Articles Posted in Derivatives

American International Group is asking a federal judge to prevent Maurice Greenberg, its former chief executive, from suing the federal government on its behalf. The insurer had already decided it wasn’t going to file a lawsuit against the federal government over its bailout that took place during the economic crisis.

Greenberg, who has filed a $25 billion securities lawsuit against the US, is pursuing derivative claims for the company. He claims that the bailout’s “onerous” terms cost the insurer’s investors billions.

While AIG isn’t trying to stop Greenberg from suing on his behalf or for other shareholders, the insurance giant has made it clear that suing the government over the rescue isn’t where it wants to focus its energy and resources. In its filing, AIG notes that according to Delaware Law, Greenberg, through Starr Investment, cannot take over the right of the AIG board to make the call on whether/not to sue.

JPMorgan Chase (JPM) must pay the trust of oil heiress Carolyn S. Burford $18 million for the “grossly negligent and reckless” way that the financial firm handled the account. In Tulsa County District Court in Oklahoma, Judge Linda G. Morrissey said that beneficiary Ann Fletcher was persuaded to invest in derivatives that were unsuitable for the trust, causing it to sustain significant losses. The judge is also ordering punitive damages to be determined at a later date, as well as repayment of the trust’s legal expenses.

Fletcher, now 75, is the daughter of Burford, who passed away in 1996. The trust was set up in 1955 by Burford’s parents. Burford’s dad is the founder of Kelly Oil and her mother had connections to another oil company.

Between 2000 and 2005, the trust and JPMorgan, which gained management over the trust after a number of bank mergers and oversaw it until 2006, got into a number of variable prepaid forward contracts. These derivatives were pitched to the trust as way for it to make more income. However, according to the court, Fletcher was cognitively impaired and experiencing medical problems when the bank recommended that the trust buy the derivatives. A year before, she even expressed in a written letter to the bank that she was scared about getting involved in “puts & calls.” She eventually chose to trust their recommendation that she buy them.

Judge Morrisey believes that the bank failed to properly explain the product to its client while neglecting to reveal that it stood to benefit from the transaction. She also says that when JPMorgan invested the contracts’ proceeds in its own investment products, which she described as “double dipping,” it was in breach of fiduciary duty. JPMorgan also billed the trust transaction investment fees and corporate trustee fees.

Morrisey said that because the bank gives employees incentives to make it revenue, this creates a conflict of interest for those that are advising and managing fiduciary accounts. She said that the financial misconduct that occurred in this securities case exhibits JPMorgan’s disregard of its clients, especially when it knew, or if it didn’t then was reckless in not knowing, that such conduct was occurring.

Investors that purchase variable prepaid contracts generally consent to give a number of the stock shares to the brokerage firm in the future. Such a deal can protect investors from certain losses and can be accompanied by tax benefits. However, they can also lead to additional fees. With Burford’s trust, however, the trustee is not allowed to sell its original stocks. The court said that JPMorgan failed to tell Fletcher that getting involved in the contracts could lead to the sale of that stock.
JPMorgan says it disagrees with the court’s ruling and it may appeal.

JPMorgan Must Pay $18 Million to Heiress Over Derivatives, Bloomberg, October 10, 2012

JP Morgan Ordered to Pay $18 Million to Oil Heiress’s Trust, New York Times, October 10, 2012


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New York’s Attorney General Sues JP Morgan Chase & Co. Over Alleged MBS Financial Fraud by Its Bear Stearns Unit, Stockbroker Fraud Blog, October 4, 2012
Ex-Employee Accuses Bank of America of Securities Fraud Involving Complex Derivatives Products, Stockbroker Fraud Blog, October 29, 2010

Barclays LIBOR Manipulation Scam Places Citigroup, Credit Suisse, Deutsche Bank, JP Morgan Chase, and UBS Under The Investigation Microscope, Institutional Investor Securities Blog, July 16, 2012 Continue reading

A former Bank of America employee is accusing the investment bank of aggressively recommending complex derivatives products to investors while at the same time failing to tell them of the risks involved. In a letter to Securities and Exchange Commission Chairman Mary Schapiro, the whistleblower said that the sales of these structured notes were so important to the BofA’s brokerage unit during the economic collapse that workers were threatened with termination if they warned clients against investing in the products or did not meet their quotas.

The ex-employee writes that another employee’s job was threatened after he told clients to liquidate their notes because of the possibility that BofA might become “nationalized,” which would make the notes worthless. The whistleblower claims to have been notified that aggressive sale of the notes was the only way the brokerage unit could fulfill its revenue goals at that time.

Bill Halldin, a Bank of America spokesperson, says that the investment firm has not heard about any such complaint regarding these allegations. He maintains that the investment bank has a policy abiding by “applicable laws and industry practices” when conducting business.

Broker Misconduct
Broker-dealers are obligated to notify investors of risks involved in an investment. They must also make sure that any investment that they recommend is appropriate for a client. Failure to fulfill these duties of care can be grounds for a securities fraud case.

Structured Notes
These derivative-like contracts allow investors to bet on bonds, stocks, or other securities. While some notes are “guaranteed” and promise a return on principal upon expiration, there are still those, such has Lehman Brothers’ notes, that fail to meet that guarantee. This can leave the holders to deal with the financial consequences. Banks may also stop trading the notes at any time.

Related Web Resources:
Informer: BofA hawked risky deals to customers, NY Post, October 29, 2010
Informer: Bofa Hawked Risky Deals to Customers, iStockAnalyst
Bank of America Blog Posts, Stockbroker Fraud Blog
Whistleblower Lawsuits, Stockbroker Fraud Blog Continue reading

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