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August 31, 2010

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

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

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

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

Price and BofA are also denying Cuomo’s allegations.

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

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

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

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

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

NY State Attorney General Andrew Cuomo

SEC

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

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

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Posted In: Bank of America , Financial Firms

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August 30, 2010

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

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

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

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

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

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

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

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

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

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Posted In: FINRA , Financial Firms , Zions Bancorp

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August 25, 2010

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

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

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

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

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

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

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

FINRA

Collateralized mortgage obligation, SEC

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

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Posted In: Collateralized Mortgage Obligations , FINRA , Financial Firms , HSBC

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August 22, 2010

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

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

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

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

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

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

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

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

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

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

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Posted In: Bank of America , FINRA , Financial Firms , Merrill Lynch , Unit Investment Trust

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August 16, 2010

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

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

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

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

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

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

Related Web Resources:
Oppenheimer Champion Income Fund, MorningStar

FINRA Arbitration and Mediation

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

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Posted In: Financial Firms , Oppenheimer

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August 10, 2010

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

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

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

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

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

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

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

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Posted In: Arbitration , Auction-Rate Securities , FINRA , Financial Firms , Securities Fraud , UBS

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August 3, 2010

Citigroup Settles Subprime Mortgage Securities Fraud Claims for $75 Million

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

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

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

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

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

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

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

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

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

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Posted In: Citigroup , Financial Firms , SEC Enforcement , Securities Fraud , Subprime Mortgage

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July 30, 2010

Goldman Sachs Settles SEC Subprime Mortgage-CDO Related Charges for $550 Million

Goldman, Sachs & Co. has agreed to reform its business practices and pay $550M to settle Securities and Exchange Commission charges that it misled investors related to a synthetic collateralized debt obligation (CDO) just as the housing market was failing. By agreeing to settle the securities fraud lawsuit, Goldman is admitting that information in the marketing materials for the product was incomplete.

The SEC case involves Abacus 2007-AC1, one of 25 investment vehicles that Goldman created so that certain clients could bet against the housing market. Unfortunately, when the market did fail, investors lost over $1 billion. Meantime, the investment bank yielded profits and John A. Paulson, the hedge fund manager that the SEC says asked Goldman to create the 2007-AC1, made money from bets he made against certain mortgage bonds.

While investors were told that an independent manager was choosing the bonds, the SEC contends that Goldman allowed Paulson to choose mortgage bonds that he thought were likely to drop in value. However, clients were not notified about Paulson & Co. Inc.’s part in the portfolio selection process or that Paulson had taken a short position against the CDO. The investment bank then sold the package to investors that would only turn a profit if the value of the bonds went up.

The $550 million penalty against Goldman is the largest that the SEC has ordered a financial services company. By agreeing to settle, Goldman is not denying or admitting to the allegations. $300 million of the fine will go to the U.S. Treasury, while $250 million will be repaid to investors that suffered losses.

Goldman Sachs to Pay Record $550 Million to Settle SEC Charges Related to Subprime Mortgage CDO, US Securities and Exchange Commission, July 15, 2010

Goldman Settles With S.E.C. for $550 Million, NY TImes, July 15, 2010

Read the SEC Complaint against Goldman Sachs (PDF)

Continue reading "Goldman Sachs Settles SEC Subprime Mortgage-CDO Related Charges for $550 Million" »

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Posted In: Financial Firms , Goldman Sachs

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July 28, 2010

Raymond James Ordered to Buy Back $2.5M in ARS by FINRA

A Financial Industry Regulatory Authority arbitration panel is ordering Raymond James & Associates Inc. and Raymond James Financial Services Inc. to buy back $2.5M in auction-rate securities from an investor. Greg Merdinger has accused Raymond James Financial Inc. of failing to warn him about the risks associated with ARS. In 2009, he filed a claim accusing the broker-dealer of breach of both contract and fiduciary duty.

Merdinger claims that from October 2006 to February 2008, Raymond James & Associates Inc. recommended that he purchase the securities while claiming that they were more liquid than money market funds, which Merdinger wanted to invest in until he was persuaded otherwise. He contends that Raymond James never told him that the ARS could become illiquid and that even into February 2008, when the market froze, Raymond James continued to advise him to buy the securities. One more purchase was even made.

Raymond James Financial’s General Counsel, Paul Matecki, has been quick to note that the broker-dealer has provided evidence that it did not know that the ARS market was at risk of failing before February 2008 when it did collapse. He also claims that there is no evidence indicating that any of its employees knew that the securities would fail.

However, Merdinger’s securities lawyer says there are copies of emails showing that Raymond James Financial managers knew the ARS market was experiencing difficulties way before it collapsed. Early last year, Raymond James chief executive and chairman issued a letter, filed with the Securities and Exchange Commission, apologizing to clients for the role the investment bank played in their ARS buys.

In addition to the $2.5M ARS repurchase, Merdinger has been awarded 5% interest on the amount until Raymond James buys back the securities. He is also to receive an additional $86,000.

Related Web Resources:
Raymond James faces $2.5 million payback ruling, BizJournals, July 27, 2010

Raymond James Ordered To Buy Back $2.5M in Auction-Rates, WSJ, July 26, 2010

Tom James apologizes for auction rate security purchases, BizJournals, January 5, 20009

Continue reading "Raymond James Ordered to Buy Back $2.5M in ARS by FINRA" »

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

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July 23, 2010

Motion for Class Certification in Lawsuit Against J.P. Morgan Securities Inc. Over Alleged Market Manipulation Scam Granted in Part by Court

A district court has granted in part the motion for class certification in the securities fraud lawsuit against J.P. Morgan Clearing Corp. and J.P. Morgan Securities Inc. involving an alleged investment scam with Sterling Foster & Co. The alleged scheme involves the manipulation of the the market for ML Direct Inc. securities during and after an IPO. The JPM entities are named in their capacity as Bear Stearns & Co. Inc. and Bear Stearns Securities Corp. successors.

The court says that one day after the IPO’s start, ML Direct stock’s price more than doubled because Sterling Foster had bought most of it. The firm then sold over 3.375 million ML Direct at about $14 to $15 a share. Because only 1.1 million shares in the IPO were for sale, the court says that Sterling Foster sold 2.3 million more shares than it owned. The other available ML Direct shares were held by insiders, who had a lock-up agreement barring them from selling their shares within the first year of the IPO unless they obtained underwriter Patterson Travis Inc.’s consent.

Sterling Foster and the insiders allegedly became involved in an undisclosed agreement that allowed the brokerage firm to buy the insiders' stock at the $3.25/share offering. Sterling Foster then bought their securities, which were delivered to Bear Stearns. The court says that as a result, the brokerage firm made a $24 million profit.

The plaintiffs are saying that the offering documents misled the investing public into thinking that significantly less ML Direct shares were being offered and that the market had set the $13 to $15/share price when Sterling Foster had artificially created it and then bought shares from insiders at the lower share price. The plaintiffs claim that Bear Stearns, as Sterling Foster’s clearing house, knowingly took part in the investment scam.

The plaintiffs moved to certify a class so they could pursue their Section 10(b) and Section 20(a) claims. The court granted the motion as to the Section 10(b) antifraud claims but denied the latter, which involves claims for control person liability.

Related Web Resource:
Levitt v. JP Morgan Securities Inc, Law.com

Continue reading "Motion for Class Certification in Lawsuit Against J.P. Morgan Securities Inc. Over Alleged Market Manipulation Scam Granted in Part by Court " »

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Posted In: Bear Stearns , Financial Firms , J P Morgan - Chase

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July 20, 2010

Securities Class Action Against Morgan Stanley by Xerox and Kodak Retirees Dismissed by Appeals Court

The U.S. Second Circuit Court of Appeals in New York has upheld a lower court’s ruling to dismiss that the securities class action filed by Eastman Kodak Co. and Xerox Corp. against Morgan Stanley. The plaintiffs, retirees from both companies, are accusing the broker-dealer of advising them that if they retired early their investments would be enough to support them during retirement. They also claim that the investment bank persuaded them to open accounts that cost them the bulk of their wealth. According to the plaintiffs’ attorney, the retirees gave up job security and employment rights after they were told that if they retired early they could avail of a 10% withdrawal rate from their individual retirement accounts.

However, upon retiring, the retirees that invested lump-sum retirement benefits with Morgan Stanley experienced “disastrous” value declines. Also, they had invested with two Morgan Stanley broker, Michael Kazacos and David Isabella, that were later barred from the securities industry. Last year the broker-dealer settled FINRA charges over the two men’s activities by paying over $7.2 million.

The appeals court says that because of the 1998 Securities Litigation Uniform Standards Act, the plaintiffs are precluded from pursuing class state law claims, including misrepresentation claims. While the statute lets plaintiffs file lawsuits in state court to get around 1995 Private Securities Litigation Reform Act’s securities fraud pleading requirements, federal preemption of class actions claiming “misrepresentations in connection with the purchase or sale of a covered security” are allowed. The three-judge panel also said that because the retirees waited too long to file their securities fraud lawsuit, they cannot raise other federal securities law claims.

Related Web Resources:
Xerox, Kodak retirees lose Morgan Stanley appeal, Reuters, June 29, 2010

Morgan Stanley to Pay More than $7 Million to Resolve FINRA Charges Relating to Misconduct in Early Retirement Investment Promotion, FINRA, March 25, 2009

1998 Securities Litigation Uniform Standards Act, The Library of Congress

Continue reading "Securities Class Action Against Morgan Stanley by Xerox and Kodak Retirees Dismissed by Appeals Court " »

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Posted In: Broker Fraud , Broker-Dealers , Class Action Lawsuits , Financial Firms , Morgan Stanley , Securities Fraud

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July 14, 2010

Goldman Sachs COO Says Investment Firm Shorted 1% of CDOs Mortgage Bonds But Didn’t Bet Against Clients

According to Goldman Sachs Group Inc. Chief Operating Operator and President Gary Cohn, the investment firm adamant that the bank did not bet against its own clients. He says that Goldman Sachs purchased protection against a decline in just 1% of mortgage-backed securities it underwrote since late 2006. Former clients, regulators, and members of Congress are accusing Goldman Sachs of designing mortgage-backed securities that would fail and then betting on their failure to purchase credit-default swaps, which pay out when a default occurs.

Cohn testified last month before the Financial Crisis Inquiry Commission. He says that in the wake of the serious allegations, the investment firm has examined the $47 billion in residential mortgage-backed securities (RMBS) and $14.5 billion in collateralized debt obligations (CDOs) that the firm underwrote since firm executives began to feel the need to treat the subprime mortgage market with caution in December 2006. He claims that by the end of June 2007, Goldman Sachs held $2.4 billion of bonds from CDOs and $2.4 billion of bonds from RMBS trusts. The investment bank had protection for approximately 1% of the total underwritten. Nearly 60% of the derivatives and bonds in the CDOs were from other institutions.

The hearing was called to probe the relationship between Goldman and American International Group Inc (AIG). The investment bank had purchased CDO protection from the insurer. Billions of dollars in federal funds had allowed AIG to stay in business even though it was facing bankruptcy and a number of the insurer’s counterparties, including Goldman, are believed to have benefited. Cohn has argued that all market participants benefited from the government’s assistance.

Related Web Resources:
Goldman Sachs Shorted 1% of its Mortgage Bonds, CDOs, Cohn Says, Business Week, June 30, 2010

Goldman's Cohn: Firm Didn't Drive Down Mortgage-Asset Marks, Bloomberg.com, June 30, 2010

Financial Crisis Inquiry Commission

Continue reading "Goldman Sachs COO Says Investment Firm Shorted 1% of CDOs Mortgage Bonds But Didn’t Bet Against Clients" »

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Posted In: Collateral Debt Obligation , Credit Default Swaps (CDS) , Financial Firms , Goldman Sachs , Mortgage Backed Securities

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July 12, 2010

Morgan Stanley Settles Massachusetts Lending Case for $102 Million

According to Massachusetts Attorney General Martha Coakley, Morgan Stanley has agreed to pay $102 million to settle allegations that it offered predatory subprime mortgage loan funding in the state. The investment firm filed its assurance of discontinuance in Massachusetts state court, agreeing to pay $19.5 million to the state, $58 million in relief to approximately 1,000 Massachusetts homeowners, $2 million to nonprofit groups that help subprime foreclosure victims, and $23.4 million to a state pension plan and a state trust for investment losses. By agreeing to settle, Morgan Stanley is not admitting to or denying the attorney general's allegations.

Coakley contends that the investment bank provided subprime lender New Century billions of dollars. The funds were used to target lower-income borrowers to get them into loans they would not be able to pay back. Coakley contends that even though Morgan Stanley “uncovered signals pretty early on” that New Century’s practices “were not sound” and the “bad loans were causing the lender to collapse" the investment bank went forward with funding and securitizing the loans. Coakley also says that Morgan Stanley was aware that New Century repeatedly violated Massachusetts banking standards between 2005 and 2007, used inaccurate and inflated appraisals, and improperly calculate debt-to-ratio from initial “teaser rates.”

The state says that Morgan Stanley packaged the loans and sold them to big investors. The investment bank has been ordered to revise some of its lending practices.

Bank of America/Countrywide, Goldman Sachs, Fremont Investment and Loan, and others have reached similar settlements with the state. The approximately $440 million in settlement money will provide borrowers, investors, homeowners, and the state with relief and recovery.

Related Web Resources:
Morgan Stanley Settles Massachusetts Subprime Loan Probe, ABC News, June 24, 2010

Morgan Stanley to Pay $102 Million in Subprime Accord, Bloomberg Businessweek, June 24, 2010

Massachusetts Attorney General Martha Coakley

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Posted In: Financial Firms , Morgan Stanley , Subprime Mortgage

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June 21, 2010

LPL Investment Holdings, Inc. IPO Registration Gives Evidence of Disparities Between Wirehouse Broker-Dealers and Independent Brokerage Firms

According to InvestmentNews, LPL Investment Holding Inc’s recent IPO registration is clear evidence that the 4 wirehouse brokerage firms still dwarf the approximately 1,200 independent contractor broker-dealers when it comes to controlling client assets. LPL is an independent broker-dealer.

Currently, there are approximately 114,000 independent reps and about 55,000 wirehouse reps. Yet even though there are so many less wirehouse reps, they still are in charge of a larger pool of client assets than their independent counterparts. While wirehouse reps manage $3.95 trillion in client assets, independent reps handle about $1.8 trillion. This means that a wirehouse broker, on average, manages $71.8 million in assets, and independent reps manage about $16 million in assets.

Also, while both wirehouse and independent reps make about 1% in commissions and fees on client assets, wirehouse reps get a 40% average payout of the fees and commissions, while independent reps get about 85%. While the average independent rep makes under $134,000 annually, the average wirehouse rep makes about $287,000 a year.

LPL rep’s earn an average payout of about $155,360. Acquired by two private equity firms in 2005, LLP states in its IPO registration that due to its efficient operating model and scale, its payout to independent contractors far exceeds that of wirehouse firms. InvestmentNews says it is unclear how many of the $1 million plus-producing brokers joined LPL because they wanted the higher payout.

LPL is owned by private equity firms Hellman & Friedman LLC and TPG Capital. The brokerage firm has filed to raise up to $600 million in its IPO.

Related Web Resources:

Does LPL's filing reveal an unspoken truth about indie B-Ds?, Investment News, June 21, 2010

TPG-Backed LPL Investment Holdings Files for $600 Million IPO, Bloomberg Businessweek, June 4, 2010

Continue reading "LPL Investment Holdings, Inc. IPO Registration Gives Evidence of Disparities Between Wirehouse Broker-Dealers and Independent Brokerage Firms " »

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Posted In: Financial Firms , LPL Investment Holdings , Miscellaneous

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June 18, 2010

FINRA Suspends License of Dallas Broker-Dealer Linked to Failed Medical Capital Notes

Dallas-based securities firm Cullum & Burks Securities Inc. has had its license suspended by the Financial Industry Regulatory Authority Inc. The broker-dealer, which had 1,300 client accounts, 100 affiliated reps, and $150 million in assets, reportedly failed to files its mandatory, quarterly Focus report.

Last November, FINRA said the Texas broker-dealer had violated its net capital requirement because it didn’t have enough capital to stay in business. It was then that Cullum & Burkes raised more capital.

The securities firm was one of three broker-dealers listed as sellers of Medical Provider Funding Corp. V, which is a series of private placements that were created by Medical Capital. Other sellers on the list included Securities America Inc. and First Montauk Securities Corp., which is now defunct.

A Reg D filing with the SEC in 2007 reported that the offering was for $400 million. Medical Capital raised about $2.2 billion in investor funds. Now, over half of the investors’ money has been lost.

Cullum & Burks Securities Inc. is the subject of a class action lawsuit filed over the Medical Capital notes sale. The complaint contend that the notes should have been registered with the Securities and Exchange Commission. However, the securities firm denies that it engaged in broker-misconduct in relation to the sale and sees itself as a victim of any wrongdoing committed by Medical Capital. In 2009, the SEC charged Medical Capital Holdings Inc. with securities fraud related to private placement sales.

Related Web Resources:
Another broker-dealer down: Dallas B-D capsized by MedCap, Investment News, June 16, 2010

FINRA

Continue reading "FINRA Suspends License of Dallas Broker-Dealer Linked to Failed Medical Capital Notes" »

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Posted In: Broker-Dealers , Cullum & Burks Securities Inc. , FINRA , Financial Firms , First Montauk Securities Corp. , Securities America , Texas Securities Fraud

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June 14, 2010

Lehman Brothers Lawsuit Claims Its Bankruptcy Was In Part Due to JP Morgan Chase’s Seizure of $8.6 Billion in Cash Reserves

The estate of Lehman Brothers Holdings is claiming that JP Morgan Chase abused its position as a clearing firm when it forced Lehman to give up $8.6 billion in cash reserve as collateral. In its securities fraud lawsuit, Lehman contends that if it hadn’t had to give up the money, it could have stayed afloat, or, at the very least, shut down its operations in an orderly manner. Instead, Lehman filed for bankruptcy in September 2008.

JP Morgan was the intermediary between Lehman and its trading partners. Per Lehman’s investment fraud lawsuit, JP Morgan used its insider information to obtain billions of dollars from Lehman through a number of “one sided agreements.” The complaint contends that JP Morgan threatened to stop serving as Lehman’s clearing house unless it offered up more collateral as protection. Lehman says it had to put up the cash because clearing services were the “lifeblood” of its “broker-dealer business.”

JP Morgan’s responsibilities, in relation to Lehman, included providing unsecured and secured intra-day credit advances for the broker-dealer’s clearing activities, acting as Lehman’s primary depositary bank for deposit accounts, and serving in the role of administrative agent and lead arranger of LBHI's $2 billion unsecured revolving credit facility.

Lehman says that the $8.6 billion in collateral was billions more than what was needed to protect JP Morgan from such losses. As a result, Lehman claims that it was unable to explore other options besides bankruptcy. It is seeking the return of the extra cash so that the money can be used to pay creditors that are still awaiting payment in the wake of its bankruptcy proceedings. Not only was Lehman’s bankruptcy case the largest bankruptcy filing in US history, but it also helped instigate the worst economic crisis since the Great Depression.

Meantime, JP Morgan spokesperson Joseph Evangelisti has told BNA that the securities fraud complaint has no merit. A court-appointed examiner has said that Lehman’s collapse can be blamed on accounting irregularities. However, Lehman CEO Richard Fuld has said that he has no knowledge of such irregularities.

You can still seek financial recovery for Lehman structured products. Contact our securities law firm to discuss your case.

Related Web Resources:
Lehman Brothers estate sues J.P. Morgan Chase, Washington Post, May 28, 2010

Lehman Brothers Sues JPMorgan Chase & Co. (NYSE: JPM), Daily Trend, June 12, 2010

Lehman Files Biggest Bankruptcy After Suitors Balk, Bloomberg.com, September 15, 2008

Posted by Shepherd Smith Edwards & Kantas | Permalink | Email This Post

Posted In: Financial Firms , J P Morgan - Chase , Lehman Brothers , Securities Fraud

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June 11, 2010

SEC Inquiring About Wisconsin School Districts Failed $200 Million CDO Investments Made Through Stifel Nicolaus and Royal Bank of Canada Subsidiaries

According to local new services, the US Securities and Exchange Commission is asking five Wisconsin school districts for additional information about the $200+ million in synthetic collateralized debt obligations that they purchased through Stifel Nicolaus and Royal Bank of Canada subsidiaries in 2006. The CDO’\s are now reportedlyworthless.

The districts collectively bought the CDOs with $35 million of their own money and more than $165 million borrowed from Depfa bank. Since then, the entire investment has failed. In March, Depfa noticed default on the district trusts which had been established for the investments and took the $5.6 million in interest that had been earned since the purchase was made.

In their 2008 securities fraud lawsuit against the investment firms, the districts accused the defendants of deceptive practices and fraud. School officials contend that they were misled into investing in CDO's because of a Stifel product that was supposed to build trusts for post-retirement teacher benefits. They say that they weren’t told that that they could lose their entire investment because of the 4 – 5% default rate among companies within the CDO. They also contend that they were never advised that their investments included sub-prime mortgage debt, credit card receivables, home equity loans, and other risky investments.

Securities Attorney Robert A. Kantas, who represents the school districts, says the firms should never have sold his clients these CDO's because the trusts weren’t qualified to make the purchases. Kantas notes that the investment was “bad from the beginning,” and he is confident that the districts will win. He says that the investments were apparently set up in a way that allowed Royal Bank of Canada to make money if the districts lost money.

Some following the suit have estimated that the lawsuit will likely not go to a jury trial until 2012. The districts are seeking to recover their entire $200+ million investment, plus costs including legal fees, plus punitive damages and/or three times the amount lost on the investments.

Related Web Resources:
SEC looks into Kimberly School District investment case, Post Crescent, June 10, 2010

Wisconsin School Districts Sue Royal Bank of Canada and Stifel Nicolaus and Co. in Lawsuit Over Credit Default Swaps, Stockbroker Fraud Blog, October 7, 2008

School Lawsuit Facts

Posted by Shepherd Smith Edwards & Kantas | Permalink | Email This Post

Posted In: Financial Firms , Royal Bank of Canada , Securities Fraud , Stifel, Nicolaus, & Co. Inc.

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June 9, 2010

J.P.Morgan Securities Ltd. Ordered by UK’s Financial Services Authority to Pay $48.7 M for Breaching Client Money Rules

Upon issuing its largest fine ever, the United Kingdom's Financial Services Authority says it is ordering J.P.Morgan Securities Ltd. to pay $48.7 million for breaching Client Money Rules that are there to make sure that financial organizations properly protect clients’ funds. FSA claims that between November 1, 2002 and July 8, 2009, JPMSL failed to segregate billions of dollars—between $1.96 billion and $23 billion—that belonged to its clients.

PER FSA’s Final Notice on May 25, JPMSL, one of the largest holders of client money in the UK, held its futures and options business’s client in a JPMorgan Chase Bank N.A. unsegregated account. The mistake was a breach of the financial service regulator’s Principle 10 and the Client Money Rules. The rules require that client funds be held in a segregated account overnight.

FSA says that JPMSL’s error would have placed clients at “significant risk” if the investment bank were to ever become insolvent. During the insolvency process, the clients would not have been able to claim from a “pool of protected client money” because they would have been “classed as general unsecured creditors.

FSA says that when determining JMPSL’s penalty, the facts that JMPSL’s misconduct wasn’t intentional and that no clients sustained any financial losses because of the mistake were factored into account.

Related Web Resources:
FSA levies largest ever fine of £33.32m on J.P.Morgan Securities Ltd for client money breaches, FSA.Gov.UK, June 3, 2010

F.S.A. Clamps Down on Client Money Rules, New York Times, June 8, 2010

Continue reading "J.P.Morgan Securities Ltd. Ordered by UK’s Financial Services Authority to Pay $48.7 M for Breaching Client Money Rules" »

Posted by Shepherd Smith Edwards & Kantas | Permalink | Email This Post

Posted In: Financial Firms , J P Morgan - Chase

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June 7, 2010

FINRA Fines Piper Jaffray $700,000 for E-mail Retention Issues and Other Violations

The Financial Industry Regulatory Authority is fining Piper Jaffray & Co. $700,000 for violations related to the investment bank’s alleged failure to maintain about 4.3 million emails from November 2002 through December 2008 and for neglecting to tell FINRA about the issues it was having with email retention and retrieval. FINRA contends that this lack of disclosure not only affected Piper Jaffray’s ability to fully comply with the SRO's email extraction requests, but it also may have impacted the investment bank’s ability to respond to email requests from other regulators, as well as from parties involved in civil arbitration or litigation.

By not disclosing that “it was not making complete production of its emails,” per FINRA Executive Vice President and Acting Director of Enforcement James S. Shorris, Piper Jaffray was “potentially preventing production of crucial evidence of improper conduct…” Shorris said email retention was a “critical regulatory requirement” for broker-dealers.

The broker-dealer was first sanctioned for email retention failure in 2002. Piper Jaffray settled by agreeing to reevaluate its systems and certify that it had set up systems and procedures that were aimed at preserving email communications. Since making that certification in 2003, Piper Jaffray has never indicated that it was experiencing system failures.

It wasn’t until FINRA investigators asked for emails that a former Piper Jaffray employee suspected of misconduct had sent and received that the investment bank’s ongoing email retention deficiencies were discovered. A CD-ROM sent by Piper Jaffray that reportedly had all of the employee’s emails was missing an email that had led to the internal probe. This investigation resulted in the employee’s firing and in FINRA making an enforcement action against the worker.

By agreeing to settle, Piper Jaffray is not admitting to or denying FINRA’s charges.

Retention issue: Finra fines Piper Jaffray over e-mail archiving, Investment News, May 25, 2010

Read the Letter of Acceptance (PDF)

Continue reading "FINRA Fines Piper Jaffray $700,000 for E-mail Retention Issues and Other Violations" »

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Posted In: FINRA , Financial Firms , Piper Jaffray

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June 3, 2010

Wells Fargo to Pay $30M in Compensatory Damages to Four Nonprofits for Securities Fraud

A jury has ordered Wells Fargo to pay four Minnesota nonprofits $30 million in securities fraud damages. The Minnesota Medical Foundation, the Minneapolis Foundation, the Minnesota Workers' Compensation Reinsurance Association, and the Robins, Kaplan, Miller & Ciresi Foundation for Children had accused the investment bank of investing their funds in high risk securities and then failing to disclose until it was too late that the investments were going down in value. The same jury has yet to decide the issue of punitive damages

The jury found that Wells Fargo violated the Minnesota Consumer Fraud Act and breached its fiduciary duty to the nonprofits. In the investment program that the Minnesota nonprofits participated in, Wells Fargo would hold its clients’ securities in custodial accounts and use the money to issue temporary loans to brokerage firms for their trading activities. Each brokerage firm posted collateral of at least 102% the worth of the borrowed securities’ value.

While the investment bank had promised that the nonprofits money would be placed in liquid, safe investments, the plaintiffs contend that Wells Fargo put their money in high-risk securities, including asset-backed and mortgage-backed securities. They say that even as the collateral investments’ value became less stable in 2007, the investment bank continued to place more of the nonprofits’ securities out on loan. The nonprofits also claim that when two of the SIV’s went into receivership and they asked Wells Fargo to either redeem their interests or return the securities, the investment bank refused to do so until the collateral investments were sold and the nonprofits made up a shortfall in value.

While the nonprofits are asking for over $400 million in damages, Wells Fargo’s lawyers argue that the actual damages to the plaintiffs was just $14.3 million. According to the bank, “the investments made by Wells Fargo on behalf of our clients in the securities lending program were in accordance with investment guidelines and were prudent and suitable at the time of purchase." Apparently ignoring the claim or puntive damages, the investment bank says it is pleased that the plaintiffs were denied the full amount of damages they had sought. Wells Fargo continues to maintain that it didn’t invest in high-risk securities and that the nonprofits had the choice to get out of the investments if they were willing to pay 102% of the collateral.

Related Web Resources:
Wells Fargo ordered to pay $30 million for fraud, MRNewsQ, June 3, 2010

Wells Fargo Wins Minnesota Verdict on Punitive Damages (Update), BusinessWeek, June 3, 2010

Continue reading "Wells Fargo to Pay $30M in Compensatory Damages to Four Nonprofits for Securities Fraud" »

Posted by Shepherd Smith Edwards & Kantas | Permalink | Email This Post

Posted In: Financial Firms , Securities Fraud , Wells Fargo

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Stock Broker Fraud Blog

Published by Houston Securities Fraud Lawyers Shepherd Smith Edwards & Kantas

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J.P.Morgan Securities Ltd. Ordered by UK’s Financial Services Authority to Pay $48.7 M for Breaching Client Money Rules

FINRA Fines Piper Jaffray $700,000 for E-mail Retention Issues and Other Violations

Wells Fargo to Pay $30M in Compensatory Damages to Four Nonprofits for Securities Fraud

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