August 27, 2014

Citigroup Global Markets Fined $1.85M By FINRA, Must Pay $638K Restitution Over Non-Convertible Preferred Securities Transaction Valuations

The Financial Industry Regulatory Authority says that Citigroup Global Markets Inc. (C) will pay a fine of $1.85 million for not providing best execution in about 22,000 customer transactions of non-convertible preferred securities, as well as for supervisory deficiencies that went on for over three years. Affected customers are to get over $638,000 plus interest.

A firm and its registered persons have to exercise reasonable diligence to make sure that the sale/buying price the customer pays is the most favorable one under market conditions at that time. FINRA says that instead a Citigroup trading desk used a pricing methodology for the securities that failed to properly factor in the securities’ National Best Bid and Offer. Because of this, contends the self-regulatory organization, over 14,800 customer transactions were priced inferior to the NBBO. The SRO also claims that because Citigroup’s BondsDirect system for order execution used a faulty pricing logic, over 7,200 customers transactions were priced at less than NBBO.

FINRA says that Citigroup’s written supervisory procedures and supervisory system related to best execution in these securities were lacking. It claims that the firm did not review customer transactions for the securities at issue, which were either executed manually by the trading desk or on BondsDirect. Such an assessment could have ensured compliance with Citigroup’s best execution duties. (FINRA noted that it had sent the firm inquiry letters about the reviews.)

Citigroup is consenting to the entry of the SRO’s findings. It isn’t, however, denying or agreeing with FINRA’s claims.

FINRA Fines Citigroup Global Markets Inc. $1.85 Million and Orders Restitution of $638,000 for Best Execution and Supervisory Violations in Non-Convertible Preferred Securities Transactions, FINRA, August 26, 2014

Citigroup to Pay $2.5 Million for Pricing Flaws of Markets Unit, The Wall Street Journal, August 26, 2014


More Blog Posts:
Citigroup’s LavaFlow to Pay $5M to SEC For Not Protecting Subscriber Data in ATS, Stockbroker Fraud Blog, July 28, 2014

Judge Rakoff Approves Citigroup’s $285M Mortgage Securities Fraud Deal with the SEC, Institutional Investor Securities Blog, August 5, 2014

Citigroup Settles Mortgage-Backed Securities Probe with DOJ for $7 Billion, Institutional Investor Securities Blog, July 14, 2014

August 26, 2014

Goldman to Buy Back $3.15B in RMBS to Resolve FHFA Claims

Goldman Sachs Group Inc. (GS) will pay $3.15 billion to buy back residential mortgage-backed securities related to bonds that were sold to Freddie Mac and Fannie Mae. The repurchase represents an approximately $1. 2billion premium and makes the mortgage companies whole on the securities. The RMBS case was brought by the Federal Housing Finance Agency.

It was in 2011 that FHFA sued 18 firms to get back taxpayer money from when the U.S. took control of Freddie and Fannie after the economy tanked in 2008. Goldman is the fifteenth bank to settle.

The firm will pay Fannie May $1 billion and $2.15 billion to Freddie Mac for the securities. The two had purchased $11.1 billion from Goldman Sachs. A few of the other banks that have settled with the FHFA include Morgan Stanley (MS), JPMorgan Chase (JPM), and Bank of America Corp. (BAC). The agency’s remaining RMBS fraud cases still pending are those against RBS Securities Inc. (RBS), HSBC North America Holdings Inc., (HSBC), and Nomura Holding America Inc. (NMR).

In June, Goldman and a couple of the now remaining defendants asked U.S. District Judge Denise Cote to reconsider her earlier ruling that FHFA did not wait too long to sue the banks over the RMBS. They've wanted the cases against them dismissed.

Their latest attempt to have the claims tossed out was a result of a recent U.S. Supreme Court ruling. In that decision, the court determined that a federal law did not preempt a state-law statute that put time restrictions on filing an applicable complaint even if a plaintiff was unaware it had a claim. Earlier this month FHFA pointed to a ruling by an appeals court that let the National Credit Union Administration push securities cases against banks even though there were potential issues regarding time limits.

Goldman Sachs Settles FHFA Lawsuit for About $1.2 Billion, The Wall Street Journal, August 22, 2014

Goldman to Buy $3.15 Billion of Debt to End FHFA Claims, Bloomberg, August 22, 2014


More Blog Posts:
Bank of America Settles Mortgage Bond Claims with FHFA for $9.3B, Institutional Investor Securities Blog, March 29, 2014

Massachusetts Files Lawsuit Against Fannie Mae, Freddie Mac, and FHFA, Stockbroker Fraud Blog, June 2, 2014

JPMorgan Will Pay $614M to US Government Over Mortgage Fraud Lawsuit, Stockbroker Fraud Blog, February 8, 2014

August 15, 2014

UBS Wealth, OppenheimerFunds Take Financial Hit From Puerto Rico Muni Bonds

Even though UBS Wealth Management Americas (UBS) has been generating record revenue, the financial firm saw its profits drop upon reporting that had it put aside $44 million for litigation costs primarily related to Puerto Rico bond fraud cases. UBS’s second quarter earnings of $238 million are 3% lower than last year.

Already, UBS clients have filed hundreds of arbitration cases and a number of securities class action lawsuits contending that the brokerage firm put investors’ money in highly leveraged and unsuitable Puerto Rico municipal bond funds that dropped in value last year. These funds begun to lose value again recently.

OppenheimerFunds Inc. (OPY), which is the biggest mutual fund to hold Puerto Rico debt, has also taken a financial hit. Bloomberg reports that in the past year, the firm has seen a loss of close to a third of its funds’ assets. For example, the Oppenheimer Rochester Maryland Municipal Fund (ORMDX) directed approximately 35% of its holdings to the islands as of the end of June. As of August 4, its assets had dropped to $64.9 million. At this time last year, the fund had $96.1 million in assets.

On Thursday, the Puerto Rico Electric Power Authority (Prepa) and creditors arrived at a deal that will give the public agency time to restructure. Prepa will appoint a chief restructuring officer and must come up with a five-year business plan. The agreement will allow the Puerto Rican power authority to utilize $280 million that was in a construction fund to cover capital improvements and current costs. Prepa had until yesterday to extend its credit line with banks or restructure around $9 billion in debt.

Last month, the power authority arrived at deals with Citigroup (C), Bank of Novia Scotia (BNS) and other banks, which has allowed it to delay about $671 million in payments that it owed them. Standard & Poor’s has lowered the utility bonds’ ratings into junk territory.

Puerto Rico lawmakers recently approved legislation that would let a number of public agencies overhaul their finances. Public utilities can work out deals with bondholders to reduce their debt load. Oppenheimer Funds and Franklin Templeton (BEN) have since gone to court to challenge the constitutionality of the law. Their investment funds hold approximately $1.6 billion in Prepa bonds.

The firms believe that the power authority can fulfill its obligations without having to restructure. Puerto Rico wants the judge to dismiss the lawsuit. BlueMountain Capital Management LLC., which holds over $400 million in Prepa-issued bonds, has also filed a lawsuit.

At Shepherd Smith Edwards and Kantas, LTD LLP, our Puerto Rico Bond fraud lawyers have already filed dozens of securities fraud claims against UBS and other brokerage firms related to Puerto Rico bonds or mutual funds holding Puerto Rico Bonds. We represent investors in the U.S. and in Puerto Rico. Please call us for a fee, no obligation, consultation if you or someone you know has lost money investing in Puerto Rico Bonds or funds tied to the Puerto Rico bond market.

Puerto Rico debt depresses UBS Wealth earnings, InvestmentNews, July 29, 2014

OppenheimerFunds Sees Some Funds Shrink 33% on Puerto Rico Bonds, Bloomberg, August 5, 2014

Puerto Rico PREPA Utility Announces Creditor Agreement, Extension, Barron's, August 14, 2014


More Blog Posts:
Investors Pursue UBS's Puerto Rico Brokerage Over Closed-End Bond Funds, Stockbroker Fraud Blog, July 23, 2014

OppenheimerFunds, Franklin Templeton Sue Over Puerto Rican Debt Law, Stockbroker Fraud Blog, July 2, 2014

Hedge Funds Are Moving in on Municipal Debt, Including Puerto Rico Debt, Institutional Investor Securities Blog, November 15, 2013

August 13, 2014

LPL Financial to Pay Illinois $2 Million Fine Related to Variable Annuity Exchanges

In a settlement reached with the Illinois Securities Department, LPL Financial (LPLA) agreed to pay a $2 million fine and $820K in restitution for inadequate books and records maintenance involving 1035 exchanges. According to the firm’s BrokerCheck file, LPL Financial did not enforce “supervisory system and procedures” when certain persons documented variable annuity exchange activities.

Following the settlement, a company spokesperson said that LPL Financial is enhancing its procedures related to surrender charges resulting from variable annuity exchange transactions. This is to make sure these are accurately documented in records, books, and any disclosures that are issued to clients. The brokerage firm is also taking steps so that advisers are properly documenting why variable annuity recommendations were made.

State regulators have been taking a closer look at LPL as they investigate investment product sales. Last year, the broker-dealer settled with the Massachusetts for at least $2 million and a $500,000 fine over nontraded real estate investment trusts. Financial Industry Regulatory Authority fined the firm $7.5 million for 35 e-mail system failures.

In response to the scrutiny, LPL Financial CEO Mark Casady told 3,500 advisers they will need to provide more documentation and background to show regulators. The firm has implemented automated processes to enhance data focus and is looking at other ways to meet regulatory obligations.

According to InvestmentNews.com, a rise in administrative and general costs, primarily because of the regulatory scrutiny, led to flat second-quarter earnings for LPL Financial Holdings Inc. Meantime, UBS Wealth Management (UBS), which also has had to deal with more scrutiny in the wake of the Puerto Rico municipal bonds, debacle, also took an earnings hit. The firm has put aside $44 million for litigation by investors claiming muni bond fraud. Oppenheimer Holdings (OPY), which is under investigation not just by FINRA but also the Securities and Exchange Commission and the U.S. Treasury Department, has reportedly put aside $12 million for possible fines.

LPL Financial hit with $2M fine, ordered to pay $820K in restitution, Investment News, July 30, 2014

LPL Tells Brokers To Expect More Paperwork, The Wall Street Journal, August 13, 2014


More Blog Posts:
LPL Financial Fined $950K by FINRA for Supervisory Failures Involving Alternative Investments, Stockbroker Fraud Blog, March 25, 2014

FINRA Bars Ex-LPL Broker Over Nontraded REIT Sales, Stockbroker Fraud Blog, December 27, 2013

LPL Financial Ordered to Pay $7.5M FINRA Fine Over E-Mail Failures, Institutional Investor Securities Blog, May 22, 2013

August 4, 2014

SEC Charges Ex-UBS Broker in $730K Elder Financial Fraud Ponzi Scam

The Securities and Exchange Commission has filed charges against ex-UBS Wealth Management Americas (UBS) broker Donna Tucker for a Ponzi fraud that allegedly bilked elderly investors of over $730,000. Tucker is accused of misappropriating the money from UBS customers over a five-year period while she worked at the financial firm.

According to the SEC, Tucker took part in unauthorized trading, made misrepresentations to customers about the status of their funds, and forged documents and checks. She allegedly gained customers’ trust by becoming friends with them.

For example, she helped one blind couple take care of their medical needs and pay their monthly bills. The latter action gave her access their checkbook. She used this authorization to forge checks written to cash that she then gave to herself.

She also purportedly lied to the couple about their holdings and gave them bogus documents showing fake brokerage account balances. The SEC says that inn one such instance, after she allegedly took money from the couple’s IRA account, the IRS sent them a delinquency letter about the premature distribution. When the couple asked Tucker about it she claimed that the letter was a mistake and no money had been withdrawn. She also generated a fake account statement to support her lie, as well as a fake letter that was supposedly from the IRA saying the matter had been resolved.

The SEC claims that Tucker took close to $350,000 from this couple alone and hid the theft by convincing them to bank online and use electronic statements because she knew they would not be able to get them.

She also allegedly took out unauthorized margin loans on accounts of customers to pay back other accounts. Tucker then used investors’ funds to pay for vehicles, vacations, clothes, and a country club membership.

UBS has since paid back several customers for Tucker’s fraud. She resigned from UBS last year. In September 2013, the Financial Industry Regulatory Authority barred her.

Tucker is settling the SEC charges and has agreed to disgorge the monies. The order she consented to permanently enjoins her from violating the Securities Act of 1933’s Section 17(a), the Securities Exchange Act of 1934’s Section 10(b), and Rule 10b-5. Meantime, the U.S. Attorney’s Office for the Western District of Virginia has filed a parallel criminal case against her.

Senior Fraud
Elder financial fraud is a serious problem. Shepherd Smith Edwards and Kantas, LTD LLP represents senior investors and others who have suffered losses because of securities fraud. Financial fraud by brokers and investment advisors may result in a huge financial strain for elderly investors. Many of them rely on their retirement monies to carry them through for the remainder of their lives. Our securities lawyers are here to help investors recoup their losses.

SEC Charges Virginia-Based Broker With Stealing Funds From Elderly Customers, SEC, July 31, 2014

Read the SEC's Complaint (PDF)


More Blog Posts:
Boston Investment Firm Accused of $5 Million Real Estate Investment Fraud Targeting Senior Investors, Stockbroker Fraud Blog, June 19, 2014

Investors Pursue UBS's Puerto Rico Brokerage Over Closed-End Bond Funds, Stockbroker Fraud Blog, July 23, 2014

Deutsche Bank, UBS Being Probed Over Dark Pools & High-Frequency Trading, While An Investor Sue Barclays, Institutional Investor Securities Blog, July 30, 2014

July 28, 2014

Citigroup’s LavaFlow to Pay $5M to SEC For Not Protecting Subscriber Data in ATS

LavaFlow Inc., a Citigroup (C) business unit, has consented to pay $ 5million to resolve U.S. Securities and Exchange Commission charges that it did not protect subscribers’ confidential trading data in its alternative trading system. LavaFlow consented to the SEC order without denying or admitting to the allegations.

Per the order, which institutes a settled administrative proceeding, LavaFlow, which runs an electronic communications network ATS, let an affiliate that runs a smart order router application to access and utilize confidential data related to non-displayed orders belonging to subscribers. The order router was not within ECN’s operations and LavaFlow lacked the proper procedures and safeguards to protect this confidential information.

Even though LavaFlow only let the affiliate use the confidential data for ECN subscribers that were also order router customers, the firm did not get subscribers’ consented for their confidential data to be used like this. LavaFlow also failed to disclose this use to the SEC.

LavaFlow has since discontinued this practice. Prior to that, however, the smart order router executed over 400 million shares over three years.

The SEC also claims that LavaFlow aided and abetted a violation by the affiliate that ran smart order router Lava Trading Inc., which kept offering brokerage firm services after it reregistered. During this several month period, Lava Trading made about $1.8 million. Citigroup Financial Products owns Lava Trading.

The SEC order says that LavaFlow violated certain rules of Regulation ATS and aided, abetted, and caused Lava Trade to violate the Securities Exchange Act of 1934. Of the $5 million settlement, $1.8 million in disgorgement of funds made by Lava Trading while it wasn’t registered, $350,000 in prejudgment interest, and a $2.85 million penalty. LavaFlow has been ordered to cease and desist from future violations.

Alternative Trading System
This is a venue that executed stock traders fro traders, including broker-dealers. These stock trading venues are typically run by banks competing with more traditional order flow exchanges. Federal rules mandate that ATS have safeguards to protect its subscribers’ confidential trading information. In the last few months, trading systems have undergone closer regulator scrutiny, especially in relation to high-frequency traders and their relationship to exchange operators.

Just last week, Barclays (BARC) sought to have a dark pool lawsuit filed against it by New York regulators dismissed. The state’s Attorney General Eric Schneiderman claims the British bank lied about giving preferential treatment to high-frequency traders and committed securities fraud.

According to the complaint, Barclays falsely portrayed how clients orders are routed and claims to protect the order from high-speed firms when actually the dark pool LX is operated to the advantage of traders. The bank is now arguing that Schneiderman used misleading data and cherry-picked facts to supports his claims.

Barclays claims that the dark pool lawsuit doesn’t succeed in identifying a specific fraud, failed to establish any material misstatements, and did not identify victims or any real harm.

The bank also says that the Martin Act, which the regulator claims Barclays violated, doesn’t apply to the lawsuit. Under the New York State securities law, prosecutors only have to prove that fraud occurred and doesn’t insist on proof that a firm meant to bilk investors. Barclay, however, said the act doesn’t apply to claims about how a dark pool is run and that Schneiderman’s office is overstepping its mandate in trying to regulate dark pools, which is an SEC job.

Since the case was filed, a number of clients have left Barclay’s LX and trading volume has declined by 75%.

Citigroup Business Unit Charged With Failing to Protect Confidential Subscriber Data While Operating Alternative Trading System, SEC, July 25, 2014

Read the SEC Order (PDF)

Barclays Files to Dismiss New York Attorney General's Dark-Pool Complaint, The Wall Street Journal, July 24, 2014


More Blog Posts:
Second Circuit Overturns Judge's Decision to Block Citigroup's $285M Settlement With the SEC, Stockbroker Fraud Blog, June 4, 2014

$11M Award Against Citi is Vacated by the New York Supreme Court, Stockbroker Fraud Blog, January 30, 2014

Citigroup Settles Mortgage-Backed Securities Probe with DOJ for $7 Billion, Institutional Investor Securities Blog, July 14, 2014

July 23, 2014

Investors Pursue UBS's Puerto Rico Brokerage Over Closed-End Bond Funds

The Financial Industry Regulatory Authority is reporting that roughly 400 claims have already been filed against UBS Financial Services Inc. of Puerto Rico (UBS) and other brokerage firms over the fallout of municipal bonds and bond funds related to the Commonwealth of Puerto Rico. As the U.S. territory’s bonds continue to drop in price, more investors are likely to file cases.

According to Securities Attorney Sam Edwards, one of the partners at Shepherd, Smith, Edwards & Kantas currently representing dozens of investors who lost money in these investments, ““The recent drop in Puerto Rico bond prices have resulted in Puerto Rico bonds, and the bond funds holding Puerto Rico bonds, to give back most, if not all, of the gains of the last nine months. Bond prices have largely returned to the lows suffered in the Fall of 2013.” Mr. Edwards continues, “This is likely to result in new groups of clients coming forward as the rally in Puerto Rico debt appears to have been short-lived.”

Investors, many of them locals, took huge financial losses when two dozen Puerto Rico bond funds sponsored by UBS and Popular Securities, Inc. (Banco Popular) declined in value last year. Many of the investors are retirees and other senior investors that have now lost their life savings. However, they are not the only ones impacted.

Even investors who did not directly invest in Puerto Rico bonds are feeling the effects. That is because there are many single-state and nationally marketed municipal bond funds in the U.S. that also got involved in the island’s debt. Many of the bond funds that were constructed for residents of different states hold Puerto Rico bond funds because of their advantageous tax status. However, with that tax advantage came significant risks.

Franklin Templeton Investments (BEN) and Oppenheimer Funds offer the 10 bond mutual funds with the most exposure to Puerto Rico bonds. Recently, these two fund managers filed a lawsuit seeking to have a new Puerto Rico law, known as the Public Corporation Debt Enforcement and Recovery Act, struck down.

The law, which lets parts of the U.S. territory restructure its debt, is causing investors to worry about significant losses to principle. The funds are arguing that the law violates the U.S. Constitution because it lets the territory impair certain contracts. They contend that the federal government is the only entity allowed to make bankruptcy law.

Puerto Rico is now asking a federal court to throw out the lawsuit, arguing that states are only barred from making bankruptcy law if this conflicts with federal law. It says that contracts are allowed to be impaired if this means fulfilling an “important government purpose.” Puerto Rico also noted that existing bankruptcy laws are not applicable to the island.

Additionally, the U.S. territory argues, the lawsuit was not timely because the specific local bonds at issue are from the Puerto Rico Electric Power Authority (PREPA) and the electric authority has not yet attempted to restructure its debt. The fund managers collectively hold around $1.7 billion in PREPA debt.

At Shepherd Smith Edwards and Kantas, LTD LLP, our Puerto Rico bond fraud law attorneys are representing many Puerto Rico residents. We have already filed more than 20 case against UBS and others, with dozens more pending. We represent investors in the U.S. and in the Commonwealth.

The first securities arbitration hearings will likely happen sometime this year. FINRA arbitrators will hear most of the muni bond fraud cases in Puerto Rico.

If you are an investor who has suffered losses from investing in these Puerto Rico bonds or bond funds holding Puerto Rico debt, please contact us today. There is still time to try to get your money back.


A Deluge of Legal Claims Hit UBS’ Puerto Rico Unit Over Closed End Bond Funds, The Wall Street Journal, July 21, 2014

Puerto Rico seeks dismissal of U.S. bond funds' lawsuit, Reuters, July 21, 2014

Puerto Rico Electric Power Authority


More Blog Posts:

OppenheimerFunds, Franklin Templeton Sue Over Puerto Rican Debt Law, Stockbroker Fraud Blog, July 2, 2014

UBS AG Under Criminal Investigation Over Puerto Rico Bond Fund Sales, Stockbroker Fraud Blog, June 21, 2014

Hedge Funds Are Moving in on Municipal Debt, Including Puerto Rico Debt, Institutional Investor Securities Blog, November 15, 2013

July 1, 2014

Broker Fraud: Ex-Investors Capital Rep. is Indicted in Ponzi Scheme, Credit Suisse Sues Two Ex-Brokers Over Client Data Theft, and SEC Files More Insider Trading in IBM-SPSS Acquisition

Ex-Investors Capital Rep. Charged in $2.5M Ponzi Scam
Patricia S. Miller, a former Investors Capital Corp. representative, has been indicted on charges that she ran a $2.5 million investment fraud. She is accused of promising clients high yields for placing funds in “investment clubs.” Miller allegedly took this money and either gambled it away or used it to pay for her own spending.

According to prosecutors in Massachusetts, alleged fraud took place from 2002 through May 2014. Investors Capital fired Miller last month. Her BrokerCheck Report notes that the independent broker-dealer let her go because she allegedly misappropriated funds, borrowed client money, generated false documents, and engaged in “fraudulent investment activity.” Miller is charged with five counts of wire fraud.

Credit Suisse Sues Former Advisers For Allegedly Stealing Client Data
Credit Suisse Securities (CS) is suing John Delehanty and David Starker for violating their non-solicitation agreements when leaving the firm. The firm is accusing the men of taking client lists and sending confidential information to their personal accounts before going to work with J.P. Morgan Securities (JPM). The firm has also filed a claim with FINRA seeking damages.

In dispute was a contact list consisting of about 3,00 names that Starker sent from his Credit Suisse work e-mail account to his personal one. The list included notes about prospective clients. Delehanty is also accused of sending confidential client information to his personal e-mail account.

Under the Protocol for Broker Recruiting, which has been signed by about 1,100 brokerage firms, a broker is not subject to litigation when recruited to another firm as long as they bring just a spreadsheet that contains only certain client data, such as phone numbers and names. Anything more is considered a violation. However, this can be undone if the broker gives back the information when resigning. Credit Suisse said that Delehanty and Starker did not answer request by the firm to follow this protocol.

SEC Files More Insider Trading Charges in IBM-SPSS Acquisition
The Securities and Exchange Commission is charging two more brokers with insider trading prior to IBM’s acquisition of SPSS Inc. in 2009. Ex-representatives Daryl M. Payton and Benjamin Durant III allegedly traded illegally on the information that the deal was going to happen. They got the tip from another broker, Thomas C. Conrad.

Now, the regulator wants ill-gotten gains of about $300,000 returned, along with financial penalties, interest, and permanent injunctions. The U.S. Attorney’s Office for the Southern District of New York has filed a parallel action against the two men.

The SEC had previously filed insider trading charges against Conradt and David J. Weishaus, also a broker and tippee. They got the information from Conradt’s roommate, research analyst Trent Martin, who received the data from an attorney who worked on the deal. The three men have settled with the SEC. They entered guilty pleas in their criminal cases.

SEC Charges Former Brokers with Trading Ahead of IBM-SPSS Acquisition, SEC, June 25, 2014

Ex-Credit Suisse brokers sued over alleged theft of client data, InvestmentNews, June 30, 2014

Advisor Indicted In Long-Running Ponzi Scheme, FA-Mag, June 30, 2014


More Blog Posts:
Ponzi Scams: FINRA Bars Ex-Raymond James Broker Over $3M Ponzi Scam, Expels Success Trade Securities, Inc. for Bilking NFL and NBA Players, Stockbroker Fraud Blog, June 27, 2014

BNP Pleads Guilty to Criminal Charges Over Sanctions Violations, Pays $8.8B Fine, Institutional Investor Securities Blog, June 30, 2014

Credit Suisse Admits Wrongdoing and Will Pay $196M to Settle SEC Charges That It Provided Unregistered Services to US Customers, Stockbroker Fraud, February 22, 2014

June 26, 2014

NY Sues Barclays Over Alleged High Speed Trading Favors in Dark Pool

New York Attorney General Eric Schneiderman has filed a securities fraud lawsuit against Barclays (BARC) Plc. accusing the British bank of lying about giving preference to high-frequency traders. The state contends that Barclays took part in fraudulent activity related to a dark pool. The British-based bank has 20 days to respond to the securities fraud charges.

Financial Industry Regulatory Authority data says that for the first week of June 2014, LX was the number two biggest alternative trading system in the United States. According to the high frequency trading case, LX, which is Barclays’ dark pool, favors computer-driven firms that can weave their way through the market at super fast speeds yet downplays how much these high-frequency traders use the venue.

Schneiderman says that the bank falsely depicted the way it routes the orders of clients and claimed to protect them from high-speed firms, when really the dark pool was run to the advantage of these traders. He claims that Barclays even specifically sought to bring in high-speed traders to LX, giving them preferential treatment over others by providing them with details about the way the dark pool is run.

According to his complaint, over a dozen high-frequency firms, including Virtu Financial Inc., Jump Trading LLC, and Citadel LLC, took part in “significant trading activity” on the LX venue. The firms are not part of this case.

Recently, the Securities and Exchange Commission announced that it is investigating dark pools. The regulator wants to know if these trading venues are providing accurate disclosure about the way they are run and if investors are treated equally. The SEC is concerned that the high speed in which stocks are sold and bought may place retail investors at a disadvantage.

If you are a retail investor who has sustained losses that you believe may be the result of securities fraud, contact Shepherd Smith Edwards and Kantas, LTD LLP today.

New York Attorney General Sues Barclays Over Stock-Trading Business, The Wall Street Journal, June 25, 2014

Cracks Open in Dark Pool Defense With Barclays Lawsuit, Businessweek, June 26, 2014


More Blog Posts:
SEC To Tackle High-Speed Trading, Dark Pools With New Initiatives, Stockbroker Fraud Blog, June 6, 2014

FINRA Headlines: SRO Fines Goldman Sachs, Merrill Lynch, and Barclays Capital $1M Each & Makes Dark Pool Data Available, June 7, 2014

Pennsylvania Private Equity Firm Settles SEC Charges Over “Pay to Play” Violations Related to Political Campaign Contributions, Institutional Investor Securities Blog, June 23, 2014

June 21, 2014

UBS AG Under Criminal Investigation Over Puerto Rico Bond Fund Sales

Authorities in the United States are reportedly investigating UBS AG (UBSN) for its actions in Puerto Rico. The criminal fraud investigation comes in the wake of allegations that an ex-UBS broker in Puerto Rico told clients to improperly borrow money to purchase local mutual funds that later sank.

The investigation is centered around non-purpose loans that came from UBS Bank USA of Utah. The former UBS broker, Jose Ramirez, organized the loans for clients. The bank has since let him go.

Under internal guidelines, such loans are not allowed to be used for the purchase of securities since those very securities will be the collateral for the loans. Now, however, investors are saying that Ramirez was utilizing these loans to purchase more shares in the bond funds for them. Some are even saying that he gave them paperwork that made it appear as if customers were borrowing from the UBS bank in Puerto Rico and not the one in Utah. More than 100 investors may have been affected.

The investors contend that Ramirez told these clients to place their loan proceeds in accounts at an unrelated local bank. They wrote him checks for the amounts of the loan and he allegedly used the money to purchase more bond fund shares for these investors.

Now investigators are trying to figure out whether UBS executives on the mainland and in Puerto Rico were aware that proceeds from loans made by the firm’s unit in Utah were used in a manner that violated the bank’s own lending rules. If these executives were aware of what was going on but failed to act to prevent the fraud, they could be found criminally accountable.

Another problem with the loans is that the US territory’s Office of the Financial Institutions Commissioner never granted UBS bank a license to lend them in Puerto Rico. After the lending of the loans was discovered, the bank consented to sell the loans to its brokerage firm in Puerto Rico. But when clients were asked to sign statements promising not to use the proceeds from the loan to buy securities, many had to refuse because some of their securities were purchased with the loan proceeds. They then had to pay back the loans by selling their shares of the bond funds right away at a loss.

Puerto Rico Muni Bonds
Whether borrowed money was used to purchase UBS’s Puerto Rico municipal bond funds or not, investors in Puerto Rico muni bonds sustained huge losses when they failed last year. Many of the muni bonds included Puerto Rico government bonds that UBS underwrote. Those bonds have now all been downgraded to “junk” status, which some being close to default or a significant restricting.

Our investigation has uncovered thousands of Puerto Rican investors who have lost a significant portion of their life savings in local closed-end funds. Our Puerto Rico bond fraud lawyers are currently representing dozens of investors both in Puerto Rico and in the US. Please contact Shepherd Smith Edwards and Kantas, LTD LLP today for a free, no obligation consultation.

Exclusive: UBS faces criminal probe for Puerto Rico bond fund sales - lawyers, Chicago Tribune, June 19, 2014

UBS Loans to Puerto Rico Fund Investors Said to Face U.S. Probe, Bloomberg, June 20, 2014


More Blog Posts:
Puerto Rico-Based Doral Financial Expected to Default on Over $150M in Muni Bondsg, Stockbroker Fraud Blog, May 12, 2014

FINRA Sees 10% Rise in Arbitration Cases, Puerto Rico Bond Claims A Factor, Stockbroker Fraud Blog, April 27, 2014

Hedge Funds Are Moving in on Municipal Debt, Including Puerto Rico Debt, Institutional Investor Securities Blog, November 15, 2013

June 18, 2014

Morgan Stanley Must Pay Connecticut Regulators $5M for Supervisory Violations

Morgan Stanley (MS) must pay banking regulators in Connecticut $5 million over allegations that the broker-dealer did not properly oversee the communications of its brokers. According to The Connecticut Department of banking, there were a number of issues with the firm’s supervisory procedures. The firm is settling without denying or admitting to the securities allegations.

The state regulators say that Morgan Stanley, which has wealth management branch offices in Connecticut, gave them information about their supervisory procedures that either was “obsolete” or nonexistent. Connecticut Securities Division director Eric Wilder also said that the firm had not updated its written supervisory procedures or compliance manuals for a number of years.

Morgan Stanley is accused of depending on an unqualified third-party provider in India to review all email communications. According to Connecticut regulators, the brokerage firm neglected to make sure that whoever was overseeing the India provider had the proper license and was following the Financial Industry Regulatory Authority’s most current procedures. (Wilder said that the minimum criteria that someone in that country needed to fulfill the compliance function was the ability to speak English—Morgan Stanley has specifically denied this allegation.)

To resolve the claims, the firm is going to update its written procedures. Branch supervisors will also be granted direct access to oversee the emails of advisers. Meantime, the third-party service provider in India can continue to work with Morgan Stanley but the proper licenses are required.

Connecticut Banking Regulators Settle With Morgan Stanley Smith Barney Over E-Mail Problems
, Courant.com, June 16, 2014

Banking Commissioner Announces $5 Million Settlement With Morgan Stanley, Connecticut Department of Banking, June 16, 2014


More Blog Posts:
Morgan Stanley Gets $5M Fine for Supervisory Failures Involving 83 IPO Shares Sales, Stockbroker Fraud Blog, May 6, 2014

PNC Bank Sues Morgan Stanley & Ex-Trust Adviser For “Surreptitious Conspiracy”, Institutional Investor Securities Blog, April 3, 2014

$550M Securities Fraud Case Between Texas’ Wyly Brothers & SEC Goes to Trial, Stockbroker Fraud Blog, April 2, 2014

June 13, 2014

Broker Headlines: Former Wells Fargo Broker Must Pay Back Firm $1.2M, Morgan Stanley CEO Wants to Lower Broker Compensation, & Representatives Oppose Best Interest Rules

Ex-Wells Fargo Advisors Broker Must Pay Back Firm $1.2M
A Financial Industry Regulatory Authority panel says that Philip DuAmarel, a former Wells Fargo Advisor (WFC), must pay his former employer back almost $1.3 million. The panel denied his claim that the firm oversold its corporate stock plan services during his recruitment. They told him to pay back the unvested part of an upfront loan he received when he became part of Wells Fargo.

DuAmarel worked for the firm for less than three years when he left in 2010 for Bank of America (BAC) Merrill Lynch. He contended that when the firm was recruiting him he was misled about Wells Fargo’s ability to serve corporate stock plans and also regarding how much he could make for helping executives with their company’s stock trades. DuMarel’s attorney said that the broker left when it became obvious he wouldn’t be able to work with clients they way he did when he was at Citigroup (C) Global Market’s Smith Barney.

Morgan Stanley CEO Seeks To Give Brokers Reduced Payouts
James Gorman, the CEO of Morgan Stanley (MS), said he wants to reduce broker payouts relative to revenue. This could mean that compensation in the wealth management business could drop to 55% of revenue, which is down 5% from last year. He said the reduction could be attributed to an increase in lending and banking products that garner less commission for advisers and fee-based accounts that offer a larger revenue/dollar of client assets (as opposed to accounts where commissions are involved).

Gorman, who made his statements at the firm’s yearly financials conference, also talked about how recruiting expenses was another area that was buoying cost ratios in the brokerage division. He said that the industry had arrived at a breaking point regarding how many veteran financial advisers could be traded back and forth among the biggest firms.

Brokers Oppose DOL’s Proposed Rule About Clients’ Best Interests in Retirement Accounts
According to The New York Times, the Securities Industry and Financial Markets Association, which represents big financial firms on Wall Street, and the Financial Services Institute are continuing to oppose a proposed Labor Department rule that would mandate that a wider group of professionals place clients’ interests ahead of their own when it comes to retirement accounts. Right now, brokers are not obligated to do this when when advising clients about retirement.

The DOL is trying to amend a rule that is part of Employee Retirement Income Security Act, which outlines when advisers become fiduciaries. Currently, it isn’t very difficult for brokers to avoid becoming a fiduciary under Erisa. Before they must follow the higher standard they have to satisfy a five-part test. If they have a customer advice just once, the adviser doesn’t have to meet the rule requirements. Also, the broker and consumer have to both agree that the advice given was the primary reason for an investment choice.

Opponents of the rule, however, have continued to delay even the release of a revised proposed rule. They claim that the new rules would affect the way the industry is paid, which could make it hard for them to work with smaller investors. They are worried the rules could stop them from being able to charge commissions.

Under Erisa fiduciaries are not allowed to receive payment in a manner that would present a conflict of interest. Right now, are compensated in ways where there is possible conflict. This happens when a representative can earn a higher commission when recommending one product over another. Revenue sharing also presents possible conflicts.

Ex-Wells broker ordered to repay firm $1.2 million, Investment News, June 12, 2014

Morgan Stanley's Gorman seeks to tame broker compensation, Investment News, June 11, 2014

Brokers Fight Rule to Favor Best Interests of Customers, NY Times, June 12, 2014

ERISA, United States Department of Labor


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June 7, 2014

FINRA Headlines: SRO Fines Goldman Sachs, Merrill Lynch, and Barclays Capital $1M Each & Makes Dark Pool Data Available

FINRA Fines Merrill Lynch, Goldman, and Barclays Capital $1M Each Over Blue Sheet Data

The Financial Industry Regulatory Authority has issued a censure that fines Goldman Sachs & Co. (GS), Merrill Lynch, Pierce Fenner & Smith Inc., and Barclays Capital Inc. $1 million each. The firms are accused of not submitting accurate and complete data about trades conducted by them and their customers to the SRO and other regulators. This information is known as “blue sheet” data. Firms are legally required to give regulators this information upon request.

Blue sheets give regulators specific information about trades, including the name of a security, the price, the day it was traded, who was involved, and the size of transaction. This information is helpful to identify anomalies in trading and look into possible market manipulations.

The three firms, which all have a prior history of submitting inaccurate blue sheet data, settled the charges without denying or admitting to the allegations. Meantime, FINRA has also put out a complaint against Wedbush Inc. also over submitting inaccurate blue sheet information. That case, however, has not been adjudicated yet.


FINRA Gives the Public Access to Dark Pool Data
To enhance market transparency and boost investor confidence, this week FINRA started providing data about the activity levels in all of the different alternative trading systems. This includes information pertaining to dark pools.

Currently, ATSs are involved in a significant chunk of OTC trading in exchange-listed equities located in the US. Although trades in ATSs have been available in real time to professionals and investors via securities information processors, they are not typically attributed to specific dark pools.

The newly available data should allow the public to see how many shares were traded each week in each dark pool. The information can be found on FINRA’s website and is free.

Meantime, as our stockbroker fraud law firm reported in another blog post, the Securities and Exchange Commission is also seeking to make dark pool venues more transparent.

Shepherd Smith Edwards and Kantas, LTD LLP represents investors in arbitration and in court. Contact us to find out whether you have reason to pursue a securities claim. Your consultation with one of our FINRA arbitration lawyers is free.


FINRA Fines Barclays Capital, Goldman Sachs and Merrill Lynch $1 Million Each for Submitting Inaccurate Blue Sheet Data, FINRA, June 4, 2014

FINRA Makes Dark Pool Data Available Free to the Investing Public, FINRA, June 2, 2014

User Agreement, ATS Transparency Data, FINRA


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June 4, 2014

Second Circuit Overturns Judge's Decision to Block Citigroup's $285M Settlement With the SEC

The Second Circuit appeals court said that District Judge Jed Rakoff abused his discretion when he rejected the $285 million mortgage settlement between the SEC and Citigroup (C). The regulator accused Citigroup of selling sections of Class V Funding III, a $1 billion mortgage-bond deal, without revealing that the bank was betting against $500 million of the assets.

Rakoff, a district court judge, said that he partially blocked the settlement because he didn’t agree with a Commission practice in which the party involved gets to resolve a case without denying or admitting to wrongdoing. Last year the SEC reversed its policy that automatically lets companies settle without making a wrongdoing admission. Now, the regulator is compelling admissions in cases that are especially egregious. Also, following Rakoff’s ruling, other judges followed his lead in a number of lawsuits.

This week, however, the appeals court said that the Commission should be granted wide deference when it is deciding whether or not a case should go to trial or settle. The three-judge panel said the deal between the SEC and Citigroup was in the interest of the public.

The court noted that Rakoff shouldn’t have sought to make the agency establish the veracity of the claims made against the party as a condition for whether he would approve the decree of consent. The Second Circuit said that the district court doesn’t have “purview” to mandate facts.

Now, the appeals court is remanding the mortgage case back to Rakoff. However, he isn’t obligated to okay the deal right away. The court said the judge could still seek additional disclosures from the two parties.

The panel also issued guidelines for how to exercise discretion in federal enforcement cases. As long as the SEC abides by these correct procedures, a judge’s decision-making power would be limited.

The appellate court’s decision is expected to directly affect the $616 million securities fraud settlement reached between SEC and SAC Capital Advisors over insider trading allegations. Although a judge approved the deal last year, the ruling was contingent upon the outcome of the appeal in the Citigroup settlement.

Appeals Court Says Judge Erred in Blocking SEC-Citigroup Settlement, The Wall Street Journal, January 4, 2014

Appeals Court Overturns Decision to Reject S.E.C.-Citigroup Settlement, The NY Times, June 4, 2014

Cohen's SAC to pay $616 million in SEC insider trade settlement, Reuters, March 15, 2013


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Citigroup’s $285M Mortgage-Related CDO Settlement with Raises Concerns About SEC’s Enforcement Practices for Judge Rakoff, Institutional Investor Securities Blog, November 9, 2011

May 30, 2014

Wells Fargo Must Face Los Angeles’s Lawsuit Over Predatory Loans

U.S. District Judge Otis Wright II says that a lawsuit by the city of Los Angeles, which seeks to hold Wells Fargo & Co. (WFC) liable for foreclosures that occurred when the U.S. housing market collapsed, may proceed. Although Wright did not rule on the merits of the city’s claims, he said that L.A.’s allegations that the bank used “predatory loans” to target minority lenders were legally sufficient at this point.

The California city has filed separate cases against Wells Fargo, Bank of America Corp. (BAC) and Citigroup Inc. (C) accusing the mortgage lenders of engaging in discriminatory practices going as far back as at least 2004. L.A. says that the banks placed minority borrowers in loans that were out of their budget, raising the number of foreclosures in the city’s neighborhoods.

According to the city, local homeowners have lost around $78.8 billion in home value because of foreclosures that occurred between 2008 and 2012. Property tax revenue that was lost because of this was reportedly $481 million. Now, Los Angeles wants to hold the banks liable for the increase in municipal services and the tax revenue that was lost due to the foreclosures.

L.A. had also sued Deutsche Bank AG (DB) in the role of the foreclosed properties’ owner. Last year, the lender settled with the city. It said that securitization trusts and services would pay the city $10 million.

Already, Bank of America and Wells Fargo have paid a combined total of over $500 million in of the largest residential cases. The US government claims that borrowers who had loans that came from Countrywide and Wells Fargo were likelier to be paired subprime loans if they were Hispanics or Blacks

Earlier this year, Illinois’s Cook County sued HSBC Holdings Plc. (HSBA) for allegedly targeting minority borrowers in the Chicago area through costly home loans. The populous county wants unspecified punitive and compensatory damages for costs to police to keep up deteriorating areas and because of lost tax revenue on properties that became vacant.

Also the US cities of Memphis, Tennessee, and Baltimore, Cleveland have filed claims contending that banks made loans to unqualified minority borrowers or gave them high-interest subprime mortgages even though they qualified for prime loans. These cities brought their cases under the Housing Act.

Wells Fargo Can’t Shake L.A. Lawsuit Over Predatory Loans, Bloomberg, May 28, 2014

Judge denies Wells Fargo's bid to dismiss L.A. predatory lending suit, Reuters, May 28, 2014


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Fannie Mae Sues UBS, Bank of America, Credit Suisse, JPMorgan Chase, Citigroup, & Deutsche Bank, & Others for $800M Over Libor
, Institutional Investor Securities Blog, December 14, 2013

May 22, 2014

SEC Investigates Merrill Lynch & Charles Schwab Over Allegations of Failures that Allowed Mexican Drug Cartels to Launder Money

The SEC is investigating whether Merrill Lynch (MER) and Charles Schwab Corp. (SCHW) did not recognize signs that that some of their customers might have been laundering money because they didn’t do enough to find out who these clients were. Some of the purported money laundering has been linked to drug cartels in Mexico.

Bank of America Corp. (BAC) now owns Merrill Lynch. The SEC says that the two broker-dealers accepted as clients individuals who gave out fake addresses and shell companies. For example, one Charles Schwab client, a Texas rancher, had been moving funds to a holding company that was actually a shell company. Also, some account holders with Schwab were linked to drug money in Mexico. Certain accounts contained millions of dollars.

Broker-dealers must set up, document, and keep up steps so that it can identify its customers and confirm their identifies. Failure to do any of these can result in stiff penalties, such as the $1 million E*Trade Financial Corp. was ordered to pay in 2008. The firm did not check to confirm the identities of over 65,000 secondary account holders. Because of this failure false reporting occurred.

Last year, HSBC Holdings Plc (HSBA) reached a $1.9 billion deal with the U.S. over charges that it made it possible for drug cartels in Latin America to launder billions of dollars. The agreement was a deferred-prosecution deal.

The firm is accused of not monitoring over $670 billion in wire transfers and over $9 billion in purchase of U.S. money from HSBC Mexico, which made it possible for the money laundering to happen. HSBC also allegedly violated U.S. economic sanctions against Sudan, Libya, Iran, Cuba, and Burma.


At Shepherd Smith Edwards and Kantas, LTD LLP, we are here to help our investors get their securities fraud losses. Contact our securities lawyers today.

SEC probes Schwab, Merrill, for anti-money laundering violations, sources say, Chicago Tribune/Reuters, May 22, 2014

HSBC Judge Approves $1.9B Drug-Money Laundering Accord, Bloomberg, July 3, 2013


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May 9, 2014

Goldman Sachs Under Investigation Over Hiring Practices, High-Frequency Trading

Goldman Sachs (GS) Group Inc. said it is under scrutiny in probes related to high-frequency trading and whether its hiring practices comply US antibribery laws. This is the first time the firm has publicly disclosed both investigations. The information was made available via Goldman’s quarterly filing with the SEC.

In the bank hiring practices investigation, Credit Suisse Group Ag (CS), Morgan Stanley (MS), UBS AG (UBS), and Citigroup (C) are also under scrutiny. The Securities and Exchange Commission wants to know whether the banks or their staff hired the relatives of well-connected officials in Asia, which could be a violation of the antibribery laws—in particular, the Foreign Corrupt Practices Act, which prevents companies from giving foreign officials items of value in exchange for business. Although it isn’t illegal to hire government officials’ relatives in Asia, hires cannot just be made for the purpose of earning new business.

As for the high-speed trading probe, the US Justice Department, the SEC, New York Attorney General Eric Schneiderman, and the Federal Bureau of Investigation are assessing trades that engage in fast algorithmic trading. Schneiderman wants to know if firms involved in high-speed trading have secret deals with trading venues, such as dark pools and stock exchanges, that lets them trade before other investors.

Goldman has Sigma X, which is a dark pool trading operation. Recently, the firm has been weighing whether to shut it down amidst the growing criticism over this kind of private stock-trading venue. (In 2011, Sigma X experienced a pricing malfunction and customers were not paid correctly for transactions. Goldman reimbursed them the losses.)

In dark pools, investors get to be more anonymous than in public markets. Recent technological glitches in the stock market, however, have emphasized the risks involved in running private trading platforms. The Financial Industry Authority is also looking at the way brokers use dark pools to make trades and route customer orders.

Goldman is currently a defendant in a class action securities case over high-speed trading. The Rhode Island capital of Providence proposed the lawsuit for investors who bought stock in the US between 2009 and now.

Goldman and the other defendants, JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC), Morgan Stanley (MS), and Citigroup Inc. (C) , are accused of working with stock exchanges run by NASDAQ OMX Group Inc., BATS Global Markets Inc., Chicago Board Options Exchange, and Intercontinental Exchange's New York Stock Exchange to manipulate the markets while engaging in fraud. As a result, contends the high-frequency trading lawsuit, every year, billions of dollars were diverted from the sellers of securities and its buyers.

The securities complaint says that brokerages and stock exchanges got kickbacks for giving high-frequency trading firms access to material trading information. Other allegations include rebate arbitrage, electronic front-running, contemporaneous trading, and spoofing.

Exchanges, brokerages hit with high-speed trading class action, Reuters, April 18, 2014

Goldman Mulls Closing Dark Pool, The Wall Street Journal, April 8, 2014


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FINRA NEWS: Goldman Sachs Appeals Vacating of Securities Award, Non-Customers of Brokerage Firm Can’t Compel Arbitration, & Three Governors Named To FINRA Board, Stockbroker Fraud Blog, August 21, 2013

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May 6, 2014

Morgan Stanley Gets $5M Fine for Supervisory Failures Involving 83 IPO Shares Sales

Morgan Stanley Smith Barney LLC (MS) will pay a $5 million fine for supervisory failures involving its advisors soliciting shares in 83 IPOs to retail investors. The Financial Industry Regulatory Authority says that the firm lacked the proper training and procedures to make sure that salespersons knew the difference between “conditional offers” and “indications of interest."

By settling, Morgan Stanley is not denying or admitting to the securities charges. It is, however, consenting to the entry of findings by FINRA.

FINRA believes these issues are related to Morgan Stanley’s acquisition of Smith Barney from Citigroup (C) a couple of years ago. In addition to inheriting more high net worth clients, the SRO contends that Morgan Stanley ended up with financial advisers who might not have gotten the needed training.

Firms are allowed to solicit for “indications of interest” in an initial public offering before the registration statement becomes effective. These are not binding and may only lead to the purchase of shares if the investor reconfirms the intent to buy after the date that the statement went into effect. As for “conditional offers to buy,” these can result in a binding deal after the date that the statement becomes effective as long as the investor doesn’t do anything to rescind it before the firm accepts.

FINRA says that beginning in February 2012, Morgan Stanley put into place a policy in which these two terms were used interchangeably and without appropriate consideration for whether the customer needed to confirm its interest prior to the execution of a sale. The SRO claims that the financial advisers did not get the training or materials they needed to make sure the policy was clear to them. Because of these violations, customers and staff may not have properly comprehended which commitment was solicited.

The SRO is accusing Morgan Stanley of failing to properly monitor compliance and not installing procedures to ensure that conditional offers were solicited in a way that met FINRA rules and federal securities law requirements. The supervisory failures purportedly continued through May 1, 2013. Some of the shares were even sold via social media, including Yelp and Facebook.

Read FINRA's Action to Morgan Stanley (PDF)

Finra Fines Morgan Stanley $5 Million Over IPO Rules, The Wall Street Journal, May 6, 2014


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April 25, 2014

Charles Schwab’s Barring of Customers from Joining Class Actions Violated FINRA Rules, Says Board of Governors

In a victory for the Financial Industry Regulatory Authority, its Board of Governors has determined that Charles Schwab & Co. (SCHW) violated the self-regulatory organization’s rules when it added waiver language to agreements that prohibited customers from becoming part of any class action cases against the financial firm. Schwab has agreed to settle these claims with a fine of $500,000. Also, it will tell all its customers that the requirement is no longer in effect.

Schwab made amendments to the customer account agreement of over 6.8 million investors in 2011. The move came after it settled a class action securities case accusing the broker-dealer of misleading thousands of customers about its YieldPlus money market fund. (The fund sustained huge losses during the 2008 economic crisis, and to resolve the claims, Schwab agreed to pay $235 million.)

Included in the amendments were waiver provisions mandating that customers consent that any claims against the firm could only be arbitrated individually. Also, arbitrators would not be able to consolidate consolidated claims for more than one party.

In 2012, Schwab was told to pay a $500,000 fine for making customers agree to this. The firm appealed. The case, however, wasn’t been resolved until now.

The board’s ruling partially reverses and affirms an earlier decision made by a FINRA Hearing Panel. The panel determined that waiver violated FINRA rules that restrict what verbiage financial firms could use in predispute arbitration agreements. It also said that the rules could not be enforced by the SRO as they were in conflict with the Federal Arbitration Act.

The board, however, determined that The Act does not preclude the regulator’s ability to enforce its rules and overturned the earlier finding. It upheld the panel’s finding that Schwab’s effort to stop FINRA arbitrators from putting together multiple parties’ claims was a violation of the regulator’s rules.

Consumer advocates and securities fraud lawyers had worried that Schwab’s efforts to prevent class action lawsuits would establish a precedent and that other brokers would follow suit by adding similar clauses in their own agreements with customers. This could have harmed those investors who can't afford the expense of arbitration on their own.

The board’s ruling comes even after the decision last year by the US Supreme Court in American Express v. Italian Colors Restaurant. In that 5-3 ruling, the court said that a class action waiver used in contracts with merchants who use American Express’s charge card was enforceable under the Federal Arbitration Act. The merchants had contended that the waiver precluded any class action claims while only allowing individual disputes to be pursued via individual cases in arbitration even though this option could be costlier.

At Shepherd Smith Edwards and Kantas, LTD, LLP, we believe that filing an individual claim increases your chances of getting the maximum recovery possible. You want to work with a securities fraud law firm that experienced in getting investors’ funds back.

Schwab drops ban on clients filing class-action lawsuits, Reuters, April 24, 2014

Board Decision Finds Charles Schwab & Co. Violated FINRA Rules by Adding Waiver Provisions in Customer Agreements Prohibiting Customers From Participating in Class Actions; Reverses FINRA Hearing Panel Decision, FINRA, April 24, 2014

American Express v. Italian Colors Restaurant (PDF)

The Federal Arbitration Act


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March 31, 2014

Bank of America, Its Ex-CEO To Pay $25M to Settle Securities Case with NY Over Merrill Lynch Deal

Bank of America Corp. (BAC) and its ex-CEO Kenneth Lewis have consented to pay $25 million to settle the remaining big securities fraud case accusing them of misleading investors about the financial state of Merrill Lynch & Co. during the 2008 financial crisis. The New York securities case accuses the bank of deceiving shareholders by not disclosing Merrill’s increasing losses before the acquisition deal was closed or letting them know that the deal let Merrill give its officials billions of dollars in awards.

As part of the settlement, the bank will pay the state of New York $15 million and it will enhance its oversight. Lewis, meantime, has consented to pay $10 million and he cannot work at or serve as a director of any public company for three years.

Also named as a defendant in the securities lawsuit but who refused to settle is ex-Bank of America CFO Joe Price. NY Attorney General Eric Schneiderman intends to pursue a summary judgment against him, as well as ask a judge to reach a decision without a trial. Schneiderman reportedly wants Price permanently banned from serving as a director or working at a public company.

Previously, Lewis and other Bank of America directors agreed to pay $20 million to settle a securities fraud lawsuit by investors accusing them of not disclosing needed data about Merrill before the takeover was approved. In 2012, the bank consented to pay $2.43 billion to resolve a class-action securities case with investors accusing the institution and its officers of making misleading and false statements about Merrill’s financial health. Just two year before that Bank of America agreed to pay $150 million to settle with the SEC over charges that it did not disclose material data about Merrill.

Bank of America acquired Merrill in a $50 billion deal in September 2008, which is when Lehman Brothers Holdings went into bankruptcy. While the deal was at first considered good news, especially as the rest of Wall Street appeared to be in so much trouble, analysts started to wonder if Lewis paid too much. There was also Merrill’s losses right before the acquisition was finalized.

Because of investors’ fears about the financial crisis, share prices of Bank of America dropped significantly, causing the value of the deal to drop to about $19 billion by the time it actually was finalized in January 2009. Securities fraud lawsuits then followed.

Bank of America’s decisions to purchase Merrill and Countrywide Financial Corp. have since compelled it to put aside over $42 billion to cover lawsuit costs, reserves, and payouts. Many of the securities cases contend that Countrywide, once one of the biggest subprime mortgage lenders, sold faulty mortgage securities to investors leading up to the 2008 economic crisis.

In October, a jury found Bank of America liable for securities fraud over the mortgages that Countrywide originated as home loans that in then sold to Freddie Mac and Fannie Mae.

Please contact our stockbroker fraud lawyers if you suspect your investment losses are because of financial fraud.

Lewis, BofA Reach $25 Million Pact With N.Y. Over Merrill, Bloomberg, March 26, 2014

Bank of America to pay $2.43B in settlement, Yahoo, September 28, 2012

Bank of America liable for Countrywide mortgage fraud, Reuters, October 23, 2008


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