March 9, 2013

US Courts & Securities Roundup: Arbitration Award in Citi’s Favor is Approved & Investors’ Claims Against An Oppenheimer Private Equity Fund Are Dismissed

District Court Approves Citigroup’s Arbitration Award in Securities Case Against the Abu Dhabi Investment Authority
A judge held that a tribunal did not behave in manifest disregard of the law and that its refusal to provide two documents that the Abu Dhabi Investment Authority had asked for did not make the proceedings “fundamentally unfair.” The court confirmed an award issued in Citigroup Inc.’s (C) favor, which found that the ADIA did not succeed in showing that the arbitration panel’s New York choice of law decision and evidentiary rulings warranted that the award be vacated.

The securities case is Abu Dhabi Investment Authority v. Citigroup Inc.
The disagreement between the two parties comes from a $7.5B investment that ADIA made in Citi in 2007. When differences that could not be reconciled came up, ADIA filed its arbitration claim with the International Centre for Dispute Resolution. It wanted to either have the contract rescinded or be paid over $4B because of alleged common law fraud, securities fraud, breach of contract, and negligent misrepresentation.

However, the arbitration panel ruled in favor of Citi. ADIA then sought to have the award vacated, noting that the tribunal’s decision to invoke New York substantive law to all claims occurred in manifest disregard” of the law while violating the Federal Arbitration Act. The court, however, disagreed. It also said that the tribunal’s refusal to grant access to two document requests was not a violation of the New York Arbitration Convention or the FAA, especially considering that it granted ADIA’s 56 other document requests, which gave the latter access to over 550,000 document pages.


Investors Claims Against An Oppenheimer Private Equity Fund Are Dismissed
The U.S. District Court for the District of Massachusetts has turned down two public retirement funds’ securities claims against an Oppenheimer & Co. Inc. The claimants contend that the Oppenheimer Global Resource Private Equity Fund I LP and related defendants had made false claims to try to get investors. Judge Rya Zobel granted the defendant’s motion to dismiss the Massachusetts securities lawsuit.

The Quincy Retirement Board and the Brockton Retirement Board had substantially invested in the Oppenheimer-administered fund in 2010. Meantime, the fund invested in a fund administered by the Romanian government. The Oppenheimer fund had estimated its investments’ worth via market price but later allegedly changed that up to applying the shares’ par value, which is a lot higher than their market value. As a result, the defendant allegedly about “quadrupled” its reported holdings’ value.

The plaintiffs putative filed a class action securities case in 2012 accusing the fund of “inflating” numbers to draw in investors and get them to think that the fund was making a profit when it was actually at a loss. They contended that the fund’s offering materials made misstatements and violated the ’33 Act. The court, however, said that the act only creates liability for statements that are untrue in a prospectus if public offerings are involved and not private placements.

Related Web Resources:
Abu Dhabi Investment Authority v. Citigroup Inc., Justia Docket

Brockton Retirement Board v. Oppenheimer Global Resource Private Equity Fund I LP, Justia Docket


More Blog Posts:
FINRA Pulls Back on Regulating Registered Investment Advisers, Stockbroker Fraud Blog, February 19, 2013

Judge that Dismissed Regulators’ Claims Against Morgan Keegan to Rule on ARS Lawsuit Again After His Ruling Was Reversed on Appeal, Institutional Investor Securities Blog, November 27, 2012

The 11th Circuit Revives SEC Fraud Lawsuit Against Morgan Keegan Over Auction-Rate Securities, Institutional Investor Securities Blog, May 8, 2012

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Posted In: Citigroup , Financial Firms

November 7, 2012

Citigroup to Pay $2M Massachusetts Over Allegedly Improper Disclosure About Facebook Before IPO & SEC Wants Additional Comments on Nasdaq’s Proposed $62M Fund For Those that Experienced Technical Glitches After Trading Began

Citigroup Global markets Inc. (C) has consented to pay $2M to settle claims by the state of Massachusetts that a research analyst improperly disclosed information about Facebook (FB) before the company’s initial public offering. According to Secretary of the Commonwealth William F. Galvin, the financial firm neglected to supervise this person, who allegedly gave research information to a media technology site. Galvin says that this disclosure violated state securities laws, a nondisclosure arrangement between Facebook and Citigroup, and FINRA and NASD rules. While Citigroup has admitted to the statement of facts, it has not denied or admitted violating SRO rules and securities laws.

Per the allegations In re Citigroup Global Markets Inc., Mass. Sec. Div., the junior analyst emailed the information to AOL Inc.-owned media site TechCrunch. The data contained projections by a senior analyst about the IPO. Citigroup is accused of not detecting or preventing the disclosure until responded to a subpoena issued by Massachusetts. Also implicated in the order was a senior Citigroup analyst accused of giving data about YouTube Inc. revenue estimates to a French magazine without getting the communication approved first.

The Facebook IPO in May has attracted a lot of attention from regulators and lawmakers. One reason for this is allegations that analysts gave certain investors select data about the offering. There was also the problem of technical glitches that arose when trading began. Securities lawsuits and congressional and regulatory probes ensued.

To compensate investors that suffered losses from the technical snafus, Nasdaq Stock Market LLC is proposing a $62 million reimbursement fund. Now, the Securities and Exchange Commission is asking for more comment about this proposed fund. As of October 26, most of the 11 letters it had received had voiced objections. For example, some took issue with the $40.527 benchmark price that was used to figure out how much members are owed, while others didn’t like how only a limited number/kinds of orders are eligible for compensation: sells that were priced at $42 or under that failed to execute, sales in this price range that were executed at a lower price, purchases priced at $42 that went through but weren’t confirmed right away, and purchases at the same price that not only went through and weren’t confirmed but also efforts were made to cancel them. Qualified market participants wanting to take part in the compensation program would have to relinquish other related claims that might also be valid.

Citi fined $2 million over Facebook IPO, fires two analysts, Reuters, October 26, 2012

Read the Consent Order resolving the proceedings between Massachusetts and Citigroup(PDF)


More Blog Posts:
Citigroup Inc. CEO Vikram Pandit Resigns, Institutional Investor Securities Blog, October 16, 2012

Citigroup Inc.’s $590M CDO Putative Class Action Settlement Gets Preliminary Approval from District Court, Stockbroker Fraud Blog, September 13, 2012

Massachusetts Commonwealth Secretary William Galvin Sues UBS for Fraud, Stockbroker Fraud Blog, June 30, 2012

Continue reading "Citigroup to Pay $2M Massachusetts Over Allegedly Improper Disclosure About Facebook Before IPO & SEC Wants Additional Comments on Nasdaq’s Proposed $62M Fund For Those that Experienced Technical Glitches After Trading Began" »

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Posted In: Citigroup , Financial Firms

September 13, 2012

Citigroup Inc.’s $590M CDO Putative Class Action Settlement Gets Preliminary Approval from District Court

The U.S. District Court for the Southern District of New York has given preliminary approval to the putative class action settlement reached between Citigroup Inc. (C) and its shareholders. Citigroup has agreed to pay $590 million over allegations that it misled the plaintiffs about its exposure to tens of billions of dollars collateralized debt obligations that were backed by residential mortgaged-backed securities and instead hid its toxic assets on its books. The plaintiffs contend that they sustained huge losses as a result. A settlement hearing for final approval is scheduled in January 2013.

The preliminary deal reached between the parties is the third largest shareholder class action settlement to be reached related to the 2008 financial crisis. Automated Trading Desk LLC shareholders, led by founder David Whitcomb and ex-ATD executive Jonathan Butler, are spearheading this securities case. (Citigroup had paid $680 million to buy ATD in 2008.) Other plaintiffs include pension funds in Ohio, Colorado, and Illinois.

Per the plaintiff shareholders, who purchased Citigroup shares between February 26, 2007 and April 18, 2008, it was around this time that Citigroup was involved in a “quasi-Ponzi scam” to make it seem as if its assets were doing well. The financial firm allegedly made material misrepresentations about CDO exposure—instead, claiming that it had sold CDOs worth billions of dollars and was no longer contending with their related risks—and failed to let investors know that it had guaranteed the securities (even transferring the guarantees it had established so the risks would be hidden).

The plaintiffs are also accusing Citibank of failing to do write-downs of the instruments in a timely manner during the class period ,even though it was aware that the subprime crash would cause great harm to its CDO holdings, and repackaging securities that no one wanted to buy into new CDOs so its exposure to the securities would be concealed. Also, per the amended complaint, Citigroup allegedly failed to modify its valuations when the CDO indexes revealed a huge drop in the securities values. Instead, the financial firm depended on higher valuations provide by sales it made to itself or from ratings firms.

Although Citibank is settling, it continues to deny the shareholder plaintiffs’ allegations. It claims it reached the agreement to get rid of the “burden and expense” of allowing this litigation to proceed. It also is saying that it is a different company now than what it was at the start of the economic crisis. Meantime, the interim lead plaintiffs have said they agreed to settle because it would be a “significant benefit” especially in light of the risk that the Settlement Class might not get anything if they had lost the CDO securities lawsuit.

Citigroup agrees to $590 million subprime settlement, The Washington Post, August 29, 2012

Citigroup Pays ATD Executives Again in $590 Million Deal, Bloomberg, August 30, 2012

In re Citigroup Inc. Sec. Litig., S.D.N.Y., No. 07 Civ. 9901 (SHS), 8/29/12 (PDF)

More Blog Posts:
Wells Fargo Securities Settles for Over $6.5M SEC Charges Over Allegedly Improper Sale of ABCP Investments with Risky MBS and CDOs, Institutional Investor Securities Blog, August 14, 2012

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

Morgan Stanley, Citigroup, Wells Fargo, and UBS to Pay $9.1M Over Leveraged and Inverse ETFs, Stockbroker Fraud Blog, May 3, 2012

Continue reading "Citigroup Inc.’s $590M CDO Putative Class Action Settlement Gets Preliminary Approval from District Court" »

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Posted In: Citigroup , Financial Firms

August 11, 2012

Stockbroker Securities Roundup: Criminal Convictions Vacated Against Six Charged in Front Running Scam and Citigroup Broker Cleared in $1B CDO Deal SEC Case

The U.S. Court of Appeals for the Second has vacated the convictions of six brokers who were criminally charged in a front-running scam to give day traders privileged information via brokerage firms’ squawk boxes. The case is United States v. Mahaffy.

Judge Barrington Parker said that confidence in the jury’s verdict was undermined because the government did not disclose a number of SEC deposition transcripts “pursuant to Brady v. Maryland, 373 U.S. 83 (1963).” Also, noting that there were flaws in the instructions that the jury was given, the second circuit vacated the honest-services fraud convictions that they had issued against the defendant.

The brokers, who were employed by different brokerage firms, had been charged for conspiring to provide A.B. Watley day traders confidential data about securities transactions. This entailed putting phone receivers close to the broker-dealers internal speaker systems so that the traders could make trades in the securities that were squawked before the customer orders were executed.

The defendants were acquitted on 38 of the 39 criminal counts, with the jury hung on the count of securities fraud conspiracy in 2007. A mistrial was declared. In 2009, the last count of conspiracy involving property fraud and honest services fraud was retried and the defendants wee convicted. However, after defendant Kenneth Mahaffy was pursued by the SEC via administrative proceedings that involved transcripts of investigative dispositions going as far back as the end of 2004, the defendants pushed for a new trial because they said these papers had exculpatory Brady material that undermined or were in contradiction to government witnesses ‘testimony regarding whether “allegedly misappropriated information” had in fact been “confidential” under Carpenter v. United States, 484 U.S. 19 (1987).

The district court said that even if the prosecution had shared this testimony, the jury would not have reached another conclusion. Now, however, the appeals court is disagreeing and has vacated the part of the conspiracy convictions related to confidential data being misappropriated.

Another broker who was recently cleared of wrongdoing is former Citigroup Global Markets Inc. (ASBXL) executive Brian Stoker. He was accused of making material misrepresentations related to the $1 billion collateralized debt obligation that resulted in the $285 billion settlement between the financial firm and the SEC that US District Judge Jed Rakoff rejected last year.

The SEC said that Stoker, who was the main structurer on the Class V Funding III CDO and in charge of making sure the offering circular was accurate, allegedly did not disclose that the financial firm was employing the CDO as a proprietary trade and that it planned on shorting a specific assets set in its investment portfolio to benefit itself at investors’ expense. (Class V III and other CDO squareds create leveraged housing market exposure, which can increase investors losses should the market collapse.) However, jurors in federal court in Manhattan have decided that Stoker was not liable for misleading investors.

Reuters reports that the outcome of SEC v. Stoker could be a boon to the SEC in the case involving Rakoff’s rejected settlement. The 2nd circuit had ruled that the district judge acted improperly when he turned the settlement down. The appeals court said it was up to the Commission and not a federal judge to decide whether such a settlement benefits the public. A separate panel will now consider a joint appeal filed by Citi and the SEC against Rakoff’s decision. Should Citi’s legal representatives argue that the Commissions evidence was completely revealed during the Stoker trial, this would undermine Rakoff’s contention that he and the public didn’t see the SEC’s case and so could not understand why merely a $285 million settlement was reached when investor lost close to $700 million in the bank’s mortgage-backed securities sale.

Stockbroker fraud can lead to massive losses for investors. You want to retain the services of a securities law firm that can help you recover your lost investment whether through arbitration or litigation.

United States v. Mahaffy (PDF)

SEC Loses Lawsuit Against Ex-Citigroup Official Stoker, Bloomberg, July 31, 2012


More Blog Posts:
Citigroup’s $285M Settlement With the SEC Is Turned Down by Judge Rakoff, Stockbroker Fraud Blog, November 28, 2011

SEC Looks Likely to Win Appeal in $285M Securities Settlement that Judge Rakoff Rejected, Institutional Investor Securities Blog, March 15, 2012

While Former Merrill Lynch & Co. Stockbroker is Found Guilty of Witness Tampering, Seven Other Defendants are Acquitted in “Squawk Box” Securities Fraud Case Involving A.B. Watley Employees, Stockbroker Fraud Blog, July 7 2007

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Posted In: A.B. Watley , Citigroup , Collateral Debt Obligation , Financial Firms , Securities Fraud

August 7, 2012

Plaintiff Says Morgan Stanley Fired Him for Calling out Investment Adviser Who Was Churning Accounts and Bilking Investors

Clifford Jagodzinski has filed a lawsuit against Morgan Stanley & Co. (MS), Morgan Stanley Smith Barney, and Citigroup (C). He claims that he was fired from his job at Morgan Stanley as a complex risk officer because he reported that an investment adviser was churning accounts and earning tens of thousands of dollars while defrauding clients. Jagodzinski filed his case in federal court.

He contends that even though he always received excellent job evaluations during the six years he worked for Morgan Stanley, he was terminated as an employee 10 days after he told supervisors that unless the financial firm started reporting unauthorized trades it would be violating SEC regulations. Jagodzinski said that the financial firm told him to sign a confidentiality agreement with a non-disparagement clause and then proceeded to hurt his career by claiming that he was let go because of poor performance. He wants reinstatement and punitive and compensatory damages of over $1 million for whistleblower violations.

Jagodzinski believes that his trouble started after he told his supervisors, Ben Firestein and David Turetzky, that Harvey Kadden, one of the firm’s new wealth managers, was allegedly flipping preferred securities so that he could make tens of thousands of dollars in commissions, while causing his clients to sustain financial losses or make little gains as he exposed them to risks that could have been avoided. Jagodzinski said that while he was initially praised for identifying the alleged misconduct, his supervisors told him not to look into the matter further. He believes this is because Morgan Stanley had given Kadden a $25 million guarantee, and due to their high expectations of him, they didn’t want to hurt his book of business.

Jagodzinski said that he encountered similar resistance when he notified the financial firm of other violations, including those involving Bill Siegel, another financial adviser that he accused of making unauthorized trades. Once again, he says he was told not to investigate or report the alleged violations further—even though (he says) Siegel admitted to making 80 unauthorized trades for one client and other ones for other clients. Although Turetsky allegedly told him that this was because he didn’t want Siegel fired, Jagodzinski suspects that his supervisor was more concerned that the defendants would have to pay penalties and fines. He also said that when he reported his concerns that yet another financial adviser was not just engaging in improper treasury trades but also abusing drugs, his worries were again brushed aside.

An employee who gets fired for blowing the whistle on a company or a coworker can have grounds for filing a wrongful termination lawsuit. If the wronged employee is a whistleblower, he is entitled to certain protections, which include being shielded from retaliation on the job for stepping forward and doing what is right.

Worker Says He Caught Morgan Stanley in the Act, Courthouse News Service, August 3, 2012

Ex-Morgan Stanley Risk Officer Sues Bank Over Firing, Bloomberg, August 1, 2012


More Blog Posts:
Dodd-Frank Whistleblower Protection Amendment Must Be Applied Retroactively, Said District Court, Stockbroker Fraud Blog, July 21, 2012

SEC’s Office of the Whistleblower In Early Phase of Evaluating Reward Claims, Institutional Investor Securities Blog, March 23, 2012

District Court Denies UBS Summary Judgment in Sarbanes-Oxley Whistleblower Lawsuit, Stockbroker Fraud Blog, June 27, 2012

Continue reading "Plaintiff Says Morgan Stanley Fired Him for Calling out Investment Adviser Who Was Churning Accounts and Bilking Investors " »

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Posted In: Citigroup , Financial Firms , Morgan Stanley , Whistleblower Lawsuits

May 3, 2012

Morgan Stanley, Citigroup, Wells Fargo, and UBS to Pay $9.1M Over Leveraged and Inverse ETFs

Wells Fargo & Co. (WFC), UBS AG (UBSN), Morgan Stanley (MS), and Citigroup Inc. (C) have consented to pay a combined $9.1 million to settle Financial Industry Regulatory Authority claims that they did not adequately supervise the sale of leveraged and inverse exchange-traded funds in 2008 and 2009. $7.3 million of this is fines. The remaining $1.8 million will go to affected customers. The SRO says that the four financial firms had no reasonable grounds for recommending these securities to the investors, yet they each sold billions of dollars of ETFs to clients. Some of these investors ended up holding them for extended periods while the markets were exhibiting volatility.

It was in June 2009 that FINRA cautioned brokers that long-term investors and leveraged and inverse ETFs were not a good match. While UBS suspended its sale of these ETFs after the SRO issued its warning, it eventually resumed selling them but doesn’t recommend them to clients anymore. Morgan Stanley also had announced that it would place restrictions on ETF sales. Meantime, Wells Fargo continues to sell leveraged and inverse ETF. However, a spokesperson for the financial firm says that it has implemented enhanced procedures and policies to ensure that it meets its regulatory responsibilities. Citigroup also has enhanced its policies, procedures, and training related to the sale of these ETFs. (FINRA began looking into how leveraged and inverse ETFs are being marketed to clients in March after one ETN, VelocityShares Daily 2x VIX Short-Term (TVIX), which is managed by Credit Suisse (CS), lost half its worth in two days.)

The Securities and Exchange Commission describes ETFs as (usually) registered investment companies with shares that represent an interest in a portfolio with securities that track an underlying index or benchmark. While leveraged ETFs look to deliver multiples of the performance of the benchmark or index they are tracking, inverse ETFs seek to do the opposite. Both types of ETFs seek to do this with the help of different investment strategies involving future contracts, swaps, and other derivative instruments. The majority of leveraged and inverse ETFs “reset” daily. How they perform over extend time periods can differ from how well their benchmark or underlying index does during the same duration. Per Bloomberg, leveraged and inverse ETFs hold $29.3 billion in the US.

“These highly leveraged investments were - and still are - being bought into the accounts of unsophisticated investors at these and other firms,” said Leveraged and Inverse ETF Attorney William Shepherd. “Although most firms do not allow margin investing in retirement accounts, many did not screen accounts to flag these leveraged investments which can operate on the same principle as margin accounts.”

For investors, it is important that they understand the risks involved in leveraged and inverse ETFs. Depending on what investment strategies the ETF employs, the risks may vary. Long-term investors should be especially careful about their decision to invest in leveraged and inverse ETFs.

Finra Sanctions Citi, Morgan Stanley, UBS, Wells Fargo $9.1M For Leveraged ETFs, The Wall Street Journal, May 1, 2012

Leveraged and Inverse ETFs: Specialized Products with Extra Risks for Buy-and-Hold Investors, SEC

FINRA investigating exchange-traded notes: spokesperson, Reuters, March 29, 2012


More Blog Posts:
SEC to Investigate Seesawing Credit Suisse TVIX Note, Stockbroker Fraud Blog, March 30, 2012

Principals of Global Arena Capital Corp. and Berthel, Fisher & Company Financial Services, Inc. Settle FINRA Securities Allegations, Stockbroker Fraud Blog, April 6, 2012

Goldman Sachs to Pay $22M For Alleged Lack of Proper Internal Controls That Allowed Analysts to Attend Trading Huddles and Tip Favored Clients, Institutional Investor Securities Blog, April 12, 2012

Continue reading "Morgan Stanley, Citigroup, Wells Fargo, and UBS to Pay $9.1M Over Leveraged and Inverse ETFs " »

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Posted In: Citigroup , Credit Suisse , Exchange Traded Funds , FINRA , Financial Firms , Inadequate Supervision , Morgan Stanley , UBS , Wells Fargo

April 10, 2012

Stockbroker Fraud Roundup: SEC Issues Alert for Broker-Dealers and Investors Over Municipal Bonds, Man Who Posed As Investment Adviser Pleads Guilty to Securities Fraud, and Citigroup Settles FINRA Claims of Excessive Markups/Markdowns

The SEC’s Office of Compliance Inspections and Examinations has put out an alert reminding broker-dealers about what their supervisory and due diligence duties are when it comes to underwriting municipal securities offerings. According to the examination staff, there are financial firms that are not maintaining enough written evidence to show that they are in compliance with their responsibilities as they related to supervision and due diligence. OCIE Director Carlo di Florio stressed how sufficient due diligence when determining the operational and financial condition of municipalities and states before selling their securities, is key to investor protection.

The SEC has also issued an Investor Bulletin to provide individual investors with key information about municipal bonds. Its Office of Investor Education and Advocacy wants to make sure investors know that the risks involved include:

Call risk: the possibility that an issuer will have to pay back a bond before it matures, which can occur if interest rates drop.

Credit risk: The chance that financial problems may result for the bond issuer, making it challenging or impossible to pay back principal and interest in full.

Interest rate risk: Should US interest rates go up, investors with a low fixed-rate municipal bond who try to sell the bond prior to maturity might lose money.

Inflation risk: Inflation can lower buying power, which can prove harmful for investors that are getting a fixed income rate.

Liquidity risk: In the event that an investor is unable to find an active market for the municipal bond, this could stop them from selling or buying when they want to or getting a certain bond price.

As a municipal bond buyer, an investor is lending money to the bond issuer (usually a state, city, county, or other government entity) in return for the promise of regular interest payments and the return of principal. The maturity date of a municipal bond, which is when the bond issuer would pay back the principal, might be years—especially for long-term bonds. Short-term bonds have a maturity date of one to three years.

In other stockbroker fraud news, Citigroup Inc. (C) subsidiary Citi International Financial Services LLC has agreed to pay almost $1.25 million in restitution and fines to settle claims by FINRA that it charged excessive markups and markdowns on corporate and agency bond transactions between July 2007 and September 2010. The SRO says that the markdowns and markups ranged from 2.73% to over 10% and were too much if you factor in the market’s condition during that time period, how much it actually cost to complete the transactions, and the services that the clients were actually provided. FINRA also claims Citi International failed to exercise “reasonable diligence” to ensure that clients were billed the most favorable price possible. To settle the SRO’s claims, Citi International will pay about $648,000 in restitution, plus interest, and a $600,000 fine.

Also, a man falsely claiming to be an investment advisor has pleaded guilty to securities fraud. Telson Okhio, president of the purported financial firm Ohio Group Holdings Inc., has pleaded guilty to wire fraud over a financial scam that defrauded one Hawaiian investor of about $1 million.

Okhio solicited $5 million from the investor while claiming that the money would be invested in the foreign currency exchange market using a $100 million trading platform. He said the investment was risk-free and would earn 200% during the first month. Okhio is accused of immediately taking $1 million of the investor’s money and placing the funds in his personal account. He faces up to 20 years behind bars.

Investor Bulletin: Municipal Bonds, SEC.gov

Individual Posing as Investment Advisor Pleads Guilty to Wire Fraud Charges, FBI, March 16, 2012

FINRA Fines Citi International Financial $600,000 and Orders Restitution of $648,000 for Excessive Markups and Markdowns, FINRA, March 19, 2012


More Blog Posts:
Principals of Global Arena Capital Corp. and Berthel, Fisher & Company Financial Services, Inc. Settle FINRA Securities Allegations, Stockbroker Fraud Blog, April 6, 2012

CFTC Says RBC Took Part in Massive Trading Scam to Avail of Tax Benefits, Stockbroker Fraud Blog, April 4, 2012

Wirehouses Struggle to Retain Their Share of the High-Net-Worth-Market, Institutional Investor Securities Blog, April 6, 2012

Continue reading "Stockbroker Fraud Roundup: SEC Issues Alert for Broker-Dealers and Investors Over Municipal Bonds, Man Who Posed As Investment Adviser Pleads Guilty to Securities Fraud, and Citigroup Settles FINRA Claims of Excessive Markups/Markdowns" »

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Posted In: Citigroup , Financial Firms , Municipal Bonds , Municipal Securities Offerings

January 21, 2012

Unsealed Documents in $54.4M FINRA Arbitration Case Reveal that Citigroup Did Not Disclose Municipal Bond Risks to Investors

Last month, a US judge refused Citigroup’s request to overturn a $54.1M arbitration award that a Financial Industry Regulatory Authority arbitration panel had ordered the financial firm to pay investors Gerald D. Hosier, Jerry Murdock Jr. and Brush Creek Capital. The award was the largest amount ever granted to individuals in a securities arbitration proceeding.

Following Citigroup’s request that a United States district court toss out the award, details from what were confidential proceedings have been unsealed. According to the New York Times, documents viewed by the arbitrators show that on a scale of 1 to 5, with 5 signifying the highest risk (usually only assigned to products that potentially carried the risk of an investor losing everything), Citigroup rated these investments as having a 5 rating for risk. Is it no wonder then that investors could and would go on to lose 80% of what they had investments.

The investments, which were municipal arbitrage portfolios, are known as ASTA/MAT. Citigroup Global Markets sold them through MAT Finance LLC.

Per internal e-mails, after the investments began declining in value in early 2008, when Citigroup wealth management head Sallie Krawcheck asked for the MAT’s risk rating,” She was told that it was “3-5.” Also, customers were never told about the 5 rating that their investments were previously given. The Times also reported that during a conference call involving brokers whose clients had sustained losses, the portfolio manager was directed to not discuss internal guidelines, which contained different information than what was in the prospectus that investors had received.

Citigroup eventually would offer to buy back the investments at a discount price but only if investors agreed to not file a securities fraud lawsuit against the financial firm. (Brokers have said they felt pressured by Citigroup to get investors on board with this. For example, a memo with the heading “Fund Rescue Options “noted that if the broker’s client let Citigroup repurchase the instruments, this would not be noted in his/her U-5 regulatory record. If, however, the client chose to sue, then this would appear in the broker’s U-5.)

In their securities fraud case, Claimants accused Citigroup of failure to supervise, fraud, and unsuitability. After the FINRA arbitration panel ordered them to pay the investors, Citigroup argued that panel members had ignored the law and contended that despite verbal statements made to investors, the latter had signed agreements acknowledging that the risk of losing everything was a possibility. Judge Christine Arguello would go on to affirm the FINRA panel’s decision. While the majority of the award was compensation for the claimants’ investment losses, about $17 million was for punitive damages.

Secrets of a Sales Machine, NY Times, January 14, 2012

Citigroup Slammed With $54 Million Award by FINRA Arbitrators in MAT/ASTA Case, Forbes, April 12, 2011


More Blog Posts:
Citigroup Request to Overturn $54.1M Municipal Bond Arbitration Ruling Denied by Judge, Institutional Investor Securities Blog, December 27, 2011

Citigroup Global Markets Settles for $725,000 FINRA Fine Over Failure to Disclose Conflicts of Interest, Stockbroker Fraud Blog, January 20, 2012

Citigroup Global Markets Inc. Sues Two Saudi Investors in an Attempt to Block Their FINRA Arbitration Claim Over $383M in Losses, Stockbroker Fraud Blog, October 22, 2012

Continue reading "Unsealed Documents in $54.4M FINRA Arbitration Case Reveal that Citigroup Did Not Disclose Municipal Bond Risks to Investors " »

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Posted In: Citigroup , FINRA , Financial Firms

January 20, 2012

Citigroup Global Markets Settles for $725,000 FINRA Fine Over Failure to Disclose Conflicts of Interest

FINRA says that Citigroup Global Markets will pay a fine of $725K for not disclosing specific conflicts of interest during public appearances made by research analysts and in research reports. By settling, Citigroup is not denying or admitting to the charges although it has, however, consented to an entry of the findings.

According to the SRO, in research reports published between 1/07 and 3/10, the financial firm did not disclose possible conflicts of interest that existed in certain business connections, including the facts that the financial firm and its affiliates:
• Received revenue or investment banking from certain companies
• Had an at least 1% or more ownership in companies that were covered
• Managed public securities offerings
• Made a market in certain covered companies’ securities

Also, FINRA says that Citigroup research analysts did not reveal these same conflicts when bringing up the covered companies during public appearances.

As a result of these alleged failures to disclose, FINRA contends that Citigroup kept investors from knowing of possible biases in the research recommendations that it made. FINRA says that such disclosures are essential in order to make sure that investors are given all of the information they need when making decisions about investments.

The SRO said that the reason Citigroup did not provide the required information is that the database for identifying and creating disclosures experienced technical difficulties and/or was inaccurate. FINRA also cites a lack of proper supervisory procedures that could have prevented such inaccuracies and disclosure failures. However, Citigroup did self-report a number of the deficiencies and has taken remedial steps to remedy them.

A financial firm can be held liable when failure to disclose key facts about an investment leads to an investor sustaining financial losses. In many instances, such omissions are made to hide or diminish the risk involved in the investment. While some omissions are intentional, others can occur due to inadequate supervision or the lack of proper systems and procedures to make sure such failures to disclose don’t happen.

It is a broker’s obligation to fairly disclose all the risks involved in a potential investment. (Misrepresenting material facts is another way that risks are concealed and investors end up losing money.

It doesn't matter whether malicious intent was involved. If a broker-dealer concealed OR failed to disclose key information related to your investment and you suffered financial losses on your investment, you may have a securities fraud case on your hands that could allow you to recover your losses.


Citi settles with Finra over alleged conflicts at its brokerage, Investment News, January 20, 2012

Finra Fines Citigroup $725,000 For Alleged Research Violations, The Wall Street Journal, January 18, 2012

Financial Industry Regulatory Authority

More Blog Posts:
Citigroup’s $285M Settlement With the SEC Is Turned Down by Judge Rakoff, Stockbroker Fraud Blog, November 28, 2011

Citigroup Global Markets Inc. Sues Two Saudi Investors in an Attempt to Block Their FINRA Arbitration Claim Over $383M in Losses, Stockbroker Fraud Blog, October 22, 2011

Securities Fraud Lawsuit Against Citigroup Involving Mortgage-Related Risk Results in Mixed Ruling, Institutional Investor Securities Blog, November 30, 2010

Continue reading "Citigroup Global Markets Settles for $725,000 FINRA Fine Over Failure to Disclose Conflicts of Interest" »

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Posted In: Citigroup , FINRA , Financial Firms

November 28, 2011

Citigroup’s $285M Settlement With the SEC Is Turned Down by Judge Rakoff

U.S. District Judge Jed S. Rakoff has turned down the proposed $285M settlement between the SEC and Citigroup Global Markets Inc. However, unlike with the SEC’s tentative $33M settlement with Bank of America that he rejected, eventually approving a $150 million settlement between both parties—this time, Rakoff is ordering the SEC and Citigroup to trial.

The SEC claimed Citigroup sold Class V Funding III right as the housing market fell apart in 2007 and then bet against the $1 billion mortgage-linked collateralized debt obligation. Meantime, the financial firm allegedly failed to tell clients about this conflict of interest. Investors would go on to lose nearly $700 million over the CDO, while Citigroup ended up making about $160 million.

To many observers, Rakoff’s decision doesn’t come as a surprise. He has expressed concern with the SEC’s handling of securities cases for some time. In his ruling today, Rakoff was very clear in stating that he didn’t believe the tentative agreement was “fair… reasonable… adequate, nor in the public interest.” He also called for the “underlying facts” and made it clear that the SEC’s typical boilerplate settlement, which usually involves the other party agreeing to the terms but not admitting to or denying wrongdoing, was not going to suffice.

Until now, the SEC’s settlement policy has allowed the Commission to declare a victory while letting defendants get away with not acknowledging any wrongdoing so that private plaintiffs cannot use such an outcome in litigation against them. Now, however, Rakoff wants the court and the public to actually learn whether or not Citigroup acted improperly.

Also in his opinion, Rakoff spoke about how the current settlement doesn’t do anything for the investors that Citigroup allegedly defrauded of hundreds of millions of dollars. Not only that but the SEC isn't promising to compensate the alleged securities fraud victims.

For now, the trial between Citigroup and the SEC is scheduled for July 2012. However, the Commission could decide to appeal Rakoff’s ruling and ask an appellate court to either make him accept the $285 million settlement or appoint a new judge to the case. According to the New York Times, however, this could prove challenging because a writ of mandamus would be required.

Our securities fraud law firm has had it with financial firms defrauding investors and then getting away with this type of misconduct. It is our job to help our clients recoup their losses whether via arbitration or in court.

Behind Rakoff’s Rejection of Citigroup Settlement, NY Times, November 28, 2011

Judge to SEC: Stop settling, start really suing, OC Register, November 28, 2011

Read Judge Rakoff's Opinion


More Blog Posts:
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

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

Ex-Goldman Sachs Director Rajat Gupta Pleads Not Guilty to Insider Trading Charges, Stockbroker Fraud Blog, October 26, 2011

Continue reading "Citigroup’s $285M Settlement With the SEC Is Turned Down by Judge Rakoff" »

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Posted In: Citigroup , Collateral Debt Obligation , Financial Firms , SEC

October 22, 2011

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

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

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

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

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

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

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

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

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

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

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

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

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Posted In: Arbitration , Citigroup , FINRA , Financial Firms

September 9, 2011

Claimant Not Only $100K Loses Securities Arbitration Case Against Citigroup Global Markets But Gets Stuck with Financial Firm’s $50K in Legal Bills

Alphonse M. Lucchese, a CitiSmith Barney customer, has not only lost his $100,000 securities claim against the financial firm in Financial Industry Regulatory Authority arbitration, but he also now must pay for Citigroup’s $49,985 in attorney fees. The case is Alphonse M. Lucchese, Claimant, v. Citi Smith Barney, Citigroup Global Markets, Inc., Robert Joseph Malenfant, and Alfred George Weaver, Respondents.

Lucchese had originally filed a securities fraud lawsuit in Middlesex Superior Court of Massachusetts. The case was later dismissed and sent to arbitration.

Lucchese claims Smith Barney stockbroker Weaver, who is a Respondent, recommended that he buy 4,000 shares of Lehman preferred. Despite his reservations—including concerns about the stock and how they compared with other companies’ shares—Lucchese “reluctantly agreed” and at $25/share spent $100,000.

The stock initially dropped 20%—a $20,000 drop in value. The Claimant says that Weaver told him to hold on to his stock. When the financial markets collapsed, Lucchese’s stocks’ worth then dropped by 63%. He says that when he told Weaver to sell the position even though it meant losing $63,000, the broker recommended that the Claimant still hold on to his shares and that Lehman was not going to fail… only it did. Lucchese’s shares then became worthless when Lehman filed for bankruptcy.

While Weaver acknowledged making a mistake by not selling Lucchese’s stock, the Respondent claims that the Claimant never ordered him to sell. Lucchese disputes this account.

The arbitrator, when ruling on the case, decided that there was lack of credible evidence supporting Lucchese’s claim. He also found that Weaver acted on “good faith” when he advised Lucchese not to sell prior to Lehman filing for bankruptcy and that the broker would have no way of knowing that this would happen.

Lucchese’s claims of securities fraud, including breach of fiduciary duty, breach of contract, negligence, failure to supervise, violations of federal and state securities laws, and other violations were denied in their entirety. In addition, the arbitrator determined that the Claimant should be responsible for Citigroup’s legal fees of $49,985, $3,150 in arbitration forum fees, and $400 for the explained decision.

Most securities cases must be resolved in arbitration and you want to make sure you are represented by experienced stockbroker fraud lawyers to increase your chances of recouping your losses. A securities claim is not the type of case you want to handle on your own.


Citi Smith Barney Customer Sues Over 2008 Failure to Sell Lehman Shares, Forbes, December 18, 2011


More Blog Posts:
Citigroup Global Markets Inc. Sues Two Saudi Investors in an Attempt to Block Their FINRA Arbitration Claim Over $383M in Losses, Stockbroker Fraud Blog, October 22, 2011

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

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

**This post has been backdated for publication.

Continue reading "Claimant Not Only $100K Loses Securities Arbitration Case Against Citigroup Global Markets But Gets Stuck with Financial Firm’s $50K in Legal Bills " »

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Posted In: Arbitration , Citigroup , Financial Firms

August 16, 2011

Citigroup Global Markets Fined $500,000 by FINRA for Inadequate Supervision of Broker Accused of Bilking Sick and Elderly Investors

Two months after a federal grand jury indicted Tamara Lanz Moon for misappropriating more than $800,000 in clients’ money, the Financial Industry Regulatory Authority (FINRA) has fined Citigroup Global Markets $500,000 for failing to properly supervise her. Moon is charged with six counts of mail fraud. The acts of broker misconduct allegedly took place between 2001 and 2008, when the 43-year-old broker was employed by Citigroup Global Markets as a registered sales assistant with Series 7 and 63 licenses.

Court documents report that Moon targeted at least 22 Citigroup clients who were sick, elderly, or for some reason couldn’t properly monitor their accounts. Her alleged victims included an elderly client suffering from Parkinson’s disease. Moon also allegedly forged signatures, changed account documents, opened accounts with deceased clients’ social security numbers, created bogus letters of authorization, revised customer addresses, and made unauthorized trades. She was fired in 2008 after Citigroup finally discovered her alleged misconduct. FINRA would go on to permanently barred her from the industry. Moon, who was arrested by the FBI following recent indictment, is out on bail.

According to FINRA, Citigroup failed to investigate or detect a number of “red flags” that should have let the financial firm know that Moon was improperly handing client funds. The SRO is also accusing FINRA of failing to put into place reasonable controls and systems related to the supervisory review of client accounts, which allowed Moon to falsify records, and neglecting to identify suspicious activity related to disbursements and transfers in the accounts that she was using to misappropriate clients’ money.

FINRA says that Moon was able to use Citigroup’s “lax supervisory practices” to bilk the financial firm’s “most vulnerable” clients. The SRO says that Citigroup could have and should have stopped her.

Among the warning signs that Citigroup is accused of not responding to:
• Address discrepancies in exception reports regarding an elderly widow whom Moon bilked of almost $80,000. When Moon explained to Citigroup that the inaccuracy occurred because the client had moved to Arizona, Citigroup accepted the reason she provided, which allowed her to keep misappropriating client money.

• Even after Citigroup was told that one customer had died, Moon was still able to create an account in that person’s name and that dead client’s widow. She then transferred money from the deceased client’s bogus account to the widow’s fraudulent account, wrote checks from the widow’s account, and transferred several thousand dollars to her personal account.

• Even though Moon set up a fraudulent account in her dad’s name, transferred $150,000 of a customer’s account into the bogus account, and took $90,000 of that money that she moved into one of her accounts, Citigroup didn’t detect her misconduct. FINRA says that this because Citigroup’s review of customer account records was deficient.

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

FINRA Fines Citigroup $500,000 for Failing to Supervise Sales Assistant Who Misappropriated Customer Funds, FINRA, August 9, 2011

Citigroup Global Markets Fined $500,000 in FINRA Failure to Supervise Case, Forbes, August 10, 2011

Citigroup Aide Stole From Widows, Father, Finra Says, Bloomberg, August 25, 2009


More Blog Posts:
Citigroup Global Markets Sales Assistant Accused of Stealing from Clients is Banned by FINRA from the Securities Industry, Stockbroker Fraud Blog, September 4, 2009

Texas Securities Fraud: Insurance Agent Could Get 100 Years Behind Bars for Using Fraudulent Annuities to Bilk Elderly Seniors of Over $5M, Stockbroker Fraud Blog, August 9, 2011

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

Federal Judge to Approve Citigroup’s $75M Securities Settlement with SEC Over Bank’s Subprime Mortgage Debt Reporting to Investors, Stockbroker Fraud Blog, September 29, 2010

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Posted In: Citigroup , FINRA , Financial Firms , Securities Fraud , Senior Investors

April 22, 2011

Citigroup Chair Says Bank's Crisis is Over

At the financial firm’s annual shareholder meeting, Citigroup chairman Richard D. Parsons says that even though there will be challenges this year, the investment bank is “clearly through the crisis.” Parsons statement reflects a significant shift for Citibank from last April when the financial firm made its first profit since the 2007 financial collapse and the government was still in possession of a large ownership stake. Citigroup, which received three government bailouts, has since paid back the Treasury Department and reported profits for five quarters in a row. Most recently, the investment bank has just reported a $3 billion profit.

The New York Times says that unlike in recent years when Citigroup shareholders that attended the annual meeting would complain about board members or former US Treasury Secretary Robert E. Rubin, this year, the shareholders that did show up primarily complained that Citi’s stock price would have to hit almost $600 for them to break even on shares.

The bank’s shares, which used to trade at over $50 each, now trade at under $5 dollars. After the reverse share split, share prices will rise to approximately $45. Each investor’s total, however, will go down by 90%.

Over 95% of shareholders had approved the stock split. At the meeting, Citi’s chief executive Vikram S. Pandit explained that while the share count was changing the value of ownership position was not. He also spoke of the benefits of drawing in institutional investors who couldn’t buy shares of companies that had stock that traded under $10. Pandit said there was potential for short-sellers to beat down the stock.

Related Web Resources:
Citi’s Annual Meeting Ceases to Be a Battleground, New York Times, April 21, 2011

Citi CEO tries to shed bank's "survivor" image, Reuters, April 21, 2011


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

Ex-Smith Barney Adviser Pleads Guilty to Securities Fraud In $3.25M Scam to Bilk Citibank and Firm Clients, Stockbroker Fraud Blog, December 13, 2010

Securities Fraud Lawsuit Against Citigroup Involving Mortgage-Related Risk Results in Mixed Ruling, Institutional Investor Securities Blog, November 30, 2010

Continue reading "Citigroup Chair Says Bank's Crisis is Over " »

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Posted In: Citigroup , Financial Firms

April 13, 2011

Citigroup Ordered by FINRA to Pay $54.1M to Two Investors Over Municipal Bond Fund Losses

In what is being called the largest award that a major Wall Street broker-dealer has been ordered to pay individual investors, the Financial Industry Regulatory Authority has ordered Citigroup to pay $54.1 million to investors Suzanne Barlyn and Randall Smith over investment losses they sustained on high risk municipal bond funds that lost 77% of their value during the financial crisis.

Richard Zinman, formerly of Citi’s Smith Barney unit, was the broker for Murdock, a venture capital investor, and Hosier, a retired patent lawyer. Zinman left Citi soon after the funds blew up. During the arbitration hearing, he testified on behalf of the two men, saying that Citi did not tell its brokers how risky and volatile the funds in fact were. Zinman now works for Credit Suisse Group.

Citigroup has been under fire for awhile now over its municipal bond funds. Geared towards wealthier clients, investments were a minimum of $500,000. The bond funds were supposed to deliver returns a few percentage points above that of municipal bonds by borrowing up to $7 for every $1 invested. The proceeds were placed in mortgage debt and municipal bonds. Unfortunately, the municipal bond funds' value dropped when the mortgage market started to fail. After Citi brokers complained, however, the financial firm offered share buybacks that lowered investor losses to approximately 61%.

As part of this case, Citi must pay $17 million in punitive damages, $3 million in legal fees, and $21,600 for the hearing free expense, which is normally divided between the parties involved. Prior to this award, the largest one Citi was ordered to pay against a bond-fund claimant was $6.4 million.

Related Web Resource:
Citigroup Loses Muni Case, The Wall Street Journal, April 13, 2011

Muni bonds hit by more selling on default fears, Los Angeles Times, January 12, 2011


More Blog Posts:
SEC to Examine Muni Bond Market Issues During Hearings in Texas and Other States, Stockbroker Fraud Blog, February 9, 2011

Ex-Portfolio Managers to Pay $700K to Settle SEC Charges that They Defrauded the Tax Free Fund for Utah, Stockbroker Fraud Blog, January 22, 2011

Federal Judge to Approve Citigroup’s $75M Securities Settlement with SEC Over Bank’s Subprime Mortgage Debt Reporting to Investors, Institutional Investor Securities Blog, September 29, 2010


Continue reading "Citigroup Ordered by FINRA to Pay $54.1M to Two Investors Over Municipal Bond Fund Losses" »

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Posted In: Citigroup , FINRA , Financial Firms , Municipal Bonds

December 13, 2010

Ex-Smith Barney Adviser Pleads Guilty to Securities Fraud In $3.25M Scam to Bilk Citibank and Firm Clients

Sanjeev Jayant Kumar Shah, a former Smith Barney financial services adviser, has pleaded guilty to one count of securities fraud and three counts of wire fraud over his involvement in a securities scam to bilk clients of Citibank and his firm. Shah was charged with diverting about $3.25 million from a foreign bank client and fabricating documents that he claimed were from bank representatives.

He is also accused of falsely saying that the transfers were required for bond purchases and that he would send statements showing these purchases. Prosecutors say that he attempted to cover up the scam by telling clients that a computer mistake had kept the bonds from showing up online bank statements and that had had bought the bonds for the bank.

The securities fraud charge comes with a 20 year maximum penalty plus a fine. Each wire fraud charge carries a maximum 30 years in prison penalty and also a fine.

Shah was at Citigroup unit Smith Barney for 3 ½ years. Citigroup says that it was the one that brought the case to the attention of the Department of Justice.

Securities Fraud
Our securities fraud lawyers are committed to helping our clients recover their financial losses. The most common investor claims against brokers and investment advisers can involve issues such as:

• Unsuitability
• Registration violations
• Margin account abuse
• Unauthorized trading
• Breach of fiduciary duty
• Breach of contract
• Failure to execute trades
• Overconcentration
• Negligence
• Churning
• Misrepresentation and omissions
• Failure to supervise

Read the guilty plea, Justice.gov, November 24, 2010 (PDF)

Former Smith Barney adviser admits $3 million fraud, Reuters, November 24, 2010

Former Smith Barney adviser admits $3 mln fraud, CNBC, November 24, 2010

Continue reading "Ex-Smith Barney Adviser Pleads Guilty to Securities Fraud In $3.25M Scam to Bilk Citibank and Firm Clients" »

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Posted In: Citigroup , Financial Firms , Smith Barney - Citigroup

November 30, 2010

Citigroup Seeking to Dismiss $11.6 Million Securities Arbitration Award to “Dallas” TV Star Larry Hagman

TV star Larry Hagman, best known for playing the roles of Texas oil tycoon JR Ewing on “Dallas” and Major Anthony Nelson on “I Dream of Jeannie,” recently won an $11.6 million securities fraud arbitration award against Citigroup. The Financial Industry Regulatory Authority says that the award is the largest that has been issued to an individual investor for 2010 and the ninth largest ever. Citi Global Markets is now seeking to dismiss the award.

The investment firm contends that the arbitration panel’s chairman did not disclose a possible conflict of interest. In its petition, Citi cites a FINRA rule obligating arbitrators to reveal such conflicts that could prevent them from issuing an impartial ruling. The financial firm claiming that because the arbitration panel head was once a plaintiff in a lawsuit that dealt with the same type of claims and subject matter, he had an undisclosed potential conflict. Hagman’s legal team have since responded with a memo arguing that the arbitrator’s lawsuit was not related to this complaint and did not involve a securities investment, the same parties, or the same facts.

Hagman and his wife Maj had accused Citigroup of securities fraud, breach of fiduciary duty, and other allegations. They claimed financial losses on bonds and stocks and a life insurance policy. In addition to the arbitration award, which consists of $1.1 million in compensatory damages and $10 million in punitive damages that will go to a charity of Hagman’s choice, Citigroup must also pay a 10% interest on the award.

Related Web Resources:
Messing With J.R., Take Four, NY Times, November 23, 2010

Actor Larry Hagman Wins $12 Million in Finra Case With Citigroup, Bloomberg, October 7, 2010

Citigroup's petition to dismiss award to Larry Hagman

Citigroup, Stockbroker Fraud Blog

Continue reading "Citigroup Seeking to Dismiss $11.6 Million Securities Arbitration Award to “Dallas” TV Star Larry Hagman " »

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Posted In: Arbitration , Citigroup , FINRA , Financial Firms

October 23, 2010

Citigroup’s $75 Million Securities Fraud Settlement with the SEC Over Subprime Mortgage Debt Approved by Judge

A federal judge has approved the $75 million securities fraud settlement reached between Citigroup and the US Securities and Exchange Commission. The investment bank had been accused of misleading investors about billions of dollars in possible losses from their exposure to high risk assets involving subprime mortgages. The SEC says that although holdings exceeded $50 billion, the broker-dealer had told clients that they were at $13 billion or lower.

US District Judge Ellen Segal Huvelle had initially refused to approve the settlement and questioned why only two Citigroup executives were being held accountable for the alleged misconduct. Last month, she said she would accept the agreement but only with certain conditions in place.

Under the approved accord, Citigroup must maintain an earnings committee and a disclosure committee for three years. A number of bank officials will also have to certify the accuracy of the earnings scripts and press releases. The revised settlement clarifies that the $75 million penalty is part of a Fair Fund pursuant to Section 308 of the Sarbanes-Oxley Act of 2002. The penalty will be distributed to investors that sustained financial losses because of Citigroup’s alleged misconduct.

Broker-dealers and their representatives can be held liable for misrepresenting or not presenting all material facts to an investor about his/her investment if that client ends up sustaining financial losses. By agreeing to settle, Citigroup is not denying or admitting to the allegations.

Related Web Resources:
Judge OKs Citigroup-SEC Accord on Mortgages, ABC News, October 19, 2010

Judge approves Citi's $75M settlement with SEC, Bloomberg Businessweek, October 19, 2010

Read the SEC Complaint (PDF)

Citigroup Settles Subprime Mortgage Securities Fraud Claims for $75 Million, Stockbroker Fraud Blog, August 3, 2010

Continue reading "Citigroup’s $75 Million Securities Fraud Settlement with the SEC Over Subprime Mortgage Debt Approved by Judge" »

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Posted In: Citigroup , Financial Firms , Mortgage Backed Securities

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

May 28, 2010

Citigroup to Pay $1.5 M for Supervisory Violations Related to Broker’s Handling of Trust Funds

According to the Financial Industry Regulatory Authority, Citigroup Global Markets Inc. has consented to pay $1.5 million in disgorgement and fines for failing to properly supervise broker Mark Singer and his handling of trust funds belonging to two cemeteries. By agreeing to settle, Citigroup is not denying or admitting to the charges. Also, the disgorgement amount of $750,000 will be given back to the cemetery trusts as partial restitution.

FINRA says that from September 2004 and October 2006, Singer and his clients Craig Bush and Clayton Smith were engaged in securities fraud. Their scheme involved misappropriating some $60 million from cemetery trust funds. Bush and Smart were the successive owners of the group of cemeteries in Michigan that the funds are believed to have been stolen from. Smart bought the cemeteries from Bush in August 2004 using trust funds that were improperly transferred from the cemeteries to a company that Smart owned.

When Singer went to work for Citigroup as a branch manager in September 2004, he brought Bush’s cemetery trust accounts with him. FINRA says that Singer then helped Smart and Bush open a number of Citigroup accounts in their names and in the names of corporate entities that the two men controlled or owned. The broker also helped them deposit cemetery trust funds into some of the accounts, as well as effect improper transfers to third parties. Some of the fund transfers were disguised as fictitious investments made for the cemeteries.

FINRA says that Citigroup failed to properly supervise Singer when it did not respond to “red flags” and that this lack of action allowed the investment scheme to continue until October 2006. As early as September 2004, Singer’s previous employer warned Citigroup of irregular fund movements involving the Michigan cemetery trusts. Within a few months, Citigroup management also noticed the unusual activity.

Citigroup failed to “conduct an adequate inquiry” even after finding out in February 2005 that Smart may have been making misrepresentations about his acquisition of hedge fund investments that belonged to the Michigan cemetery trusts and had used the hedge funds as collateral for a $24 million credit line. Although the investment bank had received a whistleblower letter in May 2006 accusing Singer of broker misconduct related to his handling of the cemetery trusts, it still failed to restrict Singer’s activities or more strictly supervise him.

Related Web Resources:
Citi Sanctioned $1.5M By Finra In Supervisory Lapse, The Wall Street Journal, May 26, 2010

Stealing from the dead, CNN Money, August 13, 2007

Continue reading "Citigroup to Pay $1.5 M for Supervisory Violations Related to Broker’s Handling of Trust Funds" »

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

Posted In: Broker Fraud , Citigroup , FINRA , Financial Firms , Securities Fraud

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