October 31, 2011

Dblaine Capital, LLC Faces SEC Securities Fraud Charges

The SEC is charging Dblaine Capital, LLC and owner David B. Welliver with securities fraud. According to its complaint, Welliver and the investment advisory firm got $4m in loans as a result of a quid pro quo deal that was undisclosed, improper, and violated their responsibilities to the fund. In return, DBlaine Capital and Welliver allegedly agreed to put the funds ‘assets in specific “alternative investment” securities. By placing the fund’s assets in a private placement offering connected to the lender, this caused the fund to violate a number of policies and investment restrictions.

Per the Commission, Dblaine Capital and Welliver placed their own financial interests first and that the two of them also defrauded the Fund by giving an inaccurate valuation for the private placement holding. This caused the shares of the fund to be offered, sold, and redeemed at an inflated net asset value.

Upon discovering that that the private placement had no value, Welliver and DBlaine Capital allegedly kept this information from shareholders. They are also accused of making misleading and false statements in filings and reports submitted to the SEC, participating in prohibited affiliated transactions, and violating a number of policies and restrictions governing the Fund and its investments that were explicitly included in offering materials.

Per Fund polices, the private placement should have been at fair value, yet the Commission says that between December 2010 and July 2011, DBlaine Capital and Welliver did not attempt to figure out that was and chose to value the private placement at acquisition cost. Also, per the SEC, Welliver used $500,000 of the $4 million in loans that DBlaine Capital obtained to cover his personal expenses, including a motor vehicle, expensive purchases, his son’s college education, back taxes, home improvements, and a vacation.

The SEC wants disgorgement of ill-gotten gains, permanent injunction, prejudgment interest, and civil penalties. It is accusing both Dblaine Capital and Welliver of violating the:

• Securities Act of 1933
• Securities Exchange Act of 1934
• Investment Advisers Act of 1940
• Investment Company Act of 1940

Unfortunately, securities fraud committed by broker-dealers and investment advisers can cause investors, shareholders, and others to suffer financial losses. Not only can this be grounds for civil action by regulators, but also victims of this type of fraud may be able to file their own claim seeking to recover what they’ve lost.

Results show that retaining the services of an experienced securities fraud attorney rather than attempting to file your claim on your own increases your chances of recouping your losses. The securities arbitration system can be a complex area to navigate and there is no reason why you should have to do this alone.

SEC Charges IA Arrangement Illegal, BNA Securities Law Daily, October 27, 2011


More Blog Post:

EagleEye Asset Management LLC Sued by SEC and CFTC for Alleged Forex Trading Scam, Stockbroker Fraud Blog, September 28, 2011

California Insider Trading Charges Filed by SEC Against Ex-Investment Fund Associate Accused of Making 3000% Profit on Marvel Call Options in Disney Acquisition, Stockbroker Fraud Blog, August 23, 2011

Citigroup to Pay $285M to Settle SEC Lawsuit Alleging Securities Fraud in $1B Derivatives Deal, Institutional Investors Securities Blog, October 20, 2011

Continue reading "Dblaine Capital, LLC Faces SEC Securities Fraud Charges" »

October 30, 2011

FINRA Vows to Step Up Internal Compliance Procedures

The Securities and Exchange Commission has filed an administrative complaint against the Financial Industry Regulatory Authority accusing one of the latter’s directors of changing three sets of staff meetings minutes that SEC officials had requested. These revisions made the documents, which were delivered in August 2008, incomplete and inaccurate. This could affect FINRA’s chances of becoming the SRO for investment advisers. Currently, FINRA serves that role for just broker-dealers.

It was FINRA that reported the document problem to the Commission and then worked with the agency to resolve the matter. The SRO then appointed new leadership in the Kansas office (the director has since resigned) where the tampering took place and implemented changes that improved procedures for document handling. Modifications included more live and online ethics training, as well as greater document integrity. Other undertakings FINRA has agreed to:

• Train workers about past document integrity problems
• Create a podcast on document integrity to show current and prospective employees
• Talk about the importance of document integrity at yearly regulatory meetings, townhall gatherings, and at Senior Management onsite visits at district offices
• Mandate that senior Office of Liaison and Counsel meet with every business that is about to undergo an on-site exam before the documents are generated for the SEC

The SEC has ordered FINRA to hire an independent consultant, who will review current FINRA policy and procedures and training, determine whether those that already exist are reasonable and properly implemented so that they can guarantee that documents given to the SEC are in integrity, and make recommendations for any improvements.

The Consultant will have to submit a report of recommendations and findings to the FINRA Board. The Board will then have thirty days to implement these recommendations, while also notifying the Consultant of the recommendations it finds to be impractical or burdensome. In such instances, the Board and the Consultant will try to find an alternative recommendation that can fulfill the same objectives that the original recommendation would have satisfied. If an agreement on this alternative is reached, then the Consultant will amend the recommendation and reissue the Report. If no agreement on an alternative is reached, then the FINRA Board will have to adopt the original recommendation made by the Consultant.

By settling the case, FINRA is not admitting to or denying the SEC allegations.

It is FINRA’s job to ensure broker-dealer compliance. It is therefore no wonder why any failure to ensure compliance among its own employees might raise some flags of concern.

Our securities fraud attorneys represent clients that have sustained financial losses because of broker misconduct. Your chances for recovering the maximum amount possible go up when you decide to work with an experienced stockbroker fraud law firm. Shepherd Smith Edwards and Kantas, LLP represents investors across the US.

Finra director doctored records before inspection: SEC, Investment News, October 27, 2011

Finra Settles in Battle of Overseers, Wall Street Journal, October 28, 2011

SEC Orders FINRA to Improve Internal Compliance Policies and Procedures, SEC, October 27, 2011

Read the administrative order

More Blog Posts:

FINRA Cannot Enforce Disciplinary Actions Through the Courts, Says Federal Appeals Court, Stockbroker Fraud Blog, October 6, 2011

FINRA Tells Congress It Is Ready to Act as SRO for Investment Advisors, Stockbroker Fraud Blog, September 13, 2011

FINRA Wants Amerivet Securities Inc.’s Lawsuit Seeking to Inspect the SRO's Records Dismissed, Institutional Investor Securities Blog, March 26, 2011

October 29, 2011

Long Island Rail Road Disability Fraud Leads to 11 People Charged

This week, at least 11 people were charged over a fraud scam that allowed hundreds of Long Island Rail Road workers to falsely claim that they had disabling injuries in order to collect annual pensions. The scam could cost a federal pension agency over $1 billion. Among the defendants are seven ex- railroad workers (including an ex-federal railroad pension agency employee and a former union president) two doctors, and an office manager.

According to prosecutors, employees that took part in the Long Island Rail Road disability fraud claimed they were disabled when in fact they were still able to play golf, ride a bike, or engage in aerobics. The doctors reportedly filed the false claims so they could receive an extra benefit from the Railroad Retirement Board. Per the criminal complaint, Dr. Peter Ajemian recommended that at least 734 employees of LIRR be approved for disability. Dr. Peter Lesniewski recommended that 222 LIRR workers receive disability benefits. A third doctor is believed to have also been involved in the scam but he recently passed away. The doctors allegedly created false illness narratives and medical assessments for hundreds of retirees, receiving $800 - $1200 for each one, in addition to fees for false medical records to support the claims of disability. They also were paid millions in health insurance payments for treatments that were not actually needed.

Approximately $121 million was paid out to LIRR workers, whose disabilities were exaggerated or made up. For example, according to the New York Times, 62-year-old defendant Gregory Noone gets $105,000 in disability and pension payments annually and supposedly is in a lot of pain when he crouches, bends, or grips objects. Yet he manages to play golf and tennis frequently. 55-year-old Steven Gagliano, whose yearly payments are $75,000, took part in a 400-mile bike tour even though he claims to experience back pain that is so severe it is disabling.

The federal government started investigating the scam after the New York Times published a number of articles about LIRR employees abusing federal Railroad Retirement Board pensions in 2008. Per the newspaper, almost all of the railroad company’s career employees were seeking and getting disability payments—that’s three to four times the disability rate of the average railroad company. Also, said the Times, the federal Railroad Retirement Board appears to have been poorly run, with inadequate tests to determine whether disability claims is legitimate. Some railroad officials had even complained that disability benefits were frequently awarded for medical conditions even if a worker’s ability to work hadn’t been impaired. Few claims were turned down.

11 Charged in L.I.R.R. Disability Fraud Plot, NY Times, October 27, 2011

Local Docs Charged in $1B LIRR Disability Scam, Rockville Center, October 27, 2011

US Railroad Retirement Board

More Blog Posts:

“Investor’s Guide to Loss Recovery” Offers Key Information on How to Use Conflict Resolution to Get Your Assets Back, Stockbroker Fraud Blog, September 7, 2011

SEC’s Proxy Access Rule is Rejected by Appeals Court, Stockbroker Fraud Blog, August 5, 2011

No Need for New SRO Overseeing Investment Advisers, Says NASAA Official to Congress, Stockbroker Fraud Blog, April 10, 2011

Continue reading "Long Island Rail Road Disability Fraud Leads to 11 People Charged" »

October 28, 2011

Money Laundering Charges Filed Against of Houston Criminal Defense Lawyer Accused of Defrauding Defendants of Over $1M

Abraham Moses Fisch, a Texas criminal defense attorney, has been arrested and charged with money laundering, conspiracy to commit money laundering, obstruction of justice, and conspiracy. According to prosecutors, Fisch and Lloyd Glen Williams, who is Houston used car financier, allegedly ran a scam that fooled criminal defendants into thinking they could get the charges against them dropped if they were willing to pay money. Since 2008, the two men have allegedly bilked $1.48 million from a number of defendants through their Houston financial fraud.

For example, per the Houston Chronicle, in 2006, Fisch told accused convinced that cocaine trafficker Edilberto "Beto" Portillo that he could get him released from prison for $1 million. At the time, Portillo was charged with money laundering and drug trafficking. He agreed to pay this amount to Fisch’s friend, who turned out to be Williams. Although Williams wasn’t a lawyer, he was presented was someone who had high level contacts and could resolve criminal cases, get charges dismissed, or have prison sentences reduced.

Another defendant that the two men bilked was Umawa Oke Imo. The Houston physical therapy agency owner just went to prison for a $45 million Medicare/Medicaid fraud scheme.

Prosecutors say that the two co-conspirators would mislead their clients about the process of working with the government. The two men also allegedly lied to some, telling them that government officials had accepted the funds as bribes. Not only did the scheme cost those charged with crimes money, but it also prevented them from reaching legitimate plea agreements and caused them to wrongly think that the cases against them would be dropped.

Per the indictment against Fisch and Williams, the two men money laundered the money they made from the fraud. Fisch is also charged with failing to submit his tax returns in a timely manner every year that he received money for the financial scam. If convicted, he faces 10 years/each of the obstruction of justice counts, 5 years for conspiracy, 10 years for each money laundering charge, 1 year for each failure to file tax return count ((between 2006 and 2010), and 10 years for conspiracy to commit money laundering. Meantime, Williams just pleaded guilty to filing a false tax return and obstruction of justice. He faces up to three years behind bars for the bogus filing, five years max for conspiracy, and a $250,000 fine.

Also arrested was Fisch’s wife, Monica Bertman, who allegedly assisted with her husband’s financial scam. If convicted, she faces up to 10 years for obstruction of justice, up to five years for conspiracy, and also a $250,000 fine.

Feds say Houston lawyer bilked more than $1 million, Chron.com, October 28, 2011

Local Defense Attorney and Others Arrested in Connection with Scheme to Obstruct Justice, FBI, October 28, 2011

Dallas Mavericks Owner Mark Cuban's Allegations of Misconduct Against the SEC Enforcement Staff are Without Merit, Says Inspector General’s Report, Stockbroker Fraud Blog, October 18, 2011

Houston Judge Overturns $9.2M Securities Fraud Ruling Against Morgan Keegan, Stockbroker Fraud Blog, October 11, 2011

Merrill Lynch Faces $1M FINRA Fine Over Texas Ponzi Scam by Former Registered Representative, Stockbroker Fraud Blog, October 10, 2011

Continue reading "Money Laundering Charges Filed Against of Houston Criminal Defense Lawyer Accused of Defrauding Defendants of Over $1M" »

October 27, 2011

Boogie Investment Group Inc. Fails Because of Fraudulent Private Placements by Provident Royalties LLC and Medical Capital Holdings Inc.

Boogie Investment Group Inc. has submitted its withdrawal request to the Financial Industry Regulatory Authority. The small broker-dealer is the 20th financial firm that sold Provident Royalties private placements to either leave the brokerage business or announce its intentions to depart. According to Investment News, that’s nearly 40% of independent broker-dealers. Just this year alone, 11 broker-dealers that sold the private placements closed shop. Provident’s bankruptcy receiver reports on its Web site that 52 broker-dealers sold the shares.

Boogie sold about $410K in private placements. Its revenue at the end of the fiscal year was $422K—a definite reduction from the $1.2M of three years back. One of the reasons Boogie decided to bow out of the industry is because of the litigation expenses stemming from the failed private placements. Not only is Boogie contending with a class action lawsuit, but also, it is faced with a securities case filed by investors that purchased Provident's Shale Royalties products and other arbitration cases not related to Provident private placements.

The Financial Industry Regulatory Authority has been tough on the financial firms and individuals that sold interests in private placements while allegedly failing to thoroughly investigate these products or even have reasonable grounds to believe that placements were suitable for clients. The failure to do the appropriate due diligence resulted in the firms being unable to know what were the risks involved. FINRA also says that the principals it has sanctioned lacked a reasonable basis for allowing their financial firms’ registered representatives to keep selling the offerings.

Other broker-dealers that are now out of business or plan to close after selling Provident offerings:
• Workman Securities Corp.
• Harrison Douglas Inc.
• Investlinc Securities LLC/Meadowbrook Securities LLC
• WFP Securities Corp.
• QA3 Financial Corp.
• Securities Network LLC
• Asset Management Strategies LLC
• Okoboji Financial Services Inc.
• Matheson Securities LLC
• Main Street Securities LLC
• United Equity Securities LLC
• CapWest Securities Inc.
• Private Asset Group Inc.
• Community Banker Securities LLC
• E-Planning Securities Inc.
• Empire Financial Group Inc.
• GunnAllen Financial Inc.
• Barron Moore Inc.
• Jesup & Lamont Securities Corp.

The Securities and Exchange Commission has charged Provident and Medical Capital Holdings with securities fraud. The two private placement issuers made about $2.7 billion through pushing these offering through a number of independent broker-dealers. This eventually resulted in huge losses for investors.

For instance, after broker-dealer Securities America sold about $700 million in Medical Capital notes, the investors in these private placements would go on to lose over $1 billion even though the notes were touted as low risk. Meantime, between 2001 and 2009 MedCap raised about $2.2 billion from more than 20,000 investors through several private placement offerings of promissory notes.

Our securities fraud attorneys have been investigating claims for clients that purchased private placement units.

And another broker-dealer bites the dust, Investment News, October 23, 2011

FINRA Sanctions Two Firms and Seven Individuals for Selling Private Placements Without Conducting a Reasonable Investigation, FINRA, April 7, 2011

Shepherd Smith Edwards & Kantas LLP Investigates Claims for Clients of Various Brokerage Firms in Connection with the Sale of Private Placement Units in Provident Royalties, LLC, Globenewswire, July 28, 2009

More Blog Posts:

FINRA Wants Brokers Selling Regulation D Private Placements to Take Part in Tougher Due Diligence Process, Stockbroker Fraud Blog, June 7, 2011

National Securities Corp., Independent Financial Group LLC, & Centaurus Financial Inc. among broker-dealers sought by Massachusetts securities regulators over private placements, Stockbroker Fraud Blog, April 19, 2010

SEC to Propose Rule Banning “Felons and Bad Actors” From Involvement in Private Offerings, Institutional Investor Securities Blog, May 29, 2011

October 26, 2011

Ex-Goldman Sachs Director Rajat Gupta Pleads Not Guilty to Insider Trading Charges

After surrendering to federal authorities today, Rajat Gupta has entered a not guilty plea to the criminal charges against him involving insider trading. Gupta, who was a former Proctor and Gamble and Goldman Sachs director, is accused of multiple counts of securities fraud and one count of conspiracy to commit securities fraud. He allegedly gave Galleon Group cofounder Raj Rajaratnam corporate secrets about Goldman. Our stockbroker fraud law firm has been following Rajaratnam’s criminal case on our blog site. (See below.) Earlier this month, he was sentenced to 11 years in prison over an insider trading scam that illegally garnered $63.8 million.

Gupta, who also once was a global head at McKinsey & Co., came under close scrutiny during Rajaratnam’s trial when he was brought up in testimony and phone conversations that were recorded in secret. He is also now facing civil charges with the Securities and Exchange Commission, which contends that he provided Rajaratnam with illegal tips about both Proctor and Gamble and Goldman Sachs’ quarterly earnings and an approximately $5 billion investment that Berkshire Hathaway was planning to make in the financial firm. Based on Gupta’s tips, Rajaratnam avoided losses of/made illegal profits of over $23 million. Rajaratnam made over 800,000 in illegal profits from the Berkshire Hathaway tip when, after first having Galleon funds buy over 215,000 Goldman shares, he ordered the liquidation of the Goldman holdings a day after the information and Goldman’s public equity offering became public.

Rajaratnam also made over $18.5 million in illegal profits for Galleon funds after Gupta allegedly told him that Goldman had positive 2008 second quarter financial results. Rajaratnam then had the hedge fund buy Goldman securities but liquidated them when Goldman made news of its earnings for that quarter public. Other charges stem from Gupta allegedly notifying Rajaratnam that fourth quarter results for that same year were negative. The Goldman holdings were sold off, allowing Rajaratnam to avoid over $3 million in losses. When Gupta allegedly tipped him about P & G's 2008 4th quarter earnings, Rajaratnam had Galleon funds sell short about 180,000 P & G shares, generating over $570,000 in illicit profits.

According to the SEC, Gupta got his confidential information from board conversations while serving as director at both companies. At the time, Gupta had numerous business ties with Rajaratnam and was seeking to strengthen that relationship. Not only had Gupta invested in Rajaratnam’s hedge funds, but they also began a number of financial ventures together.

The SEC had recently dropped its previous administrative action against Gupta over the insider trading allegations. Following that move, he vowed to drop his lawsuit claiming that the regulatory proceeding had violated his constitutional rights.

Of the 56 people that the government has charged with its crackdown on insider trading, 51 either were convicted or pleaded guilty.

With Gupta’s Arrest, Insider Inquiry Goes Beyond Wall St., Dealbook, October 26, 2011

SEC Files Insider Trading Charges against Rajat Gupta, SEC, October 26, 2011

Rajat Gupta, SEC Agree to Drop Galleon-Related Suit, Administrative Action, Bloomberg, August 5, 2011

More Blog Posts:
Galleon Group LLC Co-Founder Raj Rajaratnam Sentenced to 11 Years in Prison Over Insider Trading Scam, Stockbroker Fraud Blog, October 13, 2011

Ex-Goldman Sachs Board Member Accused of Insider Trading with Galleon Group Co-Founder Seeks to Have SEC Administrative Case Against Him Dropped
, Institutional Investor Securities Blog, April 19, 2011

Dallas Mavericks Owner Mark Cuban's Allegations of Misconduct Against the SEC Enforcement Staff are Without Merit, Says Inspector General’s Report, Stockbroker Fraud Blog, October 18, 2011

Continue reading "Ex-Goldman Sachs Director Rajat Gupta Pleads Not Guilty to Insider Trading Charges" »

October 22, 2011

Citigroup Global Markets Inc. Sues Two Saudi Investors in an Attempt to Block Their FINRA Arbitration Claim Over $383M in Losses

Citigroup Global Markets Inc. (C) is suing Abdullah and Ghazi Abbar. The Saudi investors have filed a FINRA arbitration claim against the Citigroup unit seeking to recover the $383 million that they say the bank lost their family’s money. The Abbars, who are father and son, are accusing Citigroup Global Markets of mismanaging their family’s savings.

Citigroup, which wants injunctive relief, says that the entities that took care of the the Abbars’ private-equity loan and leveraged option transactions are located abroad and therefore not under FINRA’s jurisdiction for arbitration. The financial firm also says that father, son, and their investment entities are not CGMI clients and their claims are not activities related it. The investment bank has noted that the Abbars chose to pursue it rather than the non-U.S. parties that they actually had agreements with that completed the transactions. The Abbars, however, say that those overseeing the Citigroup entities that took party in the daily management of their credit deal are personnel that are registered with FINRA.

Says Shepherd Smith Edwards and Kantas Founder and Stockbroker Fraud Lawyer William Shepherd, “The financial industry has created its own securities arbitration forum to resolve disputes and claims between and against its members. It is ironic when claims are filed that they often go to court to beg to get out of arbitration, their self-imposed fate. While courts in New York seem to operate to accommodate Wall Street’s wishes, the law for decades has held that decisions regarding the liability of securities firms are for the arbitrators, not the courts. If these investors have properly alleged any wrongdoing by the U.S. securities firm, the court has no business intervening. Such wrongdoing can be simply ‘control person liability,’ which is the failure to control or properly supervise the behavior or operations of a subordinate or subsidiary.”

CGMI placed $343 million of the Abbars money in hedge funds that were included in a leveraged option swap transaction. In their FINRA arbitration claim, the Abbars argue that leading CGMI officers, including ex- global wealth management chief Sallie Krawcheck and Chief Executive Officer Vikram Pandit, pursued them.

Father and son contend that because of alleged “gross misconduct" by CGMI, their wealth was lost. They say that the bank's failure to monitor the investments properly led to their total collapse during the height of the economic collapse in 2008. The Abbars also believe that lendings related to the Citigroup investments played a role in the losses. The Abbars says that Citigroup, which then started managing the positions that remained in the portfolio while implementing a program to redeem it, will “unjustly benefit” by about $70 million from the redemption of these investments.

Citigroup Sues to Block Arbitration of Saudi Investors’ Claim, Bloomberg/Businessweek, October 6, 2011

Citigroup Aims to Stop Arbitration From Proceeding, OnWallStreet, October 7, 2011

More Blog Posts:
Citigroup Global Markets Fined $500,000 by FINRA for Inadequate Supervision of Broker Accused of Bilking Sick and Elderly Investors, Stockbroker Fraud Blog, August 16, 2011

Citigroup Ordered by FINRA to Pay $54.1M to Two Investors Over Municipal Bond Fund Losses, Stockbroker Fraud Blog, April 13, 2011

Citigroup to Pay $285M to Settle SEC Lawsuit Alleging SecuritiesFraud in $1B Derivatives Deal, Institutional Investors Securities Blog, October 20, 2011

Continue reading "Citigroup Global Markets Inc. Sues Two Saudi Investors in an Attempt to Block Their FINRA Arbitration Claim Over $383M in Losses" »

October 19, 2011

Ex-Lehman Brothers Holdings Chief Executive Defends Request that Insurance Fund Pay Legal Bills

Once again, former Lehman Brothers Holdings Inc. executives want an insurance fund to cover their expenses stemming from securities-related misconduct they are accused of committing. This time, they want to use the money to cover their legal bills. On Monday, former Lehman Chief Executive Richard Fuld and other ex-executives submitted a filing in US Bankruptcy Court to responded to an objection made by the former owners of Maher Terminal Holdings Corp. objecting to this fund use.

Basil Maher and M. Brian Maher claim that the paperwork submitted by the former executives doesn’t support use of the insurance monies. The brothers have been in opposition with Lehman since the investment bank filed for bankruptcy in 2008. The Mahers contend that in 2007 when they wired $600 million for their sale of Maher Terminal Holdings Corp. to Lehman, the financial firm allegedly placed their money in investments that were riskier than what they had wanted. The Mahers are still trying to recoup their losses form Lehman.

The former Lehman executives want the court to give them access to a diminishing $250 million insurance fund. They say that not only would this prevent a protracted court battle with local governments that they’ve already settled with, but also, they don’t believe this will impact the investment bank’s creditors. The ex-executives had settled for $1.05 million a dispute with six California municipalities that had invested $35 million into Lehman in the two years before it failed. The municipalities later filed their securities case accusing Lehman of making misrepresentation and omissions in their offering documents, which is what the governments used as reference when making the decision to invest in the financial firm.

The former Lehman executives just recently made another request to use $90 million from the insurance fund to settle a securities lawsuit filed by Lehman shareholders. They also have asked the bankruptcy court for $8.25 million in insurance money to settle a securities case filed by the state of New Jersey.

Should the bankruptcy judge grant the ex-Lehman officials’ requests, then Fuld and the others won’t have to put out any out-of-pocket expenses for their alleged misconduct. Apparently, it is not unusual for insurance money to cover corporate officers and directors that are the target of shareholder lawsuits.

Says Shepherd Smith Edwards & Kantas LTD LLP founder and securities fraud attorney William Shepherd, “Amazing that those who put Lehman into bankruptcy can now use the first dollars available to pay their own legal bills rather than to pay their victims, including investors and the subordinates they led down the garden path to disaster. Apparently, it is again nice to be part of the ‘one-percent’ on Wall Street.”

Fuld Leads Ex-Lehman Officials in Defending Insurance Use, The Wall Street Journal, October 17, 2011

Ex-Lehman Officials to Pay $90 Million to Settle Suit, NY Times, August 25, 2011

Fuld, Lehman Executives Settle Lawsuit by California Cities, Businessweek, September 28, 2011

More Blog Posts:
Lehman Brothers’ “Structured Products” Investigated by Stockbroker Fraud Law Firm Shepherd Smith Edwards & Kantas LTD LLP, Stockbroker Fraud Blog, September 30, 2008

FINRA Orders UBS Financial Services to Pay $8.25M for Misleading Investors About Security of Lehman Brothers Principal Protected Notes, Stockbroker Fraud Blog, April 15, 2011

European Leaders Work to Get a Grip on Debt Crisis, Institutional Investors Securities Blog, October 19, 2011

Continue reading "Ex-Lehman Brothers Holdings Chief Executive Defends Request that Insurance Fund Pay Legal Bills" »

October 18, 2011

Dallas Mavericks Owner Mark Cuban's Allegations of Misconduct Against the SEC Enforcement Staff are Without Merit, Says Inspector General’s Report

According to the US Securities and Exchange Commission’s Inspector General, billionaire Mark Cuban’s allegations of misconduct against the federal agency’s enforcement staff are unfounded. The Dallas Mavericks basketball team owner’s accusations stem from the insider trading case that the SEC had filed against him.

In its 2008 Texas securities lawsuit against Cuban, the SEC accused him of selling his stake in Mamma.com after being told in confidence that the search engine company was planning a private investment in public equity transaction. The PIPE transaction was likely going to cause the company’s stock to drop in value, and SEC says that although Cuban had agreed to keep the information confidential he went ahead and sold his shares. This caused him to avoid losing more than $750,000.

The Commission considered this a breach of his confidentiality agreement and an act of insider trading. The SEC based its insider trading theory against the billionaire on its rule defining duties of confidence and trust to include a person agreeing to keep information confidential. In 2009, a federal judge dismissed the case against Cuban on the grounds that he hadn’t been an “insider” in this instance.

Last year, however, the U.S. Court of Appeals for the Fifth Circuit in Texas revived the securities case against him. The court said it was “plausible” that Cuban knew he wasn’t supposed to sell his shares in order to avoid losing money. However, it refrained from deciding whether the billionaire entrepreneur was wrong to sell his stock. A lower court in Dallas has been ordered to review the case for additional discovery.

Cuban has responded with complaints to SEC Inspector General H. David Kotz. He contends that the enforcement agency’s lawyers treated him unfairly and had been “biased and improper.” He also claims that investigators abused the “Wells notice” process and sent one out before finishing his investigation, as well as intimidated one of his witnesses. Cuban also is accusing the SEC of closing its probe into Mamma.com to get the company’s executives to help in the agency’s investigation into the insider trading allegations against him.

Kotz’s office, in its 101-page report following its investigation into Cuban’s allegations against the SEC, said that there is not enough evidence to support the billionaire’s accusations. The OIG included also included its findings into the conduct of ex-SEC trial lawyer Jeffrey Norris, who was suspended after sending emails that may have been politically charged to Cuban (Norris was later fired for similar misconduct). Kotz’s office says that Norris hadn’t been involved in the SEC’s investigation into the Cuban case.

SEC lawsuit against billionaire Cuban revived, Salt Lake Tribune, September 21, 2010

US sports magnate charges against SEC unfounded, Reuters, September 17, 2011

Mark Cuban’s Grudge Match With the S.E.C., NY Times, April 30, 2011

SEC Watchdog Finds Little to Support Cuban's Allegations of Improper Conduct, BNA Securities Law Daily, October 3, 2011

Read the OIG Report (PDF)


Related Web Resources:
After District Court Dismisses Texas Securities Fraud Against Billionaire Mark Cuban, SEC Appeal Can Now Move Forward, Stockbroker Fraud Blog, August 17, 2009

Ex-Goldman Sachs Board Member Accused of Insider Trading with Galleon Group Co-Founder Seeks to Have SEC Administrative Case Against Him Dropped, Institutional Investor Securities Blog, April 19, 2011

Houston Judge Overturns $9.2M Securities Fraud Ruling Against Morgan Keegan, Stockbroker Fraud Blog, October 11, 2011

Continue reading "Dallas Mavericks Owner Mark Cuban's Allegations of Misconduct Against the SEC Enforcement Staff are Without Merit, Says Inspector General’s Report" »

October 13, 2011

Galleon Group LLC Co-Founder Raj Rajaratnam Sentenced to 11 Years in Prison Over Insider Trading Scam

Raj Rajaratnam, a billionaire investor and co-founder of Galleon Group LLC, has been ordered to pay a $10 million fine and serve 11 years in jail for his key role in an insider trading scam that resulted in $63.8M in illegal profits. He must now forfeit $53.8M.

A jury had found the hedge fund tycoon guilty of nine counts of securities fraud and five counts of conspiracy. Rajaratnam would obtain illegal tips from bankers, executives, traders, consultants, and directors of public companies (Goldman Sachs is one). He would then use that insider information to make trades prior to public announcements about mergers, forecasts, earnings, and spinoffs involving a number of companies, including Hilton Hotels, Integrated Circuit, Akamai, and Xilinix)

Rajaratnam’s attorneys are planning to appeal. For now, however, they are requesting that he be confined at the Butner Federal Correctional Complex, which is where Bernard Madoff is in jail. Madoff was sentenced to 150 years behind bars for his multibillion-dollar Ponzi scam.

Rajaratnam, who is originally from Sri Lanka was educated in England and the US. He established the Galleon hedge fund in the 1990’s and it became one of the biggest in the world. In 2008, Galleon was managing about $7 billion.

Federal securities investigators began to suspect trouble when, in the Rajaratnam gave the SEC documents for another investigation into the activities of his younger brother—no charges were ever brought t here—a text message was included from an ex-Intel Corp. employee warning to hold off on purchasing Polycom’s stock. The former employee, Rommy Khan, was already suspected of giving out insider information.

In 2007, Khan consented to help the authorities with their probe. He and several others served as cooperating witnesses that helped the government convict Rajaratnam, who was arrested in 2009.

The 11-year sentence against him is shorter than the 24 years and five months that prosecutors wanted. That said, it is still the longest prison sentence ever issued for insider trading.

Still under investigation in connection with the scam is Rajat Gupta, who used to work as a Goldman Sachs director. According to the Wall Street Journal and Bloomberg, criminal charges against him seem likely. Prosecutors consider him a “co-conspirator” in the insider trading case against Rajaratnam.

The SEC, which dropped its civil administrative proceeding against Gupta, plans to refile its charges in federal court. Meantime, Kamal Ahmed, who was also linked to the insider trading scam, has been fired by Morgan Stanley because he had disclosed confidential information. The government has not accused him of wrongdoing.

The SEC also filed a number of securities lawsuits against at least two dozen individuals and businesses in light of the Galleon investigation.

Trader Draws Record Sentence, The Wall Street Journal, October 14, 2011

U.S. Prosecutors ‘Close to Charging’ Rajat Gupta, Bloomberg, September 20, 2011

Accused Rajaratnam Tipster Fired By Morgan Stanley, FIN Alternatives, October 7, 2011

More Blog Posts:
Ex-Goldman Sachs Board Member Accused of Insider Trading with Galleon Group Co-Founder Seeks to Have SEC Administrative Case Against Him Dropped, Institutional Investor Securities Blog, April 19, 2011

A Texan is Among Those Arrested in Insider Trading Crackdown Involving Apple Inc., Dell, and Advanced Micro Devices' Confidential Data, Stockbroker Fraud Blog, December 16, 2010

3 Hedge Funds Raided by FBI in Insider Trading Case, Stockbroker Fraud Blog, November 23, 2010

Continue reading "Galleon Group LLC Co-Founder Raj Rajaratnam Sentenced to 11 Years in Prison Over Insider Trading Scam" »

October 10, 2011

Merrill Lynch Faces $1M FINRA Fine Over Texas Ponzi Scam by Former Registered Representative

Two years after San Antonio broker was sentenced to prison for Texas securities fraud, FINRA has fined Merrill Lynch $1M for not properly supervising its former employer. These failures allegedly allowed Bruce Hammonds to run a Ponzi scam that defrauded investors of $1.4M.

Hammonds persuaded 11 people to invest in the Texas Ponzi scam, which he operated under the name B&J Partnership. It was supervisors at Merrill Lynch that gave the green light for him to open an account for B & J. The supervisors also are accused of not monitoring the funds that moved between customers and Hammonds.

Rather than putting investors’ money in a Merrill Lynch fund, he put $1.4 million of their funds in his working capital account. He even gave clients charts showing how the B & J fund was performing even though the fund wasn’t real. Hammonds used the money to pay for his personal spending, including a supposed house-flipping business.

He later pleaded guilty to federal securities charges. In addition to five years behind bars and three year supervised release. Hammond has been barred from the securities industry. All investors have been paid back in full for their losses.

In deciding to fine Merrill Lynch, FINRA found that the financial firm did not have a supervisory system that did a satisfactory enough job of monitoring accounts of employees for signs of possible misconduct. The system was only able to immediately capture accounts opened by an employee if he/she used his/her social security number as the main tax identification number. The SRO also said that between 1/06 and 6/10 Merrill Lynch did not monitor another 40,000 employee/employee-interested accounts.

By agreeing to settle, Merrill is not denying or admitting to the charges.

Failure to Supervise
It is a brokerage firm’s responsibility to establish written procedures for how to properly supervise its employees' activities. These procedures must then be implemented to prevent broker fraud. When misconduct does arise and failure to supervise played a role in allowing the incident to happen, the financial firm can be held liable for securities fraud.

Brokerage companies have to supervise every broker that they license to work for them. Even if an accused broker is later found not liable, there is still a possibility that the brokerage firm or supervisor can be held liable for failure to supervise and be ordered to pay damages. For example, a broker may not have received the proper training or was given the wrong information by the financial firm, and this resulted in Texas securities fraud that caused an investor to suffer losses.

FINRA Fines Merrill Lynch $1 Million for Supervisory Failures That Allowed a Registered Representative to Operate a Ponzi Scheme, FINRA, October 4, 2011

Shepherd Smith Edwards & Kantas LTD LLP is Investigating Merrill Lynch in Light of Recent FINRA Fines Against the Firm for Failure to Supervise, MarketWatch, October 5, 2011

More Blog Posts:
Former Merrill Lynch Employee, Guilty of $1.4 Million Texas Securities Fraud Scheme, Receives Prison Term, Stock Broker Fraud Blog, October 5, 2009

Wedbush Securities Ordered by FINRA to Pay $2.8M in Senior Financial Fraud Case Over Variable Annuities, Stock Broker Fraud Blog, August 31, 2011

Actions of Former Ferris, Baker Watts, Inc. General Counsel Accused of Supervising Rogue Broker to be Reviewed by SEC, Institutional Investors Securities Blog, December 9, 2010

Continue reading "Merrill Lynch Faces $1M FINRA Fine Over Texas Ponzi Scam by Former Registered Representative" »

October 6, 2011

FINRA Cannot Enforce Disciplinary Actions Through the Courts, Says Federal Appeals Court

The United States Court of Appeals for the Second Circuit says that the Financial Industry Regulatory Authority does not have the authority to take its members to court in order to enforce disciplinary actions. The ruling comes after a years-long legal battle involving penny stock brokerage firm Fiero Brothers and owner John J. Fiero.

Fiero and his financial firm were expelled from FINRA and ordered to pay a $1 million fine for naked short selling and other violations of federal fraud statutes. It was in 1998 that NASD Regulation Inc. filed a complaint accusing Fiero and co-conspirators of engaging in the illegal short-selling of securities to purposely push down the price 10 NASDAQ securities. The financial scam eventually led to the collapse of both Hanover Sterling, which served as the securities’ underwriter and Adler, Coleman Clearing Corp. A NASD hearing panel found that Fiero committed extortion and violated short selling rules. The $1 million fine and expulsion were imposed in 2001.

Fiero Brothers and its owner refused to pay. FINRA took them to court to obtain payment. The SRO first brought its case to New York state court, where the state’s highest court eventually threw out a ruling in FINRA’s favor. Fiero then brought the case to federal court. There, he sought a declaratory judgment that FINRA did not have the power to pursue the fine in court. FINRA then counter-sued.

Now, however, the three-judge panel is saying that FINRA’s housekeeping rule from 1990, which gave it the right to go to court to go after monetary sanctions and the country’s foundational securities laws, does not give the SRO the right to collect disciplinary fines through the court system. The federal appeals court’s ruling overturns a lower court’s decision.

Some are saying that the court’s ruling reduces FINRA’s power and vindicates complaints that have been made accusing the SRO of going beyond its statutory power and abusing the process of rule making. Even ex-FINRA enforcement head Susan Merrill believes that the ruling casts a shadow on FINRA’s housekeeping rules. The court said the 1990 rule needs to be more formally examined because rather than just being a matter of housekeeping, it impacts the rights of members that have been suspended or barred.

Banned brokers are not allowed to reenter the industry unless the pay all fines. As a result, obtaining fines is not usually a problem for FINRA. Now, however, seeing as FINRA doesn’t have the right to enforce payment in court, an action that it has taken over the last two decades, it will be interesting to see how other barred brokers may choose to respond to fine demands.

Meantime, FINRA has said that this latest ruing will not limit its ability to enforce securities laws and FINRA rules, protect investors, or discipline financial firms.

Court: FINRA cannot use lawsuits to collect fines, Reuters, October 5, 2011

Court Says Regulator Exceeded Its Power, New York Times, October 6, 2011

NASD Regulation Bars John Fiero, Expels Fiero Brothers, Inc., and Imposes $1 Million Fine For Illegal Short Sales, Market Manipulation and Extortion, NASD/FINRA, January 8, 2011

More Blog Posts:

Five Broker-Dealers Fined by FINRA Over Allegedly Misrepresenting Commissions as Fees to Clients, Stockbroker Fraud Blog, September 16, 2011

Texas Securities Fraud: FINRA Fines Bluechip Securities for Ex-Employee’s Alleged Churning of Public Customer Accounts, Stockbroker Fraud Blog, August 28, 2011

Wedbush Ordered By FINRA Panel To Pay $3.5M to Trader Over Withheld Compensation, Institutional Investor Securities Blog, July 16, 2011

Continue reading "FINRA Cannot Enforce Disciplinary Actions Through the Courts, Says Federal Appeals Court" »

October 5, 2011

SEC & DOJ File Charges Against San Francisco Investment Adviser For Alleged “Soft Dollar” Fraud

The Securities and Exchange Commission is suing investment adviser Kurt Hovan for allegedly misappropriating $178K in “soft dollars” that he claimed was used for investment research. The federal agency contends that, in fact, the money was used to cover other business-related expenses. When Kurt, as Hovan Capital Management president, was asked to provide documents supporting this, he generated bogus research reports. Meantime, the US Department of Justice is charging the 43-year-old with obstruction and mail fraud.

Soft dollars are rebates or credits. They come from brokerage firms on commissions for trades made in investment adviser’s client accounts. If the soft dollar credits are disclosed appropriately, the IA may keep the credits and use them to cover expenses related to a specific area research and brokerage services benefiting clients.

The SEC contends, however, that Kurt didn’t solely use the soft dollars for research services. Instead, $166,667 was used to pay for the salary of his brother Edward Hovan. Soft dollars were also used to pay for computer hardware and office rent. Edward and Kurt’s wife Lisa Hovan (Hovan Capital Management’s chief financial officer) are also named in the SEC’s complaint. The SEC is accusing all three of them for violating federal securities laws’ antifraud provisions. Kurt Hovan and HCM are also accused of recordkeeping violations.

The securities lawsuit also claims that conceal their soft dollar-related activities, Kurt, Lisa, and Edward set up a "Bolton Research,” which was a shell company that Edward Hovan secretly controlled. The company then billed Hovan Capital Management’s brokerage companies for research that was never conducted. Edward allegedly kicked back $65,000 of payments to Kurt and Lisa.

The allegedly false reporting to the SEC is said to have taken place during a January 2010 examination of HCM. Staff requested that the financial firm give over copies of the research reports that Bolton Research had prepared. Instead, Kurt allegedly gave the SEC phony research reports and doctored materials.

The SEC is seeking disgorgement with prejudgment interest, injunctive relief, and other financial penalties.

Securities Fraud
As you can see, securities charges and criminal charge can be filed against an investment adviser that commits securities fraud. You may want to file your own securities fraud lawsuit to recover your losses if you lost money because investment adviser misconduct was a factor.

Our securities fraud law firm knows that the thought of pursuing a financial firm to get your money back can be an overwhelming process, which is why you want to retain an experienced investment fraud lawyer that knows how to successfully pursue your recovery while protecting your rights.


Belvedere investment adviser faces criminal charges in fraud case, Marin Independent Journal, September 28, 2011

More Blog Posts:

New Jersey Investment Adviser Who Pleaded Guilty to $11.5M Financial Fraud Gets 168-Month Prison Sentence, Stockbroker Fraud Blog, September 29, 2011

Investors Working with Incompetent Registered Investment Advisers Have Few Protections, Reports Bloomberg, Stockbroker Fraud Blog, August 11, 2011

Custodial Firms Get Tougher About Registered Investment Adviser Compliance, Stockbroker Fraud Blog, December 28, 2010

Continue reading "SEC & DOJ File Charges Against San Francisco Investment Adviser For Alleged “Soft Dollar” Fraud" »

October 4, 2011

Two Texas Men Sentenced For $100 Million Life Settlement Scam that Bilked Over 800 Investors

Adley Abdulwahab and Christian Allmendinger, both principals of A&O Resource Management Ltd., must now serve decades prison for their involvement in a $100M life settlement scheme. Both defendants are from Houston, Texas. The Texas State Securities Board, the SEC, the IRS, the U.S. Postal Inspection Service, the FBI, and the Virginia Corporation Commission all investigated this life settlement scam. Over 800 investors in the US and Canada were defrauded

Allmendinger, who is vice-president and co-founder of A & O, was orderd to serve 45 years in prison, while Abdulwahab, who is part owner of A & O and a hedge fund manager is to serve 60 years. Both men were indicted on 18 counts. Also pleading guilty to the life settlement scheme was ex-A & O president David White and four others.

According to the US Justice Department, investors, who wanted conservative investments, were misled into thinking that investing in A & O was a no-risk, safe bet when in fact, it was a “sham.” Among the victims were hundreds of retirees who lost their savings because they invested in A & O. Almendinger and Abdulwahab used investors’ money to pay for expensive cars, luxury homes, and extravagant jewelry.

Abdulwahab and Allmendinger both marketed A & O life settlement investment products to investors. Per the court, the principals misrepresented A & O’s prior success to investors, while also exaggerating its size as a business. Abdulwahab also not only lied about his credentials but also did not disclose that he had pleaded guilty to a Texas felony charge of forgery of a commercial instrument.

When state regulators started looking into A & O’s financial instruments, the fraudsters made up a bogus sales transaction to “sell” the company to shell corporate entity Blue Dymond and Physician’s Trust, also a shell corporate entity. While the sale ended Allmendinger’s ties with the life settlement scam, Abdullah and his co-fraudsters still secretly controlled and continued the financial scheme until September 2009. The majority of the investors were seniors and most of them lost everything they’d invested. For many, this was their entire retirement.

It is unfortunate when an investor loses money because he/she was the victim of financial fraud. Recently, the North American Securities Administrators Association added securitized life settlement contracts on its list of practices and products that are a threat to investors. In many instances, schemes involve “worthless paper” that doesn’t keep up enough assets so that there is a guaranteed fixed return in a fixed time period.

Texas Fund Managers Sentenced Over Life-Settlement Scheme, The Wall Street Journal, September 28, 2011

Life settlements just one more potential scam in recent troubled times, San Diego Source, September 6, 2011

Principals Of A&O Entities Sentenced In Virginia For $100 Million Fraud Scheme, Justice.gov, September 28, 2011

Financial Scammers Are Now Using YouTube, Facebook, LinkedIn, Twitter, and Other Websites to Target Investors, Warns Texas Securities Commissioner, Stockbroker Fraud Blog, September 22, 2011

Ex-UBS Financial Adviser Pleads Guilty to Defrauding Private Fund Investors, Stockbroker Fraud Blog, July 13, 2011

AIG Trying to Get More Investors to Buy Life Settlements, Institutional Investors Securities Blog, April 26, 2011

Continue reading "Two Texas Men Sentenced For $100 Million Life Settlement Scam that Bilked Over 800 Investors" »