Stock Broker Fraud Blog

Former Credit Suisse Securities USA LLC investment banker Hafiz Naseem says he will appeal his conviction for insider trading charges, which include 1 count of conspiracy and 28 counts of securities fraud involving stolen nonpublic data allegedly used for insider trading that generated at least $7.5 million. He faces a maximum 5-year prison sentence and fines two times the gross loss or gain of the violation.

The Justice Department says that the ex-Credit Suisse Securities investment banker told Ajaz Rahim, a Pakistan resident and the former head of Faysal Bank, about nine upcoming merger and acquisition deals from April 2006 to February 2007 including:

- Apollo Management LP’s Jacuzzi Brands acquisition
- NorthWestern Corp.’s acquisition by Babcock & Brown Infrastructure
- Veritas DGC Inc.’s acquisition by Compagnie Generale de Geophysique SA
- The merger between Energy Partners Ltd. and Stone Energy Corp.
- The TXU buyout

Rahim then used a Bahrain-based brokerage account to purchase stocks in the deals’ target companies. Although Naseem was not involved in working on any of the acquisition deals, he allegedly poured through internal databases and papers on his coworkers’ desks for confidential data that he passed on to Rahim.

The jury handed out the conviction on February 4 during his second trial. Naseem’s first trial ended in December because two jury members did not follow instructions provided by the court.

If you are an investor who has lost money because of the misconduct of an investment adviser or another member of the securities industry, one of our stockbroker fraud attorneys may be able to assist you. Contact Shepherd Smith and Edwards today.

Related Web Resources:

Ex-Credit Suisse Banker Naseem Convicted Of Insider Trading, Wall Street Journal, February 4, 2008

Banker Convicted on NY Insider Trading, CNN, February 4, 2008

Investors have a hard time understanding the differences between investment advisers and broker-dealers, as well as distinguishing between the different services and protections that each group offer. This finding was reported last month in an SEC-commissioned study conducted by Nonprofit policy group Rand Corp.

Rand gathered its findings from data that came from six investor focus groups and a survey it conducted of 654 U.S. households.

Included among the findings:

• Many investors do not know whether they are receiving the standard of care they are owed by their financial service providers.
• Many of these same investors are satisfied with the services provided to them by their financial service providers.
• Accessibility, attentiveness, and trustworthiness in a financial service provider ranked higher than performance or expertise.
• Some investors find it difficult to understand the disclosures provided to them by their investment adviser or broker-dealer.
• Investors don’t always finish reading disclosures.

The SEC ordered the study because it wanted to factually determine the state of the brokerage and investment advisory industries and assess the regulatory and legal environment surrounding investment professionals. It commissioned the study after a federal appeals court struck down an SEC rule that let broker-dealers offer fee-based brokerage accounts and a certain degree of advice without needing to be in compliance with the 1940 Investment Advisers Act. Critics had called the rule controversial, and the SEC wanted to see if this criticism had any merit.

The boundaries between investment advisers and broker dealers are not as delineated as they used to be. Investment Advisers Association Executive Director David Tittswroth says the study's results confirm that many investors are confused.

The growing sophistication of the financial industry makes it harder for regulators to govern the different financial services. Shepherd Smith and Edward is a stockbroker fraud law firm that represents clients who have lost money because their investment accounts were inappropriately handled by a broker-dealer or an investment adviser. Contact Shepherd Smith and Edwards today to schedule a free consultation.

Related Web Resources:

Complexity of Financial Services Industry Makes It Difficult for Individual Investors to Distinguish Broker-Dealers and Investment Advisers, Rand.org, January 3, 2008

Read the Full Report, SEC.gov (PDF)

The Commodity Futures Trading Commission (CFTC) is charging Diego Mariano Rolando, an Argentine investment adviser, for his role in a $43.8 scheme that defrauded some 400 investors in the United States, South America, and Europe. Earlier this month, the U.S. District Court for the District of Connecticut issued a restraining order to freeze his assets.

According to the CFTC, Rolando allegedly engaged in the following activities:

• Fraudulent trading of customer funds in options contracts and commodity futures.
• Provided investors with fraudulent account statements.
• Gave a U.S. clearing firm false customer contact information to prevent investors from discovering the scam.

The CFTC says that Rolando went online to solicit clients through Roclerman.com and IATrading.com. He told those he contacted that he could trade securities for them. The CFTC is charging Rolando with providing clients with materials about their investments that contained "misrepresentations and omissions of fact."

The CFTC says that Rolando solicited about $48.8 million through the scam. The commission is seeking a number of sanctions, including a permanent injunction, disgorgement of ill-gotten gains, restitution to investors, and a civil financial penalty.

If you are an investor that wishes to obtain financial restitution because of losses you incurred due to the fraudulent misconduct of a broker or an investment adviser, you should speak with a stockbroker fraud lawyer immediately. Shepherd Smith and Edwards dedicates its legal practice to helping professionals like you recover your financial losses. We represent stockbroker fraud clients in the U.S., as well as internationally. Contact Shepherd Smith and Edwards for your free consultation today.

Related Web Resources:

CFTC Charges Argentine Trader With Fraud, FIN Alternatives, January 17, 2008

Read the Court Order in the Case (PDF)

U.S. Commodity Futures Trading Commission

State Street Corp. announced it established a pre-tax reserve of $618 million billion "to address legal exposure and other costs associated with the under-performance of fixed-income strategies managed by the company's investment management arm," blaming exposure to subprime mortgages. The company referenced "customer concerns as to whether the execution of the strategies was consistent with the customers' investment intent" without identifying any specific litigation.

However, the New York Times published an article stating that State Street created the reserve "after five clients sued it, claiming they had lost tens of millions of dollars in State Street funds they were told would be invested in risk-free debt like Treasuries." The article added that State Street's reserve "highlight the legal challenges that lie ahead for financial firms."

The first of the five law suits referenced by the Times article was filed October 1, 2007, by Prudential Retirement Insurance and Annuity Co. The action "seeks, among other relief, restitution of certain losses attributable to certain investment funds" sold by State Street's investment management arm, and alleges State Street "failed to exercise prudent investment management," in violation of the Employee Retirement Income Security Act of 1974 (ERISA).

The complaint says the defendants "radically altered" the investment strategies of two bond funds, the Intermediate Bond Fund and the Government Credit Bond Fund and "took undisclosed, highly leveraged positions in mortgage-related financial derivatives" and thereby "exposed" the funds to "an inappropriate level of risk" that during the summer of 2007 "produced catastrophic results." The complaint further alleges that as these events unfolded the defendants provided "untimely, incomplete and misleading information" causing losses of "roughly $80 million" to assets held by about 165 retirement plans for which Prudential is responsible, affecting approximately 28,000 plan participants.

This and three other law suits against State Street which reportedly lead to the litigation reserve, allege ERISA violations were involved. One of these suits was filed October 17 by Unisystems and the trustee of the Unisystems Employees' Profit Sharing Plan. Another was brought on October 24 by the Composite Pension Trust of Nashua Corporation. The third was brought on October 31 by the plan administrator and the trustee of the Employees' Savings and Profit Sharing Plan of the Andover Companies.

A fifth lawsuit (not specifically iidentified by the New York Times article) alleging only state law claims, and not Federal ERISA violations, was filed on November 5 in a Harris County, Texas, District Court by Memorial Hermann Healthcare System. On December 3, the defendants removed the Memorial Hermann case to Federal Court in the Southern District of Texas. The petition alleges that the State Street defendants breached an "Agreement of Trust" to serve as trustee of nearly $91 million in the plaintiff's assets, claiming these assets were invested in the State Street Limited Duration Bond Fund which lost 37 percent of its value during three weeks in August 2007.

The State Street lawsuits are reported to be indicative of legal problems to be faced by various financial institutions over the “mortgage meltdown” which began last year, including not only originators and market-makers in mortgage instruments, but also those who purchased such investments for others and perhaps companies who issued strong ratings concerning those investments.

The law firm of Shepherd Smith and Edwards is dedicated to assisting investors who have sustained losses as a result of improper handling of their retirement or other assets. Please contact Shepherd Smith and Edwards to arrange a free confidential consultation with one of our attorneys do discuss whether you may have a viabile claim to recover your losses.

In the Galleria area of Houston is Guardian Wealth Management LLC, a Registered Investment Advisory Firm with an interesting business model: To provide a home for stockbrokers who want to retire or pursue another career - and continue to get paid!

Securities regulators report over 660,000 registered representatives, with about 15% (almost 100,000) annually retiring or leaving the securities industry to pursue other careers. Since 1970, Guardian's partners say they have watched scores of co-workers leave their firms which then dealt out their clients to other brokers, often the newest kids on the block.

"Brokers can work for years developing relationships with investors but are then helpless to protect even their family and friends from those assigned to their accounts," says Guardian's Founder Jerrod Summers, adding that "Guardian was built as a 'safe harbor' for investors - free of widely publicized conflicts at brokerage firms such as tainted research, commission churning and high-load funds, annuities and other products."

As a registered investment advisory firm Guardian charges annual management fees - approximately 1% - based on assets under management, which is at the low end of the range charged by large firms. Client accounts are held at Fidelity Investments, but Guardian is not limited to Fidelity's funds or other investment alternatives.

When Brokers leave the securities business they can not retain their general brokerage license. Yet, their licenses usually qualify them as to serve as Investment Advisory Representatives (IAR's). IAR's do not advise clients but can share in the income on accounts they bring to a firm such as Guardian.

"Retired brokers can move clients to Guardian and, over time, receive two to three times their "book" (gross revenues earned on their client base)," says Summers, "and even more if their clients' accounts grow and/or if they chose to continue to build relationships."

Compared to the commission "grid" at large firms, it's possible for former brokers to earn the same in retirement as they did while working, with Guardian's staff doing the work. "Its a win-win-win situation", adds Summers, "clients receive professional services at a fair price, brokers continue to earn, yet Guardian is profitable."

Additional information about Guardian Wealth Management, LLC is available on its Web Site, www.guardian-ria.com .

In the past year, the Department of Defense has kept up its “war” against bogus financial advisers in an effort to protect military members that are wanting to invest. Last September, state insurance regulators were given one year to cooperate with the Secretary of Defense in developing strategies to protect armed forces members from “dishonest and predatory insurance sales practices while on a military installation of the United States.”

The yearlong deadline was part of a new federal law created to protect soldiers and other members of the armed forces from shady financial advisers. To date, 14 states have been in compliance with the legislation. 16 more states are expected to follow by the end of 2007.

The law is called the Military Personnel Financial Services Protection Act. It also requires the Secretary of Defense to maintain a list of advisers (along with their contact information) that have been banned, barred, or restricted from military bases because they engaged in the dishonest selling of investment products at these sites. The first listing of agents was published last May.

The law was created after a flurry of news reports in 2005 talked about how certain investors were selling high-cost securities and life insurance policies to military personnel.

John Oxendine, the state insurance commissioner for the state of Georgia, says that soldiers have always been targets of crooked financial advisers during times of war. He cited soldiers’ lack of experience about financial matters, their youth, and their naiveté as reasons for why they were prime targets for shady advisers.

Oxendine says that under Georgia’s law, passed in August, insurance agents and companies must show how an investment product is suitable for junior soldiers. Certain products, including automatic premium payment provisions, are banned. Georgia’s law has also adopted the Defense Department’s solicitation rules. Financial adviser solicitation in a day room, barrack, or other restricted area is now a “deceptive trade practice.”

A draft report detailing the progress of this “war” is slated to be presented to the U.S. Congress by the Department of Defense’s inspector general in early October.

If you have been a victim of investment fraud, there are legal remedies at your disposal that can allow you to file a claim to get your money back. Shepherd Smith and Edwards is an experienced securities litigation firm that has helped thousands of people recoup their losses.

Contact Shepherd Smith and Edwards today and ask to speak with one of our securities litigation attorneys.

Pentagon on to ‘bad’ advisers, Investment News, September 17, 2007

Military Personnel Financial Services Protection Act, Veteransresources.org

Personal Commercial Solicitation Report, Department of Defense

Sentinel Management Group, the Chicago-based money manager that the Securities and Exchange Commission has accused of misappropriating client assets and defrauding clients, is reportedly missing $505 million in its accounts. The National Futures Association found the shortfall during a recent investigation.

The missing funds could bring up questions regarding a settlement that Sentinel made to creditors and Citadel Investment Group.

According to the SEC, the money manager allegedly mixed up funds from clients with its own funds. The Financial Times says that creditors from one account were given their money back after Citadel bought a number of assets. The SEC was opposed to the transfer, however, saying that the refunded assets likely belonged to creditors from a different account.

The FTA, however, says that there is currently no hard evidence to support the SEC’s conclusion that the assets that were refunded came from another account. The investigation will continue and the assets could still be found.

NFA president Daniel Roth says that customers of future traders have not lost any money due to Sentinel. He cited the $321 million that the Bank of New York lent to Sentinel as the main source of the missing funds.

The NFA is the in-house agency of the futures industry that examines trading practices. The Commodity Futures Trading Commission, the futures market overseer of the U.S. government, is also conducting its own probe of Sentinel.

Roth says that investigators are focusing on commingled accounts, rather than accounts that were kept separate.

If you are an investor that has lost money because of the wrongful or illegal actions of any individual or company within the securities industry, do not hesitate to call Shepherd Smith and Edwards and ask to speak with one of our securities fraud attorneys. We can represent you and protect your interests and we will do everything to recover your lost funds for you.

Related Web Resources:

Sentinel missing $505M, says NFA, Investment News, September 5, 2007

Investigator: Sentinel missing $500 mil., Chicago-Sun Times, September 1, 2007

Citadel removed from Penson suit, Chicagotribune.com, September 5, 2007

Ever notice how impressive titles are thrown around in the field of investments? Just what, if anything, to these mean. The Washington State Securities Division has proposed that that anyone who uses a professional designation that connotes some type financial planning expertise should fulfill the requirements and register as an investment adviser.

The Washington Department of Financial Instututions "notes the growth in the use of professional designations which state or imply that a person has special expertise, certification or training in financial planning," as quoted in a release by the North American Securities Administrators Association Inc. (NAASA).

The state therefore plans to clarify its rules to consider a person who uses such a professional designation as holding himself out as a financial planner. It would also prohibit the misleading use of other professional designations. Washington and other states have expressed the need to limit designations regarding advisors to senior citizens. Washington has now expanded its efforts to control the use of designations to protect investors of all ages.

Shepherd Smith and Edwards represents investors nationwide in claims against members of the securities industry. We have helped clients in more than 40 states, including victims of wrongdoing by those who call themsleves investment advisors, etc. To learn whether we can assist you, contact us to arrange a free consultation with one of our attorneys.

In a letter to his Berkshire Hathaway shareholders entitled “How to Minimize Investment Returns,” Warren Buffett points out that between December 31, 1899 and December 31, 1999, the Dow rose from 66 to 11,497. That's a 17,400% gain! Thus, a hundred dollars invested into a Dow portfolio during the 20th century would have grown to $17,500!

Yet, that’s an annual compound return over 100 years of only 5.3%, said Buffet while adding that, if only 1% per year is paid in management fees, nearly 20% of the profits would go to the money manager.

Building on Mr. Buffets warning: If a $100 investment was made the last day of 1899 and managed for 1%, it would COMPOUND at a net rate of only 4.3%. Thus, the portfolio would have grown to only $6,736 during the century that followed. The fee would have cost great-gramps over $10,000, leaving him with a little over one-third what he would have without "professional help”.

So what does all this mean in real dollars? Although a dollar in 2000 was worth only 5.4 cents compared to 1900, Great-grandfather’s $100 would have increased by 2000 to nearly $945 in real value compared to 1900, almost 10 times what he started with. Yet, his investment would only be worth $363 after a money manager took an annual 1% bite.

For Warren Buffet, a frictional cost of 1% is very damaging, but what about smaller investors - realizing virtually everyone is a smaller investor than Mr. Buffett. Many are charged fees of 2% or more, either through higher fees or with annuity charges added.

An investor charged 2% in management fees per year on a hundred dollar "Dow" investment held during the 20th Century would end up with only $2,570, instead of $17,500 without management costs! In real dollars of the 1900 variety, that investor would have $139 - a real value profit of $39 rather over $800. Thus, professional help at 2% would have cost the investor 94% of his gains. Value added"? I think not!

In his letter, Mr. Buffet quotes Sir Isaac Newton, a scientific genius who nevertheless lost a bundle in the South Sea Bubble, explaining later, "I can calculate the movement of the stars, but not the madness of men." It seems that even a genius can be fooled when it comes to investments.

By: William S Shepherd

William Shepherd is the founder of the law firm of Shepherd Smith and Edwards a securities law firm that represents investors seeking recovery of losses in their accounts at investment firms. If you or someone you know has suffered investment losses, contact Shepherd Smith and Edwards today.

As discussed in earlier stories on this blog, the SEC was challanged by an investment advisors association in court for exempting Wall Street brokerage firms from liability under laws governing investment advisors, despite the fact that the brokerage firms were performing identical services.

The investment advisors won their suit a few months ago, ending the "Merrill Rule", which had strangely been championed by the SEC, a 75 year old govenment agency created to protect investors. The SEC Chairman then personally, and not on behalf of the SEC, asked Congress to end "soft dollar" arrangements for investment advisors which he said were being abused.

It its latest ComplianceAlert letter to chief compliance officers of registered firms, the SEC has highlighted numerous areas of noncompliance, including performance advertising deficiencies "discovered" during a SEC review of several registered investment advisers.

The most common deficiency, the letter said, was that many advisory firms' advertisements reguarding their performance returns omitted proper disclosures and were thus misleading. For example, there was no disclosure whether advisory fees had been deducted from the performance results, the SEC advisory said. Nor was there information in the advertisements as to whether dividends and other important data was considered when calculations were made to compare the advisors' performance to a benchmark index, such as the S&P.

The SEC alert mentioned that its review found only one investment advisor in full compliance, which is likely to send chills through the investment advisor community. While the letter also covered sales of collateralized mortgage obligations, real estate investment trust products and college savings plans, it was clear that investment advisors are directly in the SEC's sights.

Shepherd Smith and Edwards is a securities law firm which represents investors nationwide in claims against investment firms. To learn whether our firm can assist you or your firm, contact us to arrange a free confidential consultation with one of our attorneys.

Last year, money managers directed a billion in dollars of their clients' funds in hidden commissions to Wall Street investment firms, says SEC Chairman Christopher Cox. These “soft”dollars” are purportedly for research and other services. Instead, the funds are made available to the money managers who often use these for "lavish trips, theater tickets, and fancy meals," Cox added.

In these "soft dollar" transactions, clients of investment advisers pay an extra five cents or so per share which is credited to cover costs of research and other services of the firm handling the transaction. A nickel per share may seem small, but on tens of billions of total shares traded becomes a huge amount. Those paying these costs include investors into mutual funds, pension funds, and 401(k) plans.

Laws impose a “fiduciary duty" on money managers to protect their clients’ interests, even over their own. Yet, a “safe harbor” was enacted in 1975 which allows the managers and brokerage firms to “bundle” research and other services with executions and not be liable for violating duties to their clients, including the duty to shop for the best execution price.

The inherent conflicts “offer perverse incentives to investment advisers to use them in ways that aren't beneficial to investors," Cox continued, describing how money managers have an incentive to trade simply to generate additional soft dollars, rather than in the client's interest. This creates a "witch's brew" of hidden fees, conflicts of interest which harm investors, he added.

Accordingly, Cox has personally made a request that Congress reconsider the safe harbor for money mangers provided in the legislation. This appears to be a reverse of position for Cox who has sided against investors on many issues since his appointment. He states that his position is personal and he is not speaking for the SEC on this issue.

Some believe this action by Cox may be a payback to investment advisors, who recently won a court case filed against the SEC requiring it to enforce the very same fiduciary duty requirements on Wall Street brokerage firms that Cox says investment advisors are avoiding through the safe harbor.

A spokesman for the Investment Advisers Association, which won the suit against the SEC, said it was “still evaluating” Chairman Cox's opposition to the soft dollar safe harbor. The IAA's roughly 500 member firms collectively manage more than $8 trillion in assets for individual and institutional clients.

Shepherd Smith and Edwards is a securities law firm which represents investors nationwide in claims against investment firms. To learn whether our firm can assist you or your firm, contact us to arrange a free confidential consultation with one of our attorneys.

Shareholders of mutual funds Janus Capital Group may not pursue a class action claim that the company violated federal securities laws by permitting hedge funds to engage in market timing with the shares of mutual funds operated by Janus, the U.S. District Court for the District of Maryland ruled.

In recent years, the U.S. Congress has been persuaded to limit class actions involving securities only to claims under federal securities laws. Meanwhile, federal securities claims are limited to misrepresentations and omissions in the purchase and sale of securities and do not, for example, include claims for actions which are simply fraudulent or negligent. Furthermore, courts have decided that no one can be held liable for assisting, or "aiding or abetting", others in violating federal securities law. Such limitations enabled Janus avoid its responsibility and have the class action against it dismissed.

In their complaint, the plaintiffs, purchasers of Janus Group stock, alleged that the Janus Funds misstated in their fund prospectuses their policies regarding market timing and late trading.
Specifically, the prospectuses said the funds were "not intended for market timing or excessive trading" and that measures were in place to stop such practices.

The plaintiffs then claimed that in fact the mutual funds permitted several hedge funds to engage in market timing transactions. The plaintiffs further claimed that the price of Janus Group stock declined significantly after such practices were revealed to the public and investors began to withdraw money from the funds. T

In dismissing the "parent investor class action" filed under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, the federal judge also that, since the shareholders were unable to sufficiently allege that Janus Capital Management -which manages the Janus Funds-- or made a false statement of material fact in connection with the shareholders' purchase or sale of a security that those claims should also be dismissed.

The judge further decided that, since the Janus Group did not actually make or prepare the prospectuses, or create the statements included in them, it
could not be held liable for fraud. Although the plaintiffs argued that
the fact that the prospectuses included Janus's logo, name, and Web site should make Janus Group liable for the allegedly misleading statements, the court said that such a proposition is "far from self-evident, and plaintiffs cite no authority in support of it."

The court also rejected the contention that the funds' dissemination of the prospectuses was sufficient to hold Janus Group liable for the misstatements, since it could not be held liable for aiding and abetting the fraud, for the reasons stated above, stating that courts have already "simply rejected the proposition that dissemination of a misleading document is tantamount to making a misstatement for securities fraud purposes."

However, investors who lost in the Janus mutual funds or other investments may be able to seek recovery of losses if their accounts were mishandled. The law firm of Shepherd Smith and Edwards represents investors nationwide in claims against stockbrokers, investment advisors and their firms. To learn whether we can assist you, contact us to arrange a free confidential consultation with an attorney.

In a recent survey of financial services professionals, many financial advisers said that they knowingly skirted their companies’ compliance regulations and are tired of complying with a regulatory framework that seems to be growing more complicated.

100 financial services professionals were surveyed by Shorewood, Minnesota-based consulting and training firm for the financial services industry Vestment Advisors Inc. 71 of the respondents were registered representatives.

One survey participant said that everyone violates compliance rules on a daily basis because it was not possible to work in the securities industry without regularly violating an SEC or NASD rule Another participant said that it was unlikely that anyone had “never violated a compliance rule,” seeing that hundreds of rules existed.

Other participants provided examples of these violations, including “selling away” clients’ loans, unauthorized trading, forging signatures, not processing checks upon receipt, and not sending correspondence to clients through compliance officers first for review.

While 13% of registered representatives said they spent a full day every week taking care of paperwork and compliance issues, 21% of the 71 registered representatives surveyed said that they spent less than one hour a week on these kinds of matters.

Some advisers admitted to not having the time to complete the adviser training, even asking others who worked for them to take the exams instead. Many of them also expressed frustration that when they have made attempts to take action that was legally within compliance regulations, their attempt were rejected by their firms. Nearly half of the advisers surveyed worried that a client would file a complaint or lawsuit against them.

Katherine Vessenes, Vestment Advisors President, blamed lack of proper training by compliance offers as a reason for these kinds of misconduct.

If you are an investor who has lost money because of the misconduct of a financial adviser and you would like to file a claim to recover your loss, it is advisable that you speak with an investment fraud attorney who can represent you. Statistics show that you increase your chances of recovery by retaining the services of a lawyer who can make your claim for you while protecting your interests.

Shepherd Smith and Edwards is a law firm dedicated to helping clients like you. We’ve represented thousands of clients over the years and have a very good track record of success. Over 90% of our clients have recovered all if not part of their losses. Contact Shepherd Smith and Edwards today to schedule your free consultation.

Advisers often skirt compliance rules, survey finds, Investmentnews.com, May 29, 2007

Related Web Resource:

Financial Advisors Are Struggling With Compliance And Legal Issues: Study shows loss of production and fear of lawsuits are a concern to advisors, Vestment.net