Investment Fraud Lawyer Blog

The SEC's inspector general, David Kotz, released a report last Friday finding that the SEC failed to properly do its job of overseeing credit rating firms. However, based on an August 29 Wall Street Journal article ("SEC Criticized on Raters") by Sarah N. Lynch, Mr. Kotz's report apparently focused on the applications of smaller firms, not the big three agencies - Moody's, Fitch, and Standard & Poors - whose ratings are primarily relied upon by the investing public. The big three were criticized for assigning toxic mortgage securities their highest ratings after the housing price bubble began to burst in the summer of 2006 and being paid by the issuers for their ratings. (For background, see our November 3, 2008 blog called "Are Credit Rating Agencies Just a Bunch of Bull?").

Continue reading " Inspector General Criticizes SEC Oversight of Credit Ratings Firms " »

There have been various developments over the past several weeks which investors may consider relevant in allocating their resources or evaluating alternatives that are available to them. Some of the more significant developments include, but are not limited to, the following:

• The Dow Jones Industrial Average opened the week at 9506 and, on Monday, moved up 3 points.

• On Tuesday, the Dow Jones Industrial Average rose 30 points.

• On Wednesday, the Dow Jones Industrial Average gained 4 points.

• On Thursday, the Dow Jones Industrial Average rose 37 points.

• On Friday, the Dow Jones Industrial Average fell 36 points and closed the week at 9544.

Continue reading " Page Perry's Market Monitor - August 28, 2009 " »

A retired securities lawyer and his wife have filed suit in the U. S. District Court for the Middle District of North Carolina over losses they sustained as a result of investing in preferred stock auction rate securities issued by Nuveen Investments. Auction rate securities are debt instruments -- in this case preferred stock-- for which interest is regularly reset through a Dutch auction. Auction rate securities were once routinely marketed as safe, cash equivalents that were highly liquid, but the broker-dealers who sold them failed to disclose that liquidity was entirely dependent upon the success of the auction process, which was being artificially supported by the undisclosed participation of brokers bidding in auctions where they had an interest. The North Carolina suit alleges fraud and securities law violations at all levels, including claims against the issuers, the underwriters, and the broker-dealers who sold the securities and managed the auction process.

Continue reading " Investor Sues Nuveen, Merrill, Citigroup and Deutsche Bank over Auction Rate Securities " »

The North American Securities Administrators Association (NASAA), the organization of state securities regulators, has published its annual list of top 10 investor traps to avoid. NASAA identified Leveraged Exchange-Traded Funds (ETFs), real estate investment schemes, private placement offerings, natural resources investments, and Ponzi schemes as the greatest potential threats to investor safety. Regarding leveraged ETFs, NASAA warns: “Given their volatility, these funds typically are not suitable for most retail investors.” NASAA also warns investors to be wary of pitches for investments in gold bullion and currency scams, life settlements, entertainment investments, short-term commercial promissory notes, and speculative inventions and new products.

Continue reading " Regulators Issue Warnings about Leveraged Exchange-Traded Funds (ETFs) and Other Toxic Investments " »

The Securities and Exchange Commission is outmanned and outgunned by the folks it is trying to police, according to an August 20 article in the Wall Street Journal by Tom McGinty and Kara Scannell. The SEC turned over daily surveillance of the markets to the markets’ own self-regulatory organizations (“SROs”) long ago. Now, under pressure from Congress and investors to prove it is up to the job, after its glaring failures in the Madoff Ponzi scheme and other scandals, Chairman Mary Shapiro’s SEC is trying desperately to catch up. But surveillance of complex modern markets requires “the quantitative, analytical capacity that the agency has never had,” observes Jonathan Katz, who left the SEC in 2006 after 20 years as secretary.

Continue reading " The SEC Simply Does Not Have Sufficient Resources To Do Its Job " »

Charles Schwab’s recent article in the Wall Street Journal, entitled “Brokers Aren’t Responsible for Bad Bets,” is a cynical attempt to change the subject that compares very unfavorably with the intellectual honesty of Warren Buffet, according to Susan Antilla in her August 21 article in Bloomberg.com. Mr. Schwab’s article was in response to a lawsuit filed against Charles Schwab & Co., Inc. by the Attorney General of New York. The lawsuit alleges, in essence, that Schwab owed its customers a duty to properly understand and make accurate representations concerning the auction rate securities it sold, and that Schwab breached that duty by misrepresenting them as liquid, short-term investments without discussing the risks. These representations gave investors a false sense of security that their investments would always be liquid when auction rate securities, in fact, faced significant, inherent liquidity risks. The Complaint can be found at http://www.oag.state.ny.us/media_center/2009/aug/aug17a_09.html.

Continue reading " Despite Assurances to Investors, Schwab Doesn't Want to Play by the Rules " »

According to a recent article in InvestmentNews, a former executive of Securities America feared a “panicked run on the bank” for clients who held securities issued by Medical Capital Holdings Inc. On July 16, the SEC charged Medical Capital Holdings Inc. with fraud related to the sale of $77 million of private securities.

Continue reading " How Much did Securities America Really Know about Problems at Medical Capital Holdings? " »

There have been various developments over the past several weeks which investors may consider relevant in allocating their resources or evaluating alternatives that are available to them. Some of the more significant developments include, but are not limited to, the following:

• The Dow Jones Industrial Average opened the week at 9321 and, on Monday, dropped 186 points.

• On Tuesday, the Dow Jones Industrial Average rose 83 points.

• On Wednesday, the Dow Jones Industrial Average gained 61 points.

• On Thursday, the Dow Jones Industrial Average rose 37 points.

• On Friday, the Dow Jones Industrial Average jumped 156 points and closed the week at 9506.

Continue reading " Page Perry's Market Monitor - August 21, 2009 " »

Reuters reports that the State Street Corporation, a financial services holding company, may not have enough money to pay fees and penalties stemming from lawsuits centered on risky investments the firm made.

Continue reading " State Street's Subprime Woes Continue " »

Northern Trust Securities, Inc. has succeeded in obtaining the dismissal of a class action filed against it by Aimis Art Corp. arising out of the sale of auction rate securities, reported Liz McKenzie in her Law360 article entitled “Northern Trust Escapes Investor’s ARS Action.” Aimis filed the lawsuit on September 17, 2008. On September 29, 2008, Northern Trust announced a program through which it would repurchase certain of the auction rate securities. In December 2008, Aimis received the par value of its investment in the auction rate securities. The case was pending in the U. S. District Court for the Southern District of New York.

Continue reading " Auction Rate Securities Class Action Dismissed When Brokerage Firm Buys Back Holdings of Investor " »

Investors are bringing an increasing number of legal claims against brokerage firms as a result of inappropriate sales of preferred stocks issued by financial institutions. For example, Merrill Lynch has been hit with an arbitration claim filed by an elderly couple that lost $650,000 in the preferred stocks of financial companies according to Sue Asci in her August 16 article in InvestmentNews called “Merrill Lynch confronts arbitration claim involving financials’ preferred stock.” The claim, filed with FINRA, alleges that Merrill engaged in fraudulent sales practices, including self-dealing (more on that below).

Continue reading " More Investor Claims Focus on Sales of Preferred Stocks Issued by Financial Institutions " »

The Financial Industry Regulatory Authority (“FINRA”), the regulator of broker-dealers and protector of investors, allegedly failed to investigate the sworn testimony of a former Stanford broker, in 2003, that the Stanford Financial Group, a FINRA broker-dealer, was “engaged in a Ponzi scheme to defraud its clients,” according to recent articles by Reuters, published by the New York Times, and Scott Cohn, posted on CNBC.com. Had FINRA investigated back in 2003, the financial disaster inflicted on Stanford investors might have been avoided.

Continue reading " Securities Regulators Questioned about Dropping the Ball " »

Brokerage firms who sold auction rate securities had to feel a jolt if they read Chad Bray’s recent article in the Wall Street Journal (“Broker Convicted in Auction-Rate Case”). A jury convicted a former Credit Suisse broker of a crime – subject to 45 years in prison – after less than a day of deliberation. It’s true that the government claimed that he and another broker changed the names of securities on communications with clients to conceal the fact that the securities were not backed by federally guaranteed student loans, which is not something every broker who sold auction rate securities did. Nevertheless, the jury found the broker “guilty of securities fraud and two counts of conspiracy,” according to the article, and “securities fraud” is a charge widely associated with sales practices related to auction rate securities. In the words of the U.S. Attorney who prosecuted the case: “The defendant’s fraudulent misrepresentations saddled investors with unknown risks they did not bargain for…. [an allegation found in most civil lawsuits involving auction rate securities] This case shows that those who engage in such schemes will be held to account for their criminal activity.”

Continue reading " Bad News for Brokerage Firms that Sold Auction Rate Securities " »

Smaller securities firms that trade their own capital are recruiting the risk-takers that major Wall Street firms are letting go, according to an August 11 article in the Wall Street Journal by Aaron Lucchetti. These firms received no government bailout money and are not subject to tougher regulation and compensation oversight reserved for the major firms that pose a “systemic risk.” We are “a recipient of the purge,” according to one such firm.

Continue reading " Small Brokerage Firms Are Attracting Big Firm Traders " »

There have been various developments over the past several weeks which investors may consider relevant in allocating their resources or evaluating alternatives that are available to them. Some of the more significant developments include, but are not limited to, the following:

• The Dow Jones Industrial Average opened the week at 9370 and, on Monday, dropped 32 points.

• On Tuesday, the Dow Jones Industrial Average fell 97 points.

• On Wednesday, the Dow Jones Industrial Average gained 120 points.

• On Thursday, the Dow Jones Industrial Average rose 37 points.

• On Friday, the Dow Jones Industrial Average fell 77 points and closed the week at 9321.

Continue reading " Page Perry's Market Monitor - August 14, 2009 " »

The Bankruptcy Estate of Terra Securities ASA and seven Norwegian municipalities have filed a securities fraud action against Citigroup Global Markets, Inc. and related entities, as reported in the Wall Street Journal and news wires. The complaint contends that, in 2007, Citigroup fraudulently induced Terra and the municipalities into purchasing notes linked to a "tender option bond" (or TOB) fund managed by Citigroup. TOB funds hold leveraged positions in U. S. municipal bonds. The municipalities lost approximately $90 million and Terra, a Norwegian securities firm, experienced additional losses when it was forced into bankruptcy. The case was filed in the United States District Court for the Southern District of New York.

Continue reading " Norwegian Cities Sue Citigroup to Recover Losses in Tender Option Bond Funds " »

CNN Money reported that Bank of America’s negotiated $33 million settlement with the Securities and Exchange Commission has hit a roadblock. U.S. District Court Judge Jed Rakoff said that Bank of America “effectively lied to their shareholders” when the bank said that it would not pay bonuses to acquired Merrill Lynch employees. In fact, it paid $3.6 billion in bonuses, which averages to $91,000 per bonus. As a result, the judge said that the settlement did not fit the amount of the crime, saying, “Is there not something strangely askew in a fine of $33 million? This is a tiny, tiny fraction. Why isn’t this a grossly unfair amount?”

Continue reading " SEC Settlement with Bank of America Hits a Roadblock " »

Mary Shapiro’s Securities and Exchange Commission is stepping up enforcement activities in an effort to counter criticism that it has not done its job, according to an August 11 article in the Wall Street Journal by Kara Scannell entitled “’Urgency’ Drives SEC Crackdown.’” The SEC’s reputation as the dozing sheriff was battered by its failure to detect and/or take action against the Madoff Ponzi scheme and numerous other fraudulent schemes. Its inspector general is expected to release a critical report on the handling of the Madoff case. Former New York Attorney General Elliot Spitzer recently told Henry Blodget that the SEC does not need new authority, it just needs to stop going to lunch with Wall Street bankers every day and start issuing subpoenas.

Continue reading " Is the SEC's Recent Activity the "Real Thing?" " »

Investors have filed a class action complaint against Proshares Advisors LLC and others for violating anti-fraud provisions of the federal securities laws by misrepresenting and failing to disclose material risks associated with an inverse leveraged exchange traded fund (“ETF”), reported Evan Weinberger in his recent 360Law article entitled “Class Alleges ProShares ETF Is ‘Defective Product.’” That fund is the UltraShort Real Estate ProShares fund offered by ProShares Trust. The Complaint notes that sales of such products have “exploded in popularity” in recent years, that ProShares Trust is the fifth largest provider of ETFs in the United States and managed 99% of the inverse and leveraged ETFs in the country.

Continue reading " Class Action Filed Over Leveraged and Inverse ETF Securities " »

Raymond James “long-suffering clients remain frozen in auction-rate securities hell,” says Gretchen Morgenson in her August 2 article in the New York Times called “Investors Without a Lifeline.” Raymond James misrepresented auction rate securities to retail investors as safe and liquid, just like many larger Wall Street firms that have settled with the regulators and agreed to buy them back. But Raymond James is refusing to buy back auction rate securities it sold to investors on the ground that it did not underwrite them, it just sold them. In its most recent quarterly filing, Raymond James further indicated that it lacks sufficient regulatory capital and borrowing power to buy back the securities, and says, if it were forced to do so, that “could adversely affect the results of operations,” according to the article.

Continue reading " Raymond James Ignores Customers to Whom it Sold Auction Rate Securities " »

In her August 4th Wall Street Journal column called Compliance Watch, Suzanne Barlyn reports that Morgan Keegan is engaging in a rarely used hardball tactics in three arbitrations arising out of sales of its proprietary bond mutual funds in which arbitration panels have awards. So far, Morgan Keegan has moved to vacate awards issued in three cases involving more than $1 million in damages, attorneys’ fees and costs.

Continue reading " Morgan Keegan Continues "Hardball" Arbitration Tactics " »

On both sides of the Atlantic, regulatory officials have increased scrutiny of structured financial products such as credit-default swaps and collateralized debt obligations. In an article entitled, “U.K. Probes Structured-Finance Products,” the Wall Street Journal highlights investigations into possible fraud in the valuation and sale of these assets.

Continue reading " False Valuations of Structured Finance Securities Continue to Concern Regulators " »

Investors are leaving big, full service firms like Morgan Stanley Smith Barney and Bank of American Merrill Lynch, and investing their money through online discount firms like Schwab and TD Ameritrade, according to a recent CNBC.com article called “Investors Dump Brokers to Go It Alone.” This has been happening for some time now, but the trend has accelerated since investors were badly burned by the toxic securities sold by major financial institutions and the related collapse and near-collapse of many of those financial institutions.

Continue reading " Major Wall Street Firms Losing Customers " »

Fidelity Investment has joined Charles Schwab and Morgan Stanley Smith Barney in warning customers about the complexity and risks of Leveraged Exchange Traded Funds (ETFs), reported Daisy Maxey in her article, “Fidelity the Latest to Caution on ETFs,” published in the August 4 Wall Street Journal. Fidelity’s web site now states: “Most [Leveraged ETFs] reset daily and seek to achieve their objectives on a daily basis. Due to compounding, performance over longer periods can differ significantly from the performance of the underlying index.”

Continue reading " Sales of Leveraged and Inverse ETFs Expose Wall Street Firms to Liability for Misrepresentation and Unsuitable Recommendations " »

As reported by CNN early on August 6, 2009, a U.S. federal judge rejected the pending settlement between Bank of America and the Securities and Exchange Commission. The SEC had alleged that the bank defrauded its shareholders by claiming that it would not pay bonuses to Merrill Lunch employees after the two companies merged earlier this year when, in fact, it had approved Merrill’s payment of $5.8 billion in bonuses. Ultimately, the bank paid $3.8 billion in bonuses to Merrill employees. Misleading shareholders is a particularly serious charge against the bank, especially since it later had to accept public funding to help it absorb Merrill. Bank of America had accepted $20 billion from the federal Troubled Asset Relief Program (TARP).

Continue reading " Judge Refuses to Rubber Stamp SEC Settlement with Bank of America " »

The recent settlement between regulators and broker-dealers that sold auction rate securities are not good news for large and institutional investors, reports Law360 in a July 30 article entitled “Will Their Be An Onslaught of ARS Litigation?” The settlements typically require the defendant firms to by back auction rate securities from individual investors, nonprofits and small companies with less than $10 million in assets at the firm. On the other hand, the brokerage firms are only required to use their “best efforts” or “work with” large investors in addressing their liquidity problems. Armed with this knowledge, and the knowledge that the government will not assist them, a number of institutional investors have gone the self-help route by taking legal action. Among them are Ashland Inc. ($194 million), Braintree Laboratories ($33 million) and Texas Instruments ($524 million), Ocwen Financial Corp. and Bankruptcy Management Solutions Inc. More large companies are expected to do the same.

Continue reading " Large Investors Are Pursuing Auction Rate Securities Claims " »

In her recent article in the Wall Street Journal, Eleanor Laise reports that sales of Leveraged and Inverse Exchange Traded Funds (ETFs) have exploded to $32.8 billion as of June 2009, almost tripling the $11 billion held at the start of 2008. The number of such ETFs has increased to 119, an increase of 86%, over the same period. “The explosive growth in this area over the past year reflects an aggressive sales effort,” said William F. Galvin, Secretary of the Commonwealth of Massachusetts. These products are unsuitable for and should not have been sold to most investors.

Continue reading " Regulators Investigate Sales of Leveraged and Inverse ETFs " »

Today, Bank of America agreed to pay a $33 million fine to settle charges brought by the SEC arising out of Bank of America’s acquisition of Merrill Lynch.
Specifically, the SEC accused Bank of America of misleading of investors about performance bonuses that were to be paid to executives at Merrill Lynch following the acquisition of Merrill. The bank neither admitted nor denied these charges in agreeing to the settlement.

Continue reading " Bank of America Pays $33 million to Settle with the SEC " »

Recent news that the SEC has charged Medical Capital Holdings Inc. and Provident Asset Management, LLC with fraud related to large private-securities deals could mean serious problems for broker-dealers who sold the products to investors.

Continue reading " SEC Charges Medical Capital Holdings and Provident Asset Management with Fraud " »

In the wake of a FINRA Regulatory Notice and a number of articles in the financial press, some brokerage firms say they are either issuing warnings about the products or silently following the discussions surrounding them. So reports Daisey Maxey of the Wall Street Journal in her July 30 article entitled “Warning Signs Up for Leveraged ETFs. Morgan Stanley Smith Barney says its sales of leveraged and inverse ETFs is “under review.” Charles Schwab says it is warning clients to “proceed with extreme caution” because “these funds may not give you the returns you may be expecting.” Schwab says that, while it does not “recommend” leveraged ETFs, investor may purchase them on their own through Schwab. Likewise, TD Ameritrade says it does not “actively sell” leveraged ETFs but they are available on its web platform.

Continue reading " Beware Leveraged and Inverse Exchange Traded Funds " »

"What's up, Doc?" It may not sound like the start of a very effective sales pitch, but when Radical Bunny LLC (no relation to Bugs) talked, people listened, according to a recent article by John Emswhiller in the Wall Street Journal entitled "SEC Sues Four Over Real-Estate Deal." At least 900 investors placed over $197 million with Radical Bunny in connection with a purported Phoenix commercial real estate venture. The Securities and Exchange Commission (SEC) says the money was funneled to Mortgages, Ltd., which made short-term, high-interest loans to real estate developers that were building malls, office parks, condominiums, and other projects. When the commercial real estate bubble burst, and the borrowers defaulted, Mortgages, Ltd, Radical Bunny, its principals and investors were left holding a big, empty bag. Bankrutptcy filings ensued, as did enforcement actions by the SEC against Radical Bunny and its principals. Mortgages, Ltd.'s chief executive committed suicide.

Continue reading " SEC Cracks Down on Phoenix Investment Fraud " »

There have been various developments over the past several weeks which investors may consider relevant in allocating their resources or evaluating alternatives that are available to them. Some of the more significant developments include, but are not limited to, the following:

• The Dow Jones Industrial Average opened the week at 9093 and, on Monday, rose 15 points.

• On Tuesday, the Dow Jones Industrial Average fell 12 points.

• On Wednesday, the Dow Jones Industrial Average dropped 26 points.

• On Thursday, the Dow Jones Industrial Average soared 84 points.

• On Friday, the Dow Jones Industrial Average rose 17 points and closed the week at 9172.

Continue reading " Page Perry's Market Monitor - July 31, 2009 " »