its adviser were closely connected. Janus Capital Group, which is a public company, created Janus Investment Fund, which then retained Janus Capital Management to deal with management, investment, and administrative services. However, in its appeal to the nation’s highest court, Janus argued that the funds are separate legal entities. He said that the parent company and subsidiary are not responsible for the prospectuses, and they therefore cannot be held liable. The investors filed their securities fraud lawsuit after the New York attorney general sued the adviser in 2003.

The plaintiffs claimed that the funds disclosure documents falsely indicated that the adviser would implement policies to curb strategies based on fund valuation delays. At issue was whether it could be said that the adviser issued misleading statements that the SEC rule addressed. Justice Thomas said no. He noted although the adviser wrote the words under dispute, the fund was the one that issued them. Meantime, Justice Stephen G. Breyer, who wrote the dissent, said that there is nothing in the English language stopping someone from saying that if several different parties that each played a part in producing a statement then they all played a role in making it.

Shepherd Smith Edwards and Kantas founder and stockbroker fraud lawyer William Shepherd says, “As Wall Street fraud continues to plague investors, regulator ignore existing rules and legislators bow to lobbyists to dilute new legislation aimed at curtailing the plague. Yet, as an attorney I am most dismayed when “activist” judges - especially Supreme Court Justices – take the side of those who victimize investors. In the 1930’s and 1940’s laws were passed to regulate Wall Street. Our capital markets then became the safe haven for investors worldwide and grew exponentially. Now we seem to be in a ‘race to the bottom,’ with Wall Street more and more resembling Times Square - with a huckster every ten feet.”

Related Web Resources:

Janus Capital Group v. First Derivative Traders, US Supreme Court (PDF)

In 5-4 Vote, Supreme Court Limits Securities Fraud Suits, New York Times, June 14, 2011

Supreme Court Ruling on Janus Funds “Smells”, Business Insider, June 16, 2011


More Blog Posts:
Janus Avoids Responsibility to Mutual Fund Shareholders for Alleged Role in Widespread Market Timing Scandal, Stockbroker Fraud Blog, June 11, 2007

Wells Fargo Advisors LLC Agrees to $1 Million FINRA Fine for Securities Charges Related to Mutual Fund Prospectus Delivery, Stockbroker Fraud Blog, May 12, 2011

June 15, 2011

Texas Foreign Currency Trader and Developer of “Alpha One” Convicted of Securities Fraud

The owner of “Alpha One” has been convicted of Texas securities fraud for defrauding investors of millions of dollars. Robert David Watson, 50, pleaded guilty to the charge yesterday.

Watson admits that between 2003 and 2009, he employed deceptive and manipulative devices and contrivances related to the sale and purchase of investments in a series of trading enterprises that he formed. He also acknowledges that he raised tens of millions of dollars from investors and maintained custody and control of the money under the guise that he was using the funds to trade, sell, and buy foreign currencies.

Watson convinced people to put money in his ventures by making representations that he was looking to make money with the “Alpha One” model, which he developed and maintained. He claimed that the model has made high historical returns since 2000 and between June 2006 and February 2009 made an annualized return of 23.04%.

Now, however, Watson says that contrary to what he represented, he did not trade. Instead, he made minimal trades and made little—if any—profits. He also caused bogus account statements to be sent to investors through wire communication, US mail, or electronically and put together sham statements of bank accounts and trading activity to make the account statements appear legitimate. When investors took out these “returns” or their principal investments, he paid them with money from other investors rather than foreign currency trade profits. Despite not doing much trading, he paid himself hundreds of thousands of dollars yearly during the securities scam.

Alpha One: Foreign Currency Trader Convicted of Securities Fraud, LoanSafe, June 13, 2011

“Alpha One” Foreign Currency Trader Convicted of Securities Fraud, FBI, June 10, 2011


More Blog Posts:

Houston Securities Arbitration: FINRA Panel Orders Penson Financial Services, Inc. to Pay Boushy North Investments, Ltd. $500,000, Stockbroker Fraud Blog, June 11, 2011

District Court in Texas Decides that Credit Suisse Securities Doesn’t Have to pay Additional $186,000 Arbitration Award to Luby’s Restaurant Over ARS, Stockbroker Fraud Blog, June 2, 2011

Texas Securities Commissioner's Emergency Cease and Decease Order Accuses Insignia Energy Group Inc. of Misleading Teachers, Stockbroker Fraud Blog, May 23, 2011

Continue reading "Texas Foreign Currency Trader and Developer of “Alpha One” Convicted of Securities Fraud" »

June 13, 2011

Ex-Morgan Stanley Trader to Settle SEC Unauthorized Swaps Trading Claims for $150,000

Larry Feinblum, an ex-Morgan Stanley & Co. Inc. (MS) trader, has consented to settle for $150,000 SEC allegations that he hid from risk managers the true extent of risk involved in certain proprietary trading. This move caused the financial firm to suffer about $24.47 million in losses when it unwound the unauthorized positions.

The SEC claims that over a 3-month period in 2009, Feinblum, who was a supervisor on Morgan Stanley’s Equity Financing Products Swaps Desk, and trader Jennifer Kim executed a number of transactions that set up net risk positions that were significantly over limits that “could be exceeded only with supervisory approval.” The two are also accused of submitting swap orders into the firm’s risk management system that they never planned on executing and which they then promptly canceled.

The SEC says that not only did Feinblum and Kim set up their arbitrage trading strategy at positions that exceeded Morgan Stanley’s risk limits, but they also submitted the orders for the purpose of artificially and temporarily lowering the net risk positions in the securities as recorded in the firm’s risk management systems. They also went after a trading strategy that was supposed to create a profit from price discrepancies between foreign markets and US markets.

On December 17, 2009, Feinblum, who had just lost $7 million the day before, admitted that he and Kim had gone beyond the risk limits on repeated occasions and that they hid their misconduct. Morgan Stanley then proceeded to unwind the positions but by then they had already taken the financial hit.


Related Web Resources:

Former Morgan Stanley Trader Barred for Bogus Swaps, Securities Technology Monitor, June 2, 2011

SEC: Morgan Stanley trader’s trick caused millions in losses, The Washington Post, June 2, 2011

SEC Administrative Proceeding


More Blog Posts:

China-Based Hackers Broke into Morgan Stanley Network, Reports Bloomberg, Stockbroker Fraud Blog, February 28, 2011

Morgan Stanley Failed to Disclose Financial Adviser’s Felony Charge to FINRA, Claims Car Accident Victim’s Attorney, Stockbroker Fraud Blog, January 10, 2011

Morgan Stanley & Co. and TD Ameritrade Inc. to Repurchase Over $338M in Auction Rate Securities from New Jersey Investors, Institutional Investor Securities Blog, May 4, 2011

Continue reading "Ex-Morgan Stanley Trader to Settle SEC Unauthorized Swaps Trading Claims for $150,000" »

June 11, 2011

Houston Securities Arbitration: FINRA Panel Orders Penson Financial Services, Inc. to Pay Boushy North Investments, Ltd. $500,000

In Houston, a FINRA arbitration panel has awarded Boushy North Investments, Ltd. $500,000 in its securities arbitration case against Penson Financial Services, Inc. Boushy North Investments had initially sought $4M in punitive damages and more than $3.8M in compensatory damages for negligence, unauthorized trading, breach of fiduciary duty, and gross negligence. At the Texas securities arbitration hearing, however, the Claimant amended and reduced its compensatory damages and withdrew punitive damages and legal fees.

Boushy North Investments accused Penson of failing to prevent an unsuitable and unauthorized day-trading strategy for its family limited-partnership account. Meantime, Penson denied the allegations, asserted specific defenses, and submitted a Third-Party Complaint against Thomas Cooper and Second Mile Wealth Management, Inc., which asserted causes of action over crack of contract, indemnification, and rascal linked to the Third-Party Respondents’ purported element representations about the trade and the direction of the trading in Claimant’s account. Penson eventually discharged its Third-Party Claim’s result of action for fraud.

The claim for unauthorized trading hadn't been included in the Original Statement of Claim submitted in September 2009. The first effort to amend that was February. However, FINRA denied it because different or new pleadings cannot be turned in after a panel has been chosen and if a leave to amend hasn't been granted. Last month, however, after the proper motions were submitted, the panel granted the unauthorized trading count.

Penson Faced Multi-Million Dollar Day-Trading Claim in FINRA Arbitration, Broke and Broker, June 1, 2011

Multi-Million Dollar Day-Trading Claim Hits Penson in FINRA Arbitration, Forbes, May 31, 2011


More Blog Posts:

District Court in Texas Decides that Credit Suisse Securities Doesn’t Have to pay Additional $186,000 Arbitration Award to Luby’s Restaurant Over ARS, Stockbroker Fraud Blog, June 2, 2011

Texas Securities Commissioner's Emergency Cease and Decease Order Accuses Insignia Energy Group Inc. of Misleading Teachers, Stockbroker Fraud Blog, May 23, 2011

Texas-Based AIG’s Largest Private Shareholder Says US Will Likely Sell Its Shares in the Insurer At Lower Price than Expected, Stockbroker Fraud Blog, May 13, 2011

Continue reading "Houston Securities Arbitration: FINRA Panel Orders Penson Financial Services, Inc. to Pay Boushy North Investments, Ltd. $500,000" »

June 9, 2011

SEC Approves Proposed FINRA Rule Change Subjecting Back Office Personnel of Broker-Dealers to Registration and Qualification Examination Requirements

The Securities and Exchange Commission has approved the Financial Industry Regulatory Authority’s proposed rule change subjecting certain back office personnel of broker-dealers to registration and qualification examination requirements. The changes would be made to FINRA Rule 1230(b)(6).

The SEC says it is approving the proposed change on an expedited basis because it is in line with the 1934 Securities Exchange Act requirement that FINRA rules should protect investors while preventing securities fraud and manipulation. As part of the rule change, registration category and a qualification exam category would be set up for certain operations personnel, who would also be subject to continuing education requirements. The Commission believes that this rule change will take care of certain regulatory gaps that still exist in the industry.

Those subject to the rule change would be three categories of persons:
• Senior management in charge of covered functions (these include customer account data; document maintenance, collection, maintenance and reinvestment of funds; stock loan/securities lending; and delivery and receipt of fund and securities)
• Personnel accountable for authorizing work that advances the covered functions
• Persons authorized to commit a member’s capital to directly advance the covered functions

FINRA is recommending that the new requirements be phased in. The SEC is currently soliciting comments.

Related Web Resources:

US SEC Approves Registration of Brokerage Back-Office Employees, Wall Street Journal, June 17, 2011

FINRA to Share Details on New Back-Office Staff Rules, AdvisorOne, June 20, 2011

1934 Securities Exchange Act


More Blog Posts:
SEC Approves FINRA’s Proposal to Give Investors an All-Public Arbitration Panel Option, Stockbroker Fraud Blog, February 12, 2011

Dodd-Frank Reforms Will Lower Deficit by $3.2B Over the Next Decade, Estimates CBO, Institutional Investors Securities Blog, April 8, 2011

Fiduciary Standard in Securities Industry Doesn't Need New Definition, Stockbroker Fraud Blog, November 26, 2010

Continue reading "SEC Approves Proposed FINRA Rule Change Subjecting Back Office Personnel of Broker-Dealers to Registration and Qualification Examination Requirements" »

June 8, 2011

David Lerner & Associates Ignored Suitability of REITs When Recommending to Investors, Claims FINRA

FINRA has filed securities charges against David Lerner & Associates, Inc. accusing the broker-dealer of not taking into account suitability when soliciting vulnerable investors—in particular, elderly clients, to buy shares in the non-traded, $2B Apple REIT Ten offering. The SRO is also accusing the broker-dealer of posting misleading information online about distributions.

DLA has been Apple REITs only underwriters for nearly two decades. The broker-dealer has sold almost $6.8B of the securities into about 122,600 customer accounts. The series has made $600M in fees and other earnings for the broker-dealer, making up 60 to 70% of the firm’s yearly business. Since January, DLA also has been sole underwriter for Apple REIT Ten, which has sold over $300M of a $2B offering of shares. DLA associates earn numerous fees, including 10% of all offerings.

The SRO says that for at least seven years, the closed Apple REITs have “unreasonably valued” their shares at $11 (notwithstanding performance declines, market fluctuations, and increased leverage). The REITs, which were launched from 2004 and 2008 and were used mainly used to buy extended hotel stays, have managed to keep up “outsized” distributions of 7-8% through leveraged borrowing and returning of capital to investors. The SRO contends, however, that DLA did not disclose on its website that the income from real estate was not enough to support these. FINRA also claims that DLA provides “misleading” distribution rates on its website for all past Apple REITs.

DLA is denying the allegations.

Finra Sues David Lerner Firm, Wall Street Journal, June 1, 2011

FINRA Charges Firm With Ignoring Suitability, Providing Bad Data on REITs, BNA, June 1, 2011

REITs


More Blog Posts:

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UBS Financial Services Fined $2.5M and Ordered to Pay $8.25M Over Lehman Brothers-Issued 100% Principal-Protection Notes, Institutional Investors Securities Blog, April 12, 2011

Continue reading "David Lerner & Associates Ignored Suitability of REITs When Recommending to Investors, Claims FINRA" »

June 7, 2011

FINRA Wants Brokers Selling Regulation D Private Placements to Take Part in Tougher Due Diligence Process

The Financial Industry Regulatory Authority is calling on broker-dealers that sell high-risk Regulation D private placements to step up their due diligence efforts, including “pushing and pulling” for information about the financial products. FINRA chief executive and chairman Robert Ketchum says that although granted, levels of due diligence will not be the same for each deal, broker-dealers still need to play an active role when examining a Reg D offering.

Due diligence related to the sale of private placements has become a focus of attention since the Provide Royalties LLC and Medical Capital Holdings Inc. deals collapsed and the Securities and Exchange Commission charged them with fraud. With both deals, many of the broker-dealers that sold them depended on third-party firms to write the due diligence reports about the offerings. Yet, despite not doing any due diligence of their own, these broker-dealers still received a 1% “due-diligence fee” as part of the sale.

Ketchum says that attending a “canned information session” or just reading a document is not enough when part of one’s job is to actively sell or offer advice about private placements. He even suggested that in certain instances, such as when selling gas and oil well partnerships, broker-dealers should visit some of the key production areas.

Regulation D Private Placements
Regulation D Private Placements are usually sold to “accredited” investors” and a limited number of non-accredited investors. In addition to investigating Regulation D private placements before selling them, a broker-dealer must have reasonable grounds to believe that the investment is suitable for each customer and that each client fully comprehends the risks involved in investing.

Related Web Resources:

Finra's Ketchum: B-Ds must ‘push and pull' for Reg D details, Investment News, June 8, 2011

FINRA Sets Regulatory Guidance for Investigating Private Placements, FINRA, April 20, 2010

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Provident Royalties Faces $485 Million Texas Securities Fraud, Says SEC, Stockbroker Fraud Blog, July 26, 2009

Continue reading "FINRA Wants Brokers Selling Regulation D Private Placements to Take Part in Tougher Due Diligence Process " »

June 2, 2011

District Court in Texas Decides that Credit Suisse Securities Doesn’t Have to pay Additional $186,000 Arbitration Award to Luby’s Restaurant Over ARS

The U.S. District Court for the Southern District of Texas has ruled that Credit Suisse Securities shouldn’t have to pay Luby’s Restaurants another $186,000 as part of its arbitration to the investor. The case is Luby's Restaurants LP v. Credit Suisse Securities (USA) LLC. Shepherd Smith Edwards and Kantas Founder and Texas Securities Fraud Attorney William Shepherd had this to say about the ruling: “Attorneys for each side have the opportunity to submit language to the arbitrators that it desires to be reflected in an award. In cases where the award sought is anything more than payment of a specific amount it is wise to submit such language.”

Luby's Restaurants LP bought over $30 million in auction-rate securities from Credit Suisse. The investor bought the ARS based on the financial firm's representation that the instruments were very liquid, safe, and a suitable investment.

Luby’s later filed its arbitration claim with FINRA for ARS losses. By then it had gotten back everything but $8.9 million in securities. Then, after initiating the proceedings—but prior to the arbitration hearing—Luby’s redeemed another one of its securities for less than par and lost $186,000.

The arbitration panel would go on to rule in favor of Luby’s. Credit Suisse was directed to buy back the ARS from Luby’s at par and with interest. While both parties sought to confirm the award, they were in dispute over whether the $186,000 that Luby’s lost after it filed its arbitration case should be included.

The court says that Credit Suisse does not have to pay that amount to Luby’s. The court noted that the Award doesn’t mention the additional damages that Luby’s sustained when it sold some of the securities under par during pendency of the arbitration but prior to the hearing.

Related Web Resources:
$186K Under Arbitration Award, BNA Securities Law Daily, May 31, 2011

Luby's Restaurants LP v. Credit Suisse Securities (USA) LLC, Justia

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Goldman Sachs and Wells Fargo Investments Repurchase $26.9M in Auction-Rate Securities from New Jersey Investors, Institutional Investors Securities Blog, May 25, 2011


Continue reading "District Court in Texas Decides that Credit Suisse Securities Doesn’t Have to pay Additional $186,000 Arbitration Award to Luby’s Restaurant Over ARS" »