Investment Fraud Lawyer Blog

Raymond James' Auction Rate Securities Problems Mount

2010-08-28T22:29:57Z

A Financial Industry Regulatory Authority (FINRA) arbitration panel has ordered Raymond James & Associates, Inc. and one of its registered representatives to pay $925,000 to a Texas couple who purchased $1.4 million of municipal auction rate securities issued by Jefferson County, Alabama, according to August 26th articles in InvestmentNews by Bruce Kelly (“Raymond James pays more auction rate claims”) and in the Wall Street Journal by Suzanne Barlyn (“Raymond James Forced to Buy Back Securities”).

]]> In this case, the auction system failed before the claimants’ securities first came up for auction, thirty five days after they bought their Jefferson County sewer bonds. One of the three arbitrators specifically dissented as to the size of the award, writing “I believe the award to the Glenndennings should be $1,400,000.00 instead of $925,000.00.”

This case is the second time in a period of several weeks that Raymond James has been ordered to pay back auction rate securities customers, according to the WSJ. As the InvestmentNews article notes, this is the third time Raymond James has been ordered to return money to clients who purchased auction rate securities. So far, Raymond James reportedly has been ordered to pay $3.5 million.

When the auction rate securities market froze in February 2008, Raymond James’ client reportedly held $1.9 billion in auction rate debt. Its still hold $600 million in auction rate securities for which there is no active market, according to the article.
The arbitration award shows Wall Street's misconduct that led to the market meltdown is still impacting investors more than three years after the crisis first struck the credit markets in mid-2007.

The $330 billion market for auction-rate securities froze in February 2008, when Wall Street dealers stopped supporting the periodic auctions that set the interest rates on long-term debt that Wall Street misrepresented as being safe, short-term “cash-equivalent” investments.

Raymond James has not yet been sued by a securities regulator in connection with sales of auction rate securities. Charles Schwab was sued by the New York attorney general for allegedly misrepresenting or failing to disclose the liquidity risks of auction rate securities. Likewise, the Massachusetts Securities Division ordered Oppenheimer & Co. to pay $56 million to auction rate securities investors and $250,000 to the state to cover the cost of its investigation.

Page Perry, LLC is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys have extensive experience in representing investors in auction rate securities cases. For further information, please contact us.

Judges Begin to Question "Sweetheart" Securities Regulatory Settlements

2010-08-27T16:52:13Z

Some judges are starting to question lenient settlement deals proffered by Wall Street firms and their arguably captive regulator, the SEC, according to an August 19, 2010 article in the Wall Street Journal by David Weidner called “In Search Of Justice for Wall (Street).” Two U.S. District Court Judges, Jed S. Rakoff and Ellen Segal Huvelle, have rejected settlements on the ground that the penalties were too small to be fair to the investing public. Another federal judge, Emmet G. Sullivan, threatened to reject but ultimately accepted a settlement proposed by the SEC and Barclays PLC. Judge Sullivan reportedly had earlier called it a "sweetheart deal."

]]> Judge Huvelle, who rejected a settlement agreement proposed by the SEC and Citigroup, told the parties: "I look at this and say, 'Why would I find this fair and reasonable?' You expect the court to rubber-stamp, but we can't." “The judge, striking a frustrated tone, fired several questions at the SEC, among them why it pursued only two individuals in the case and why Citigroup shareholders should have to pay for the alleged sins of bank executives.” (See “Judge Won’t Approve Citi-SEC Pact,” by Kara Scannell, Wall Street Journal, August 17, 2010. The SEC charged Citi with misleading investors by deliberately understating its subprime exposure by $37 billion, and proposed a settlement of $75 million. The judge said she was provided no guideposts to determine whether that was a fair settlement.

In his August 18, 2010 article in the Wall Street Journal, “Citigroup’s Paltry Debt Penalty,” David Reilly points out that while the SEC charged and settled with two Citigroup executives, the SEC also made it clear that more executive were involved than the two who were asked to pay $100,000 and $80,000, respectively – a relatively paltry sum for a Wall Street executive. He also pointed out that Goldman Sachs paid $550 million for a lesser offense than the $75 million being proposed for Citigroup.

The judges who have rejected proposed settlements have voiced concerns that the SEC should pursue "more serious sanctions against individual managers," according to the article, citing Robert Heim, a former SEC assistant regional director. "Right now, it's numbers negotiated between prosecutors and the accused. Judges are concerned the penalties are too small," Mr. Heim was quoted as saying. Shareholders are twice victimized – once by the wrongdoing and again by a trivial penalty.

In his “In Search of Justice…” article, Mr. Weidner asks readers to consider a group of notorious Wall Street offenders: Merrill Lynch's Henry Blodget, Credit Suisse's Frank Quattrone, Bear Stearns's Ralph Cioffi and Matthew Tanin, Bank of America's Theodore Siphol, the New York Stock Exchange's Dick Grasso, Morgan Stanley’s Mary Meeker, and Citigroup's Jack Grubman. “A few of them lost their jobs. Some were tried. But there wasn't a conviction in the bunch. Some have even thrived.” People see that and think: that is not right and fair. They are angry about it, and judges are people too.

J. Boyd Page, senior partner at Page Perry, LLC, an Atlanta-based law firm, said: “I think these judges realize that it does no good to fine a corporation that will simply pass through a fine to customers or shareholders. The wrongdoers in these cases are executive officers, and the only way to change their behavior is to put the fear of God in them. Let them know that the penalty for financial fraud is the loss of their personal assets. Then you’ll see some change.”

Page Perry, LLC is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys have extensive experience in representing investors in securities matters. For further information, please contact us.

More Municipal Fraud Charges Ahead?

2010-08-27T14:43:03Z

Bloomberg is reporting that the SEC’s recent fraud action against the State of New Jersey may be the first of many such suits targeting public officials who raised money in the $2.8 trillion municipal bond market. New Jersey agreed to settle the fraud charges on August 18, 2010, the same day they were filed by the SEC.

]]> “They will be looking for other cases,” James Doty, a former SEC general counsel, was quoted as saying. “It’s a harbinger that they expect disclosure standards to be scrutinized and be increased.”

“There are a lot of states that are significantly underfunded,” a former SEC chief accountant was quoted as saying. “There’s likely to be a dozen that have the same type of problems as New Jersey, and it’s not just states but cities too.”

Miami is reportedly in the SEC’s cross-hairs for omitting to disclose to investors that it used funds earmarked for capital projects to replenish its general fund in fiscal 2007 and 2008, according to the article.

The SEC reportedly began investigating New Jersey in 2007 following a New York Times article criticizing the state’s pension accounting. The SEC found the state failed to inform investors that $704 million represented as pension payments were actually transfers of money already in the retirement system, and also failed to disclose a $2.4 billion decline in value of pension fund assets, which “created the false impression” that the Teachers’ Pension and Annuity Fund and the Public Employees’ Retirement System were adequately funded.

Elaine Greenberg, head the SEC’s new municipal securities and public pensions unit and former SEC enforcement attorney, was quoted as saying: “We hope to alert other states and municipalities of their disclosure obligations under the federal securities laws as it pertains specifically to their pension fund liabilities,” Greenberg said in an interview, referring to the SEC’s New Jersey action. “The obligation is that the disclosure is current and is accurate.”

More disclosure rules are needed, however, according to Mary Shapiro, who heads the SEC. Since 1975, state and local bond issuers have not been required to file offering documents with the SEC or adhere to accounting standards, as public companies must. Any disclosure requirements are imposed on the banks that underwrite their securities. The SEC wants better disclosure rules, but the Dodd-Frank financial reform law calls for a two-year study into whether tougher disclosure is needed.

Page Perry, LLC is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys have extensive experience in representing investors in municipal securities matters. For further information, please contact us.

Bubbles in the Bond Markets?

2010-08-26T21:19:44Z

Both risk averse and yield-hungry investors who have created a bubble in the market for bonds – including both US Treasuries and corporate junk bonds – are in for a rude awakening if things do not go just right, according to an August 22, 2010 InvestmentNews article, “The dangers of the growing bond bubble.”

]]> The bubble is most pronounced in US Treasuries. Investors seeking a safe haven have caused bond prices to rise and bond yields to fall to record levels. Five-year Treasuries are yielding 1.38% - down from 4.43% in 2007, 2.80% in 2008, and 2.2% in 2009. Ten year Treasuries are yielding 2.56% - down from 4.63% in 2007. Thirty year Treasuries are yielding 3.71% - down from 4.84% in 2007. Thirty years is a long time to tie up money at 3.71% with so many members of the Federal Reserve so concerned about inflation.

The Federal Reserve will have to accomplish a minor miracle to prevent erosion of the dollar's purchasing power despite its huge injections of liquidity into the economy. But many investors are more concerned about return of investment than return on investment, according to the article.

Unfortunately, if interest rates rise, and investors are forced to sell their bonds, they will suffer a loss of principal. Even if they hold to maturity and receive 100% of their principal and interest, that sum may be worth less than what they invested.

Those most in danger, however, are holders of junk bonds and junk bond exchange-traded funds. Investors could be damaged not only by rising yields but also by defaults in a slowing economy. Junk bond investors must hope for a Goldilocks scenario – not too hot (inflation), not too cold (deflation).

Despite this risk, demand for junk bonds has driven yields down, as they are still significantly higher than Treasuries or investment-grade corporate bonds. Ten year investment grade corporate bonds are yielding about 2.84%, but many junk bonds yield more than 7%.

Investor should not get carried away with bond investing in current market conditions. There are substantial risks in the market especially with junk bonds. Investors should expect a full explanation of such risks from any financial advisor recommending bond purchases.

Page Perry, LLC is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys have extensive experience in representing investors in bond investments. For further information, please contact us.

Georgia Court Upholds $4.1 Million Damage Award Against SunTrust Robinson Humphrey for Terminating and Defaming a Broker who Sold Auction Rate Securities

2010-08-23T17:11:23Z

On July 30, 2010, Judge Michael D. Johnson of the Superior Court of Fulton County, Georgia, confirmed and upheld a December 2009 award issued by an Atlanta-based Financial Industry Regulatory Authority (FINRA) arbitration panel ordering SunTrust Robinson Humphrey, Inc. (SunTrust) to pay over $4.1 million in damages (including punitive damages, attorneys’ fees and costs) to a former registered representative based on a claim of wrongful termination and malicious defamation in annotating the claimant’s Form U-5 (a regulatory filing) to indicate that he had been “permitted to resign” for “failure to follow firm sales practice policy.”

After the award was issued, SunTrust filed a motion to vacate (i.e., throw out) the award, which Judge Johnson denied at the same time that he confirmed the award.

]]> Arbitration awards are notoriously difficult to vacate, and are considered to be “final” absent a showing that certain statutory grounds for vacating an award exist. Such grounds essentially involve a corruption of the process, and exist only:

(1) where the award was procured by corruption, fraud, or undue means;

(2) where there was evident partiality or corruption in the arbitrators, or either of them;

(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or any other misbehavior by which the rights of any party have been prejudiced; or

(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

Curtis Carlson, Charles M. Dalziel, Jr., and Joseph Alonso, the lawyers comprising the registered representative’s legal team, are now in the process of effectuating the expungement of the employee’s record as ordered by the arbitration panel and Judge Johnson.

Page Perry, LLC is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. The firm also has an active practice in representing individuals in employment disputes with brokerage firms. The firm is currently involved in representing several brokers in such disputes. The firm has won arbitration award for clients in employment disputes in the amounts of $1.7 million and $3.9 million. For further information, please contact www.pageperry.com.

Has Congress Dumped Unreasonable Hedge Fund Oversight Responsibility on the States?

2010-08-23T15:48:19Z

Under the new Dodd-Frank financial reform law, hedge funds with $100 million or less under management will be overseen by state regulators. While state securities regulators have done a remarkable job of enforcement given their limited funds, is Congress asking too much of them? The answer may be a resounding “yes” since the budget cuts in many states have resulted in a lack the funds and staff to do the job, according to an August 19, 2010 Wall Street Journal article by Kara Scannell, “States Will Be Hedge-Fund Police.” If that is the case, a major piece of financial reform may turn out to be illusory. That is because a disproportionate amount of fraud tends to be committed by these thousands of mid-sized and smaller hedge funds that will now be policed by the states.

]]> "Fraud is more likely to happen with small managers than big managers," Christopher Wells, head of the hedge-fund practice at the law firm Proskauer Rose LLP, was quoted as saying. "Regulators and investors should be concerned that some of the states don't have the capacity to monitor what smaller managers are doing."

The new Dodd-Frank financial law requires all hedge funds and other investment advisor firms to register with regulators and undergo exams. But only those with more than $100 million under management will be regulated by the Securities and Exchange Commission. The rest will be overseen by states. Under earlier laws, threshold was $25 million. The SEC estimates that state regulators will have to oversee approximately 4,000 more advisory firms than before.

"Right now, as it is, the states don't have the budget or the manpower to even deal with the advisers that they have," one lawyer who advises several smaller hedge funds was quoted as saying. "You're lucky if the states [examine firms] on a three-year basis. I've had certain clients who have never been audited."

As has been widely reported, state budgets are being cut, and some regulators have been furloughed. Some states are considering their options including boosting fees. California, for example, is "reviewing our rate structure" as a way to add staff.

Denise Crawford, the securities commissioner of Texas and head of the National Association of State Securities Administrators (NASAA), sounds more optimistic. "Over 3,000 investment advisers have never been examined by the SEC. That is frightening in this environment. It just makes good sense from an investor-confidence standpoint to divide up this world," she was quoted as saying.

Ms. Crawford reportedly expects the number of advisers her department oversees will double to 2,400, and the number of examiners will increase from 19 to 29. However, examiners only “try to” inspect every adviser once every five years, according to Ms. Crawford.

Is one inspection visit every five years by a single examiner likely to uncover financial fraud? The SEC inspected Bernard Madoff's operations several times without discovering his multibillion-dollar Ponzi scheme. The SEC currently oversees 11,300 investment advisers and examines about 10% of them each year, according to then article.

California is apparently trying to work smarter by targeting inspections to risk factors such as complaints "rather than simply performing them on a fixed interval."
Ms. Crawford reportedly said that NASAA will examine advisers if an individual state runs into budgetary problems. If necessary, NASAA "will go in and fund it as a special project," she said. But what are NASAA’s resources? Is not NASAA dependent on the budget-slashed state agencies?

Page Perry, LLC is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys have extensive experience in representing hedge fund investors. For further information, please contact us.

Forbes Magazine Warns Investors about Equity-Indexed Annuities

2010-08-20T16:22:21Z

Sales pitches often misrepresent and fail to disclose important facts about equity-indexed annuities, according to Mel Lindauer in his August 13, 2010 Forbes article, “The Truth About Equity-Indexed Annuities.”

Despite claims that they are simple, equity-indexed annuities are so complex that most people who sell them have an insufficient understanding of how they operate, according to the article.

]]> While investors are typically told that the product provides “stock market-like returns with no risk,” that is misleading. The non-guaranteed return, which may be described as being pegged to the S&P 500 stock index, is actually determined by a complicated formula that causes it to be much less than implied. Also, the “guaranteed” return can be as low as 1 per cent and only applies if the product is held to maturity.

The claim “you can’t lose money” is not exactly true either. It only applies if you hold the product to maturity (and if the issuer is solvent at that time). Investors are often mislead into believing their money can be withdrawn at any time, but that comes with a gotcha. These products impose a surrender fee for certain withdrawals that can result in a significant loss of principal, and even more if the underlying investments have declined in value.

In addition, any quoted “guaranteed” monthly income benefit only applies if the investor annuitizes and the income benefit may include a return of principal, according to the article.

It is telling that the insurance industry has fought the SEC’s attempt to regulate equity-indexed annuities as securities, because that would entail requirements and duties that the industry wants to avoid. Courts have ruled that the SEC does have the power to regulate equity indexed annuities and classify them as securities, but the court order also requires the SEC to consider a host of factors which complicates the picture, according to the article. Both the SEC and the Financial Industry Regulatory Authority (FINRA) have issued warnings about equity-indexed annuities.

Last but not least, the article pointed to a comprehensive paper on the problems and complexities of equity indexed annuities that was prepared by Craig J. McCann, Ph.D. of Securities Litigation & Consulting Group, Inc. At the request of the North American Securities Administrators Association, which is composed of state securities regulators, Dr. McCann prepared the paper in support of the SEC's proposal to provide federal investor protections to purchasers of equity-indexed annuities. Dr. McCann reportedly concluded:

"Existing equity-indexed annuities are too complex for the industry's sales force and its target investors to understand the investment.

--This complexity is designed into what is actually a quite simple investment product to allow the true cost of the product to be completely hidden.

--The high hidden costs in equity-indexed annuities are sufficient to pay extraordinary commissions to a sales force that is not disciplined by sales practice abuse deterrents found in the market for regulated securities.

-- Unsophisticated investors will continue to be victimized by issuers of equity-indexed annuities until truthful disclosure and the absence of sales practice abuses is assured.

Mel Lindauer’s conclusion: “just say ‘No’ when someone tries to sell you an Equity-Indexed Annuity. Then turn around and run, don't walk away.”

Page Perry, LLC is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys have extensive experience in representing investors in equity-indexed annuities. For further information, please contact us.

New Jersey Sued by SEC for Securities Fraud

2010-08-19T23:45:04Z

The State of New Jersey has the dubious honor of being the first U.S. state ever to be charged with violating federal securities laws, according to an article in CNNMoney by Ben Rooney, “SEC sues New Jersey for fraud.” The state agreed to settle the fraud charges on August 18, 2010, the same day they were filed by the SEC.

]]> The alleged fraud involved bond sales totaling $26 billion over a six year period ending in April 2007. According to the SEC, New Jersey mislead bond investors through offering documents that created the false impression that the state could fund certain pension funds. In fact, the SEC said, New Jersey could not do that without raising taxes or cutting services that could impact its budget.

"The State of New Jersey didn't give its municipal investors a fair shake, withholding and misrepresenting pertinent information about its financial situation," Robert Khuzami, Director of the SEC's Division of Enforcement, was quoted as saying in a statement.

While no financial penalty was imposed, New Jersey was ordered to "cease-and-desist" from further violations and ordered to improve its financial disclosures, according to the article.

Seeking to reassure potential investors, officials pointed out that New Jersey has never missed a bond payment and that the state is endeavoring to improve its disclosures. "We aim to have the best disclosure of any state in the nation, and we intend to meet that goal in our bond offerings," said Andy Pratt, spokesman for the New Jersey Treasury. That is some pretty impressive hootspa under the circumstances.

It's Not Too Late for Investors to Obtain Recovery of MAT/ASTA Municipal Arbitrage Losses

2010-08-18T17:39:13Z

Investors who purchased MAT/ASTA municipal arbitrage funds between 2002 through 2005 may mistakenly believe that they have waited too long and it is too late to pursue a claim for damages against Citigroup. Fortunately, this is not the case.

]]> While statutes of limitation may arguably bar some claims based on deceitful sales practices such as misrepresentation and omission for some early MAT/ASTA investors, other legal claims exist that are clearly not barred, even for early investors in the funds. That was demonstrated by an August 2010 Financial Industry Regulatory Authority (FINRA) award exceeding $1.8 million to a MAT/ASTA investor. See Gerald J. Kazma, as Trustee of the Gerald J. Kazma Revocable Trust, et al. vs. Citigroup Global Markets, Inc., et al, FINRA Dispute Resolution Arbitration Number 09-02697. The Kazma family was represented by Robert Wayne Pearce, P.A. of Boca Raton, Florida. Mr Pearce and his firm recently entered into an agreement with Page Perry, LLC to jointly investigate and prosecute MAT/ASTA claims.

In the Kazma case, the arbitrators specifically found that Citigroup and Citigroup Alternative Investments, LLC negligently mismanaged the MAT/ASTA funds and negligently supervised their employees. Because Citigroup’s mismanagement of MAT/ASTA began during 2006 through 2007 and continued through early 2008, even early investors in the funds are now eligible to pursue their claims. Thus, claims based on mismanagement and negligent supervision in 2006 and 2007 remain actionable under the laws of most states.

The impact of the decision is that it greatly expands the number of potential clients who can pursue valid claims against Citigroup and its affiliates. The Kazma award also strongly suggests that any MAT/ASTA investor, even a Citigroup employee who had no involvement with the funds, can file a claim for negligent management and may well recover his losses.

While there is, of course, no guarantee that other arbitration panels will follow the Kazma award and reach the same conclusion, the decision is nonetheless significant in that it gives many MAT/ASTA investors the opportunity to finally recover the damages they sustained through no fault of their own.

Page Perry, LLC is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys have extensive experience in representing investors in FINRA securities arbitrations, including MAT/ASTA investors. For further information, please contact us.

FINRA Investigates CDO Sales Practice Abuses by Morgan Stanley, Barclays and Credit Suisse

2010-08-15T16:49:58Z

The Financial Industry Regulatory Authority (FINRA) is investigating possible sales practice violations (e.g., misrepresentations and omissions) by Morgan Stanley, Barclays, and Credit Suisse in pitching collateralized debt obligation securities (CDOs) to institutional investors, according to a July 23, 2010 Reuters article by Steve Eder and Leslie Gevirtz, “FINRA probes M Stanley, Barclays, Credit Suisse.”

]]> The FINRA probe reportedly comes amid several other regulatory investigations into the role that CDOs played in the financial crisis. CDOs are notes backed by pools of mortgages that were tranched or sliced into layers of different preferences and risk. Some of the riskiest tranches were held by Wall Street banks, such as Merrill Lynch. CDOs are unregulated, and, therefore, hard to quantify or even detect, even though they were and are present in large quantities. The financial crisis began when Wall Street banks became afraid to lend and do business with each other, because nobody knew how much of this stuff was being held by financial institutions, they just knew that it was a lot and it was toxic.

The article notes that Goldman Sachs recently paid $550 million to settle civil fraud charges filed by the Securities and Exchange Commission over the Goldman's creation and marketing of the Abacus CDO, which, unbeknownst to investors, was designed in part by a speculator who stood to profit if it failed, which it did.

As pointed out by Reuters, however, “FINRA is not known for handing out stiff penalties.” Even across the pond, foreign observers know that FINRA, ostensibly a regulator, behaves more like the securities industry’s trade association. A case in point, according to Reuters, is the relatively trivial fine levied against Deutsche Bank for misrepresentations in the sale of subprime securities – in the amount of $7.5 million.

Page Perry, LLC is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 35 occasions. Page Perry’s attorneys have extensive experience in representing investors in securities matters and are actively involved in cases involving CDOs. For further information, please contact us.

Morgan Stanley's Research Abuses Continue - The Beat Goes On

2010-08-14T17:05:31Z

The Financial Industry Regulatory Authority on Tuesday said it ordered Morgan Stanley to pay $800,000 for failing to disclose conflicts of interests in thousands of equity-research reports and public appearances of its research analysts since 2006.

]]> Previously, in 2005, FINRA had found that the company violated research analyst disclosure rules.

FINRA said on Tuesday that Morgan Stanley & Co. Inc., a subsidiary of the investment bank and part of its global wealth-management group, failed to disclose accurate information about the firm's relationships with companies it covered in more than 6,500 equity research reports. In addition, relevant disclosures also weren't made for 84 public appearances of its research analysts.

The deficient disclosures include failing to reveal securities holdings of an analyst or a member of the analyst's household in a company. Morgan Stanley also didn't disclose when it received banking revenue from these companies or if the company was acting as a manager of stock offerings of these companies.
FINRA’s acting enforcement chief James S. Shorris said such infringement "strikes at the heart of FINRA's research disclosure requirements," while "depriving investors of important information."

As part of the settlement, Morgan Stanley has to review a sample of its research reports and certify to FINRA that they comply with research analyst conflict-of interest rules. Such reviews must take place every six months for the next two years.

Morgan Stanley said in a statement it was "pleased to settle this issue" and noted it initially reported the matter to FINRA. The company added that it has implemented systems for the publication of the required disclosures in response to this matter.

Page Perry, LLC is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 35 occasions. Page Perry’s attorneys have extensive experience in representing investors in securities claims against Morgan Stanley. For further information, please contact us.

New Law Provides Big Rewards for Securities Fraud Whistleblowers

2010-08-13T17:13:06Z

Buried in the 2,300 pages of the new Dodd-Frank Financial Reform Act is a provision called Section 922 that provides for substantial financial rewards for any person who provides “original information” to the SEC that leads to a successful enforcement action relating to the violation of federal securities laws. The whistleblower may be an investor, an employee or other industry insider, or any other member of the public not employed by a law enforcement or regulatory agency. If the whistleblower’s tip leads to a monetary sanction of over $1 million, the whistleblower will be entitled to between 10% and 30% of the amount recovered by the SEC. The new law also provides whistleblowers with legal protection from retaliation, giving them the right to sue for damages if they lose their jobs or are blackballed by the industry. Together, these new provisions provide a powerful incentive for investors and financial professionals to report misconduct in the securities industry, which will hopefully have the long-term effect of deterring fraud and other abuses.

]]> Since the Act was just signed into law on July 21, details of how it will be implemented are not yet available. However, it is likely that the SEC will issue regulations and procedures that are comparable to those under similar whistleblower programs set up by the federal government, including one for the IRS and another under the False Claims Act that is designed to ferret out abuse by government contractors. Lawyers who have found their professional niche in representing whistleblowers before other government agencies will soon be expanding their efforts to take advantage of the new law, but most such lawyers have little or no background dealing with the securities industry or the SEC. According to Craig T. Jones, a partner in the Atlanta-based law firm of Page Perry LLC, “our firm has many decades of combined experience representing investors and other participants in the securities industry, and we look forward to working with lawyers who represent whistleblowers in dealing with the SEC.”

While it is possible for a whistleblower to go directly to the SEC without a lawyer, experience in prior whistleblower cases shows that the whistleblower benefits from legal representation in several ways. First and foremost is the issue of privacy, and the new law provides that a lawyer can serve as an intermediary with the government without disclosure of the whistleblower’s identity. Secondly, an attorney or law firm that is experienced in dealing with the SEC and securities law issues can be helpful to both the whistleblower and regulators in seeing that the proper information is communicated to the proper authorities. “There is more to the process than simply bringing together whistleblowers and regulators,” says attorney Jones. In addition to convincing the government that the whistleblower is credible and has meritorious information, the lawyer may have to help the government build its case against the violator and often has to prove that the whistleblower is an original source and is not just parroting information that is available in the public domain. Finally, if other whistleblower programs are any indication, there will be a fair amount of subjectivity on the part of the SEC in determining the amount of the cash reward, and an attorney can negotiate the best deal possible. Most attorneys who represent whistleblowers will do so on a contingent fee basis—that is, for a percentage of whatever reward the attorney is able to negotiate with the government.

“Anyone connected with the securities industry who thinks they might qualify should investigate their legal options,” says Jones. “We are certainly interested in talking with potential whistleblowers, as well as any lawyers who already represent them, to develop a strategy that maximizes both the legal protection and financial recovery afforded to the client. There are few lawyers who singularly possess all of the knowledge and skills necessary to represent whistleblowers who are also familiar with the securities industry, so these cases lend themselves to a team approach.”

Citi Knew of Subprime Problems and Risks in 2006

2010-08-12T21:38:04Z

Citigroup was “negative” on subprime mortgages at least as early as 2006. Despite that, Citigroup continued to originate subprime mortgages and underwrite subprime mortgage-backed securities in large quantities. In 2007, Citigroup originated $19.7 billion in subprime mortgages and underwrote $13.4 billion in subprime mortgage-backed securities. Senior management says it did not have a clue what was going on. See April 8, 2010 article in the Huffington Post by Shahien Nasiripour, “Citi ‘Negative On Subprime mortgages As Early As 2006, Yet Firm Continued to Pump Out Subprime Mortgage Products.”

]]> This kind of activity – Wall Street selling customers something it is betting against – is one reason why we need a consumer financial protection agency. "[T]hat's why you have a consumer agency to ride along with the prudential regulator," you want independent examiners looking out for less sophisticated investors, one administration official was quoted as saying.

"We were negative on subprime," Thomas Maheras, former chief trader for Citigroup and co-CEO of Citi Markets and Banking, reportedly admitted to Congresses’ Financial Crisis Inquiry Commission. "We were, from the very earliest part of '07 and the end of '06, we were in most of our business areas reducing our risk around subprime."

Citigroup was also negative on housing prices. "We had in our base case that housing was going down during '07 and would likely continue,” Maheras was quoted as saying.

The Financial Crisis Inquiry Commission publicly grilled current and former top Citi officials over their roles in creating one of the biggest disasters on Wall Street.
Charles "Chuck" Prince, the firm's CEO from 2004 to 2007, reportedly told the Financial Crisis Inquiry Commission that the subprime mortgage origination was contrary to his policies but he did not know that Citigroup was involved in that until near end of his term. "I found out at the end of my tenure, I did not know it before, that we had some warehouse lines out to some originators," Prince reportedly stated. "And I think getting that close to the origination function being that involved in the origination of some of these products is something that I wasn't comfortable with and that I did not view as consistent with the prescription I had laid down for the company not to be involved in originating these products."

Prince told the SEC: "[A]s more and more of these subprime mortgages were created as raw material for the securitization process, …[a]t the end of that process, the raw material going into it was actually bad quality, it was toxic quality, and that is what ended up coming out the other end of the pipeline. Wall Street obviously participated in that flow of activity."

Given these facts – that the right hand and the brain apparently did not know that the left hand was engaged in harmful activities – it is the view of the Financial Crisis Inquiry Commission and others that Citigroup is too big to manage.

A Citigroup spokesman reportedly declined to comment for the article.

Citigroup received $45 billion of taxpayer bailout money after losing nearly $30 billion over the past two years, according to the article. Citigroup also took advantage of a little-noticed bailout for banks that lets them borrow money cheaply while putting taxpayers on the hook for potential losses, by issuing, as of April, nearly $65 billion in Federal Deposit Insurance Corp.-guaranteed debt.

Page Perry, LLC is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 35 occasions. Page Perry’s attorneys have extensive experience in representing investors in securities claims against Citigroup and its affiliates. For further information, please contact us.

Wall Street Banks Seek to Avoid Responsibilty for Checking Out Mortgage Securities They Sell to the Public

2010-08-12T18:17:11Z

Faced with proposed new regulations for mortgage-backed securities designed to prevent another financial crisis, some Wall Street banks are saying that they should have no responsibility “to undertake any sort of credit analysis” when creating and selling mortgage-backed securities, and that they have no ability to do that, according to Floyd Norris, a commentator on finance and economics, in his August 5, 2010 New York Times article, “Caveat Emptor, Continued.”

]]> The Securities and Exchange Commission has proposed new requirements for the issuance of certain mortgage-backed securities, including detailed “asset level disclosure” (so the buyer can see what is “under the hood”), required updates of those disclosures, a five-day cooling off period between the offering and the sale, requiring sponsors of securitizations to hold on to pieces of them, and to not hedge away the risk, and, most controversially, a certification by the chief executive of the firm that created the deal stating that s/he has reviewed it and believes the mortgage assets have “characteristics that provide a reasonable basis to believe” the securities will perform as advertised.

Some claim that the certification requirement is just a pain in the rear that would add nothing new to the law. But, according to Norris, there is a likely benefit based on what happened with the Sarbanes-Oxley requirement that CEOs certify federal filings. “[I]t appears that the act of signing made many executives pay more attention to what it was the company was saying, and to force more checking. The S.E.C. hopes that will happen with securitizations as well.” The SEC says it believes the certification requirement “should lead to enhanced quality of the securitization.”

What do the members of the securities industry think of the certification requirement? Actually, they are split. Members of the Securities Industry and Financial Markets Association (SIFMA) that invest in mortgage-backed securities think the certification requirement is a capital idea. But SIFMA members that create such securities do not like the certification requirement at all. “In the view of our dealer and sponsor members, it is not the role of the depositors [industry jargon for creators] and its officers to undertake any sort of credit analysis,” SIFMA copped out to the SEC, adding, “They are not trained to do so.”

Mary L. Shapiro, the SEC’s chairwoman, has said that current securities laws are not geared to facilitate regulation of asset-backed securities. Last fall, she reportedly recommended a separate law to regulate for such securities, as was done for mutual funds.

In the pre-crisis days, investors relied on ratings by companies such as Moody’s, Standard and Poors, and Fitch, but such ratings proved to be disastrously wrong. “If there is to be a revived private mortgage securitization market,” Norris said, “it will need investors who are willing to do their own work analyzing the investments. And it will require that those in a position to control the underwriting standards when the loans are made have incentives to make loans that will be repaid.”

Page Perry, LLC is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in representing investors who lost money investing in mortgage-backed securities and CDOs. For further information, please contact us.

Law Firms Announce New Joint Venture to Pursue MAT/ASTA Municipal Arbitrage Claims

2010-08-11T16:49:38Z

The law firms of Page Perry, LLC and Robert Wayne Pearce, P.A. are proud to announce their agreement to join together in investigating and pursuing MAT/ASTA municipal arbitrage cases against Citigroup and its affiliates. Both firms have extensive experience in prosecuting MAT/ASTA cases and already have been involved in representing almost fifty (50) MAT/ASTA clients between them.

]]> J. Boyd Page, senior partner of Page Perry, LLC, said: “Bob Pearce and I began discussing working together on the MAT/ASTA cases late last week. We were already involved in dozens of cases and decided there would be a synergy in working together. Bob is an outstanding lawyer as evidenced by his recent $1,817,000 award in a MAT/ASTA case, in which the arbitration panel found that Citigroup and its affiliates were guilty of negligent mismanagement and negligent supervision. I believe that this decision greatly expands the number of potential clients who can pursue valid claims against Citigroup affiliates. It has been obvious that various misrepresentations and sales practice violations occurred in connection with the sales of MAT/ASTA, but the misconduct didn’t seem to end there. Bob and I both believe that egregious mismanagement also occurred. I think that Bob’s recent case proves that it did occur.”

The two law firms believe that three separate bases for recovery exist in MAT/ASTA cases, depending on the facts and circumstances of the particular case. Those bases are as follows: (1) that MAT/ASTA was a flawed product; (2) that Citigroup and its affiliates misrepresented and omitted to disclose material facts at the point of sale; and (3) that Citigroup and its affiliates were guilty of negligent mismanagement of MAT/ASTA and negligent supervision of its employees.

The mismanagement claim opens the door for many more investors to bring viable claims for recovery of their losses. Since some of the MAT/ASTA products were sold prior to 2006, certain sales practice claims (e.g., misrepresentation and omission) may arguably be barred by the statute of limitations in certain states. Claims based on mismanagement and negligent supervision in 2006 and 2007, on the other hand, are still clearly actionable under the laws of most states.

Robert Pearce said: “Boyd Page and I have known each other for twenty-five years. Page Perry has nine experienced attorneys, a large support staff and significant experience in MAT/ASTA cases. I’m very excited about our new venture.”

Both firms will work together in investigating and pursuing MAT/ASTA cases and are currently involved in representing aggrieved investors in these cases all over the country.