Investment Fraud Lawyer Blog

A report released on February 6 entitled, "An Empirical Study: Perception of Fairness of Securities Arbitration," concludes that 55.1% of respondents were dissatisfied with the outcome of their arbitration cases. Many of those surveyed also viewed the arbitration system as unfair and their arbitration panels as biased. The report was based on responses from more than 3,000 customers, lawyers and representatives of brokerage firms. (This blog reported on this study on February 7th).

Sara Hansard of Investment News recently revisited this study in a February 25th article. Although the Securities Industry and Financial Markets Association (SIFMA) and the Financial Industry Regulatory Authority Inc. (FINRA) participated in the survey, both claim that the 13% response rate was too low and therefore conclusions were "mixed."

Managing director and associate general counsel of SIFMA, Kevin Carroll, said that it was unfair to highlight only investor dissatisfaction with the arbitration system. In a statement about the survey, SIFMA said that 58% of respondents characterized arbitrators as competent and 73% said they listened to arbitrators. "The [survey] results don't show a system that's broken," Carroll said.

Continue reading " Controversy Continues Over Arbitration Study Findings " »

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Posted In: Common Securities Broker Abuses

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On January 30, 2008, the North American Securities Administrators Association Inc. (NASAA) released a list of 11 "pro-investor legislative priorities" that it plans to support this year.

Investment News journalist Bruce Kelly reported that “state securities regulators are worried that the recent emphasis on making U.S. capital markets more competitive could lead to the pre-emption of their power by federal regulators.” Thus, NASAA’s first priority is to “support a strong and effective regulatory structure for capital markets."

NASAA's second priority is to "restore fairness and balance in the securities arbitration system."

Continue reading " NASAA's 2008 Legislative Agenda " »

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Posted In: Common Securities Broker Abuses , Elder Abuses , Regulatory Developments , Securities Arbitration

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Believe it or not, some states are actually “partnering” with marketing firms to convince low- and middle-income seniors to buy long-term care insurance policies that they do not need and cannot afford, according to an article in today's Wall Street Journal by Jennifer Levitz and Kelly Greene entitled States Draw Fire for Pitching Citizens On Private Long-Term Care Insurance.

LTC insurance is one of the most complex and expensive forms of insurance around. It also provides agents some of the highest commissions in the business – between 30% and 65% of the first-year premium payments plus 3% to 5% a year after that. The benefits for many targeted customers are nonexistent because their income and assets are low enough that they would qualify for free long term care under Medicaid.

To add insult to injury, some of these insurance companies play “hardball” with their customers, jacking up LTC premiums by as much as 700% after the first year, and refusing to pay legitimate claims. The National Association of Insurance Commissioners (“NAIC”) reported a 74% increase in complaints to state regulators relating to claim denials on LTC policies from 2003 to 2006. NAIC also said that more than 70% of those denials are reversed after complaints were made – a “pattern of error” not found with other types of health insurance.

Continue reading " "We're From The Government ... And We're Here To Sell You Long Term Care Insurance" " »

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Washington Post staff writer Carrie Johnson reported on February 14, 2008 that the probes by investigators into dozens of companies for fraud and insider trading in connection with the subprime mortgage crisis are progressing slowly. The FBI currently has 16 criminal investigations pending while the Securities and Exchange Commission is investigating close to 24 additional companies. Attorneys general in at least four states have issued subpoenas and private class-action lawsuits have been filed targeting banks, homebuilders, lenders, and credit-rating agencies.

FBI section chief Sharon E. Ormsby said that policing mortgage and credit-related fraud is the FBI Financial Crimes Unit’s "number one priority." The SEC has since assigned 100 lawyers to participate in a nationwide subprime mortgage-working group, which has made criminal referrals to other government agencies. Part of the challenge of these investigations is that they concern complex accounting and business decisions and investigators must sift through mountains of paperwork and trading records.

Continue reading " Subprime Probes Slowed By Complexity " »

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Posted In: Market Developments , Regulatory Developments , Subprime Mortgage & Collateralized Debt Obligation Problems

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According to BBC News, Germany’s HSH Nordbank plans to sue UBS to recover “significant” losses attributable to UBS’s mis-selling of subprime investments and failure to manage subprime securities in line with “prudent investment objectives.” HSH Nordbank, one of German’s largest financial institutions, said it plans to file suit in the State of New York.

This announcement further adds to UBS’s subprime woes. Not only has UBS suffered billions in losses from the subprime debacle, but both criminal authorities and the SEC are investigating UBS’s valuation and pricing of subprime investments. UBS is also being investigated over the adequacy of disclosures to investors to whom it sold subprime securities.

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Posted In: Subprime Mortgage & Collateralized Debt Obligation Problems

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In a Page One story in the Wall Street Journal on February 12, 2008, reporters Ellen Schultz and Theo Francis alerted us to one of the latest financial schemes targeting seniors, veterans, and the disabled. This is the latest twist for the fast growing payday loan industry – lenders who make high interest loans that are secured by the borrower’s future paychecks. The industry is now targeting recipients of monthly government benefits, including social security, disability, and veteran’s benefits.

Since federal laws bar the government from sending benefits directly to lenders, the lenders create relationships with banks that arrange for prospective borrowers to have their government benefits electronically deposited into an account. The banks then transfer funds to respective payday lenders who subtract the debt repayments, fees and interest before giving recipients the balance, which seniors often refer to as their “allowance.”
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With effective annual percentage rates as high as 400% or more, payday lenders can completely control a Social Security recipient’s finances. No statistics are publicly available on the proportion of payday loans that are backed by Social Security and other government benefits. An analysis of data from the U.S. Department of Housing and Urban Development revealed that payday lenders are located around government-subsidized housing for seniors as well as the disabled.

Continue reading " High Interest Payday Lenders Trap Seniors, Veterans And The Disabled " »

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The fallout from the subprime mortgage contagion continues to spread to other parts of the credit markets. Wall Street Journal reporter Robert Frank recently (Feb. 14, 2008) recounted the story of Brian and Basil Maher who sold their family's shipping business last summer for more than $1 billion. The brothers then put the some of these proceeds in what should have been a safe investment with Lehman Brothers Holdings Inc., with strict orders to “make only the most conservative, cash like investments.” Instead, the brothers lost $286 million within weeks.

Unbeknownst to the Mahers, Lehman Brothers invested more than two-thirds of their money in auction rate securities, which are an obscure type of bond now sending shock waves through the economy. Auction rate securities are an unusual type of long-term bonds that behave like short-term bonds. Auction rate securities are used to fund a wide variety of programs, including college student-loan programs and municipal road and bridge projects. These securities became popular with investors looking for cash-like investments because they offered better returns than traditional money-market investments but were just as easy to buy and sell.

Continue reading " $286 Million Auction Rate Securities Loss? " »

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Posted In: Subprime Mortgage & Collateralized Debt Obligation Problems

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According to a February 14, 2008 story by Christine Richard and James Tyson at Bloomberg.com, bond insurers may be split into two separate businesses in what would be the biggest overhaul since the industry was created almost 40 years ago. In prepared testimony to the House Financial Services Subcommittee on Capital Markets, New York Insurance Department Superintendent Eric Dinallo said that such separation is one of the proposals regulators have been discussing with struggling bond insurers, FGIC Corp., MBIA Inc., and Ambac Financial Group Inc. Dinallo, whose main goal is to protect borrowers and debt holders, said, ``One would have the municipal bond policies and any other healthy parts of the business. The other would have the structured finance and problem parts of the business.''

New York Governor Eliot Spitzer told the subcommittee that although the split is not seen as “optimal,” it may be necessary if the insurers cannot raise the capital needed to avoid credit-rating downgrades. Losing the AAA ratings bond insurers use to guarantee $2.4 trillion municipal and mortgage-backed debt lowers confidence in the rankings of thousands of hospitals, schools, and local governments around the country.

Since demand for AAA rated securities currently exceeds supply, New York has invited new companies to provide bond insurance. ``We cannot allow the millions of individual Americans who invested in what was a low-risk investment lose money because of subprime excesses. Nor should subprime problems cause taxpayers to unnecessarily pay more to borrow for essential capital projects,'' Dinallo said.

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Posted In: Subprime Mortgage & Collateralized Debt Obligation Problems

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Several years ago bond insurers branched out from their traditional business of insuring municipal bonds to insuring collateralized debt obligations (CDOs) and other securities relating to subprime mortgages. Now, with the subprime contagion sweeping the world, the bond insurers are facing significant losses. The bond insurers have begun to lose their own AAA credit ratings as the ratings of many of the CDOs related to subprime mortgage securities have been downgraded or put on watch with the threat of downgrading.

In a February 19, 2008 article posted at Bloomberg.com, Mark Pittman and Christine Richards reported that the plan of Eric Dinallo, the New York Superintendent of Insurance, to split the bond insurers into two companies – one of which would insure the municipal bonds and the other which would insure the CDOs and other subprime mortgage securities – may preserve the AAA rankings of municipal securities but allow the continued slide of the rankings of asset-backed securities. This could cause the credit ratings on $580 billion of asset backed securities to be cut and spark further losses for investors and writedowns by financial institutions of their subprime mortgage securities. Oppenheimer & Co. analyst Meredith Whitney estimated last month that the investment banks might have to record additional writedowns of $70 billion if the bond insurers fail.

Continue reading " New York's Rescue Plan For Bond Insurers May Cause Additional Subprime Losses " »

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Posted In: Subprime Mortgage & Collateralized Debt Obligation Problems

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The credit crisis triggered by the collapse of the subprime mortgage market has claimed its latest victim: auction-rate securities. These complex debt instruments are long-term corporate or municipal bonds or preferred stock on which the interest rates are reset periodically, typically every seven, 28 or 35 days. Assuming there are buyers, holders of these instruments can sell them on the reset days. The problem is that lately buyers have been few and far between. The $330 billion auction-rate securities market is experiencing turmoil and uncertainty it has never seen before.

Auction-rate securities have been popular with issuers like state and local governments, colleges, universities, hospitals, charitable organizations, cultural institutions and other non-profit entities because financing costs are low, no third-party bank support is required and there are usually fewer parties involved in the financing process.

Continue reading " The Subprime Crisis Strikes Again: Auction-Rate Bond Market Now Vulnerable " »

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Posted In: Subprime Mortgage & Collateralized Debt Obligation Problems

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In an article in the February 19, 2008 Atlanta Journal-Constitution, Associated Press reporter Mark Jewell noted that regulators are trying to punish Wall Street for its mortgage finance practices. While these practices have expanded homeownership and spread risk among new players, they came at the cost of duping the borrowers and investors who supplied cash to fuel the housing bubble that has burst.

State securities regulators and some individual cities have brought lawsuits trying to prove that investment banks and big mortgage lenders are not just guilty of making poor business decisions and failing to foresee the looming mortgage troubles but rather of engaging in fraud. The FBI is also investigating possible criminal conduct based upon what Wall Street firms knew about the risks of securities backed by subprime mortgages and whether they hid those risks from investors.

Observers do not expect the regulators to extract massive financial penalties in the civil cases they are bringing against Wall Street firms and mortgage lenders. But they could uncover evidence that will force Wall Street on the defensive as the government seeks to ease the subprime-related financial strains on the bond insurers. Evidence of bad behavior by Wall Street could also fuel the filing of even more lawsuits by private investors. Already 278 subprime cases were filed in federal courts in 2007.

Continue reading " Credit Crunch Causes A Myriad Of Regulatory And Legal Actions " »

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Posted In: Subprime Mortgage & Collateralized Debt Obligation Problems

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Andrew Frye of Bloomberg.com has reported that the North American subsidiary of Allianz, Europe’s largest insurer, has agreed to a settlement with California’s insurance regulator under which it will pay $10.1 million and change its annuities sales practices. California alleged that Allianz misled investors and pushed unsuitable products onto thousands of elderly persons. In a statement, Commissioner Steve Poizner noted, ``The fact that Allianz used deceptive practices and high-pressure sales tactics to lure and cajole seniors into buying unsuitable products is appalling.''

Page Perry has reviewed the California settlement document. In sum, the settlement requires Allianz to (1) pay a $3,000,000 monetary penalty, (2) pay $300,000 in attorneys fees, (3) make a $3,750,000 contribution over five years to the Life and Annuity Consumer Protection Fund special account within the California Insurance Fund, (4) make a $3,000,000 "High Impact" investment in the California Organized Investment Network, (5) establish annuity suitability systems, standards and procedures, and (6) conduct a claims review process for current or former owners of certain annuities. The claims review process will give policyholders (regardless of age) the opportunity to request rescission of their policies or receive "other specified restitution" from Allianz.

Continue reading " Allianz Agrees To $10.1 Million Settlement With California Insurance Regulator But Still Faces Class Action Claims " »

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Posted In: Consumer Class Actions , Variable Annuities and Equity-Indexed Annuities

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Moody’s Investors Service downgraded the insurance units of FGIC Corp., the fourth-largest bond insurer, six levels from Aaa to A3 and announced that further downgrades were possible. This downgrade occurred as a result of FGIC’s expansion into guaranteeing CDOs backed, in part, by subprime mortgages. FGIC, which is owned by Cypress Group, PMI Group, Inc. and Blackstone Group LP, had its rating cut eight levels to below investment grade.

As a result of Moody’s downgrade, the New York Insurance Department has reported that FGIC is seeking to be split in two to protect the municipal bonds it insures from the problems attributable to its guarantees of subprime-related securities. Essentially, FGIC is seeking to separate its “good” business (insuring municipal bonds) from its “bad” business (insuring subprime structured finance products.) FGIC reportedly insures $220 billion of municipal bonds and another $94 billion of other debt.

Continue reading " Bond Insurer FGIC Downgraded Again, Seeks To Split--Litigation Likely To Follow " »

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Posted In: Market Developments , Municipal Bonds , Subprime Mortgage & Collateralized Debt Obligation Problems

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In prepared testimony before Congress last week, New York Governor Elliot Spitzer acknowledged that losses from the subprime crisis may threaten the U.S. economy. During his presentation, Spitzer pointed out that many were to blame for the subprime problem.

Spitzer complained that inadequate federal regulation of the mortgage markets and of the conversion of subprime mortgages into securities contributed heavily to problems in the U.S. economy. Spitzer pointed out that federal regulators should have been more proactive in dealing with the subprime situation and the abuses that occurred in the subprime market.

Continue reading " Spitzer: Subprime Crisis May Cause A "Tsunami" For U.S. Economy " »

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Posted In: Subprime Mortgage & Collateralized Debt Obligation Problems

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An article from Bloomberg.com by David Mildenberg reported that the nation’s biggest mortgage lender, Countrywide Financial Corp., announced that overdue mortgage loans were at their highest level in six years during January 2008. The amount of unpaid principal on loans more than 60 days late substantially increased to 7.47% from 4.32% in January 2007.

Unfortunately, the number of delinquencies is likely to increase significantly as the year progresses. Analysts at Citigroup have reported that payments on $460 billion of adjustable-rate mortgages nationwide will be re-set this year, with an additional $420 billion expected to re-set for 2011. The increased mortgage payments required by these re-sets is likely to result in additional defaults by borrowers.

The news is no better on the home price front. Some experts are expecting that in some bubble markets – such as California and Florida – 2008 will bring another 20% to 25% decline in home prices, which may create another cycle of delinquencies.

These developments do not bode well for investors in subprime-related securities. Further deterioration of this market appears likely.

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Posted In: Subprime Mortgage & Collateralized Debt Obligation Problems

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On February 7, 2008, the American Equity Investment Life Holding Company reached a settlement of a lawsuit over variable annuities with the Minnesota Attorney General. Hennepin County District Court Judge Kevin S. Burke approved the settlement that resolved all the issues raised in the lawsuit.

The settlement’s two primary components are (i) a defined suitability process for Minnesota consumers and (ii) a claims process for the past sales of certain variable annuity products where the senior consumers were either misinformed or received an unsuitable product.

Continue reading " American Equity And Minnesota AG Settle Annuity Lawsuit " »

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Posted In: Consumer Class Actions , Variable Annuities and Equity-Indexed Annuities

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On Thursday, February 14, 2008, correspondent Sarah Krouse reported in the Atlanta Journal-Constitution on testimony given before the Senate Special Committee on Aging regarding mortgage scams that are targeting seniors.

According to Krouse, three of the common types of fraud are:

Title Transfer – A scammer convinces a homeowner to sign a fraudulent document that serves to sign the house over to the scammer;

Home Sale – A foreclosure “rescue” company buys the house with the promise that the senior can remain as a renter and repurchase the house in a few years. Needless to say, these promises are unenforceable; and

Mortgage Negotiation – A fake rescue firm tells the homeowner that it will negotiate an extended and/or lower payment of the mortgage. The senior makes the mortgage payments to the firm, but none of the money reaches the mortgage company.

Continue reading " Common Mortgage Scams Target Seniors " »

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Posted In: Elder Abuses , Subprime Mortgage & Collateralized Debt Obligation Problems

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Today’s Wall Street Journal reported in an article by Kate Kelly that the criminal investigation into the collapse of two internal Bear Stearns hedge funds could hinge on whether the funds’ managers misled investors during a conference call in the Spring of 2007.

In an investor call held on April 25, 2007, Ralph Cioffi, the funds' manager, said that he was “cautiously optimistic” about Bear’s ability to hedge its securities tied to subprime home loans. One month earlier, however, Cioffi had moved $2 million of his own money out of one of the two troubled funds and into a newer and less risky Bear internal fund. At the same time, Cioffi was engaging in discussions with colleagues – some of which were conducted by email – about the worrisome state of credit markets and whether the declines in the subprime securities would be trouble for his funds.

Prosecutors in the US Attorney’s Office in Brooklyn, New York are examining whether any disparity between the public and the private comments of Cioffi and others could constitute fraud. No grand jury subpoenas have yet been issued.

Continue reading " Criminal Probe Of Bear Stearns May Center On Investor Call " »

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Posted In: Bear Stearns , Bear Stearns Hedge Funds , Regulatory Developments , Subprime Mortgage & Collateralized Debt Obligation Problems

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