September 1, 2015

FINRA Orders UBS to Pay Investors Over $2.9M For Puerto Rico Bond and Fund Losses

UBS (UBS) must pay over $2.9M to investors Andres Ricardo Gomez and Ana Teresa Lopez-Gonzales for losses related to their investments in Puerto Rico securities. Mr. Ricardo, Ms. Lopez-Gonzales and their relatives filed an arbitration case with the Financial Industry Regulatory Authority (“FINRA”) claiming breach of fiduciary duty, fraud, breach of contract, negligence, unsuitability, misrepresentation and omission, overconcentration, and failure to supervise under FINRA rules and Puerto Rican law.

Mr. Ricardo’s and Ms. Lopez-Gonzales’ relatives resolved the securities fraud case for an undisclosed sum before the FINRA arbitration panel issued its ruling. The allegations are related to investments in Puerto Rico municipal bonds, UBS proprietary closed-end funds, and the use of Claimants’ investments as collateral to borrow money through credit lines. UBS Financial Services and UBS Financial Services Inc. of Puerto Rico denied all claims.

The Claimants had initially sought $10 million in compensatory damages and other appropriate relief, the cancellation of all loan balances, disgorgement of fees and commissions earned by UBS, pre- and post-award interest, legal fees, expenses, and other fees. Claimants also sought punitive damages.

In response, UBS sought to have the Puerto Rico bond fund case dismissed. In addition, UBS requested that the FINRA panel order Mr. Ricardo and one of the other claimants pay $500,000 in damages.

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August 29, 2015

Citco Settles Madoff-Related Securities Case With Fairfield Investors for $125M

Citco Group Ltd. has agreed to pay $125 million to resolve a lawsuit related to the Bernard Madoff Ponzi Scheme. The plaintiffs in the case are investors of Fairfield Greenwich Ltd.

Investors in Fairfield’s funds sued Citco Group and others after Madoff was arrested in 2008 for running a multibillion-dollar Ponzi scam. Citco was a defendant because it was retained by Fairfield to monitor assets, as well as Madoff's trading activities. The plaintiffs argued that Citco owed them a duty of care.

By settling, Citco is not denying or admitting to wrongdoing. It said that it consented to resolve the case to avoid further litigation.

The $125 million investor settlement is one of the largest with an administrator or custodian of a Madoff feeder fund. Fairfield placed about $7 billion with Bernard L. Madoff Investment Securities LLC.

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August 28, 2015

SEC Charges J.P. Morgan Ex-Investment Bank Analyst and Friends with Insider Trading

The Securities and Exchange Commission is charging ex-J. P. Morgan Securities, LLC (JPMS) bank analyst Ashish Aggarwal with illegally tipping confidential information about firm clients in impending acquisitions and mergers involving technology companies to his friend Shahriyar Bolandian. Bolandian then purportedly used the information to trade in his own accounts and in the accounts of his sister and father, while also tipping his friend Kevan Sadigh so that he too could insider trade. Together, Bolandian and Sadigh allegedly made over $672,000 in illicit profits. The regulator is also charging them both with insider trading.

According to the SEC Complaint, Aggarwal misappropriated confidential information about two deals in which J.P. Morgan had served as an adviser. After notifying Bolandian, the latter and Sadigh purchased the same call options in two companies: PLX Technology and ExactTarget. The two men allegedly traded prior to the public announcement of PLX Technology Inc.’s intended acquisition by Integrated Device Technology Inc. in 2012 and ExactTarget’s acquisition by Salesforce.com and PLX Technology in 2013.

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August 27, 2015

Beware of UBS Puerto Rico Sending Out Settlement Offers

UBS Puerto Rico clients have reported over the last few days the receipt of unsolicited settlement offers from UBS Puerto Rico for losses in customer accounts. The letters, which appear to be dated August 20, 2015 and are from Roberto Fortuno, Managing Director of the UBS San Juan Complex, offer small amounts for losses. The letters appear to be a part of last year’s UBS settlement with the Puerto Rico Office of the Commissioner of Financial Institutions, whereby UBS Puerto Rico was ordered to pay some customers for losses in UBS’s proprietary closed-end bond funds. As a part of that settlement, UBS Puerto Rico was ordered to identify similar customers and also offer to pay them as well.

While an unsolicited offer from UBS may seem like good news, we at Shepherd, Smith, Edwards & Kantas caution any customers who receive such a letter to consult an attorney before signing anything. The letters indicate that an agreement to take the money will require customers to come to UBS’s offices in San Juan or Ponce and sign a release. Such releases are typically very broad and may result in customers losing rights that have nothing to do with the losses in the closed-end funds. Moreover, our experience with UBS in these cases is that UBS’s opinion of losses is very different than most clients. As a result, anyone who receives such a letter should contact counsel to make sure they have representation. According to the letters our firm has reviewed, the offers are only open for 30 days, so time is of the essence.

The attorneys at Shepherd, Smith, Edwards & Kantas have over 100 years of combined experience in securities law and the securities business. We represent clients all over the globe in investment losses. In particular, our Puerto Rico team has been working with dozens of clients for almost two years in these cases. If you receive a letter from UBS or have lost money in Puerto Rico investments with UBS, Banco Popular, Santander or any other firm on the island, please call us for a no cost, no obligation consultation about your rights.

August 26, 2015

SEC Says Broker-Dealers Need to Do a Better Job of Monitoring High Risk Products

The Securities and Exchange Commission has put out an alert warning brokerage firms that they need to better monitor the sale of high risk complex investments to retail investors. The regulator said that its analysis of 26,600 transactions of $1.25 billion of structured securities products revealed that there has been quite a number of times when the investments were sold to investors for whom they were not appropriate.

According to InvestmentNews, the Commission examined 10 branch offices of brokerage firms. The assessments took place from January 2011 through the end of 2012. In one firm, they discovered $96 million of structured-product sales that were made to conservative investors. At two other broker-dealers, the SEC discovered high concentrations of structure products in the accounts of older investors. One representative purportedly modified a customer’s investment goals without that person’s consent after a sale went through to make the complex product purchases appear justified.

Brokers are required to abide by suitability standards, which mandate that investment products that are sold meet each client’s risk tolerance and investment goals. The SEC said that in exams that were conducted, there were firms that appeared to have weak suitability controls.

The Commission wants broker-dealers to regard this alert as a wake up call so that they will take a closer look at their compliance programs. The regulator noted that while all the broker-dealers that were scrutinized had written procedures and policies for suitability, the controls were not consistently or properly implemented. In some instances, suitability controls differed among the different branches of a firm.


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August 25, 2015

Puerto Rico Delays $750M Bond Sale

According to The New York Times, Puerto Rico is again delaying a recent proposed bond issuance latest decision to stall the bond sale, this time because of trouble in the global markets. However, said the newspaper, the island’s government also seems to have come to the conclusion it could not borrow the $750 million by issuing the bonds at an interest rate that was affordable.

The delay in the Puerto Rico bond sale comes just two months after Gov. Alejandro Garcia Padilla declared the territory’s debts unpayable. Not only are the territory’s three big public utilities unable to pay off their debt but also they cannot shut down their operations. Earlier this month, the island defaulted on the bulk of a bond payment due on debt belonging to the Public Finance Corporation, which is another one of Puerto Rico’s government agencies.

On Tuesday, Puerto Rico asked the U.S. Supreme Court grant it the use of bankruptcy protection as the Commonwealth attempts to restructure $20 billion in public utility debt. Garcia Padilla and Secretary of Justice Cesar Miranda Rodriguez submitted a petition requesting that the court overturn previous rulings striking down the 2014 Puerto Rico Public Corporation Debt Enforcement and Recovery Act.

The Act granted Puerto Rican utilities and public companies bankruptcy protection not included under U.S. Chapter 9 bankruptcy laws. Meaning, while the territory awaits that decision, the September 1 deadline for Puerto Rico to outline its restructuring plan is just days ahead.

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August 22, 2015

FSC Securities to Be Held Accountable for $1.2M FINRA Arbitration Award Issued to Victims of Ponzi Scammer Who Faked His Death

A Financial Industry Regulatory Authority Inc. panel said that FSC Securities Corp. is responsible for a $1.2 million arbitration award for compensatory damages to investors that were bilked by Aubrey Lee Price, the infamous Ponzi scammer from Georgia who tried to fake his death to in 2012. FSC Securities is a broker-dealer with AIG Advisor Group (AIG).

The eight claimants contend that the brokerage firm did not supervise a number of brokers who sold them fraudulent securities that were part of Price’s $40 million Ponzi scam. According to their securities lawyer, Price and two other ex-FSC brokers persuaded clients to invest in the PFG fund, an unregistered investment fund, which was the main product of the scheme.

When the trading account sustained huge losses Price prepared account statements for investors that noted fake asset amounts and investment returns. The claimants believe that FSC failed to properly supervise its brokers and had numerous chances to detect that Price and the other brokers were selling away into the PFG fund while claiming “preposterous” return rates.

Price was an FSC broker from 2006 to 2008. Prior to that he worked at Citigroup Global Markets (C) and Banc of America Investment Services (BAC). Last year, a federal judge sentenced him to 30 years behind bars for bank fraud.

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August 18, 2015

Over 14,000 Massachusetts Investors Receive Checks for Losses in $1B TelexFree Ponzi Scam

The first checks for compensation in the $1 billion global Ponzi scam involving TelexFree Inc. have gone out to over 14,000 investors in Massachusetts. Victims received $2.9 million in total as part of a settlement with Fidelity Cooperative Bank. This is only a small portion of the alleged losses.

About 1.9 million investors are still waiting to get any financial relief in the case, which affected not just people in the US as the scam spread globally and virally online and by word of mouth. The alleged Ponzi scam involved fraudsters selling inexpensive Internet phone service for long distance calls. They were recruited as members for $1,400 increments. Big financial returns were promised to investors for bringing in other investors and using Internet ads to market the business. While early investors made money, many others suffered substantial losses.

Telex-Free was shut down in Brazil in 2013, but the Ponzi operation continued in Massachusetts where it was headed up by James Merrill and Carlos Wanzeler. Both deny the criminal and civil charges.

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August 16, 2015

UBS Puerto Rico Branch Manager Had Warned that Brokers Were Pushing Improper Loan Practices

According to Reuters, internal correspondence records show that in 2012, a former branch manager at UBS Puerto Rico (UBS) warned the Swiss banking giant’s officials that its brokers were encouraging customers to get involved in improper loan practices. In a number of emails, Carlos Capacete, who was a branch manager at the time, wrote to at least two bank officers noting his suspicions of misconduct.

Reuters says that in the documents it reviewed, Capacete told regional manager Doel Garcia that he had encouraged Mariela Torres, a UBS Puerto Rico compliance director, to look into suspect loans. In another email, Capacete followed up with his inquiry to see if the loans had been investigated for possible misuse involving the bank’s credit lines.

Then, in yet another email, Capacete documented what he knew about the loans, which he believed were fraudulent, explained how he discovered the purported wrongdoing, and noted his efforts to notify Torres about the alleged misconduct. Capacete also wrote that a UBS attorney had told him that the firm had conducted an audit and found that his suspicions were wrong.

Despite this alleged audit, late last year UBS reached a $5.2 million municipal bond settlement with Puerto Rico's Office of the Commissioner of Financial Institutions to resolve allegations of improper loan practices. The bank settled that case without denying or admitting to the charges. It did, however, consent to enhancing its supervision of several brokers whom regulators said may have steered clients toward improperly borrowing money to purchase more funds. UBS also terminated a broker for the same allegations and received an arbitration award of $2.5 million against it in an early case concerning the same broker.

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August 15, 2015

Investors Could Get Hurt By REM, and Other ETFs Impacted by Growing Short-Term Rates

In the last five years, artificially low interest rates have resulted in yield hungry investors being drawn to investments such as iShares Mortgage Real Estate Capped ETF, an exchange-traded fund that trades under the symbol REM. Since 2010, this ETF has gathered over $1 Billion in assets, in part because of its 14% dividend.

Unlike older and more traditional REIT ETFs, REM does not own companies that possess properties. Instead, the exchange-traded fund puts its money in financial firms that borrow at short-term rates and buy long-term mortgage securities while making a profit from the difference and passing that over as income. All this creates the 14% yield.

Unfortunately, with the increased likelihood of a Fed rate hike, the yield curve has started to become flat, reducing the spread that creates the 14% yield for REM. Also, short-term rates have started going up faster than long-term ones. The result has been that REM’s price has started to drop. And, if the central bank were to initiate a rate hike, that 14% yield and REM’s performance could end up in even more trouble. Bloomberg says that already REM has been down 5% since the Memorial Day weekend.

According to Shepherd Smith Edwards and Kantas Partner and Securities Fraud Attorney Sam Edwards, “Funds like REM seem very attractive to investors, especially when rates are so low. The risk of a fund like REM is far greater than traditional REIT investments and will suffer greatly in a rising interest rate environment. The vast majority of investors in funds such as this do not comprehend the risk of such a complicated strategy and find out too late they were taking more risk than was appropriate.”

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August 14, 2015

Ex-Caldwell Broker is Barred by FINRA for Churning Accounts

The Financial Industry Regulatory Authority has permanently barred ex-Caldwell International Securities Corp. broker Richard Adams from the industry. Adams is accused of churning customer accounts.


According to FINRA, from July 2013 to June 2014, Adams engaged in excessive trading and churned the accounts of two customers, making close to $57,000 in commissions. The customers lost over $37,000 as a result.

Adams is also accused of not reporting numerous unsatisfied judgments and liens on his U4 Registration Form, which he is required to do under FINRA rules. By settling the civil case against him, Adams is not denying or admitting to the charges.

Churning
This type of illegal activity typically involves a broker engaging in the excessive selling or buying of securities in a customer account for the purpose of earning commissions. Signs of possible churning may include frequent in-and-out purchase and securities sales that appear unrelated to the customer’s investment goals.

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August 13, 2015

Edward Jones to Pay $20M to Resolve SEC Allegations that It Overcharged for Muni Bond Sales

Edward D. Jones & Co., the brokerage firm subsidiary of Jones Financial Companies, has consented to pay $20 million to resolve U.S. Securities and Exchange Commission allegations accusing the firm of overcharging clients by at least $4.6 million on new municipal bond sales. The regulator contends that the brokerage firm offered bonds at a higher price than what securities laws require.

Underwriters are supposed to sell new bonds at an initial offering price that was negotiated with the bond issuer. The SEC claims that instead of offering the municipal bonds to customers at the worked out price, the firm allegedly brought the bonds into its own inventory and then later sold them at high prices. Also, said the Commission, in certain instances the bonds were offered to customers after they had already started to trade in the secondary market at higher prices than what was initially offered.

The regulator said that at the very least Edwards Jones was negligent with the overcharges and its behavior was “inconsistent” with the standards and written agreements that govern municipal underwriting. The SEC says it will continue its probe into the matter.

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