February 14, 2015

SEC Cases: Insider Trading Charges Filed Against Georgia Resident, Mutual Fund Adviser Accused of Improper Asset Handling, & Two-Ex CFOs Agree to Give Back Bonuses Because of Accounting Fraud

Atlanta, GA Man Accused of Making $740,000 for Insider Trading
The Securities and Exchange Commission is filing charges against a Georgia man who is accused of insider trading and making about $740,000 in illicit profits. Charles L. Hill allegedly traded in Radiant Systems stock based on the confidential insider data a friend gave him about an upcoming tender offer to purchase the company. The friend was a friend of a Radiant Systems executive.

In 2011, Hill bought about 100,000 shares valued at close to $2.2 million on the final day of trading prior to the public announcement of the acquisition. That was his first time buying stock of Radiant Systems, and before that it had been years since he’d purchased equity securities.

Mutual Fund Adviser Settles SEC Case with $50K Penalty
In another SEC case, Walter Island Capital LLC will pay $50,000 as a penalty to resolve charges accusing the firm of improperly handling fund assets. The mutual fund adviser, which works with several alternative mutual funds, purportedly maintained millions of dollars of the funds’ cash collateral at brokerage firm counterparties instead of at a custodial bank.

The Commission said that an investment company that maintains securities in a qualified bank’s custody has to do the same with other cash assets. The SEC said that Walter Island Company failed to make sure that about $247 million in cash collateral was maintained at such a bank. The mutual fund adviser is settling without denying or admitting to the charges.

Two-Ex CFOs Return Stock Sale Profits, Bonuses In the Wake of Accounting Fraud
On Tuesday, the SEC announced that two ex-Saba Software CFOs have agreed to return close to $500K in stock sale profits and bonuses that they were given while the company was committing accounting fraud.

The William Slater and Peter E. Williams III are not charged with the company’s misconduct. However, the Sarbanes-Oxley Act requires that they reimburse the company for both the stock sale profits and bonuses.

From December 2008 to January 2012, Slater was CFO until October 2011, when Williams was in the position until January. During that time Saba Software overstated pre-tax earnings and issued material misstatements about revenue recognition practices. In 2014, the software company and two ex-executives were charged with accounting fraud involving falsified timesheets so that quarterly financial targets were hit. Slater made over $333K in stock sale profits and bonuses, while Williams made close to $142K.

Our securities fraud lawyers at Shepherd, Smith, Edwards, and Kantas, LTD LLP are here to help investors get their money back.

The Insider Trading Case against Hill (PDF)

The SEC Order Against Walter Island Capital

The SEC Order Against Slater, Williams (PDF)

More Blog Posts:
SEC Claims Investment Adviser Paid for Fraud Settlement With Client Monies, Stockbroker Fraud Blog, February 10, 2015

Sun Antonio Spurs Star Tim Duncan Files Texas Investment Adviser Fraud Case
, Stockbroker Fraud Case, January 31, 2015

Investment Adviser, Ameriprise Financial Services Sued by Hanson McClain Over Client Information, Institutional Investor Fraud Blog, January 12, 2015

August 20, 2014

SEC Examines Municipal Advisers and Alternative Mutual Funds, Reviews “Wrap-Fee” Accounts

The Securities and Exchange Commission introduced a two-year plan to examine municipal advisers who assist localities and states to raise money in the $3.7 trillion municipal bond market. During this period, regulators plan to look at a significant chunk of the approximately 1,000 SEC-registered municipal advisers.

These advisers are usually small firms with one or two employees. They are not affiliated with banks. Municipal advisers are retained to time, price, and market muni-bond transactions.

The SEC has been clamping down on municipalities for not updating investors about their financial health. The regulator wants the U.S. Congress to give it more authority in the market. Right now, muni issuers are exempt from disclosure requirements that corporations have to make when selling securities. Now the agency wants to know whether municipal advisers are meeting their fiduciary duty and placing clients’ interests before their own.

It was the 2010 Dodd-Frank law that established this obligation. Also under the law, municipal advisers have to register with the SEC and follow the rules that the the Municipal Securities Rulemaking Board is developing.

In other SEC news, the regulator is conducting a broad examination of alternative mutual funds. This will include scrutiny of big investment firms, including BlackRock Inc. (BLK) and AQR Capital Management LLC, as well as smaller firms that didn’t use to offer mutual funds as investment products to customers. According to sources that spoke to The Wall Street Journal, the regulator's focus appears to be more on collecting information about the industry rather than coming up with specific related enforcement actions.

Alternative funds, also known as liquid alternative funds, are a category of mutual funds that use hedge fund-like strategies. Fund companies tout them as vehicles for hedging against market risk that are usually less costly for individual investors who want to employ strategies previously reserved for sophisticated investors.

The SEC wants to look at the funds’ liquidity, the way they use leverage, and how much oversight the funds’ boards provide. Previously, the regulator expressed concerned with the risks involved in alternative mutual funds.

Meantime, the agency is also looking to suss out conflicts of interest involving the possible use of flat-fee wrap accounts at registered investment advisers. Customers pay a yearly or quarterly fee for wrap products that manage a portfolio of investments. They do this instead of paying individual commissions for traders.

The market includes mutual fund advisory programs, separately management accounts, unified managed accounts, and certain kinds of brokerage-based managed account. If an adviser is charging fees according to assets under management, money management charges for wrap products are additional.

With wrap accounts, reverse churning can happen. This involves placing a client that doesn’t trade often into an account that is fee-based instead of commission-based. Typically, there is hardly (if any) activity to justify the fee.

The SEC recently won a court case against an adviser that improperly placed clients into wrap programs. The investment adviser, Benjamin Lee Grant, was accused of improperly persuading clients to go with him when he left Wedbush Morgan Securities to establish Sage Advisory Group.

According to the regulator, Grant convinced clients to make the move by claiming they would save on fees. Rather than paying 1% plus commissions for trading like they did at Wedbush, they would just pay Sage a 2% wrap fee.

However, says the SEC, Grant did not tell clients that the brokerage expenses would be much lower at Charles Schwab & Co. (SCWH), which was the discount broker that Sage used. Grant then pocketed the savings.

Contact our securities fraud law firm today.

SEC cracks down on wrap accounts, InvestmentNews, August 14, 2014

SEC Launches Examination of Alternative Mutual Funds, The Wall Street Journal, August 12, 2014

U.S. SEC launches municipal adviser exams, Reuters, August 19, 2014

Federal jury sides with SEC against Boston investment adviser in fraud case
, Business Journals, August 14, 2014

More Blog Posts:
SEC Charges Linkbrokers Derivatives in $18M Securities Fraud, Institutional Investor Securities Blog, August 18, 2014

FINRA Investor Alert Warns About Scams Touting Ebola Cure and Other Viral Disease Stock Schemes, Stockbroker Fraud Blog, August 19, 2014

UBS Wealth, OppenheimerFunds Take Financial Hit From Puerto Rico Muni Bonds, Stockbroker Fraud Blog, August 15, 2014

October 30, 2013

Are Alternative Investments Good for Investors?

Even as alternative mutual funds have become very popular among financial advisers and investors These investments employee a variety of complex investment strategies and opportunities to create portfolio diversification that are supposed to protect clients from steep market drops. Already, billions of dollars have gone into these funds in recent years. Their total assets, at around $234 billion right now, are a 33% increase from last year. However, just because so many people are interested in alternative mutual funds doesn’t mean they are good for the average investor.

According to The New York Times, there are some financial advisers who are cautioning customers to exercise great care for the same reason that a lot of investors decide not to go with traditional mutual funds that are actively managed—because it is tough to identify which alternative investment managers are talented/skilled enough to do the job right and which ones could end up getting lucky.

Also, it can be hard enough comprehending any fund prospectus. Multi-alternative funds have hedge-fund-like strategies and managed futures. Then, there are the nontraditional bond funds, which trade on anticipating what bonds will do next and hedging risks linked to rates. Seeing as it is important for investors to be able to comprehend what they are getting into, alternative mutual funds might not be the best choice for the average investor.

These complex investments also can be expensive. Morningstar, an independent investment research firm, says that they cost on average approximately 1.77% of assets.

"Wall Street burns the midnight oil putting together 'products' to sell to Mr., Miss and Mrs. America,” said Shepherd Smith Edwards and Kantas, LTD LLP Founder and Stockbroker Lawyer William Shepherd. The goal is not to serve the best interest of the investor but simply to make a sale. The perfect product is one that sounds great to untrained ears (including the untrained ears of salespersons) and generates a fat hidden commission. Some call such 'products' innovative, others correctly call them gimmicks."

In 2013 alone, 55 new alternative funds have been ushered in, which means that there are now 400 such funds. Blackstone Group, AQR Capital Management and other big hedge fund players are beginning to offer alternative mutual funds to “regular” investors—something that isn’t possible with hedge funds, because individual investors have to be accredited with an income of at least $200,000 and over $1 million in assets.

Meantime, Forbes just reported on two studies on retail investment alternatives. Both found that the growth trend with these investmentss is likely continued. Strategic Insights and Cerulli Associates conducted the studies.

Our alternative mutual fund lawyers represent investors that have sustained losses due to financial adviser fraud. Contact Shepherd Smith Edwards and Kantas, LTD LLP today. Your case consultation with our securities lawyers is free.

Retail Alternative Investments - The Good, Bad And Ugly, Forbes, October 25, 2013

An Intriguing Product That’s Too Complex for Many, New York Times, October 26, 2013

More Blog Posts:

J.P. Morgan’s $13B Residential Mortgage-Backed Securities Deal with the DOJ Stumbles Into Obstacles, Stockbroker Fraud Blog, October 28, 2013

Puerto Rican Labor Groups Want the US Territory to Sue UBS over the Bond Debacle, Institutional Investor Securities Blog, October 28, 2013

SEC Wants Comments About FINRA’s Proposed Rules About Broker-Dealer Supervision, Institutional Investor Securities Blog, October 24, 2013

October 31, 2012

Securities Roundup: Study Recommends Against Additional Money Fund Reforms, Lawmakers Disagree on Whether Dodd-Frank Wiped Out “Too Big to Fail” & An SEC Committee Approves Recommendations to Proposed General Solicitation Ban

Per a study released by the U.S. Chamber of Commerce, it is “ill-advised” to regulate money market mutual funds further due to the effective reforms that the SEC already implemented two yeas ago, including revisions that made the funds more transparent and liquid and not as high risk. The study comes in the wake of debate between lawmakers, market participants, and regulators about more regulations to the industry. For example, SEC Chairman Mary Schapiro has been pushing for the additional reforms because she believes the money market mutual fund industry continues to be a threat to the financial system.

The authors of the study derived their findings from money fund investment data that had been filed with the Commission, as well as from information on commercial paper from the Federal Reserve. Among its conclusions is that the reforms in 2010 made the funds more liquid and better equipped to deal with significant redemption changes. Also, in the last two years, the funds have begun to shift “more dynamically” through geographies and asset classes in reaction to “evolving risks.”

Another area that has been up for debate is whether the Dodd-Frank Wall Street Reform and Consumer Protection Act has, in fact, ended “too big to fail” and outlawed bailouts. Rep. Barney Frank (D-Mass) issued an analysis earlier this month that said that the law does. However, another report, by House Financial Services Committee Chairman Rep. Spencer Bachus (R-Ala), disagrees.

Dodd-Frank has sough to terminate “too big to fail,” which is the description for financial firms that are so big and interlinked that should they fail the consequences for the economy would be catastrophic. The government would therefore need to intervene should these entities get into trouble. While the analysis issued from Frank said that the law sets up a “framework” that lets big financial institutions fail without causing economic disaster, the report from Frank found that not only are the country’s largest banks still too big to fail—even bigger than during the recent financial crisis—but also, rather than ending bailouts, it institutionalized them and made them permanent via the act’s ‘Orderly Liquidation Authority in its Title II.

Meantime, the SEC’s Investor Advisory Committee voted in favor of adopting recommendations made by its Investor as Purchaser subcommittee to modify the Commission’s proposed amendments to the general solicitation ban for certain private placements. Per the proposal, the Jumpstart Our Business Startups Act’s Title II would let issuers generally solicit investors for/advertise offerings under Regulation D Rule 506 and 1933 Securities Act Rule 144A as long as only qualified institutional buyers and accredited investors are the ones doing the buying.

Among the recommendations; adopting a new Form GS for issuers planning to depend on the new provisions, mandating that issuers provide materials that they use general solicitation to the SEC (which will in turn make it available to the public), making Form D a requirement to issuers depending on a Reg D exemption, taking action to make sure that performance claims found in materials for general solicitations are grounded in proper performance reporting standards, amending the “accredited investor” definition’s natural persons prong, including non-exclusive safe harbors for how issuers can confirm that the buyers of their generally solicited Rule 506 offerings are this type of investor, and making sure felons and bad actors are disqualified and unable to take part in the Rule 506 offerings.

Shepherd Smith Edwards and Kantas, LTD, LLP is a securities law firm that represents victims of investment fraud throughout the US.

Money Market Funds Since the 2010 Regulatory Reforms: More Transparency, Increased Liquidity, and Lower Credit Risk, US Chamber of Commerce

Find the analyses on Dodd-Frank and "Too big to fail" here, The Committee on Financial Services

Investor Committee OKs Recommendations For SEC's Proposal on General Solicitation, BNA/Bloomberg, October 15, 2012

More Blog Posts:
Court Upholds Ex-NBA Star Horace Grant $1.46M FINRA Arbitration Award from Morgan Keegan & Co. Over Mortgage-Backed Bond Losses, Stockbroker Fraud Blog, October 30, 2012

Plaintiff Must Arbitrate Faulty Investment Advice Claim With TD Ameritrade But Can Proceed With Litigation Against Oakwood Capital Management, Stockbroker Fraud Blog, October 29, 2012

If SEC JOBS Act Rule 506 Proposal is Made Final, Legal Challenges Are Likely, Institutional Investor Securities Blog, October 27, 2012

October 8, 2012

Securities Roundup: SLUSA Bars Investors’ State Securities Case Alleging Trust Account Management Negligence, Blocks Investors From Remanding Fraud Case to Puerto Rico & FINRA Enhances Proposed Rules' Cost-Benefit Analysis, Looks at Non-Traded REIT Ads

According to the U.S. Court of Appeals for the Sixth Circuit, the Securities Litigation Uniform Standards Act bars state law breach of contract and negligence claims related to the way the plaintiffs’ trust accounts were managed. The appeals court’s ruling affirms the district court’s decision that the claims “amounted to allegations” that the defendants did not properly represent the way investments would be determined and left out a material fact about the latters’ conflicts of interest that let them invest in in-house funds.

SLUSA shuts a loophole in the Private Securities Litigation Reform Act that allows plaintiffs to sue in state court without having to deal with the latter’s more stringent pleading requirements. In Daniels v. Morgan Asset Management Inc., the plaintiffs sued Regions Trust, Morgan Asset Management, and affiliated entities and individuals in Tennessee state court. Per the court, Regions Trust, the record owner of shares in a number of Regions Morgan Keegan mutual funds, had entered into two advisory service agreements with Morgan Asset Management, with MAM agreeing to recommend investments to be sold or bought from clients’ trust accounts. The plaintiffs are claiming that MAM was therefore under obligation to continuously assess whether continued investing in the RMK fund, which were disproportionately invested in illiquid mortgage-backed securities that they say resulted in their losses, was appropriate.

The defendants were able to remove the action to federal district court, which, invoking SLUSA, threw out the lawsuit. The appeals court affirms this dismissal.

SLUSA also blocks other fund investors from being able to remand their proposed classed action case over alleged fraudulent omissions and disclosures in fund offering materials to a Puerto Rican court.

In Hidalgo-Velez v. San Juan Asset Management Inc., the plaintiffs sued officers and directors of San Juan Asset Management Inc., Puerto Rico Global Income Target Maturity Fund Inc., BBVA Securities Puerto Rico Inc., the fund’s investment adviser, outside auditor PricewaterhouseCoopers LLP, and a number of John Does. The plaintiffs contended that fraudulent omissions and disclosures were made in the prospectus that they referred to when buying fund shares and that these defective offering materials that are a violation of Puerto Rico law.

PricewaterhouseCoopers (PRICWP) removed the action to the U.S. District Court for the District of Puerto Rico, asserting that the case falls within SLUSA’s removal provision. The plaintiffs then made a motion to remand the lawsuit to the Commonwealth court. The district court, however, chose to deny the plaintiffs’ motion, noting that SLUSA precludes lawsuits over a “covered class action” in state court claiming fraud involving the sale or purchase of a “covered security” and that removal is appropriate under the act when the complaint is a covered class action grounded in common law or state statutory and alleges omissions or misrepresentations of material fact or the employ of any manipulative device related to the sale or purchase of a covered security. Also, per the judge, the Fund’s common stock is a “covered security” and therefore does fall within the removal provision of the act.

In other securities news, Financial Industry Regulatory Authority Chairman and Chief Executive Officer Richard G. Ketchum told BNA that the SRO plans to more thoroughly examine the benefits and costs of proposed rules before turning them over to the Securities and Exchange Commission for approval. FINRA Chief Legal Officer Robert Colby will spearhead these efforts.

FINRA will also be taking a closer look at ad data for non-traded real estate investment trusts. The SRO sent targeted exam letters titled “Spot-Check of Non-Traded REIT Communications” to certain broker-dealer members. Per FINRA rules, the sales literature and ads of member firms may have to contend with periodic spot checks. Also, the firms that received the letters have been asked to turn in a list of their communications related to their non-traded REITs. FINRA is also seeking proof that the ads were given written approval.

Daniels v. Morgan Asset Management Inc.

Securities Litigation Uniform Standards Act

Hidalgo-Velez v. San Juan Asset Management Inc.

FINRA Will Enhance Cost-Benefit Analysis Of Proposed Rules, Chairman Ketchum Says, BNA/Bloomberg, October 1, 2012

Targeted Examination Letters: Spot-Check of Non-Traded REIT Communications

More Blog Posts:
Texas Securities Fraud: State Law Class Action in R. Allen Stanford’s Ponzi Scam Not Barred by SLUSA, Stockbroker Fraud Blog, March 28, 2012

Annuity Investors Should Not Rely on Class Actions to Recover Their Losses, Stockbroker Fraud Blog, February 14, 2009

REIT Retail Properties of America’s $8 Public Offering Results in Major Losses for Fund Investors, Institutional Investor Securities Blog, April 17, 2012

October 2, 2012

Securities Lawsuit Over Excessive AXA Mutual Fund Management Fees in Variable Annuity Program Can Proceed, Says NJ District Court

According to the U.S. District Court for the District of New Jersey, plaintiff Mary Ann Sovolella can sue AXA Equitable Life Insurance Co. on behalf of eight mutual funds that belong to a variable annuity program for excessive management fees. Per Judge Peter Sheridan, the economic realities and a broad interpretation the 1940 Investment Company Act Section 36(b) gives her standing. The defendants are AXA Equitable Funds Management Group LLC (collectively AXA) and AXA Equitable Life Insurance Company (AXA Equitable).

Sovolella is suing on behalf of the AXA Funds, EQ Advisors Trust and those that paid investment management fees. She alleges that charging the funds management fees that were excessive violates ICA’s Section 36(b). The defendants’ sought to have the securities lawsuit dismissed on the grounds of lack of statutory standing.

The plaintiff joined the EQUI-VEST Deferred Variable Annuity Program after the opportunity was offered to her by her employer, Newark School System (due to a group annuity contract involving AXA Equitable). The eight AXA Funds in the EQ Trust are part of the portfolios that were made available to Sovolella through the program. AXA charges the funds an investment management fee that is taken out of the fund balance, which lowers the “value of the Plaintiff’s investment.”

While ICA’s Section 36(b) includes the provision that investment advisers have a fiduciary obligation regarding the “receipt of compensation for services” that they give to mutual funds, there are limits as to who can pursue a claim. An action can only be brought by the Securities and Exchange Commission or a security holder for a mutual fund that is allegedly charging fees that are excessive. However, per the court, ICA doesn’t provide a definition for the term “security holder.” While the defendants argued that Sovolella is not a “security holder” the plaintiff, maintains that she is one as this pertains to the funds.

Denying the defendants’ motion to dismiss, the court said that while it doesn’t make “sense to limit standing” in in order to enforce Section 36(b) to AXA or any entity that didn’t pay the fees that were allegedly excessive, Sovolella and other investors that are similarly situated are accountable for and did pay all challenged fees while bearing the complete risk of “poor investment performance,” entitled to direct AXA on how to vote their shares, and when the plaintiff opts to take out her investment in the fund it will be her responsibility to pay the investment taxes. Plaintiff, therefore, possesses an “economic stake" in these transactions.

Sivolella v. AXA Equitable Life Insurance Co., Justia (PDF)

1940 Investment Company Act (PDF)

More Blog Posts:
Stockbroker Fraud News Roundup: UBS Puerto Rico Settles SEC Action for $26M, Morgan Keegan’s Bid to Get $40K Award Over Marketing of RMK Advantage Income Fund Vacated is Denied, and SEC Settles with Attorney Involved in $1B Viaticals Scam, Stockbroker Fraud Blog, May 11, 2012

Securities Fraud: Mutual Funds Investment Adviser Cannot Be Sued Over Misstatement in Prospectuses, Says US Supreme Court, Stockbroker Fraud Blog, June 16, 2011

Why Were Two Former Morgan Stanley Smith Barney Brokers Not Named As Defendants in Securities Lawsuit by State Regulators Over $6M Now Missing From Wisconsin Funeral Trust?, Stockbroker Fraud Blog, September 27, 2012

Continue reading "Securities Lawsuit Over Excessive AXA Mutual Fund Management Fees in Variable Annuity Program Can Proceed, Says NJ District Court " »

May 11, 2012

Stockbroker Fraud News Roundup: UBS Puerto Rico Settles SEC Action for $26M, Morgan Keegan’s Bid to Get $40K Award Over Marketing of RMK Advantage Income Fund Vacated is Denied, and SEC Settles with Attorney Involved in $1B Viaticals Scam

UBS Financial Services Inc. of Puerto Rico (UBS) has agreed to pay $26.6 million to settle the Securities and Exchange Commission administrative action accusing the financial firm of misleading investors about its control and liquidity over the secondary market for nearly two dozen proprietary closed-end mutual funds. By settling, UBS Puerto Rico is not denying or admitting to the allegations.

Per the SEC, not only did UBS Puerto Rico fail to disclose to clients that it was in control of the secondary market, but also when investor demand became less in 2008, the financial firm bought millions of dollars of the fund shares from shareholders that were exiting to make it appear as if the funds’ market was stable and liquid. The Commission also contends that when UBS Puerto Rico’s parent firm told it to lower the risks by reducing its closed-end fund inventory, the Latin America-based financial firm carried through with a strategy to liquidate its inventory at prices that undercut a number of customer sell orders that were pending. As a result, closed-end fund clients were allegedly denied the liquidity information and price that they are entitled to under the law. UBS Puerto Rico must now pay a $14 million penalty, $11.5 million in disgorgement, and $1.1 million in prejudgment interest.

The SEC has also filed an administrative action against Miguel A. Ferrer, the company’s ex-CEO and vice chairman, and Carlos Ortiz, the firm’s capital markets head. Ferrer allegedly made misrepresentations, did not disclose certain facts about the closed-end funds, and falsely represented the funds’ market price and trading premiums. The Commission is accusing Ortiz of falsely representing the basis of the fund share prices.

In other stockbroker fraud news, the U.S. District Court for the District of Colorado has denied Morgan Keegan & Co. Inc.'s bid to vacate the over $40,000 arbitration award it has been ordered to pay over the way it marketed its RMK Advantage Income Fund (RMA). Judge Richard Matsch instead granted the investors’ motion to have the award confirmed, noting that there were “many factual allegations” in the statement of claim supporting the contention that the firm was liable.

Per the court, Morgan Keegan had argued that the arbitration panel wasn’t authorized to issue a ruling on the claimants’ bid for damages related to the marketing of the fund, which they had invested in through Fidelity Investment. Morgan Keegan contended that seeing as it had no business relationship with the claimants, it couldn’t be held liable for their losses, and therefore, the FINRA arbitration panel had disregarded applicable law and went outside its authority. The district court, however, disagreed with the financial firm.

In other stockbroker fraud news, the SEC has reached a settlement with a Florida attorney accused of being involved in a financial scam run by a viaticals company that defrauded investors of over $1 billion. The securities action, which restrains Michael McNerney from future securities violations, is SEC v. McNerney. He is the ex-outside counsel for now defunct Mutual Benefits Corp.

The MBC sales agent and the company’s marketing materials allegedly falsely claimed that viatical settlements were “secure” and “safe” investments as part of the strategy to get clients to invest. The viaticals company also is accused of improperly obtaining polices that couldn’t be sold or bought, improperly managing escrow premium funds in a Ponzi scam, and pressuring doctors to approve bogus false life expectancy figures.

McNerney, who was sentenced to time in prison for conspiracy to commit securities fraud, must pay $826 million in restitution (jointly and severally with other defendants convicted over the MBC offering fraud).

UBS Puerto Rico unit to pay $26.6 mln in SEC pact
, Reuters, May 1, 2012

Morgan Keegan & Co. Inc. v. Pessel (PDF)

SEC Files Charges Against Former Attorney for Mutual Benefits, SEC, April 30, 2012

More Blog Posts:
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, Stockbroker Fraud Blog, April 10, 2012

Commodities/Futures Round Up: CFTC Cracks Down on Perpetrators of Securities Violations and Considers New Swap Market Definitions and Rules, Stockbroker Fraud Blog, April 20, 2012

Institutional Investor Fraud Roundup: SEC Seeks Approval of Settlement with Ex-Bear Stearns Portfolio Managers, Credits Ex-AXA Rosenberg Executive for Help in Quantitative Investment Case; IOSCO Gets Ready for Global Hedge Fund Survey, Institutional Investor Securities Blog, March 29, 2012

Continue reading "Stockbroker Fraud News Roundup: UBS Puerto Rico Settles SEC Action for $26M, Morgan Keegan’s Bid to Get $40K Award Over Marketing of RMK Advantage Income Fund Vacated is Denied, and SEC Settles with Attorney Involved in $1B Viaticals Scam" »

June 16, 2011

Securities Fraud: Mutual Funds Investment Adviser Cannot Be Sued Over Misstatement in Prospectuses, Says US Supreme Court

In a 5-4 ruling, the US Supreme Court placed specific limits on securities fraud lawsuits this week when it ruled in Janus Capital Group v. First Derivative Traders, No. 09-525 that the mutual funds investment adviser could not be sued over misstatements in fund prospectuses. Justice Clarence Thomas, who wrote for the majority, said that only the fund could be held liable for violating an SEC rule that makes it unlawful for a person to make a directly or indirectly untrue statement of material fact related to the selling or buying of securities.

The fund and its adviser were closely connected. Janus Capital Group, which is a public company, created Janus Investment Fund, which then retained Janus Capital Management to deal with management, investment, and administrative services. However, in its appeal to the nation’s highest court, Janus argued that the funds are separate legal entities. He said that the parent company and subsidiary are not responsible for the prospectuses, and they therefore cannot be held liable. The investors filed their securities fraud lawsuit after the New York attorney general sued the adviser in 2003.

The plaintiffs claimed that the funds disclosure documents falsely indicated that the adviser would implement policies to curb strategies based on fund valuation delays. At issue was whether it could be said that the adviser issued misleading statements that the SEC rule addressed. Justice Thomas said no. He noted although the adviser wrote the words under dispute, the fund was the one that issued them. Meantime, Justice Stephen G. Breyer, who wrote the dissent, said that there is nothing in the English language stopping someone from saying that if several different parties that each played a part in producing a statement then they all played a role in making it.

Shepherd Smith Edwards and Kantas founder and stockbroker fraud lawyer William Shepherd says, “As Wall Street fraud continues to plague investors, regulator ignore existing rules and legislators bow to lobbyists to dilute new legislation aimed at curtailing the plague. Yet, as an attorney I am most dismayed when “activist” judges - especially Supreme Court Justices – take the side of those who victimize investors. In the 1930’s and 1940’s laws were passed to regulate Wall Street. Our capital markets then became the safe haven for investors worldwide and grew exponentially. Now we seem to be in a ‘race to the bottom,’ with Wall Street more and more resembling Times Square - with a huckster every ten feet.”

Related Web Resources:

Janus Capital Group v. First Derivative Traders, US Supreme Court (PDF)

In 5-4 Vote, Supreme Court Limits Securities Fraud Suits, New York Times, June 14, 2011

Supreme Court Ruling on Janus Funds “Smells”, Business Insider, June 16, 2011

More Blog Posts:
Janus Avoids Responsibility to Mutual Fund Shareholders for Alleged Role in Widespread Market Timing Scandal, Stockbroker Fraud Blog, June 11, 2007

Wells Fargo Advisors LLC Agrees to $1 Million FINRA Fine for Securities Charges Related to Mutual Fund Prospectus Delivery, Stockbroker Fraud Blog, May 12, 2011

May 12, 2011

Wells Fargo Advisors LLC Agrees to $1 Million FINRA Fine for Securities Charges Related to Mutual Fund Prospectus Delivery

FINRA is fining Wells Fargo Advisors LLC $1 million over the allegations that the financial firm did not deliver mutual fund prospectuses within the three days (as required by federal securities laws) and delays in the updating of material information about former and current representatives. Wells Fargo has agreed to the fine.

Per FINRA, about 934,000 clients who bought mutual funds two years ago were affected when Wells Fargo did not deliver prospectuses within three days of the transactions. Prospectuses were given to clients anywhere from one to 153 days late. The SRO contends that even after a 3rd provider notified the broker-dealer about the delay, Wells Fargo allegedly did not take corrective action to remedy the problem.

FINRA also says that the financial firm did not abide by the SRO’s rules when it wasn’t prompt in reporting required information about its representatives, both past and present. Securities firms must make sure that the information on their representatives' applications for registration on Forms U4 are current in FINRA’s CRD (Central Registration Depository). Termination notices, known as Forms U5, must also be updated. Financial firms have 30 days from finding out about a “significant event” to update the forms. Examples of such events are customer complaints, formal investigations, or an arbitration claim against a representative. FINRA says that Wells Fargo did not update 7.6% of its Forms U5 and about 8% of its Forms U4 between 7/1/08 and 6/30/09. This resulted in almost 190 late amendments.

By agreeing to settle, Wells Fargo is not denying or admitting to the securities charges. The broker-dealer has, however, consented to the entry of FINRA’s findings.

Related Web Resources:
FINRA Fines Wells Fargo Advisors $1 Million for Delays in Delivering Prospectuses to More Than 900,000 Customers, FINRA, May 5, 2011

FINRA fines Wells Fargo $1M for prospectus delays, Forbes/AP, May 5, 2011

CRD, Financial Industry Regulatory Authority

More Blog Posts:

AG Edwards & Sons (Wells Fargo Advisors) to Settle Securities Charges it Sold Variable Annuities that Lacked Proper Documentation to Elderly Client, Stockbroker Fraud Blog, May 4, 2011

Wells Fargo Settles SEC Securities Fraud Allegations Over Sale of Complex Mortgage-Backed Securities by Wachovia for $11.2M, Institutional Investor Securities Blog, April 7, 2011

Wells Fargo to Pay $30M in Compensatory Damages to Four Nonprofits for Securities Fraud, Stockbroker Fraud Blog, June 30, 2010

Continue reading "Wells Fargo Advisors LLC Agrees to $1 Million FINRA Fine for Securities Charges Related to Mutual Fund Prospectus Delivery" »

January 22, 2011

Ex-Portfolio Managers to Pay $700K to Settle SEC Charges that They Defrauded the Tax Free Fund for Utah

According to the US Securities and Exchange Commission, while working at Aquila Investment Management LLC, ex-portfolio managers Thomas Albright and Kimball Young allegedly defrauded the Tax Free Fund for Utah (TFFU)—a mutual fund that was heavily invested in municipal bonds. Now, the two men have settled the securities fraud charges for over $700,000. However, by agreeing to settle, Young and Albright are not admitting to or denying the allegations.

The SEC claims that without notifying the TFFU’s board of trustees or Aquila management, the two men started making municipal bond issuers pay “credit monitoring fees” on specific private placement and non-rated bond offerings. The fees, which were as high as 1% of each bond's par value, were charged to supposedly compensate Albright and Young for additional, ongoing work that they say was required because the bonds were unrated. The SEC says that credit monitoring was actually part of the two men's built-in job responsibilities and that although deal documents made it appears as if the fees (totaling $520,626 from 2003 to April 2009) had to be paid and would go to TFFU, they actually end up in a company that Young controlled and that Albright owned equal shares in.

The SEC says that after management at Aquila found out in 2009 that Young and Albright were charging these unnecessary fees, the financial firm suspended the two men right away and reported them to the agency. The agency says the two men violated their basic responsibilities as investment advisers of mutual funds when they failed to act in the fund’s best interests.

Related Web Resources:
The SEC Order Against Young (PDF)

The SEC Order Against Albright (PDF)

Tax Free Fund for Utah

Municipal Bonds, Stockbroker Fraud Blog

Continue reading "Ex-Portfolio Managers to Pay $700K to Settle SEC Charges that They Defrauded the Tax Free Fund for Utah " »

August 23, 2010

Investors Seek Recovery of Losses in Oppenheimer Champion Income Fund, Oppenheimer Rochester National Municipal Bond Fund and Nuveen High Yield Municipal Bond Fund

Oppenheimer Champion Income Fund (OPCHX; OCHBX; OCHCX; OCHNX; OCHYX) plummeted 82% overall making it the worst performing taxable high yield bond fund of 2008. The investors believed they were in a conservative high yield fund when in fact they were exposed to illiquid derivatives and high risk mortgage backed securities. The collapse eliminated approximately $2 billion over the course of 15 months.

Investors who purchased this fund were clients of UBS, Citigroup Smith Barney, Wachovia, Linsco Private Ledger LPL, Merrill Lynch, UBS, ING, and Stifel Nichols among others. Many investors who were sold conservative high yield bond funds were shocked to learn that they had losses of 40% to 80% of their principal. With slightly higher risk than a CD, this gave investors a one to two percent higher rate of return. Now, these conservative investors will need nearly 5 years of income just to recover. Meanwhile due to the inverse relationship between interest rates and bonds, high quality bonds have risen in value.

The Oppenheimer Rochester National Municipal Bond Fund (ORNAX; ORNBX; ORNCX) lost approximately 60% of its $4 billion in assets. The fund violated its investment ratio in illiquid securities and failed to disclose risk factors associated with the overconcentration of municipal bonds that could become illiquid quickly.

The Nuveen High Yield Municipal Bond (NHMAX; NHMBX; NHMCX; NHMRX) suffered losses of 40% in 2008. The fund invests around 80% in bonds rated BBB or below and was the reason for the decline.

Continue reading "Investors Seek Recovery of Losses in Oppenheimer Champion Income Fund, Oppenheimer Rochester National Municipal Bond Fund and Nuveen High Yield Municipal Bond Fund" »

March 24, 2010

More on YieldPlus Mutual Fund: Charles Schwab Corp. Tries to Dissuade SEC From Filing Securities Claims

Charles Schwab Corp. doesn’t want the Securities and Exchange Commission to file securities claims over the YieldPlus mutual fund. Schwab contends that it never misrepresented the fund when it compared it to money market funds. The brokerage firm also says that it did not mislead investors, give certain ones more information than others, or let other Schwab funds cause financial harm to Charles Schwab YieldPlus Funds investors.

While the SEC has yet to file YieldPlus-related claims against Schwab, it did send the brokerage firm a Wells notice last year notifying that it may sue. Schwab had switched about half of its assets in the YieldPlus fund into mortgage-backed securities without shareholder approval. Following the housing market collapse, what was once the largest short-term bond fund in the world fund, with $13.5 million in assets in 2007, lost 35% before dividends. As of February 28, Bloomberg data shows that the mutual fund had $184 million in assets.

Even though the Investment Company Act of 1940, Section 13(a) states that a shareholder vote must take place before a company can do other than what its policies allow when it comes to which industries investments can be concentrated in, Schwab says it didn’t need approval because although the fund changed how mortgage-backed securities were categorized, it did not change its fundamental concentration policy.

However, in a March 19 court filing, the SEC said Schwab’s decision in 2006 that mortgage-backed securities without federal insurance aren’t subject to the fund’s 25% cap on “industry” investments and that these securities are not an industry was not just an act of “rejiggering.” Schwab invested almost 50% of the YieldPlus funds assets in these securities—despite the fact that its 1999 registration statement says that the fund will not concentrate investments in one industry. The SEC says that shareholder approval should have taken place not because the fund revised its classification about mortgage-backed securities as an industry but because 25% of the fund’s assets were invested in mortgage-backed securities.

In their securities fraud lawsuits, shareholders have accused Schwab of misleading them when describing the fund as “marginally riskier” than cash.

Related Web Resources:
Schwab Seeks to Fend Off SEC Lawsuit Over YieldPlus, Bloomberg/Business Week, March 23, 2010

The Charles Schwab Corporation : Schwab YieldPlus Funds Investor Shares or Schwab YieldPlus Funds Select Shares, Securities.Stanford.Edu

Securities and Exchange Commission

February 8, 2010

Claims Filed Against Morgan Keegan Division of Regions Financial Causes Shortage of Arbitrators

The Financial Industry Regulatory Authority has had to bring in hundreds of additional arbitrators to deal with the approximately 400 securities fraud claims that investors have filed against Regions Financial Corp., the investment banking unit of Morgan Keegan & Co. Investors are seeking to recover $35 million after three of its mutual funds dropped in value by up to 82% when the housing market fell apart. The Region Financial Corp mutual funds contained subprime-related securities, including collateralized debt obligations, low-quality mortgages, and mortgage-backed securities.

Morgan Keegan claims that it notified investors of the risks associated with investing in the mutual funds. Regions says that to date, 79 arbitration cases have been heard. 39 of the cases were dismissed and 114 arbitration claims seeking $24 million were dropped before decisions were reached. The investment firm is putting up a tough fight against the complaints. So far, arbitrators have been awarded $7.6 million.

Because so many investors filed arbitration claims, FINRA has had to contact arbitrators in different parts of the US and ask them to come to the different cities where the hearings on the mutual funds are talking place. The average pool of arbitrators in each city is now approximately 721 persons. This is an increase from its previous average pool of 87 arbitrators.

Stockbroker fraud attorney William Shepherd says that his securities fraud law firm Shepherd Smith Edwards & Kantas LTD LLP is committed to helping investors recover their financial losses related to Regions Financial Corp mutual funds. “Our law firm is handling dozens of claims nationwide regarding these funds, each on an individual basis. Some law firms have grouped claims and are using other methods we believe do not properly serve victims. This has skewed results against investors.” SSEK offers prospective clients a free case evaluation.

Related Web Resources:
Arbitrator Out of Work? Call Finra, The Wall Street Journal, February 5, 2010


February 5, 2010

Securities Claims Over Morgan Stanley Mutual Funds Dismissed by Appeals Court

Upholding a lower court’s decision, the U.S. Court of Appeals for the Second Circuit affirmed that investors’ securities claims in two Morgan Stanley (MS) mutual funds—the Morgan Stanley Technology Fund and the Morgan Stanley Information Fund—should be dismissed. The claimants had accused the investment firm of failing to disclose conflicts of interest between investment banking arms and its research analysts.

The court ruled that mutual fund offering statements are not necessary to disclose possible conflicts of interest that occur due to the dismantling of the “information barrier” between stock researchers and investment bankers. The appellate panel also found that there are two class actions against the open-ended mutual funds that fail to identify illegal omissions in the funds’ prospectuses or registration statements.

According to investors, they should have been notified that objectivity could be compromised because the managers of the mutual funds heavily depended on broker-dealers for their stock research. Citing the Securities Act of 1933, they filed a securities fraud lawsuit against Morgan Stanley. The plaintiffs contended that the brokerage firm’s offering documents omitted the possible conflict of interest. The plaintiffs claimed that these omissions cost them $500,000 and that the combined losses for the class were over $1 billion.

A federal judge dismissed their broker fraud complaints, citing a failure to prove that the law mandates disclosure of possible conflicts of interest. The second circuit affirmed the lower court’s ruling, saying it agreed with the SEC’s amicus curiae stating that both Form 1-A and the Securities Act do not require defendants to reveal that the information the plaintiffs’ claimed had been left out and that what the plaintiffs considered to be risks specific to the Morgan Stanley funds were in fact ones that every investor faces.

Among the defendants: Morgan Stanley, Morgan Stanley DW Inc. (MSDWI), MS & Co, the Technology Fund, the Information Fund, Morgan Stanley Investment Management Inc. (MSIM), Morgan Stanley Investment Advisors Inc. (MSIA), and Morgan Stanley Distributors Inc.

Related Web Resources:
Second Circuit Rules Morgan Stanley Mutual Funds Not Liable for Failing to Disclose Conflicts of Interest with Stock Analysts, Law.com, February 1, 2010

Court Nixes Class Actions Against Morgan Stanley, Courthouse News, January 29, 2010

Continue reading "Securities Claims Over Morgan Stanley Mutual Funds Dismissed by Appeals Court" »

October 27, 2009

Morgan Keegan Again Ordered by Arbitrators to Pay Bond Fund Losses to Investors

Morgan Keegan & Co. has been ordered to pay $51,000 to Larry and Diane Papasan. Larry Papasan is Memphis Light, Gas and Water Division’s former president.

The Papasans filed their arbitration claim against Morgan Keegan last year after they lost about $80,000 in the account they had with the investment firm. The Papasans’ claim is one of many arbitration cases and securities fraud lawsuits filed by Morgan Keegan investors who sustained RMK fund losses. The general accusation is that the broker-dealer misrepresented the volatility of the bond funds, which they allegedly were not managing conservatively.

Larry Papasan, who is retired, opened his account because he knew John Wilfong, a former Morgan Keegan financial adviser. Wilfong felt so confident about the bond funds that he even sold them to his mother, Joyce Wilfong, who also went on to suffer financial losses from her investment. Her friend Maxine Street also suffered bond fund losses.

The two women filed a joint arbitration claim against Morgan Keegan. Joyce was awarded $68,000, while Street settled for an undisclosed sum.

According to the Papasans, John Wilfong spoke with Jim Kelsoe, the RMK funds’ manager, prior to leaving Morgan Keegan for UBS. Kelsoe allegedly told Wilfong not to liquidate because the funds were safe. The Morgan Keegan fund manager is named in other cases for allegedly failing to disclose the risks associated with the mutual fund investments.

Related Web Resources:
Latest RMK Award Goes to Ex- MLGW Head, Memphis Daily News, October 27, 2009

Two Morgan Keegan Funds Crash and Burn, Kiplinger, December 2007

Continue reading "Morgan Keegan Again Ordered by Arbitrators to Pay Bond Fund Losses to Investors" »

October 17, 2009

Market Timing Violations Against AG Edwards & Sons Inc. Supervisors and Broker Upheld by the SEC

The US Securities and Exchange Commission is upholding the market timing violations against two AG Edwards and Sons Inc. supervisors and one of its stockbrokers. Billions of dollars were involved in the mutual fund market timing transactions.

While market timing, which involves the buying and selling of mutual fund shares in a manner that takes advantage of price inefficiencies, is not illegal, a violation of 1934 Securities Exchange Act Section 10(b) and Rule 10b-5. can arise when there is intent to deceive.

Last year, the ALJ found that AG Edwards and Sons brokers Charles Sacco and Thomas Bridge intentionally violated antifraud provisions when they engaged in market timing activities even though they had been restricted from doing so. The ALJ also found that supervisors Jeffrey Robles and James Edge failed to properly supervise the stockbrokers.

The antifraud charges filed against Bridge by the SEC Enforcement Division involved 1,352 trades (representing $1.126 billion) he executed over a two-year period for companies belonging to client Martin Oliner. The Enforcement Division accused Sacco of entering 25,533 market timing trades (representing $4.036 billion) for two hedge fund clients between 5/02 – 9/03.

The SEC determined that Edge, who was Bridge’s supervisor, knew and was complicit in the latter’s actions. Although Robles was not considered to have been complicit in Sacco’s alleged broker fraud, the commission said he should have noticed there were problems.

The SEC ordered Bridge to cease and desist from future violations. He is also barred from associating with any dealers or brokers for five years. Sacco has already settled his broker-fraud case.

Edge is barred from acting in a supervisory role over any dealer or broker for five years. Robles received a similar bar lasting three years. All three men were ordered to pay penalties, while Bridge was ordered to disgorge almost $39,000 plus $16,665.57 in prejudgment interest.

Related Web Resources:
Read the SEC's Opinion regarding this matter

Commission Sanctions Thomas C. Bridge for Violations of the Antifraud Provisions of the Securities Laws and James D. Edge and Jeffrey K. Robles for Failing to Supervise Reasonably, Trading Markets, September 29, 2009

Continue reading "Market Timing Violations Against AG Edwards & Sons Inc. Supervisors and Broker Upheld by the SEC " »

July 8, 2009

SEC Wants to Know Why Target-Date Mutual Funds are Growing Riskier

The US Labor Department and the Securities and Exchange Commission want to know why target-date mutual funds, which were supposed to get safer as investors aged, have become more high risk. Large mutual fund firms, including Vanguard and Fidelity , promised that as investors approached their retirement target-date funds would automatically shift from high-growth investments to safer ones, such as bonds. These funds were supposed to be a safe bet for retirement.

In 2007, the Labor Department issued a ruling protecting employers that automatically sent workers 401(k) funds to target funds if the employees later lost money. This decision released a lot of money into the funds. Approximately $182 billion has gone into target-date funds. Yet as the stock market fell in 2008, a number of 2010 funds lost 40% value.

Now, SEC Chairman Mary Shapiro wants to know whether companies misled investors about the risks involved with target-date funds. The SEC has gathered data that reveal that no clear standards exist for how target-date funds should operate and that they can vary when it comes to investment risks even if their names or target dates are similar. According to Shapiro, the SEC is worried that funds with even the same target date can vary a great deal when it comes to investment and returns. Funds invested in safer bonds appeared to perform better. Last year:

Fidelity Freedom 2010 Fund: Invested 50% in stocks; it lost 25% of its value last year.
Wells Fargo 2010 Fund: Lost 11% and is heavy in bonds.
AllianceBernstein 2010: Dropped by 1/3rd; 57% invested in stocks.
Deutsche Bank Fund: 4% down; favors fixed-income investments.

Now, Congress wants workers that want to invest in target-date funds and other 401(k) funds to receive accurate marketing, better disclosure fees, and better financial advice. Envestnet Asset Management and Behavioral Research Associations conducted a study that brought to light a number of misconceptions about target-date funds. For example, employees believed target-date funds offer a guaranteed return, faster money growth, and the ability to invest less and still be able to retire.

Related Web Resources:
Target-Date Mutual Funds May Miss Their Mark, NY Times, June 24, 2009

Target-Date Funds That Hit the Mark, Smart Money, January 17, 2008

Continue reading "SEC Wants to Know Why Target-Date Mutual Funds are Growing Riskier" »

March 14, 2009

Morgan Keegan Settlement with Children’s Wish Fund Shows the Impact Recouping Investment Losses Can Have On The Little People

In 2007, Morgan Keegan settled an arbitration claim with the Indiana Children’s Wish Fund for an undisclosed amount. The charity had reported losing $48,000 in a mutual fund it had invested in with the brokerage firm.

The Wish Fund became involved in mortgage securities after a local banker persuaded the charity’s executive director, Terry Ceaser-Hudson, to invest money in a bond fund through Morgan Keegan. Ceaser-Hudson was put in touch with broker Christopher Herrmann. When she asked him about the risks of investing in the fund, she says he assured her that investing it would be as safe as investing in a CD or a money market account.

In June 2007, the Wish Fund invested nearly $223,000 in the fund. That week, two Bear Stearns funds collapsed.

Less than three weeks after investing the charity’s money in the Morgan Keegan fund, Ceaser-Hudson says she was surprised to see a $5,000 loss. As the bond fund’s net asset value fell in September, she ordered the sale of the stakes to be sold. She got back about $174,000 of the $223,000 she had invested on behalf of the Wish Fund—that’s a 22% loss in just three months. Ceaser-Hudson filed an arbitration claim against Morgan Keegan and accused Herrmann of breach of duty when he making an unsuitable recommendation to the Wish Fund.

It appears as if the Regions Morgan Keegan mutual fund board members, like many investment professionals, did not properly assess the risks that came with investing in mortgage securities. Most of the brokerage firm’s directors do not own shares in the bond funds that were devastated, which means that the majority of them were not impacted by their decline.

For a charity like the Children’s Wish Fund, however, the losses it incurred had been preventing nine sick children from having their wishes granted.

Related Web Resources:
The Debt Crisis, Where It’s Least Expected, New York Times, December 30, 2007

The Indiana Children's Wish Fund

Continue reading "Morgan Keegan Settlement with Children’s Wish Fund Shows the Impact Recouping Investment Losses Can Have On The Little People" »

November 26, 2008

SEC Adopts Rules to Streamline Mutual Funds Disclosures But Delays Making Decision on Credit Ratings’ Final Rules

In a unanimous vote, the Securities and Exchange Commission agreed to adopt rule amendments to improve mutual fund disclosures. This includes letting investors receive a summary prospectus written in simple English. The SEC also adopted revisions to the mutual funds’ registration form known as form N-1A, including amendments that let exchange-traded funds use summary prospectuses.

Summary Prospectus
The summary prospectuses, which are voluntary, may include important information about investment strategies and goals, past fund performance, risks, and fees. As long as the statutory prospectus, summary prospectus, and other essential data can be accessed online, mutual funds that send investors a summary prospectus will be fulfilling their prospectus delivery requirements. Key data, such as selling and buying procedures, financial intermediary compensation, and tax consequences must also be included. The SEC expects approximately 75% of all mutual funds to use summary prospectuses.

SEC Chairman Christopher Cox is calling the mutual fund amendments a huge step forward for investors. The amendments will go into effect on February 28, 2009. Form N-1A changes won't go into effect until January 2010.

On the same day these amendments were passed, however, the SEC announced that it was delaying making any final rule changes about credit rating firms and the credit ratings they issue. SEC Chairman Cox said the rating rule proposals package will be discussed on December 3. The Commission continues to maintain that credit rating agency rules remain a top priority for 2008.

However, the future of one proposed ratings provision may already be uncertain. The provision involves mandating that nationally recognized statistical ratings organizations reveal the data that they are using to come up with their ratings. The SEC planned to exclude this provision from the November meeting and it may not be included in the December talks.

Commenting on these recent developments, Stockbroker Fraud Attorney William Shepherd had this to say:

The SEC’s handling of mutual fund disclosure amendments and the proposed credit rating provisions demonstrate that despite the incredible damage to investors over the past eight years, the SEC remains the proverbial “fox in charge of the henhouse.” Led by Chairman Christopher Cox, a former Republican Congressman who is a champion of deregulation, the SEC has continued to provide a free reign to Wall Street, while acting in the worst interest of investors.

Making mutual fund information easier to read is not for the public's benefit. Instead, it is designed to put the onus of sales fraud on the investor—yet another example of “blame the victim.” Rather than maintain the requirement that mutual funds send a full prospectus to investors, these companies must now only provide a “summary," with the full disclaimer document available online.

Thus, when an investor complains that he or she was not given an accurate description of what was being purchased, or worse, was lied to about the risks, all the salesperson and firm needs to do is say: “Well, the prospectus was available to you, all you had to do was go online to read it.”

Of course, 99 our 100 investors will likely not do this. Furthermore, it has been a recent common practice for those who sell mutual funds to omit mailing the required prospectus but later say that they did.

As for the decision to delay making a decision on final rules for credit ratings—why take action now, Mr. Cox, when you have stood by as the credit rating agencies have fraudulently sold their ratings to borrowers for years, while you, the SEC, and Wall Street have known that the credit ratings were completely bogus?

Shame on you, Mr. Cox, shame on the Bush Administration for putting you in office, and shame on the greedy folks on Wall Street for using the SEC as a tool to defraud investors. For all Americans, I ask: “Where is the outrage?”

Mr. Shepherd is the cofounder of Shepherd Smith Edwards & Kantas LTD LLP , a securities fraud law firm that is nationally recognized for its ability to successfully help investors recoup their losses.

Related Web Resources:

SEC Adopts Fund Disclosure, Money Market Rules, CCH Wallstreet.com

US SEC delays action on credit rating agency rules, Reuters.com, November 19, 2008

Securities and Exchange Commission

October 22, 2008

Banorte Securities International, Ltd. Agrees to $1.1 Million Fine Over Charges It Recommended Class B Mutual Fund Shares Instead of Class A

Banorte Securities International, Ltd. has agreed to a $1.1 million fine to settle charges that it recommended to customers that they buy Class B off-shore mutual fund shares even though they would have benefited more financially by buying Class A shares. The Financial Industry Regulatory Authority announced the settlement agreement last week.

By agreeing to settle, Banorte is not admitting to or denying the charges. The company also agreed to a plan that would address more than 1,400 transactions involving accounts in over 300 customer households.

Banorte had been accused of having inadequate supervisor systems to oversee the sales of off-shore mutual fund shares, including guidelines that failed to properly advise registered representatives that Class A share purchases eligible for front-end loans were more affordable than Class B Shares.

According to FINRA enforcement head Susan L. Merrill, firms are obligated to consider all share classes and pricing features that would most benefit a customer—regardless of whether or not that clients resides in the United States or abroad. The majority of Banorte’s customers reside in Mexico. Merrill also said that firms must take all relevant factors into considerations when making mutual fund recommendations to clients.

Class A Shares
These shares come with a front-end sales charge and lower ongoing fees that are asset-based.

Class B Shares
While these shares usually do not come with a front-end sales fee, their asset-based fees are usually higher than Class A Shares’ fees.

FINRA alleges that during 2003 until May 2004, the majority of Banorte mutual fund sales involved Class B shares even though investing in Class A Shares could have resulted in higher returns for clients.

Related Web Resources:

FINRA Fines Banorte Securities International $1.1 Million for Improper Sales of Class B Mutual Fund Shares, FINRA, October 16, 2008

Banorte Securities International, Ltd.

FINRA Fines Banorte $1.1 Million

Continue reading "Banorte Securities International, Ltd. Agrees to $1.1 Million Fine Over Charges It Recommended Class B Mutual Fund Shares Instead of Class A" »