The Securities and Exchange Commission today charged a Houston-based broker with engaging in unauthorized and unsuitable trading on behalf of two Florida municipalities, putting them at risk of losing millions of dollars while he reaped commissions of more than $14 million for himself.
The SEC's complaint alleges that Harold H. Jaschke, while associated with the brokerage firm First Allied Securities, Inc., churned the accounts of the City of Kissimmee, Fla., and the Tohopekaliga Water Authority and lied to both customers about his trading practices on their behalf. Churning is a fraudulent practice that occurs when a broker engages in excessive trading in order to generate commissions and other revenue without regard for the customer's investment objectives.
"Jaschke was unscrupulous with the municipalities' funds and ignored their interests for his own personal gain," said Rosalind Tyson, Director of the SEC's Los Angeles Regional Office. "He lied to his customers, took advantage of their trust, and risked their financial well-being."
The SEC's complaint, filed in federal court in Orlando, Fla., alleges that Jaschke engaged in a high-risk, short-term trading strategy involving zero-coupon U.S. Treasury bonds that were very sensitive to interest rate changes. For example, if interest rates were to increase by only 1 percent, the value of a 30-year bond could drop by 25 percent.
According to the SEC's complaint, Jaschke's risky trading strategy involved buying and selling the same bond within a matter of days, and sometimes within the same day. Jaschke exposed the municipalities to greater risks when he leveraged their accounts using repurchase agreements to finance the bond purchases that they otherwise would not have been able to afford. This strategy dramatically increased the risks as Jaschke caused the municipalities to borrow large sums of money to hold larger bond positions.
The SEC alleges that Jaschke knew the municipalities' ordinances prohibited his trading strategy and required that their funds be invested with the paramount consideration to be safety of capital. Jaschke also knew that the municipalities' ordinances prohibited the use of repurchase agreements for investment. According to the SEC's complaint, had the bond market not swung sharply in Jaschke's favor allowing the municipalities to close their accounts with a modest profit, they could have lost approximately $60 million over a two-year period as a result of his misconduct.
Tuesday, December 29, 2009
Monday, December 21, 2009
FINRA Fines Pacific Cornerstone Capital
The Financial Industry Regulatory Authority (FINRA) announced today that it has fined Pacific Cornerstone Capital, Inc. of Irvine, CA, and its former chief executive officer, Terry Roussel, a total of $750,000 for failing to include full and complete information in private placement offering documents and marketing material. FINRA also charged Pacific Cornerstone and Roussel with advertising violations and supervisory failures.
Pacific Cornerstone was fined $700,000 and agreed to make corrective disclosures to investors and to submit advertising and sales literature to FINRA for pre-use review for one year. Roussel was fined $50,000 and suspended in all capacities for 20 business days and in a principal capacity for an additional three months.
"Investors rely on offering documents to provide information necessary for them to make informed investment decisions," said Susan L. Merrill, FINRA Executive Vice President and Chief of Enforcement. "In this case, Pacific Cornerstone targeted returns and the timing of return of principal invested without a reasonable basis."
From January 2004 to May 2009, Pacific Cornerstone sold private placements in two affiliated companies using offering documents and accompanying sales literature that contained targets as to when investors would receive the return of their principal investment and the yield on their investment. The offering documents included statements that the affiliated entities targeted returns of principal in two to four years and targeted a yield on a $100,000 investment in excess of 18 percent. FINRA found no reasonable basis for those statements.
Further, Pacific Cornerstone and Roussel continued to use a similar targeted time period for return of capital and rate of return in successive offering documents, although those targets were not supported by prior performance. FINRA also found that the offering documents failed to disclose the complete financial condition of one or both of the companies.
Pacific Cornerstone also offered private placement units of the two affiliated entities, Cornerstone Industrial Properties, LLC and CIP Leveraged Fund Advisors, LLC, to other broker-dealers and investment advisors, which in turn sold the units to the investing public. A total of approximately $50 million worth of units were sold to approximately 950 accredited investors over a period of almost six years. Pacific Cornerstone continued to use the same targeted two-to-four year return of principal and 18 percent rate of return in successive offering documents, despite not having met those targets.
During the same period, Roussel periodically sent letters to the private placement investors to update them on the progress of their investment that painted a positive — but unrealistic — future, without providing required risk disclosures. Roussel's letters also failed to disclose the complete financial picture of the two companies.
Pacific Cornerstone was fined $700,000 and agreed to make corrective disclosures to investors and to submit advertising and sales literature to FINRA for pre-use review for one year. Roussel was fined $50,000 and suspended in all capacities for 20 business days and in a principal capacity for an additional three months.
"Investors rely on offering documents to provide information necessary for them to make informed investment decisions," said Susan L. Merrill, FINRA Executive Vice President and Chief of Enforcement. "In this case, Pacific Cornerstone targeted returns and the timing of return of principal invested without a reasonable basis."
From January 2004 to May 2009, Pacific Cornerstone sold private placements in two affiliated companies using offering documents and accompanying sales literature that contained targets as to when investors would receive the return of their principal investment and the yield on their investment. The offering documents included statements that the affiliated entities targeted returns of principal in two to four years and targeted a yield on a $100,000 investment in excess of 18 percent. FINRA found no reasonable basis for those statements.
Further, Pacific Cornerstone and Roussel continued to use a similar targeted time period for return of capital and rate of return in successive offering documents, although those targets were not supported by prior performance. FINRA also found that the offering documents failed to disclose the complete financial condition of one or both of the companies.
Pacific Cornerstone also offered private placement units of the two affiliated entities, Cornerstone Industrial Properties, LLC and CIP Leveraged Fund Advisors, LLC, to other broker-dealers and investment advisors, which in turn sold the units to the investing public. A total of approximately $50 million worth of units were sold to approximately 950 accredited investors over a period of almost six years. Pacific Cornerstone continued to use the same targeted two-to-four year return of principal and 18 percent rate of return in successive offering documents, despite not having met those targets.
During the same period, Roussel periodically sent letters to the private placement investors to update them on the progress of their investment that painted a positive — but unrealistic — future, without providing required risk disclosures. Roussel's letters also failed to disclose the complete financial picture of the two companies.
Friday, December 18, 2009
Settlement and Judgment Reached in SEC Investigation into Striker Petroleum, LLC.
Last week a judgment was entered against Striker Petroleum, LLC in US District Court. Striker is a limited liability company based out of Frisco, Texas involved in acquiring oil and gas properties with the intent to increase production. The company, however, was charged in an Securities and Exchange Commission (SEC) investigation with perpetrating multiple wrongdoings.
The judgment against Striker and its two main officers, Mark Roberts and Christopher Pippin, calls for Striker to be disgorged of its ill-gotten gains. Further, the judgment seeks to impose prejudgment interest as well as civil penalties. The actual amount Striker will be charged, and consequently, how much investors will get back, however, remains unclear. An asset freeze has been imposed and a court appointed receiver is currently reviewing the resources held by Striker with the hope that investors will eventually recoup at least some of their initial investment.
The settlement does not require Striker to admit or deny any wrongdoing. For more information on this situation, please see our current investigation.
The judgment against Striker and its two main officers, Mark Roberts and Christopher Pippin, calls for Striker to be disgorged of its ill-gotten gains. Further, the judgment seeks to impose prejudgment interest as well as civil penalties. The actual amount Striker will be charged, and consequently, how much investors will get back, however, remains unclear. An asset freeze has been imposed and a court appointed receiver is currently reviewing the resources held by Striker with the hope that investors will eventually recoup at least some of their initial investment.
The settlement does not require Striker to admit or deny any wrongdoing. For more information on this situation, please see our current investigation.
Wednesday, December 16, 2009
SEC Charges Four in Insider Trading Case in Northern California
The SEC has charged former TPG Capital L.P. associate Vinayak Gowrish and former Lazard Freres & Co. LLC vice president and investment banker Adnan Zaman with orchestrating an insider trading scheme. The scheme involved the two aforementioned individuals stealing confidential merger and acquisition information from their former employers and passing it along to two friends who then executed favorable trades.
The friends, Sameer N. Khoury and Pascal S. Vaghar, traded stocks and options based on this nonpublic information and in the process generated almost $500,000. Gowrish and Zaman benefitted from this relationship in the form of kickbacks including free rent and cash.
The activities were shielded from the SEC and other regulatory bodies through a system concocted by the four to evade regulatory measures. The four developed a system of coded text messages and also passed along sensitive information through the use of sticky notes. Despite their measures to the contrary, all four now face charges of violating Section 14(e) of the Securities Exchange Act of 1934 and Rule 14e-3.
Three of the four, Zaman, Vaghar, and Khoury, have offered to settle with full injunctive relief and disgorgement. Also, Zaman will be permanently barred from associating with any broker or dealer. Gowrish, however, has yet to settle, and the SEC is seeking the imposition of fines and penalties against him.
The friends, Sameer N. Khoury and Pascal S. Vaghar, traded stocks and options based on this nonpublic information and in the process generated almost $500,000. Gowrish and Zaman benefitted from this relationship in the form of kickbacks including free rent and cash.
The activities were shielded from the SEC and other regulatory bodies through a system concocted by the four to evade regulatory measures. The four developed a system of coded text messages and also passed along sensitive information through the use of sticky notes. Despite their measures to the contrary, all four now face charges of violating Section 14(e) of the Securities Exchange Act of 1934 and Rule 14e-3.
Three of the four, Zaman, Vaghar, and Khoury, have offered to settle with full injunctive relief and disgorgement. Also, Zaman will be permanently barred from associating with any broker or dealer. Gowrish, however, has yet to settle, and the SEC is seeking the imposition of fines and penalties against him.
Tuesday, December 15, 2009
Proposed Financial Reform Endangered by "Hat Switching" Provision
The investment adviser world is frenzied over a provision included in the financial services reform legislation recently approved by the House of Representatives. The so-called, “hat switching,” provision is one sentence long and buried within the expansive legislation. The provision, part of H.R. 4173, reads as follows:
“Nothing in this section shall require a broker or dealer or registered representative to have a continuing duty of care or loyalty to the customer after providing personalized investment advice about securities.”
This can be read as meaning that the fiduciary standard owed to a client disappears once investment advice is given.
The move towards creating a single fiduciary standard would be greatly hindered if such a provision makes it into the final language of the bill. The provision would protect discount brokerage firms from a continued fiduciary relationship with a client after initial advice and/or sale of a product.
It can be expected that this is not the last time we will hear of this provision.
“Nothing in this section shall require a broker or dealer or registered representative to have a continuing duty of care or loyalty to the customer after providing personalized investment advice about securities.”
This can be read as meaning that the fiduciary standard owed to a client disappears once investment advice is given.
The move towards creating a single fiduciary standard would be greatly hindered if such a provision makes it into the final language of the bill. The provision would protect discount brokerage firms from a continued fiduciary relationship with a client after initial advice and/or sale of a product.
It can be expected that this is not the last time we will hear of this provision.
Monday, December 14, 2009
FINRA - Private Placement Enforcement Cases to Come
James Shorris, executive director of enforcement at the Financial Industry Regulatory Authority (FINRA) has been quoted by Investment News as saying that enforcement cases on multiple private placement deals can be expected to begin by next year.
Private placement memorandum (PPM) deals, also known as Reg D offerings, have come under increased scrutiny after enjoying a period of great popularity. Issues that have been brought to the attention of FINRA include:
- Potential misrepresentations made by brokers regarding the sale of PPMs
- Due Diligence issues, including conflicts of interest over the authorship of due diligence reports
- Whether or not the PPM was suitable for many of the clients holding them
These and other issues are currently being examined by FINRA in connection with multiple PPM offerings.
Private placement memorandum (PPM) deals, also known as Reg D offerings, have come under increased scrutiny after enjoying a period of great popularity. Issues that have been brought to the attention of FINRA include:
- Potential misrepresentations made by brokers regarding the sale of PPMs
- Due Diligence issues, including conflicts of interest over the authorship of due diligence reports
- Whether or not the PPM was suitable for many of the clients holding them
These and other issues are currently being examined by FINRA in connection with multiple PPM offerings.
Friday, December 11, 2009
House Kills Amendement Aimed at Expanding FINRA's Power
The House passed an amendment killing a proposal that would have given the Securities and Exchange Commission (SEC) the power to allow the Financial Industry Regulatory Authority (FINRA) to carry out oversight on investment advisers working at broker-dealer firms.
The amendment, submitted by Republican Representative Spencer Bachus, R-Alabama, was part of the Investor Protection Act of 2009. The bill, which also includes a single fiduciary standard for registered investment advisers and independent broker-dealers, is one part of a move by Congress to reform the financial industry.
Bauchus agreed with the decision to scrap the amendment, but indicated that he would investigate alternatives to regulate advisers.
The amendment, submitted by Republican Representative Spencer Bachus, R-Alabama, was part of the Investor Protection Act of 2009. The bill, which also includes a single fiduciary standard for registered investment advisers and independent broker-dealers, is one part of a move by Congress to reform the financial industry.
Bauchus agreed with the decision to scrap the amendment, but indicated that he would investigate alternatives to regulate advisers.
Thursday, December 10, 2009
Notice to Striker Petroleum Investors - Aidikoff, Uhl & Bakhtiari Files FINRA Arbitration Claims on Behalf of Defrauded Investors
Aidikoff, Uhl & Bakhtiari (www.securitiesarbitration.com) announces the filing of FINRA arbitration claims against brokerage firms that sold Striker Petroleum and other private placements to investors.
Striker Petroleum raised approximately $57 million from September 2006 through September 2008 from the sale of debentures collateralized through oil and gas properties to approximately hundreds of investors nationwide.
“Investors should be aware that a federal court issued permanent injunctions at the request of the SEC against Striker Petroleum and its principals due to allegations of fraudulent debenture offerings,” said attorney David Harrison. “The SEC alleged that Striker Petroleum made material misrepresentations to its investors regarding the firm’s earnings and assets, in addition to the use of investor proceeds.”
Striker Petroleum and its principals consented to a permanent injunction, the appointment of a receiver and asset freeze.
The receiver was appointed by the court to collect, marshal, manage and distribute Striker Petroleum’s assets for the benefit of investors. “Often times, a receiver is appointed when it’s too late for an investor to recapture from the issuer a significant amount of their investment,” said attorney Ryan K. Bakhtiari.
“Unfortunately investors including retirees who sought fixed income and preservation of capital purchased Striker Petroleum,” said Mr. Bakhtiari.
The individual brokers and individual advisors who sold Striker are not targets of investor claims.
Striker Petroleum raised approximately $57 million from September 2006 through September 2008 from the sale of debentures collateralized through oil and gas properties to approximately hundreds of investors nationwide.
“Investors should be aware that a federal court issued permanent injunctions at the request of the SEC against Striker Petroleum and its principals due to allegations of fraudulent debenture offerings,” said attorney David Harrison. “The SEC alleged that Striker Petroleum made material misrepresentations to its investors regarding the firm’s earnings and assets, in addition to the use of investor proceeds.”
Striker Petroleum and its principals consented to a permanent injunction, the appointment of a receiver and asset freeze.
The receiver was appointed by the court to collect, marshal, manage and distribute Striker Petroleum’s assets for the benefit of investors. “Often times, a receiver is appointed when it’s too late for an investor to recapture from the issuer a significant amount of their investment,” said attorney Ryan K. Bakhtiari.
“Unfortunately investors including retirees who sought fixed income and preservation of capital purchased Striker Petroleum,” said Mr. Bakhtiari.
The individual brokers and individual advisors who sold Striker are not targets of investor claims.
Guilty Plea in Westgate Capital Ponzi Likely
James Nicholson, a Saddle River hedge fund manager accused of bilking investors of as much as $160 million, has tentatively agreed to plead guilty to charges his Westgate Capital Management LLC was a Ponzi scheme.
A plea hearing is set for noon Friday in federal court in Manhattan, according to a court order signed by U.S. District Judge Richard Sullivan.
Erika Edwards, one of Nicholson's attorneys, said Monday she and federal prosecutors have verbally reached an agreement, but she declined to provide details as they continue to work out a formal settlement that would be signed by Nicholson.
Nicholson, 43, ran Westgate, based in Rockland County, for a decade, until he was arrested in late February. His alleged scheme collapsed in December 2008, when $5 million in investor redemption checks bounced, and other investors were unable to claim millions of dollars, prosecutors in New York said. Nicholson is charged with securities, investment adviser and mail fraud as well as structuring [for allegedly trying to avoid reporting currency transactions], and faces a maximum of 65 years in prison.
A conclusion of the criminal case against Nicholson would set the stage for prosecutors to begin helping Westgate's more than 370 investors — some of whom have apparently lost much of their savings, retirement and children's college funds — recoup some
A plea hearing is set for noon Friday in federal court in Manhattan, according to a court order signed by U.S. District Judge Richard Sullivan.
Erika Edwards, one of Nicholson's attorneys, said Monday she and federal prosecutors have verbally reached an agreement, but she declined to provide details as they continue to work out a formal settlement that would be signed by Nicholson.
Nicholson, 43, ran Westgate, based in Rockland County, for a decade, until he was arrested in late February. His alleged scheme collapsed in December 2008, when $5 million in investor redemption checks bounced, and other investors were unable to claim millions of dollars, prosecutors in New York said. Nicholson is charged with securities, investment adviser and mail fraud as well as structuring [for allegedly trying to avoid reporting currency transactions], and faces a maximum of 65 years in prison.
A conclusion of the criminal case against Nicholson would set the stage for prosecutors to begin helping Westgate's more than 370 investors — some of whom have apparently lost much of their savings, retirement and children's college funds — recoup some
SEC Alleges that Sunwest Mangement Commited Fraud
U.S. regulators charged Sunwest Management and its former chief executive with securities fraud on Monday, alleging that the retirement home operator lied to investors and eventually operated the business as a kind of Ponzi scheme.
The Securities and Exchange Commission accused Oregon-based Sunwest, which operates more than 200 retirement homes in the United States, and former chief executive Jon Harder of concealing the risks of investments and exposing investors to “massive losses,” Reuters said.
Between 2006 and 2008, Sunwest raised at least $300 million from investors and used the funds for down payments on approximately 100 retirement homes with the balance financed by institutional lenders and banks, according to the S.E.C.’s lawsuit.
Investors were told they were buying an ownership interest in a specific retirement home that would generate enough profit to pay a 10 percent annual return, and that Sunwest had a history of never missing a payment, the suit said.
The Securities and Exchange Commission accused Oregon-based Sunwest, which operates more than 200 retirement homes in the United States, and former chief executive Jon Harder of concealing the risks of investments and exposing investors to “massive losses,” Reuters said.
Between 2006 and 2008, Sunwest raised at least $300 million from investors and used the funds for down payments on approximately 100 retirement homes with the balance financed by institutional lenders and banks, according to the S.E.C.’s lawsuit.
Investors were told they were buying an ownership interest in a specific retirement home that would generate enough profit to pay a 10 percent annual return, and that Sunwest had a history of never missing a payment, the suit said.
Wednesday, December 9, 2009
FINRA Arbitrations Filed Seeking Damages of More Than $10 Million -- Medical Capital
Aidikoff, Uhl & Bakhtiari (www.securitiesarbitration.com) announces the filing of additional FINRA arbitration claims against brokerage firms that sold Medical Capital and other securities to investors.
To date the firm has filed claims on behalf of more than 25 families seeking more than $10 million in damages against several brokerage firms. The individual brokers and individual advisors who sold Medical Capital are not targets of investor claims.
“Investors should be aware of a pending class action, said attorney David S. Harrison. “The class case may have certain pitfalls that investors should be aware of in selecting an attorney. Most individual investors will fare better by pursuing an individual FINRA arbitration.”
Medical Capital Corporation and Medical Provider Funding Corporation VI raised more than $2.2 billion through the offering of notes in Medical Provider Funding Corp VI and earlier special purpose entity offerings.
“Often the most important choice an investor makes following a disaster like Medical Capital is the remedy they will pursue to vindicate their rights,” said attorney Ryan K. Bakhtiari. “Investors should carefully consider their options.”
Important Facts to Consider Prior to Joining a Medical Capital Class Action
- Many investors may have viable claims based on the investments’ unsuitability. Because a suitability claim is dependent on an individual’s circumstances, this claim cannot be prosecuted on a class wide basis.
- Investors with significant losses are likely to recover only pennies on the dollar through a class action.
- Class actions sometimes create hurdles to recovery for individual investors including depositions and motion practice which are generally not permitted in securities arbitrations decided before FINRA. The FINRA arbitration process can usually be completed in a much shorter period of time, often 15 months. Recovery through a class action may take several years.
To date the firm has filed claims on behalf of more than 25 families seeking more than $10 million in damages against several brokerage firms. The individual brokers and individual advisors who sold Medical Capital are not targets of investor claims.
“Investors should be aware of a pending class action, said attorney David S. Harrison. “The class case may have certain pitfalls that investors should be aware of in selecting an attorney. Most individual investors will fare better by pursuing an individual FINRA arbitration.”
Medical Capital Corporation and Medical Provider Funding Corporation VI raised more than $2.2 billion through the offering of notes in Medical Provider Funding Corp VI and earlier special purpose entity offerings.
“Often the most important choice an investor makes following a disaster like Medical Capital is the remedy they will pursue to vindicate their rights,” said attorney Ryan K. Bakhtiari. “Investors should carefully consider their options.”
Important Facts to Consider Prior to Joining a Medical Capital Class Action
- Many investors may have viable claims based on the investments’ unsuitability. Because a suitability claim is dependent on an individual’s circumstances, this claim cannot be prosecuted on a class wide basis.
- Investors with significant losses are likely to recover only pennies on the dollar through a class action.
- Class actions sometimes create hurdles to recovery for individual investors including depositions and motion practice which are generally not permitted in securities arbitrations decided before FINRA. The FINRA arbitration process can usually be completed in a much shorter period of time, often 15 months. Recovery through a class action may take several years.
Tuesday, December 8, 2009
Brookstreet and CEO Charged with Fraud
The Securities and Exchange Commission (SEC) has charged California-based Brookstreet Securities Corporation and its President/CEO, Stanley Brooks, with fraud. The charges stem from Brookstreet’s habitual selling of risky mortgage-backed securities to clients with conservative investment objectives.
This risky and unsuccessful strategy was part of an internal Brookstreet program aimed at selling collateralized mortgage obligations (CMO) to clients, many of whom were categorically ill-suited to hold such investments. Through the internal CMO program, approximately $300 million of client funds were invested, a great deal of which were ultimately lost.
As markets deteriorated, CMOs being hit particularly hard, Brookstreet customers found themselves taking massive losses. Many clients lost their savings, homes, and retirements because of the program, and eventually, Brooks lost his company. Brooks, for his part, was warned multiple times about the errant logic in his program.
Brooks was personally warned on multiple occasions regarding the risk inherent in the CMO program with whistleblowers including his own Compliance Department, registered representatives, and institutional bond traders…among others.
Brookstreet and its CEO have been charged under the antifraud provisions of the Exchange Act.
This risky and unsuccessful strategy was part of an internal Brookstreet program aimed at selling collateralized mortgage obligations (CMO) to clients, many of whom were categorically ill-suited to hold such investments. Through the internal CMO program, approximately $300 million of client funds were invested, a great deal of which were ultimately lost.
As markets deteriorated, CMOs being hit particularly hard, Brookstreet customers found themselves taking massive losses. Many clients lost their savings, homes, and retirements because of the program, and eventually, Brooks lost his company. Brooks, for his part, was warned multiple times about the errant logic in his program.
Brooks was personally warned on multiple occasions regarding the risk inherent in the CMO program with whistleblowers including his own Compliance Department, registered representatives, and institutional bond traders…among others.
Brookstreet and its CEO have been charged under the antifraud provisions of the Exchange Act.
Monday, December 7, 2009
SEC OBTAINS ASSET FREEZE OF JOSEPH S. BLIMLINE FOR HIS INVOLVEMENT IN THE PROVIDENT ROYALTIES $485 MILLION NATIONWIDE OFFERING FRAUD
On December 3, 2009, the Securities and Exchange Commission obtained a temporary restraining order and emergency asset freeze against Joseph S. Blimline relating to his involvement in a $485 million offering fraud and Ponzi scheme. The scheme was orchestrated by Joseph S. Blimline, Paul R. Melbye, Brendan W. Coughlin and Henry D. Harrison through a company they owned and controlled, Provident Royalties LLC. The Commission had previously filed a complaint against Melbye, Coughlin and Harrison and on July 7, 2009, obtained a temporary restraining order, asset freeze and appointment of a receiver with respect to those defendants. In addition to the asset freeze against Blimline, the court has extended the authority of the receiver over the newly-frozen assets.
The Commission alleges in its amended complaint that Provident advanced approximately $93 million of investor funds to Blimline and entities he controlled. The funds were for the purported purchase of oil and gas interests, or loans, to which Provident often never received title or repayment. The amended complaint also alleges that in presentations to investors and representatives of broker-dealers marketing Provident securities, Blimline failed to disclose his receipt of such funds, his involvement in the management of Provident and a prior sanction imposed against him by the Michigan securities authorities for prior conduct.
The Commission's amended complaint charges the defendants with violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The amended complaint seeks a temporary restraining order and preliminary and permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest and financial penalties. Officer and director bars are sought against Blimline, Melbye, Harrison and Coughlin. An additional 36 affiliated entities that did not sell securities are named as relief defendants in the amended complaint for purposes of disgorgement.
The Commission alleges in its amended complaint that Provident advanced approximately $93 million of investor funds to Blimline and entities he controlled. The funds were for the purported purchase of oil and gas interests, or loans, to which Provident often never received title or repayment. The amended complaint also alleges that in presentations to investors and representatives of broker-dealers marketing Provident securities, Blimline failed to disclose his receipt of such funds, his involvement in the management of Provident and a prior sanction imposed against him by the Michigan securities authorities for prior conduct.
The Commission's amended complaint charges the defendants with violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The amended complaint seeks a temporary restraining order and preliminary and permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest and financial penalties. Officer and director bars are sought against Blimline, Melbye, Harrison and Coughlin. An additional 36 affiliated entities that did not sell securities are named as relief defendants in the amended complaint for purposes of disgorgement.
Friday, December 4, 2009
UBS Held Liable In Lehman PPN FINRA Arbitration
According to the WSJ today:
In what will likely be a closely studied ruling, a retail investor was awarded $200,000 after a Financial Industry Regulation Authority arbitration panel decided the investor's UBS AG (UBS) broker inappropriately sold her risky Lehman Brothers principal protected notes.
The case is one of the first involving the Lehman notes to be heard by a Finra arbitration panel. While the arbitration ruling won't set a precedent, it could be an indicator of how future rulings on similar cases will play out.
There are "many pending similar cases," said Jacob Zamansky, of Zamansky & Associates, who represented the investor in the arbitration case. Zamansky stated he is representing a dozen clients in a similar situations around the country.
As in most arbitration awards, the three-person arbitration panel didn't give reasons for its findings. Other panels that hear similar cases don't have to follow precedent so they could rule in different ways on nearly identical cases. Still, the case will likely be cited by other plaintiff lawyers.
The case, submitted for arbitration a year ago, was brought against UBS Financial Services, a unit of UBS, which is also being investigated by numerous regulators for alleged issues around its selling of these notes. Zamansky's client was seeking $300,000 in compensatory damages because the broker recommended structured products. Zamansky argued that the notes were "speculative derivative securities" and were "unsuitable" for unsophisticated investors, according to the Finra claim statement.
The broker purchased two notes for his client: a $225,000 guaranteed principal protection note and a $75,000 return optimization note. The panel ruled that the client should be compensated $150,000 plus interest and attorney fees on the principal protected note; there was no compensation for the $75,000 note.
UBS said in a statement it "is disappointed the arbitration panel in this case awarded the claimant any damages, even if it was the only half the compensatory losses she was seeking. UBS maintains that any client losses were the direct result of the unexpected and unprecedented failure of Lehman Brothers, which affected all Lehman bondholders."
Steven Caruso, attorney with Maddox, Hargett & Caruso, said that there are hundreds or thousands more arbitration cases that are expected to be filed in connection with Lehman principal protected notes. Caruso said his firm alone will represent roughly 100.
In what will likely be a closely studied ruling, a retail investor was awarded $200,000 after a Financial Industry Regulation Authority arbitration panel decided the investor's UBS AG (UBS) broker inappropriately sold her risky Lehman Brothers principal protected notes.
The case is one of the first involving the Lehman notes to be heard by a Finra arbitration panel. While the arbitration ruling won't set a precedent, it could be an indicator of how future rulings on similar cases will play out.
There are "many pending similar cases," said Jacob Zamansky, of Zamansky & Associates, who represented the investor in the arbitration case. Zamansky stated he is representing a dozen clients in a similar situations around the country.
As in most arbitration awards, the three-person arbitration panel didn't give reasons for its findings. Other panels that hear similar cases don't have to follow precedent so they could rule in different ways on nearly identical cases. Still, the case will likely be cited by other plaintiff lawyers.
The case, submitted for arbitration a year ago, was brought against UBS Financial Services, a unit of UBS, which is also being investigated by numerous regulators for alleged issues around its selling of these notes. Zamansky's client was seeking $300,000 in compensatory damages because the broker recommended structured products. Zamansky argued that the notes were "speculative derivative securities" and were "unsuitable" for unsophisticated investors, according to the Finra claim statement.
The broker purchased two notes for his client: a $225,000 guaranteed principal protection note and a $75,000 return optimization note. The panel ruled that the client should be compensated $150,000 plus interest and attorney fees on the principal protected note; there was no compensation for the $75,000 note.
UBS said in a statement it "is disappointed the arbitration panel in this case awarded the claimant any damages, even if it was the only half the compensatory losses she was seeking. UBS maintains that any client losses were the direct result of the unexpected and unprecedented failure of Lehman Brothers, which affected all Lehman bondholders."
Steven Caruso, attorney with Maddox, Hargett & Caruso, said that there are hundreds or thousands more arbitration cases that are expected to be filed in connection with Lehman principal protected notes. Caruso said his firm alone will represent roughly 100.
Wednesday, December 2, 2009
Inland Western Retail Real Estate
A week after the first sale of commercial-mortgage-backed securities in more than a year, another deal is about to hit the market in the latest sign that capital markets are easing for corporate borrowers like real-estate investment trusts.
Inland Western Retail Real Estate Trust Inc., which owns some 300 retail properties nationwide, closed on Tuesday on $625 million in new financing from J. P. Morgan Chase & Co. to pay down its existing debt. The bank is expected to convert the $500 million first-mortgage part of the financing into a CMBS offering and sell through private placements the remaining $125 million in "mezzanine," or junior, debt to investors hunting for higher returns, according to people familiar with the matter. A spokesman at J.P. Morgan declined to comment.
Inland is a "nontraded" REIT whose shares are registered with the Securities and Exchange Commission but don't trade on a stock exchange.
The move comes as investors at mutual funds, pension funds, insurance companies and other institutions have regained their appetite for CMBS debt that features conservative underwriting, simple structures and greater safeguards for investors than CMBS sold during the boom years.
This growing demand reflects a trend in the broader equity and debt markets, which have started to open up for REITs and other corporations. So far this year, REITs have raised more than $20 billion by selling shares and bonds.
To be sure, the turn of the capital markets is still tentative. But it has led scores of small and private real-estate owners - the type that is still finding it hard to access capital - to think about going public to raise capital.
Inland Western Retail Real Estate Trust Inc., which owns some 300 retail properties nationwide, closed on Tuesday on $625 million in new financing from J. P. Morgan Chase & Co. to pay down its existing debt. The bank is expected to convert the $500 million first-mortgage part of the financing into a CMBS offering and sell through private placements the remaining $125 million in "mezzanine," or junior, debt to investors hunting for higher returns, according to people familiar with the matter. A spokesman at J.P. Morgan declined to comment.
Inland is a "nontraded" REIT whose shares are registered with the Securities and Exchange Commission but don't trade on a stock exchange.
The move comes as investors at mutual funds, pension funds, insurance companies and other institutions have regained their appetite for CMBS debt that features conservative underwriting, simple structures and greater safeguards for investors than CMBS sold during the boom years.
This growing demand reflects a trend in the broader equity and debt markets, which have started to open up for REITs and other corporations. So far this year, REITs have raised more than $20 billion by selling shares and bonds.
To be sure, the turn of the capital markets is still tentative. But it has led scores of small and private real-estate owners - the type that is still finding it hard to access capital - to think about going public to raise capital.
FINRA Fines Terra Nova Financial $400,000; Firm Made Over $1 Million in Improper Soft Dollar Payments
The Financial Industry Regulatory Authority (FINRA) today announced that it has fined Terra Nova Financial, LLC, of Chicago, $400,000 for making more than $1 million in improper soft dollar payments to or on behalf of five hedge fund managers, without following its own policies to ensure the payments were proper.
Terra Nova was also charged with failing to properly supervise its soft dollar program, failing to implement adequate supervisory procedures and failing to retain its business-related electronic instant messages. Terra Nova also failed to timely respond to FINRA's requests for productions of various documents, including emails and instant messages, thus delaying FINRA's investigation.
FINRA also sanctioned three individuals. Cleovan Jordan, the soft dollar administrator who managed Terra Nova's relationship with its hedge fund clients, was suspended from associating in any capacity with a securities firm for 30 days and fined $20,000. Joshua Teuber, who supervised the soft dollar operation, was charged with failure to properly supervise, suspended from acting in a supervisory or principal capacity for 20 days and fined $15,000. David Persenaire, the firm's Chief Compliance Officer until September 2009, was charged with failing to ensure the implementation of adequate written systems and procedures, suspended from acting in a supervisory or principal capacity for 10 days, fined $10,000 and required to take and pass a Compliance Official Qualification Exam.
As part of the settlement, Terra Nova is required to retain an independent consultant to review and enhance its policies, systems and procedures relating to its soft dollar operations.
Terra Nova was also charged with failing to properly supervise its soft dollar program, failing to implement adequate supervisory procedures and failing to retain its business-related electronic instant messages. Terra Nova also failed to timely respond to FINRA's requests for productions of various documents, including emails and instant messages, thus delaying FINRA's investigation.
FINRA also sanctioned three individuals. Cleovan Jordan, the soft dollar administrator who managed Terra Nova's relationship with its hedge fund clients, was suspended from associating in any capacity with a securities firm for 30 days and fined $20,000. Joshua Teuber, who supervised the soft dollar operation, was charged with failure to properly supervise, suspended from acting in a supervisory or principal capacity for 20 days and fined $15,000. David Persenaire, the firm's Chief Compliance Officer until September 2009, was charged with failing to ensure the implementation of adequate written systems and procedures, suspended from acting in a supervisory or principal capacity for 10 days, fined $10,000 and required to take and pass a Compliance Official Qualification Exam.
As part of the settlement, Terra Nova is required to retain an independent consultant to review and enhance its policies, systems and procedures relating to its soft dollar operations.
Tuesday, December 1, 2009
Lawyer Scott Rothstein Pleads Not Guilty To Ponzi Scheme Allegations
A once high-flying attorney who courted politicians and celebrities was arrested Tuesday on federal racketeering and fraud charges alleging he operated a $1 billion investment scheme involving phony legal settlements.
Lawyer Scott Rothstein was led into the Miami FBI office in handcuffs following his early morning arrest on five charges, including a violation of the Racketeer Influenced and Corrupt Organizations, or RICO law, often used against the Mafia and other criminal organizations.
Rothstein was also charged with wire fraud, money laundering, and mail and wire fraud conspiracy. The combined maximum prison term for convictions on all counts is 100 years, according to court documents.
A few hours after his arrest, Rothstein pleaded not guilty in federal court even though the information charging document — rather than an indictment — used by prosecutors typically means a defendant has agreed to eventually plead guilty.
Lawyer Scott Rothstein was led into the Miami FBI office in handcuffs following his early morning arrest on five charges, including a violation of the Racketeer Influenced and Corrupt Organizations, or RICO law, often used against the Mafia and other criminal organizations.
Rothstein was also charged with wire fraud, money laundering, and mail and wire fraud conspiracy. The combined maximum prison term for convictions on all counts is 100 years, according to court documents.
A few hours after his arrest, Rothstein pleaded not guilty in federal court even though the information charging document — rather than an indictment — used by prosecutors typically means a defendant has agreed to eventually plead guilty.
The Tim Durham Ponzi Scheme
The case against Indianapolis financier Tim Durham continues to unfold.
On Monday, the U.S. attorney filed a motion dismissing the effort to seize Durham's assets.
U.S. Attorney Tim Morrison said there was probable cause to believe the assets (which include his 30,000 square foot Geist home, along with other properties and bank accounts) were gained through unlawful acts.
Morrison said the government originally moved to seize Durham’s assets in order to ensure Durham didn’t sell off the properties or any of his other assets.
Morrison said once they realized there was no need to seize the assets at this point, they filed the notice of dismissal.
He wouldn't comment further on why they came to this realization.
He did make it clear the government could move forward on seizing assets if the case becomes a criminal matter.
Last week, federal authorities filed civil charges against Indianapolis businessman Tim Durham, alleging he was involved in wire fraud.
The civil suit filed accuses Durham of running a Ponzi scheme where he allegedly used money from new investors to pay off old investors.
On Monday, the U.S. attorney filed a motion dismissing the effort to seize Durham's assets.
U.S. Attorney Tim Morrison said there was probable cause to believe the assets (which include his 30,000 square foot Geist home, along with other properties and bank accounts) were gained through unlawful acts.
Morrison said the government originally moved to seize Durham’s assets in order to ensure Durham didn’t sell off the properties or any of his other assets.
Morrison said once they realized there was no need to seize the assets at this point, they filed the notice of dismissal.
He wouldn't comment further on why they came to this realization.
He did make it clear the government could move forward on seizing assets if the case becomes a criminal matter.
Last week, federal authorities filed civil charges against Indianapolis businessman Tim Durham, alleging he was involved in wire fraud.
The civil suit filed accuses Durham of running a Ponzi scheme where he allegedly used money from new investors to pay off old investors.
Monday, November 30, 2009
CIT InterNotes Purchasers May Be Able To Recover Investment Losses
Aidikoff, Uhl & Bakhtiari has launched www.citinternotes.com and investigation of the sales practices of Wall Street firms in recommending CIT InterNotes to their clients.
As capital became less available to CIT from institutional investors that it had relied on in the past, the company began marketing products to retail investors. In essence, the retail marketing plan allowed CIT to offload risk without the transparency it would face from institutional lenders.
“Investors who purchased CIT InterNotes may have been led to believe that CIT InterNotes were a suitable, conservative and stable investment at a time when CIT was under considerable financial pressure,” stated attorney Philip M. Aidikoff.
“The Financial Industry Regulatory Authority (FINRA) has taken note of this situation and is currently investigating whether the risks to CIT InterNotes were adequately disclosed to prospective clients,” said attorney Ryan K. Bakhtiari. “Investors should consider all of their options if they have suffered losses in CIT InterNotes.”
The individual brokers and individual advisors who sold CIT InterNotes are not targets of investor claims.
Aidikoff, Uhl & Bakhtiari represents retail and institutional investors around the world in securities arbitration and litigation matters. Attorneys for the firm have appeared before the Financial Industry Regulatory Authority (FINRA) and in numerous state and federal courts to resolve financial disputes between customers, banks, brokerage firms and other financial institutions. More information is available at www.citinternotes.com or www.securitiesarbitration.com or to discuss your options please contact an attorney below.
As capital became less available to CIT from institutional investors that it had relied on in the past, the company began marketing products to retail investors. In essence, the retail marketing plan allowed CIT to offload risk without the transparency it would face from institutional lenders.
“Investors who purchased CIT InterNotes may have been led to believe that CIT InterNotes were a suitable, conservative and stable investment at a time when CIT was under considerable financial pressure,” stated attorney Philip M. Aidikoff.
“The Financial Industry Regulatory Authority (FINRA) has taken note of this situation and is currently investigating whether the risks to CIT InterNotes were adequately disclosed to prospective clients,” said attorney Ryan K. Bakhtiari. “Investors should consider all of their options if they have suffered losses in CIT InterNotes.”
The individual brokers and individual advisors who sold CIT InterNotes are not targets of investor claims.
Aidikoff, Uhl & Bakhtiari represents retail and institutional investors around the world in securities arbitration and litigation matters. Attorneys for the firm have appeared before the Financial Industry Regulatory Authority (FINRA) and in numerous state and federal courts to resolve financial disputes between customers, banks, brokerage firms and other financial institutions. More information is available at www.citinternotes.com or www.securitiesarbitration.com or to discuss your options please contact an attorney below.
Administration Pushes For Mortgage Relief
The Obama administration today announced a renewed push to get lenders to convert hundreds of thousands of temporarily restructured mortgages into permanent ones to help keep struggling homeowners from falling into foreclosure.
The changes include a requirement for mortgage lenders and servicers to provide updates to the administration, sometimes daily, about each mortgage being modified, and possible fines and other sanctions for those who do not meet certain performance obligations.
The moves come amid complaints of bureaucratic nightmares from people who have received the short-term reductions in their payments but have been unable to get their lender or servicer to make the changes permanent. The mortgages have been altered under the administration's $75-billion Home Affordable Modification Program, which uses financial incentives to get banks and other mortgage holders to reduce the payments for homeowners who meet certain qualifications.
The program has temporarily modified more than 650,000 mortgages as of Oct. 30, but few of those three-month trials are estimated to have been made permanent. As of Sept. 1, only 1,711 trial modifications had become permanent, according to oversight panel monitoring the $700 billion Troubled Asset Relief Program. TARP money is used to fund the program.
The changes include a requirement for mortgage lenders and servicers to provide updates to the administration, sometimes daily, about each mortgage being modified, and possible fines and other sanctions for those who do not meet certain performance obligations.
The moves come amid complaints of bureaucratic nightmares from people who have received the short-term reductions in their payments but have been unable to get their lender or servicer to make the changes permanent. The mortgages have been altered under the administration's $75-billion Home Affordable Modification Program, which uses financial incentives to get banks and other mortgage holders to reduce the payments for homeowners who meet certain qualifications.
The program has temporarily modified more than 650,000 mortgages as of Oct. 30, but few of those three-month trials are estimated to have been made permanent. As of Sept. 1, only 1,711 trial modifications had become permanent, according to oversight panel monitoring the $700 billion Troubled Asset Relief Program. TARP money is used to fund the program.
InvestmentNews -- LPL Sues Pac Life Over Purchase of Broker Dealers
Indemnification dispute with the insurer won't affect their businesses, firm insists
By Bruce Kelly
At the same time that LPL Holdings Inc. and the three broker-dealers it bought from Pacific Life Insurance Co. were filing suit against the insurer, LPL was reaching out to its advisers to reassure them that the dispute wouldn't affect their businesses.
On Nov. 20, LPL sued Pacific Life, claiming that the latter was in breach of contract and trying to duck paying potentially millions of dollars of settlements and awards stemming from rogue brokers at the three subsidiaries, which were sold to LPL in 2007 for about $100 million in cash and stock.
In its lawsuit, filed in New York State Supreme Court in Manhattan, LPL said that “it is apparent that Pacific Life is merely seeking to avoid its express contractual obligations” over the payment stemming from arbitration claims.
Kathy TarantolaBill Dwyer: "We do not expect this legal matter to have any bearing on your business, your access to Pacific Life products or how you serve your clients," he wrote in a note to advisers. The same day, LPL sent a note to its network of 12,000 advisers, telling them about the legal development.
“We do not expect this legal matter to have any bearing on your business, your access to Pacific Life products or how you serve your clients,” wrote Bill Dwyer, LPL's president for national sales and marketing.
Not 'an issue'
“I don't see this as an issue,” said Frank Congemi, an LPL adviser. Pacific Life needs the broker-dealers and reps to sell its products, he said.
Mr.Congemi also doesn't see how annoying LPL would be good for Pacific Life.
He was formerly affiliated with Mutual Service Corp., one of the former Pacific Life firms. Along with about 1,700 other advisers, his securities license was transferred to LPL Financial, the biggest broker-dealer in the network, in September.
That was when LPL moved the former Pacific Life brokers onto its platform entirely, and industry observers have said that the move may have added to the legal dispute between the two sides.
Although many advisers have no reason to worry about the matter, LPL has set aside money as a result of the transfer of representatives and client accounts from the Pacific Life broker-dealers to LPL. Regulators required LPL to put the cash aside, LPL said.
“As a requirement for the regulatory approval for the transfer, the affiliated broker-dealers were required to deposit $12.8 million into escrow accounts pending the resolution of certain matters,” LPL said in its quarterly earnings report this month.
According to the LPL lawsuit, Pacific Life, as part of the deal's purchase-and-sale agreement, agreed to indemnify LPL from settlements, judgments, awards and defense costs from investor claims against the three firms for actions occurring prior to the closing of the deal.
So far, Pacific Life has ponied up “millions of dollars of settlement and defense costs related to” investor claims, the lawsuit states. However, the firm has suddenly switched tactics, the lawsuit claims, and refused last month to pay $57,000 to fund a settlement involving one of the broker-dealers LPL acquired, Associated Securities Corp.
In addition to that firm and Mutual Service, Pacific Life sold Waterstone Financial Group Inc. to LPL.
The dispute over which company is responsible for paying investors first came to light in LPL's quarterly earnings report this month. In the report, LPL made veiled references to the dispute.
Caving in
According to the lawsuit, Pacific Life has been searching for a way to cut its liabilities for months. In March, it told LPL that it had no obligation to cover an arbitration award of $8.4 million that had been issued against Associated Securities, according to the lawsuit.
When LPL and Associated Securities challenged that position, Pacific Life “abandoned” its argument and paid for the settlement. Representatives of LPL and Pacific Life said that the lawsuit wouldn't affect their continued relationship.
“As happens from time to time in the best of business relationships, LPL and Pacific Life disagree on the interpretation of a certain contractual provision,” Pacific Life spokeswoman Milda Goodman wrote in an e-mail. “This dispute will now be resolved by the courts, and will not disrupt the ongoing favorable business relationship between LPL, their financial advisers and Pacific Life.”
Likewise, an LPL spokesman, Joseph Kuo, said that the company doesn't expect the dispute to have an effect on the relationship between the company and Pacific Life.
By Bruce Kelly
At the same time that LPL Holdings Inc. and the three broker-dealers it bought from Pacific Life Insurance Co. were filing suit against the insurer, LPL was reaching out to its advisers to reassure them that the dispute wouldn't affect their businesses.
On Nov. 20, LPL sued Pacific Life, claiming that the latter was in breach of contract and trying to duck paying potentially millions of dollars of settlements and awards stemming from rogue brokers at the three subsidiaries, which were sold to LPL in 2007 for about $100 million in cash and stock.
In its lawsuit, filed in New York State Supreme Court in Manhattan, LPL said that “it is apparent that Pacific Life is merely seeking to avoid its express contractual obligations” over the payment stemming from arbitration claims.
Kathy TarantolaBill Dwyer: "We do not expect this legal matter to have any bearing on your business, your access to Pacific Life products or how you serve your clients," he wrote in a note to advisers. The same day, LPL sent a note to its network of 12,000 advisers, telling them about the legal development.
“We do not expect this legal matter to have any bearing on your business, your access to Pacific Life products or how you serve your clients,” wrote Bill Dwyer, LPL's president for national sales and marketing.
Not 'an issue'
“I don't see this as an issue,” said Frank Congemi, an LPL adviser. Pacific Life needs the broker-dealers and reps to sell its products, he said.
Mr.Congemi also doesn't see how annoying LPL would be good for Pacific Life.
He was formerly affiliated with Mutual Service Corp., one of the former Pacific Life firms. Along with about 1,700 other advisers, his securities license was transferred to LPL Financial, the biggest broker-dealer in the network, in September.
That was when LPL moved the former Pacific Life brokers onto its platform entirely, and industry observers have said that the move may have added to the legal dispute between the two sides.
Although many advisers have no reason to worry about the matter, LPL has set aside money as a result of the transfer of representatives and client accounts from the Pacific Life broker-dealers to LPL. Regulators required LPL to put the cash aside, LPL said.
“As a requirement for the regulatory approval for the transfer, the affiliated broker-dealers were required to deposit $12.8 million into escrow accounts pending the resolution of certain matters,” LPL said in its quarterly earnings report this month.
According to the LPL lawsuit, Pacific Life, as part of the deal's purchase-and-sale agreement, agreed to indemnify LPL from settlements, judgments, awards and defense costs from investor claims against the three firms for actions occurring prior to the closing of the deal.
So far, Pacific Life has ponied up “millions of dollars of settlement and defense costs related to” investor claims, the lawsuit states. However, the firm has suddenly switched tactics, the lawsuit claims, and refused last month to pay $57,000 to fund a settlement involving one of the broker-dealers LPL acquired, Associated Securities Corp.
In addition to that firm and Mutual Service, Pacific Life sold Waterstone Financial Group Inc. to LPL.
The dispute over which company is responsible for paying investors first came to light in LPL's quarterly earnings report this month. In the report, LPL made veiled references to the dispute.
Caving in
According to the lawsuit, Pacific Life has been searching for a way to cut its liabilities for months. In March, it told LPL that it had no obligation to cover an arbitration award of $8.4 million that had been issued against Associated Securities, according to the lawsuit.
When LPL and Associated Securities challenged that position, Pacific Life “abandoned” its argument and paid for the settlement. Representatives of LPL and Pacific Life said that the lawsuit wouldn't affect their continued relationship.
“As happens from time to time in the best of business relationships, LPL and Pacific Life disagree on the interpretation of a certain contractual provision,” Pacific Life spokeswoman Milda Goodman wrote in an e-mail. “This dispute will now be resolved by the courts, and will not disrupt the ongoing favorable business relationship between LPL, their financial advisers and Pacific Life.”
Likewise, an LPL spokesman, Joseph Kuo, said that the company doesn't expect the dispute to have an effect on the relationship between the company and Pacific Life.
Sunday, November 29, 2009
SEC OBTAINS ASSET FREEZE OVER LIMITED PARTNERSHIP MANAGED BY CULVER CITY ADVISER
The Securities and Exchange Commission ("Commission") obtained an asset freeze and other emergency relief to halt the continuing false disclosures being made by a Culver City, Calif. investment adviser.
The Commission alleges that Heath M. Biddlecome ("Biddlecome"), through his firm California Wealth Management Group, doing business as IFC Advisory ("IFC"), operated a limited partnership investment fund, raising $9.8 million from investors, many of whom were IFC clients.
The Commission's complaint alleges that Biddlecome established Homestead Properties, L.P. ("Homestead") to invest in mobile home park communities. The complaint further alleges that Biddlecome, without ever informing investors, changed the partnership's investment strategy to securities day trading. According to the complaint, Biddlecome transferred $4.5 million of the partnership's moneys and began to trade options, trade on margin, and engage in short sales. The complaint alleges that this risky day trading strategy has resulted in erratic performance, alternating between six figure trading losses to profits in various months; in September and October 2009 alone, the account value declined $1.9 million.
The Commission's complaint, which was filed in federal court in Los Angeles, alleges that the defendants falsely claimed that a brokerage firm would sell the partnership interests and an accounting firm would audit the partnership's books yearly. The complaint alleges that, in reality, Biddlecome ever enlisted these third parties to perform such services. In addition, although investors were told distributions would be made quarterly out of net profits and certain investors received distributions, Homestead suffered losses for two years. The complaint also alleges Biddlecome misappropriated partnership moneys to pay for his personal credit card bills.
The Commission alleges that Heath M. Biddlecome ("Biddlecome"), through his firm California Wealth Management Group, doing business as IFC Advisory ("IFC"), operated a limited partnership investment fund, raising $9.8 million from investors, many of whom were IFC clients.
The Commission's complaint alleges that Biddlecome established Homestead Properties, L.P. ("Homestead") to invest in mobile home park communities. The complaint further alleges that Biddlecome, without ever informing investors, changed the partnership's investment strategy to securities day trading. According to the complaint, Biddlecome transferred $4.5 million of the partnership's moneys and began to trade options, trade on margin, and engage in short sales. The complaint alleges that this risky day trading strategy has resulted in erratic performance, alternating between six figure trading losses to profits in various months; in September and October 2009 alone, the account value declined $1.9 million.
The Commission's complaint, which was filed in federal court in Los Angeles, alleges that the defendants falsely claimed that a brokerage firm would sell the partnership interests and an accounting firm would audit the partnership's books yearly. The complaint alleges that, in reality, Biddlecome ever enlisted these third parties to perform such services. In addition, although investors were told distributions would be made quarterly out of net profits and certain investors received distributions, Homestead suffered losses for two years. The complaint also alleges Biddlecome misappropriated partnership moneys to pay for his personal credit card bills.
Saturday, November 28, 2009
SEC Charges Two Individuals With Illegal Insider Trading in Advance of Negative News
On November 19, 2009, the Securities and Exchange Commission filed a civil injunctive action in the United States District Court for the District of Nevada against R. Brooke Dunn, a former executive at Shuffle Master, Inc., and Nicholas P. Howey for illegal insider trading in Shuffle Master stock and options prior to an announcement of disappointing financial results by Shuffle Master.
The SEC's Complaint alleges that, on February 26, 2007, after he first learned that Shuffle Master would announce disappointing preliminary financial results, Dunn called Howey and provided him with material nonpublic information relating to Shuffle Master's anticipated announcement. Howey then immediately sold all of his previously-purchased Shuffle Master stock and calls and purchased Shuffle Master puts. The next day, after Shuffle Master announced its disappointing financial news, Howey sold all of the Shuffle Master puts he purchased the previous day. Through the foregoing transactions, Howey profited by (or avoided losses of) approximately $237,000.
The Complaint charges Dunn and Howey with violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and seeks permanent injunctions, disgorgement of illegal trading profits, prejudgment interest, and civil penalties. The Complaint also seeks an order barring Dunn from serving as an officer or director of a public company.
The SEC's Complaint alleges that, on February 26, 2007, after he first learned that Shuffle Master would announce disappointing preliminary financial results, Dunn called Howey and provided him with material nonpublic information relating to Shuffle Master's anticipated announcement. Howey then immediately sold all of his previously-purchased Shuffle Master stock and calls and purchased Shuffle Master puts. The next day, after Shuffle Master announced its disappointing financial news, Howey sold all of the Shuffle Master puts he purchased the previous day. Through the foregoing transactions, Howey profited by (or avoided losses of) approximately $237,000.
The Complaint charges Dunn and Howey with violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and seeks permanent injunctions, disgorgement of illegal trading profits, prejudgment interest, and civil penalties. The Complaint also seeks an order barring Dunn from serving as an officer or director of a public company.
Friday, November 27, 2009
SEC HALTS AFFINITY FRAUD TARGETING THE SOMALI COMMUNITY
The Securities and Exchange Commission ("Commission") obtained a court order to halt a securities fraud targeting investors in the Somali immigrant community in San Diego, Seattle, and elsewhere.
The Commission's complaint names Mohamud A. Ahmed ("Ahmed"), age 45, of Spring Valley, Calif., and his company, Shidaal Express, Inc. ("Shidaal Express"), which operates in the San Diego area. The complaint alleges Ahmed formed Shidaal Express to provide check-cashing, money transfer, and other financial services for the Somali immigrant community, and a sign at one storefront location listed "Investment Opportunities" among the services provided. According to the complaint, Ahmed raised at least $3 million, including $200,000 from a San Diego mosque, by promising exorbitant guaranteed returns of 5% per month, or 60% annually.
The Commission charged Ahmed and Shidaal Express with committing securities fraud by making false and misleading statements to persuade people to invest with them. According to the complaint, Ahmed solicited investors through word-of-mouth, at a mosque in San Diego, at a presentation given in a Seattle-Tacoma hotel, and through Shidaal Express's website. The Commission alleges that Ahmed lured investors by assuring them they could receive their money back at any time. While initially paying investors monthly returns, the complaint alleges Ahmed tried to extract more money from the investors. The complaint alleges Ahmed eventually stopped paying monthly returns but continued lulling investors.
The Honorable Jeffrey Miller, United States District Judge
The Commission's complaint names Mohamud A. Ahmed ("Ahmed"), age 45, of Spring Valley, Calif., and his company, Shidaal Express, Inc. ("Shidaal Express"), which operates in the San Diego area. The complaint alleges Ahmed formed Shidaal Express to provide check-cashing, money transfer, and other financial services for the Somali immigrant community, and a sign at one storefront location listed "Investment Opportunities" among the services provided. According to the complaint, Ahmed raised at least $3 million, including $200,000 from a San Diego mosque, by promising exorbitant guaranteed returns of 5% per month, or 60% annually.
The Commission charged Ahmed and Shidaal Express with committing securities fraud by making false and misleading statements to persuade people to invest with them. According to the complaint, Ahmed solicited investors through word-of-mouth, at a mosque in San Diego, at a presentation given in a Seattle-Tacoma hotel, and through Shidaal Express's website. The Commission alleges that Ahmed lured investors by assuring them they could receive their money back at any time. While initially paying investors monthly returns, the complaint alleges Ahmed tried to extract more money from the investors. The complaint alleges Ahmed eventually stopped paying monthly returns but continued lulling investors.
The Honorable Jeffrey Miller, United States District Judge
Thursday, November 26, 2009
SEC Sues Dallas Company for Conducting Fraudulent $25 Million Promissory-Note Offering and Obtains the Appointment of a Receiver
On November 20, 2009, the Commission filed suit in the United States District Court for the Northern District of Texas against Dallas-based company Capital Mountain Holding Corporation, its president Derek A. Nelson, and two other Nelson-controlled entities known as Systems XXI, Act I, LLC ("Act I") and Systems XXI, Act II, LLC ("Act II"). The Commission also named two other entities owned by Nelson, Plouteo, Inc. and Homaide Real Estate Services, Inc. as Relief Defendants.
The Commission alleges that beginning in 2008 Nelson offered and sold promissory notes issued by CMHC, Act I, and Act II. The notes were marketed through a website and by a Canada-based investment club. The proceeds were to be used to buy distressed properties. Nelson told investors that after acquiring the properties at a discount, he would improve, rent, and resell them at prices closer to the properties' true value, thereby generating the returns promised to investors. The CMHC notes promised 10% per month interest for three months. The Act I and Act II notes that paid 18% per annum for two years (Act I) and 21% per annum for five years (Act II). Nelson promised that 90% of Act I and Act II funds would be used to acquire real estate and to rehabilitate the properties for rental or resale. Nelson further represented that Act I and Act II would loan money to CMHC in exchange for first lien positions on CMHC's properties. Nelson persuaded many of the CMHC noteholders to rollover their CMHC note principal into the Act I and Act II notes because they would be "more secure."
The Commission alleges that beginning in 2008 Nelson offered and sold promissory notes issued by CMHC, Act I, and Act II. The notes were marketed through a website and by a Canada-based investment club. The proceeds were to be used to buy distressed properties. Nelson told investors that after acquiring the properties at a discount, he would improve, rent, and resell them at prices closer to the properties' true value, thereby generating the returns promised to investors. The CMHC notes promised 10% per month interest for three months. The Act I and Act II notes that paid 18% per annum for two years (Act I) and 21% per annum for five years (Act II). Nelson promised that 90% of Act I and Act II funds would be used to acquire real estate and to rehabilitate the properties for rental or resale. Nelson further represented that Act I and Act II would loan money to CMHC in exchange for first lien positions on CMHC's properties. Nelson persuaded many of the CMHC noteholders to rollover their CMHC note principal into the Act I and Act II notes because they would be "more secure."
Wednesday, November 25, 2009
Former Stratton Oakmont Executive Charged in Securities Fraud Case
Irving Stitsky, a former executive at Stratton Oakmont, along with Mark Alan Shapiro and William B. Foster, have been found guilty of committing securities fraud. The crime involved more than 150 investors who together entrusted Stitsky with $18 million.
The three convicted perpetrated their illegal activity under an umbrella corporation known as, “Cobalt.” The company claimed to acquire and develop real-estate properties, some of which were never under its ownership. The three also lied to investors about the history of their company. In addition to these misrepresentations, Stitsky and Shapiro failed to disclose that they were convicted felons.
Stitsky is most known for his boiler room operations in the 1990s, actions that caused him to lose his securities licenses. Shapiro, on the other hand, served 30 months in prison after pleading guilty to bank fraud and conspiracy to commit tax fraud.
After the three-week trial, Stitsky, Shapiro, and Mr. Foster were found guilty of securities fraud, wire fraud, mail fraud and conspiracy charges.
The three convicted perpetrated their illegal activity under an umbrella corporation known as, “Cobalt.” The company claimed to acquire and develop real-estate properties, some of which were never under its ownership. The three also lied to investors about the history of their company. In addition to these misrepresentations, Stitsky and Shapiro failed to disclose that they were convicted felons.
Stitsky is most known for his boiler room operations in the 1990s, actions that caused him to lose his securities licenses. Shapiro, on the other hand, served 30 months in prison after pleading guilty to bank fraud and conspiracy to commit tax fraud.
After the three-week trial, Stitsky, Shapiro, and Mr. Foster were found guilty of securities fraud, wire fraud, mail fraud and conspiracy charges.
Tuesday, November 24, 2009
SEC Charges Swiss National with Insider Trading
The Commission today announced that it filed a First Amended Complaint against Lorenz Kohler (Kohler), a resident of Mels, Switzerland, and Swiss Real Estate International Holding AG (Swiss Real Estate) alleging that they engaged in insider trading in advance of the October 9, 2006 public announcement of a $566 million merger between CNS and GlaxoSmithKline plc. The First Amended Complaint alleges that Kohler purchased out-of-the-money call options in CNS in his personal account and in an account in the name of Swiss Real Estate, a company controlled by Kohler, based on material non-public information relating to the company's potential acquisition. The Commission alleges that Kohler and Swiss Real Estate realized illicit gains of approximately $387,566. The Commission further alleges that Kohler tipped his wife and his brother-in-law, who then traded in CNS options in advance of the announcement of the acquisition of CNS and realized significant illicit gains.
The First Amended Complaint also names Sacho Todorov Dermendjiev (Dermendjiev) as a relief defendant. The Commission alleges that Dermendjiev, who resides in Bulgaria, was the beneficial owner of banking and securities accounts over which Kohler held power of attorney. According to the First Amended Complaint, Kohler purchased option contracts on CNS stock for Dermendjiev's account just prior to announcement of the acquisition of CNS and sold these options immediately after announcement of the CNS acquisition, resulting in illicit gains of $74,655 for Dermendjiev.
The First Amended Complaint also names Sacho Todorov Dermendjiev (Dermendjiev) as a relief defendant. The Commission alleges that Dermendjiev, who resides in Bulgaria, was the beneficial owner of banking and securities accounts over which Kohler held power of attorney. According to the First Amended Complaint, Kohler purchased option contracts on CNS stock for Dermendjiev's account just prior to announcement of the acquisition of CNS and sold these options immediately after announcement of the CNS acquisition, resulting in illicit gains of $74,655 for Dermendjiev.
33 Days to Opt Out of Schwab Yield Plus Class Action
Aidikoff, Uhl & Bakhtiari announces that the deadline to opt out of the Schwab YieldPlus class action lawsuit is fast approaching. Schwab YieldPlus
Fund investors who are members of the class action -- which involves
the Schwab YieldPlus Fund Select Shares (Nasdaq:SWYSX) and the Schwab
YieldPlus Investor Shares (Nasdaq:SWYPX) -- have approximately 33 days
to submit their request to opt out of the class action if they wish to
pursue an individual arbitration claim with the Financial Industry
Regulatory Authority (FINRA).
"Charles Schwab marketed and sold the Schwab YieldPlus Funds as safe,
cash-like investment alternatives. Instead, evidence shows that the
funds contained more than 45% of toxic mortgage- and asset-backed
securities. This exposed investors to not only more risk but also the
potential for more financial losses," says Ryan Bakhtiari, an attorney
whose law firm Aidikoff, Uhl & Bakhtiari has successfully represented
investors in their claims against Charles Schwab and the YieldPlus
Funds.
Bakhtiari adds that investors who suffered financial losses in their
Schwab YieldPlus investments need to carefully consider whether they
remain in the Schwab class action lawsuit or submit their request for
exclusion and pursue a separate individual FINRA arbitration claim.
"For some investors, class action representation in the YieldPlus case
can be an attractive legal option when individual financial losses are
small. In other instances, however, filing an individual claim with
FINRA may be a more economically attractive option. Investors should
consult with counsel to review their options," Bakhtiari says.
Investors must submit their requests for exclusion by December 28,
2009, or they will be bound by the results of the class action lawsuit.
Fund investors who are members of the class action -- which involves
the Schwab YieldPlus Fund Select Shares (Nasdaq:SWYSX) and the Schwab
YieldPlus Investor Shares (Nasdaq:SWYPX) -- have approximately 33 days
to submit their request to opt out of the class action if they wish to
pursue an individual arbitration claim with the Financial Industry
Regulatory Authority (FINRA).
"Charles Schwab marketed and sold the Schwab YieldPlus Funds as safe,
cash-like investment alternatives. Instead, evidence shows that the
funds contained more than 45% of toxic mortgage- and asset-backed
securities. This exposed investors to not only more risk but also the
potential for more financial losses," says Ryan Bakhtiari, an attorney
whose law firm Aidikoff, Uhl & Bakhtiari has successfully represented
investors in their claims against Charles Schwab and the YieldPlus
Funds.
Bakhtiari adds that investors who suffered financial losses in their
Schwab YieldPlus investments need to carefully consider whether they
remain in the Schwab class action lawsuit or submit their request for
exclusion and pursue a separate individual FINRA arbitration claim.
"For some investors, class action representation in the YieldPlus case
can be an attractive legal option when individual financial losses are
small. In other instances, however, filing an individual claim with
FINRA may be a more economically attractive option. Investors should
consult with counsel to review their options," Bakhtiari says.
Investors must submit their requests for exclusion by December 28,
2009, or they will be bound by the results of the class action lawsuit.
Monday, November 23, 2009
In B-D deals, it's impossible to know what lies beneath
LPL-Pacific Life dispute points up acquisitions' unseen risks
By Bruce Kelly
November 22, 2009, 6:01 AM EST
Investment News
The dispute between LPL Investment Holdings Inc. and Pacific Life Insurance Co. over liability for rogue brokers is a reminder that unseen risks can be part of any acquisition, no matter how well-vetted, according to lawyers and investment bankers.
The two firms are staring each other down over which firm will have to pony up the potentially millions of dollars in claims stemming from fraud suits against rogue brokers from the three independent-contractor firms LPL acquired from Pacific Life two years ago.
Even with the most intensive due diligence, risks from brokers' activities
and sales practices can remain uncovered, one attorney said.
“You're never going to know all potential liability,” said Dennis Concilla, a partner with Carlile Patchen & Murphy LLP. Last year's revelation that Bernard Madoff created a $65 billion Ponzi scheme has proved that even the largest risks remain hidden for years.
Filings reveal feud
“There's liability out there that none of us could have dreamt of,” he said.
Veiled references to the quarrel between Pacific Life and LPL first surfaced this month in official filings.
This month, in its quarterly earnings report to the Securities and Exchange Commission, LPL said that it was in dispute with an un-named third-party indemnifier “in connection with various acquisitions.”
Until now, the report said, the “indemnifying party” defended and paid “for certain legal proceedings and claims.”
The LPL report said that the firm had received a written notice Oct. 1 from an unnamed third party saying that “under a certain purchase and sale agreement,” the third party “is no longer obligated to indemnify the company for certain claims.”
LPL “believes that this assertion is without merit, and intends to vigorously dispute it,” the report said.
A source close to Pacific Life, who asked not to be identified, said the unnamed third party is “absolutely” Pacific Life.
Recent changes in LPL's clearing agreement with the former Pacific Life reps could have triggered the dispute, industry observers said.
In 2007, LPL paid around $97 million for the three firms — Mutual Service Corp., Associated Securities Corp. and Waterstone Financial Inc. — which at the time had a combined 2,200 reps and advisers generating $350 million in gross revenue.
Each of those three broker-dealers maintained its own clearing arrangements, at first with Pershing LLC and then using a combination of Pershing's platform and LPL's proprietary BranchNet.
That all changed in September, when LPL moved the three firms' remaining 1,700 reps and advisers off that hybrid platform and onto its self-clearing platform.
At least some of the claims that Pacific Life wants to have off its books involve former Associated Securities broker Jeffrey Forrest, who lost an $8.8 million arbitration claim this year.
The attorney for the plaintiffs in that case, Philip Aidikoff, said that over the summer, he filed two more claims totaling $10.5 million against Mr. Forrest, who has been barred from the securities business.
Other brokers from Pacific Life firms have been named in arbitration cases brought by investors claiming millions of dollars in losses. Attorney Kalju Nekvasil has represented 392 investors with claims totaling more than $20 million against Mutual Service Corp.
In August, Mr. Nekvasil wrote a letter to Richard Ketchum, chief executive of the Financial Industry Regulatory Authority Inc., expressing concern over the transfer of brokers and assets to LPL from Mutual Service. In the letter, he expressed concern that the transfer could leave Mutual Service with no assets and unable to meet any arbitration awards.
Mr. Nekvasil declined to comment about those arbitration claims.
By press time, Pacific Life spokesman Tennyson Oyler had not returned phone calls seeking comment.
An LPL spokesman, Joseph Kuo, said, “As a matter of policy, we have no comment beyond the disclosure in our” quarterly report. “We have a long-standing and productive relationship with Pacific Life.”
By Bruce Kelly
November 22, 2009, 6:01 AM EST
Investment News
The dispute between LPL Investment Holdings Inc. and Pacific Life Insurance Co. over liability for rogue brokers is a reminder that unseen risks can be part of any acquisition, no matter how well-vetted, according to lawyers and investment bankers.
The two firms are staring each other down over which firm will have to pony up the potentially millions of dollars in claims stemming from fraud suits against rogue brokers from the three independent-contractor firms LPL acquired from Pacific Life two years ago.
Even with the most intensive due diligence, risks from brokers' activities
and sales practices can remain uncovered, one attorney said.
“You're never going to know all potential liability,” said Dennis Concilla, a partner with Carlile Patchen & Murphy LLP. Last year's revelation that Bernard Madoff created a $65 billion Ponzi scheme has proved that even the largest risks remain hidden for years.
Filings reveal feud
“There's liability out there that none of us could have dreamt of,” he said.
Veiled references to the quarrel between Pacific Life and LPL first surfaced this month in official filings.
This month, in its quarterly earnings report to the Securities and Exchange Commission, LPL said that it was in dispute with an un-named third-party indemnifier “in connection with various acquisitions.”
Until now, the report said, the “indemnifying party” defended and paid “for certain legal proceedings and claims.”
The LPL report said that the firm had received a written notice Oct. 1 from an unnamed third party saying that “under a certain purchase and sale agreement,” the third party “is no longer obligated to indemnify the company for certain claims.”
LPL “believes that this assertion is without merit, and intends to vigorously dispute it,” the report said.
A source close to Pacific Life, who asked not to be identified, said the unnamed third party is “absolutely” Pacific Life.
Recent changes in LPL's clearing agreement with the former Pacific Life reps could have triggered the dispute, industry observers said.
In 2007, LPL paid around $97 million for the three firms — Mutual Service Corp., Associated Securities Corp. and Waterstone Financial Inc. — which at the time had a combined 2,200 reps and advisers generating $350 million in gross revenue.
Each of those three broker-dealers maintained its own clearing arrangements, at first with Pershing LLC and then using a combination of Pershing's platform and LPL's proprietary BranchNet.
That all changed in September, when LPL moved the three firms' remaining 1,700 reps and advisers off that hybrid platform and onto its self-clearing platform.
At least some of the claims that Pacific Life wants to have off its books involve former Associated Securities broker Jeffrey Forrest, who lost an $8.8 million arbitration claim this year.
The attorney for the plaintiffs in that case, Philip Aidikoff, said that over the summer, he filed two more claims totaling $10.5 million against Mr. Forrest, who has been barred from the securities business.
Other brokers from Pacific Life firms have been named in arbitration cases brought by investors claiming millions of dollars in losses. Attorney Kalju Nekvasil has represented 392 investors with claims totaling more than $20 million against Mutual Service Corp.
In August, Mr. Nekvasil wrote a letter to Richard Ketchum, chief executive of the Financial Industry Regulatory Authority Inc., expressing concern over the transfer of brokers and assets to LPL from Mutual Service. In the letter, he expressed concern that the transfer could leave Mutual Service with no assets and unable to meet any arbitration awards.
Mr. Nekvasil declined to comment about those arbitration claims.
By press time, Pacific Life spokesman Tennyson Oyler had not returned phone calls seeking comment.
An LPL spokesman, Joseph Kuo, said, “As a matter of policy, we have no comment beyond the disclosure in our” quarterly report. “We have a long-standing and productive relationship with Pacific Life.”
Friday, November 20, 2009
TD Bank Sued in Rothstein Ponzi Scheme
Six investors have filed a suit against TD Bank in connection with the alleged Ponzi scheme perpetrated by South Florida attorney Scott Rothstein. The suit claims that TD Bank was a complicit party in the scheme that appears to have defrauded hundreds of millions from investors.
According to those filing suit, TD Bank failed to authenticate the origins of huge sums of money going in and out of accounts held there. These accounts were opened for the benefit of investors, yet Rothstein withdrew funds, funds used in support of his supposed scheme. The investors filing the suit state that TD Bank made them feel safe about their investment, reassured even. That trust was violated by TD Bank failing to take appropriate steps to ensure that investor money was not being diverted in an illegal fashion, as it now appears to have been.
In an odd corollary, Rothstein has yet to be criminally charged in connection with the scheme. FBI investigators insist that the investigation is ongoing and that once warranted, arrests will be made.
According to those filing suit, TD Bank failed to authenticate the origins of huge sums of money going in and out of accounts held there. These accounts were opened for the benefit of investors, yet Rothstein withdrew funds, funds used in support of his supposed scheme. The investors filing the suit state that TD Bank made them feel safe about their investment, reassured even. That trust was violated by TD Bank failing to take appropriate steps to ensure that investor money was not being diverted in an illegal fashion, as it now appears to have been.
In an odd corollary, Rothstein has yet to be criminally charged in connection with the scheme. FBI investigators insist that the investigation is ongoing and that once warranted, arrests will be made.
Thursday, November 19, 2009
Notice to CIT InterNotes Purchasers -- Aidikoff, Uhl & Bakhtiari Launches Website and Investigation of Customer Losses
Aidikoff, Uhl & Bakhtiari announces the launch of www.citinternotes.com and investigation of the sales practices of Wall Street firms in recommending CIT InterNotes to their clients.
As capital became less available to CIT from institutional investors that it had relied on in the past, the company began marketing products to retail investors. In essence, the retail marketing plan allowed CIT to offload risk without the transparency it would face from institutional lenders.
“Investors who purchased CIT InterNotes may have been led to believe that CIT InterNotes were a suitable, conservative and stable investment at a time when CIT was under considerable financial pressure,” stated attorney Philip M. Aidikoff.
“The Financial Industry Regulatory Authority (FINRA) has taken note of this situation and is currently investigating whether the risks to CIT InterNotes were adequately disclosed to prospective clients,” said attorney Ryan K. Bakhtiari. “Investors should consider all of their options if they have suffered losses in CIT InterNotes.”
The individual brokers and individual advisors who sold CIT InterNotes are not targets of investor claims.
Aidikoff, Uhl & Bakhtiari represents retail and institutional investors around the world in securities arbitration and litigation matters. Attorneys for the firm have appeared before the Financial Industry Regulatory Authority (FINRA) and in numerous state and federal courts to resolve financial disputes between customers, banks, brokerage firms and other financial institutions. More information is available at www.citinternotes.com or www.securitiesarbitration.com or to discuss your options please contact an attorney below.
As capital became less available to CIT from institutional investors that it had relied on in the past, the company began marketing products to retail investors. In essence, the retail marketing plan allowed CIT to offload risk without the transparency it would face from institutional lenders.
“Investors who purchased CIT InterNotes may have been led to believe that CIT InterNotes were a suitable, conservative and stable investment at a time when CIT was under considerable financial pressure,” stated attorney Philip M. Aidikoff.
“The Financial Industry Regulatory Authority (FINRA) has taken note of this situation and is currently investigating whether the risks to CIT InterNotes were adequately disclosed to prospective clients,” said attorney Ryan K. Bakhtiari. “Investors should consider all of their options if they have suffered losses in CIT InterNotes.”
The individual brokers and individual advisors who sold CIT InterNotes are not targets of investor claims.
Aidikoff, Uhl & Bakhtiari represents retail and institutional investors around the world in securities arbitration and litigation matters. Attorneys for the firm have appeared before the Financial Industry Regulatory Authority (FINRA) and in numerous state and federal courts to resolve financial disputes between customers, banks, brokerage firms and other financial institutions. More information is available at www.citinternotes.com or www.securitiesarbitration.com or to discuss your options please contact an attorney below.
SEC Charges Investor Relations Firm and its Executives with Fraud, Registration Violations, and Acting as an Unregistered Broker-Dealer
Today the Securities and Exchange Commission ("Commission") filed a civil action in the U.S. District Court for the Middle District of Florida, alleging that investor relations firm Big Apple Consulting USA, Inc. ("Big Apple"), its wholly-owned subsidiary MJMM Investments, LLC ("MJMM"), and four of its executives-CEO Marc Jablon, vice president Matthew Maguire, MJMM president Mark Kaley, and Keith Jablon, vice president of another Big Apple subsidiary-made public misrepresentations and material omissions about the financial state of CyberKey Solutions, Inc., ("CyberKey") while the two entities sold hundreds of millions of CyberKey shares. These CyberKey shares were sold under no registration statement and no legitimate exemption from registration. The SEC also charged Big Apple and MJMM with acting as unregistered broker-dealers, and Marc Jablon, Maguire, and Kaley with aiding and abetting the two entities' violations in that respect.
According to the SEC's complaint, the Big Apple executives learned by August 8, 2006, that CyberKey's only significant source of revenue, a supposed $25 million purchase order from the U.S. Department of Homeland Security ("DHS"), could not be located by DHS itself and almost certainly did not exist. Despite this knowledge, the Big Apple team continued to promote CyberKey and its business relationship with DHS and sold hundreds of millions of CyberKey shares into the public market. In addition to planning and editing press releases, Big Apple used a telephone calling room of 14 to 50 callers to promote CyberKey stock, including the company's relationship with DHS, to registered brokers. In doing so, Big Apple and MJMM acted as dealers in connection with the distribution of CyberKey stock and as brokers by participating in securities transactions at key points in the chain of distribution of CyberKey shares.
The SEC's complaint charges each of the defendants with violations of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, as well as with violations of Section 17(a) of the Securities Act of 1933 ("Securities Act"). The SEC's complaint also charges Big Apple, MJMM, Maguire and Marc Jablon with violating Sections 5(a) and 5(c) of the Securities Act. Finally, the complaint charges Big Apple and MJMM with violations of Section 15(a) of the Exchange Act and Marc Jablon, Maguire and Kaley with aiding and abetting the entities' violations of Section 15(a).
According to the SEC's complaint, the Big Apple executives learned by August 8, 2006, that CyberKey's only significant source of revenue, a supposed $25 million purchase order from the U.S. Department of Homeland Security ("DHS"), could not be located by DHS itself and almost certainly did not exist. Despite this knowledge, the Big Apple team continued to promote CyberKey and its business relationship with DHS and sold hundreds of millions of CyberKey shares into the public market. In addition to planning and editing press releases, Big Apple used a telephone calling room of 14 to 50 callers to promote CyberKey stock, including the company's relationship with DHS, to registered brokers. In doing so, Big Apple and MJMM acted as dealers in connection with the distribution of CyberKey stock and as brokers by participating in securities transactions at key points in the chain of distribution of CyberKey shares.
The SEC's complaint charges each of the defendants with violations of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, as well as with violations of Section 17(a) of the Securities Act of 1933 ("Securities Act"). The SEC's complaint also charges Big Apple, MJMM, Maguire and Marc Jablon with violating Sections 5(a) and 5(c) of the Securities Act. Finally, the complaint charges Big Apple and MJMM with violations of Section 15(a) of the Exchange Act and Marc Jablon, Maguire and Kaley with aiding and abetting the entities' violations of Section 15(a).
Wednesday, November 18, 2009
FINRA BrokerCheck to Add Past Broker Information after SEC Ruling
Starting on November 30th, 2009, disclosure records of former brokers will be available on the Financial Industry Regulatory Authority’s (FINRA) website under its current service – BrokerCheck. This is only possible because of a Securities and Exchange Commission (SEC) approval allowing FINRA to add this material.
Currently, FINRA’s BrokerCheck allows one to view the disclosure records of current brokers, however, two year after leaving the securities field that record is made unavailable. FINRA Chairman and CEO Richard Ketchum believes the addition of past brokers’ records will make the financial market safer for investors. Ketchum sites cases where barred brokers have been connected to recent securities fraud after having lost their license.
With the addition of past broker records on BrokerCheck, Ketchum and others hope that investors might find out information that could shield them from involvement with objectionable former brokers. Current FINRA estimates place the amount of additional records to be made available on November 30th around 15,000.
Currently, FINRA’s BrokerCheck allows one to view the disclosure records of current brokers, however, two year after leaving the securities field that record is made unavailable. FINRA Chairman and CEO Richard Ketchum believes the addition of past brokers’ records will make the financial market safer for investors. Ketchum sites cases where barred brokers have been connected to recent securities fraud after having lost their license.
With the addition of past broker records on BrokerCheck, Ketchum and others hope that investors might find out information that could shield them from involvement with objectionable former brokers. Current FINRA estimates place the amount of additional records to be made available on November 30th around 15,000.
Tuesday, November 17, 2009
The Devolution of DBSI
Investors in DBSI Inc. are only now getting a clear idea of what was going on at the Idaho-based commercial real estate investment company. There was little indication to investors that financial issues existed at DBSI until a notice they received six weeks prior to the company filing for Chapter 11 bankruptcy proceedings. However, problems at DBSI appeared long this, and started becoming apparent to those within the company as early as 2004.
It was in 2004 that DBSI accountants first noted cash shortages. It was also around that time that DBSI began in earnest to operate like an elaborate ponzi-scheme. By 2005, DBSI was dependent on new investor funds in order to provide cash for operations and provide the guaranteed 7% dividend to prior investors. The company came up with two ways to keep new funds coming in to pay off old investors.
It appears that the first strategy involved the use of hidden markups. DBSI would buy a commercial property at a given price, and then sell it to new investors at a profit. The amount of the markup was not disclosed in many cases; a violation of securities law provided the properties were sold as a security. One disturbing characteristic of this practice was the amount of time between DBSI buying an investment property and selling it to investors; sometimes it was as short as one day.
The second strategy came from a seemingly benign concept known as, “accountable reserves.” Starting in 2005, every new project had an accountable reserves fund which set aside money for tenant improvements and repairs. Well, that was the stated goal anyways. In actuality, only 18% of the money in those funds went towards tenant improvements and repairs. The other 82% of the over $99 million dollars available in accountable reserves went towards other DBSI funds.
Even with hidden markups and diverted tenant funds, DBSI was not able to maintain a financially viable enterprise. By 2007, the company was losing $3 million a month on its properties. That number increased to $8 million by 2008. Unfortunately, investors were kept in the dark until six weeks before DBSI filed for bankruptcy.
It was in 2004 that DBSI accountants first noted cash shortages. It was also around that time that DBSI began in earnest to operate like an elaborate ponzi-scheme. By 2005, DBSI was dependent on new investor funds in order to provide cash for operations and provide the guaranteed 7% dividend to prior investors. The company came up with two ways to keep new funds coming in to pay off old investors.
It appears that the first strategy involved the use of hidden markups. DBSI would buy a commercial property at a given price, and then sell it to new investors at a profit. The amount of the markup was not disclosed in many cases; a violation of securities law provided the properties were sold as a security. One disturbing characteristic of this practice was the amount of time between DBSI buying an investment property and selling it to investors; sometimes it was as short as one day.
The second strategy came from a seemingly benign concept known as, “accountable reserves.” Starting in 2005, every new project had an accountable reserves fund which set aside money for tenant improvements and repairs. Well, that was the stated goal anyways. In actuality, only 18% of the money in those funds went towards tenant improvements and repairs. The other 82% of the over $99 million dollars available in accountable reserves went towards other DBSI funds.
Even with hidden markups and diverted tenant funds, DBSI was not able to maintain a financially viable enterprise. By 2007, the company was losing $3 million a month on its properties. That number increased to $8 million by 2008. Unfortunately, investors were kept in the dark until six weeks before DBSI filed for bankruptcy.
Monday, November 16, 2009
"Green" Ponzi Scheme Uncovered
The plethora of Ponzi schemes uncovered in the wake of Stanford and Madoff may be joined by a similar scheme with a new twist: green investment fraud. If the Securities and Exchange Commission (SEC) is correct, four individuals and two companies based out of Colorado and Pennsylvania defrauded mainly elderly investors out of $30 million through a purportedly green investment opportunity.
The SEC has charged Wayde and Donna McKelvy, through their Denver-based company Speed of Wealth LLC in conjunction with two Mantria Corporation executives, Troy Wragg and Amanda Knorr, with orchestrating the Ponzi scheme. The four allegedly targeted those in and approaching retirement to invest as much as possible into Mantria Corporation. They marketed seminars and, “webinars,” through radio, television, internet, and print. At these meetings conducted by Speed of Wealth, would be investors were advised into liquidating retirement accounts, savings accounts, mutual funds, stocks, bonds, and other traditional investments in order to invest in Mantria offerings.
In addition to the serious questions such advice elicits, promises were apparently made in seminars promising annualized returns of 17% to “hundreds of percent (sic).” Unfortunately for investors, these claims were patently false. In fact, almost no money was generated with funds collected from investors, and the McKelvys collected a generous and undisclosed 12% commission. As is emblematic of ponzi schemes, new investor funds were used to compensate old investors.
Each defendant has been charged with violating offering registration and anti-fraud provisions of securities laws.
The SEC has charged Wayde and Donna McKelvy, through their Denver-based company Speed of Wealth LLC in conjunction with two Mantria Corporation executives, Troy Wragg and Amanda Knorr, with orchestrating the Ponzi scheme. The four allegedly targeted those in and approaching retirement to invest as much as possible into Mantria Corporation. They marketed seminars and, “webinars,” through radio, television, internet, and print. At these meetings conducted by Speed of Wealth, would be investors were advised into liquidating retirement accounts, savings accounts, mutual funds, stocks, bonds, and other traditional investments in order to invest in Mantria offerings.
In addition to the serious questions such advice elicits, promises were apparently made in seminars promising annualized returns of 17% to “hundreds of percent (sic).” Unfortunately for investors, these claims were patently false. In fact, almost no money was generated with funds collected from investors, and the McKelvys collected a generous and undisclosed 12% commission. As is emblematic of ponzi schemes, new investor funds were used to compensate old investors.
Each defendant has been charged with violating offering registration and anti-fraud provisions of securities laws.
Sunday, November 15, 2009
SEC Sues Houston Businessman for Conducting Fraudulent $10 Million Promissory-Note Offering
On November 13, 2009, the Commission filed suit in the United States District Court for the Southern District of Texas against Houston businessman Albert Fase Kaleta and his company, Kaleta Capital Management, Inc. ("KCM"). Two other entities, Business Radio Network, L.P. d/b/a BizRadio ("BizRadio") and Daniel Frishberg Financial Services, Inc. (d/b/a DFFS Capital Management, Inc.) ("DFFS") were named as Relief Defendants solely for the purposes of equitable relief.
The Commission alleges that Kaleta and KCM raised approximately $10 million from approximately 50 investors in a fraudulent offering of promissory-note securities. The Commission further alleges that Kaleta misrepresented that KCM would use the offering proceeds to provide short-term loans to credit-worthy small businesses. Instead, at Kaleta's direction, KCM loaned approximately $6.7 million of the offering proceeds to the Relief Defendants DFFS and BizRadio, two financially precarious KCM affiliates who had no reasonable prospect of repaying the loans. Kaleta knew the financial condition of both companies because he was president, chief compliance officer, and a 44% owner of DFFS and, with others, controlled BizRadio. The complaint alleges that Kaleta also took approximately $1.5 million of the offering proceeds to pay his personal expenses. Finally, the Commission alleges that contrary to Kaleta's representations, he used investor funds to make interest payments to some of the promissory note holders.
The Commission alleges that Kaleta and KCM raised approximately $10 million from approximately 50 investors in a fraudulent offering of promissory-note securities. The Commission further alleges that Kaleta misrepresented that KCM would use the offering proceeds to provide short-term loans to credit-worthy small businesses. Instead, at Kaleta's direction, KCM loaned approximately $6.7 million of the offering proceeds to the Relief Defendants DFFS and BizRadio, two financially precarious KCM affiliates who had no reasonable prospect of repaying the loans. Kaleta knew the financial condition of both companies because he was president, chief compliance officer, and a 44% owner of DFFS and, with others, controlled BizRadio. The complaint alleges that Kaleta also took approximately $1.5 million of the offering proceeds to pay his personal expenses. Finally, the Commission alleges that contrary to Kaleta's representations, he used investor funds to make interest payments to some of the promissory note holders.
Saturday, November 14, 2009
SEC CHARGES MADOFF COMPUTER PROGRAMMERS
The Securities and Exchange Commission today charged two computer programmers for their role in helping convicted Ponzi schemer Bernard L. Madoff cover up the fraud at Bernard L. Madoff Investment Securities LLC (BMIS) for more than 15 years.
The SEC alleges that Jerome O'Hara of Malverne, N.Y., and George Perez of East Brunswick, N.J., provided the technical support necessary to produce false documents and trading records, and took hush money to help keep the scheme going.
According to the SEC's complaint, filed in U.S. District Court for the Southern District of New York, Madoff and his lieutenant Frank DiPascali, Jr., routinely asked O'Hara and Perez for their help in creating records that, among other things, combined actual positions and activity from BMIS' market-making and proprietary trading businesses with the fictional balances maintained in investor accounts. O'Hara and Perez wrote programs that generated many thousands of pages of fake trade blotters, stock records, Depository Trust Corporation (DTC) reports and other phantom books and records to substantiate nonexistent trading. They assigned file names to many of these programs that began with "SPCL," which is short for "special."
A separate computer internally known as "House 17" was used to process BMIS investment advisory account data at the direction of Madoff, DiPascali and others. The SEC alleges that O'Hara and Perez knew that the House 17 computer was missing a host of functioning programs necessary for actual securities trading and reporting. According to the SEC's complaint, they recognized that the trades being entered into House 17 and the account statements and trade confirmations being sent to investors did not reflect actual trades.
The SEC alleges that
The SEC alleges that Jerome O'Hara of Malverne, N.Y., and George Perez of East Brunswick, N.J., provided the technical support necessary to produce false documents and trading records, and took hush money to help keep the scheme going.
According to the SEC's complaint, filed in U.S. District Court for the Southern District of New York, Madoff and his lieutenant Frank DiPascali, Jr., routinely asked O'Hara and Perez for their help in creating records that, among other things, combined actual positions and activity from BMIS' market-making and proprietary trading businesses with the fictional balances maintained in investor accounts. O'Hara and Perez wrote programs that generated many thousands of pages of fake trade blotters, stock records, Depository Trust Corporation (DTC) reports and other phantom books and records to substantiate nonexistent trading. They assigned file names to many of these programs that began with "SPCL," which is short for "special."
A separate computer internally known as "House 17" was used to process BMIS investment advisory account data at the direction of Madoff, DiPascali and others. The SEC alleges that O'Hara and Perez knew that the House 17 computer was missing a host of functioning programs necessary for actual securities trading and reporting. According to the SEC's complaint, they recognized that the trades being entered into House 17 and the account statements and trade confirmations being sent to investors did not reflect actual trades.
The SEC alleges that
Friday, November 13, 2009
New SEC Complaint Alleges Medical Capital Fraud More Pervasive than Previously Thought
The Securities and Exchange Commission (SEC) has amended its complaint against Orange County Medical Receivables Company Medical Capital Holdings. The amended complaint alleges that, in addition to the previous charges, Medical Capital docketed fake, inflated, and valueless billings/receivables. They then used these forgeries as justification in charging clients millions of dollars in fraudulent fees.
The amended complaint also alleges that Medical Capital used money from new investors to pay off old investors. The amended allegations provide a picture of purported fraud that is far more organized than previously thought.
The new charges could prove to be detrimental to Medical Capital’s top executives, Sidney Field and Joseph Lampariello. The SEC is hoping that the court will order Field and Lampariello to disgorge profits made from the scheme.
For more information of Medical Capital, please click on the link in the list of topics to the right.
The amended complaint also alleges that Medical Capital used money from new investors to pay off old investors. The amended allegations provide a picture of purported fraud that is far more organized than previously thought.
The new charges could prove to be detrimental to Medical Capital’s top executives, Sidney Field and Joseph Lampariello. The SEC is hoping that the court will order Field and Lampariello to disgorge profits made from the scheme.
For more information of Medical Capital, please click on the link in the list of topics to the right.
Thursday, November 12, 2009
South Florida Attorney at Center of Fraud Scheme
Scott Rothstein, partner of South Florida law firm Rothstein Rosenfeldt Adler, has found himself at the center of an FBI investigation. The Bureau is alleging that Rothstein may be the linchpin of an investment scam that could top $1 billion. Rothstein, who is out of town at an undisclosed location, is not yet being charged with a crime.
FBI Special Agent in Charge, John Gillies, notes that this investigation is ongoing, adding that, “We’re far from over.” The government is asking for investors who have invested with Rothstein to come forward. Their hope is that they will be able to create a concrete and complete list of victims, thereby strengthening the case against Rothstein. The largest victims will be contacted first, with those who lost smaller amounts to follow.
The actual scheme involves Rothstein gleaning hundreds of millions of dollars from investors who purchased legal settlements from him since 2005. Some of these purchased legal settlements, however, may never have existed. In a move to pay off unrelenting investors in his alleged scheme, it appears that Rothstein may have even resorted to taking advantage of family friend and auto magnate, Ed Morse.
Those with information pertaining to this investigation may call: 800-CALLFBI (225-5324) or email: Rothstein.investment@ic.fbi.gov.
FBI Special Agent in Charge, John Gillies, notes that this investigation is ongoing, adding that, “We’re far from over.” The government is asking for investors who have invested with Rothstein to come forward. Their hope is that they will be able to create a concrete and complete list of victims, thereby strengthening the case against Rothstein. The largest victims will be contacted first, with those who lost smaller amounts to follow.
The actual scheme involves Rothstein gleaning hundreds of millions of dollars from investors who purchased legal settlements from him since 2005. Some of these purchased legal settlements, however, may never have existed. In a move to pay off unrelenting investors in his alleged scheme, it appears that Rothstein may have even resorted to taking advantage of family friend and auto magnate, Ed Morse.
Those with information pertaining to this investigation may call: 800-CALLFBI (225-5324) or email: Rothstein.investment@ic.fbi.gov.
Wednesday, November 11, 2009
SEC CHARGES EZRA C. LEVY, FORMER CFO OF INVESTMENT ADVISORY FIRM, WITH FRAUD AND SEEKS ORDER FREEZING HIS ASSETS
The Securities and Exchange Commission today announced that it has filed fraud charges against Ezra C. Levy, the former Chief Financial Officer of Boston Provident, L.P. According to the complaint filed in U.S. District Court for the Southern District of New York, Levy executed a fraudulent scheme to benefit himself at the expense of Boston Provident and its clients, by deliberately arranging secret sales of securities from his personal trading account to Boston Provident's accounts at inflated prices. Specifically, on two days in June 2009, Levy secretly entered "sell" orders for securities at above-market prices for his personal account and, at approximately the same time, entered "buy" orders for the same securities, at the same above-market prices, for Boston Provident's accounts. By placing these matched orders, Levy caused sales of securities from his personal account to Boston Provident's accounts at inflated prices. Levy's profit from these fraudulent trades exceeded $537,000. The complaint alleges that Levy violated the antifraud provisions of the federal securities laws, specifically Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. As part of its action, the Commission is seeking an order freezing Levy's assets and other relief.
The SEC acknowledges the assistance and cooperation of the U.S. Attorney's Office for the Southern District of New York.
The SEC acknowledges the assistance and cooperation of the U.S. Attorney's Office for the Southern District of New York.
Tuesday, November 10, 2009
Senate Banking Committee Releases Discussion Draft on Financial Reform Legislation
The Senate Banking Committee has released a discussion draft of proposed financial reform legislation (see Investor Protection Act) titled, “Restoring American Financial Stability Act of 2009.” The discussion draft varies from the version recently approved House Financial Services Committee in one key respect: it is better for investors. The Senate version provides wide-ranging protections for investors that are more inclusive than the House approved version.
The difference is best exemplified in certain key reform areas, perhaps most notably in relation to redefining fiduciary duty. Fiduciary duty is simply the duty one owes a client to always invest with the client’s interests being the main concern. Currently there exists a two-tiered system between independent broker-dealers and registered investment advisers. The hope of many is for this system to become more streamlined, and both version attempt to accomplish this.
The Senate discussion draft proposes a simple solution to this problem. The Senate solution is to eliminate the broker-dealer exclusion from the definition of, “investment adviser.” This would make broker-dealers held to the same standards as investment advisers; a definitive win for investors and a vote towards increasing investor confidence.
The House approved version takes a more hands-off approach. Their version would require the Securities and Exchange Commission (SEC) to draft rules to synchronize the current two-tiered system. The likelihood that such a move would create as stringent a standard as the current fiduciary duty to which investment advisers are held is unlikely.
Either version, House or Senate, may become part of the finalized version of the financial reform legislation. It remains to be seen which will win out, but one thing is for sure, the debate will carry on.
The difference is best exemplified in certain key reform areas, perhaps most notably in relation to redefining fiduciary duty. Fiduciary duty is simply the duty one owes a client to always invest with the client’s interests being the main concern. Currently there exists a two-tiered system between independent broker-dealers and registered investment advisers. The hope of many is for this system to become more streamlined, and both version attempt to accomplish this.
The Senate discussion draft proposes a simple solution to this problem. The Senate solution is to eliminate the broker-dealer exclusion from the definition of, “investment adviser.” This would make broker-dealers held to the same standards as investment advisers; a definitive win for investors and a vote towards increasing investor confidence.
The House approved version takes a more hands-off approach. Their version would require the Securities and Exchange Commission (SEC) to draft rules to synchronize the current two-tiered system. The likelihood that such a move would create as stringent a standard as the current fiduciary duty to which investment advisers are held is unlikely.
Either version, House or Senate, may become part of the finalized version of the financial reform legislation. It remains to be seen which will win out, but one thing is for sure, the debate will carry on.
Monday, November 9, 2009
Medical Capital and Provident Charges make Broker-Dealers Think Twice
The charges of fraud brought against Medical Capital Holdings Inc. and Provident Royalties LLC by the Securities and Exchange Commission (SEC) has helped bring about a shift in the securities industry. Broker-dealers who were once willing to offer Private Placement deals to their clients with abandon are now more willing to scrutinize such deals than before.
This newfound scrutiny has come at a cost to the relationship between the firms that are looking to gain investment dollars and those that sell these investments to clients. There is a renewed sense of urgency for accurate accounting, as well as transparency on the part of the private placement entity. For the Private Placement industry to survive, such measures are necessary. Provident Royalties is one example of what might have been avoided had such measures been consistently practiced.
Provident had at times made outlandish, “dividend,” promises. Some dividend options were stated by Provident to be as high as 15% to 18%. When the reality is that such dividend payments exceed the potential profit of a business model, questions should have been raised, but were not. However, there is hope that now those questions may start to be asked, and if so, investors will benefit.
This newfound scrutiny has come at a cost to the relationship between the firms that are looking to gain investment dollars and those that sell these investments to clients. There is a renewed sense of urgency for accurate accounting, as well as transparency on the part of the private placement entity. For the Private Placement industry to survive, such measures are necessary. Provident Royalties is one example of what might have been avoided had such measures been consistently practiced.
Provident had at times made outlandish, “dividend,” promises. Some dividend options were stated by Provident to be as high as 15% to 18%. When the reality is that such dividend payments exceed the potential profit of a business model, questions should have been raised, but were not. However, there is hope that now those questions may start to be asked, and if so, investors will benefit.
Sunday, November 8, 2009
SEC Charges 13 Additional Individuals and Entities in Galleon Insider Trading Case
On November 5, 2009, the Securities and Exchange Commission (Commission) filed an amended complaint in the United States District Court for the Southern District of New York in its insider trading action against billionaire Raj Rajaratnam and his New York-based hedge fund advisory firm Galleon Management LP. The SEC's amended complaint names thirteen new defendants and alleges insider trading that cumulatively generated more than $33 million in illicit gains. Among those identified today by the SEC were three hedge fund managers, three professional traders at Schottenfeld Group, a New York-based trading firm, and a senior executive at Atheros, a California-based developer of networking technologies.
On October 16, the SEC filed a complaint in federal court in Manhattan alleging, among other things, that Rajaratnam had tapped into his network of friends and close business associates to obtain insider tips and confidential information about corporate earnings or takeover activity at several companies, including Google, Hilton, Intel and Polycom. He then used the non-public information to illegally trade on behalf of Galleon.
Today's amended complaint names some of the sources for the insider tips and confidential information to Rajaratnam and Galleon, and identifies other traders who traded on the basis of the same inside information or other newly identified inside information coming from various sources.
On October 16, the SEC filed a complaint in federal court in Manhattan alleging, among other things, that Rajaratnam had tapped into his network of friends and close business associates to obtain insider tips and confidential information about corporate earnings or takeover activity at several companies, including Google, Hilton, Intel and Polycom. He then used the non-public information to illegally trade on behalf of Galleon.
Today's amended complaint names some of the sources for the insider tips and confidential information to Rajaratnam and Galleon, and identifies other traders who traded on the basis of the same inside information or other newly identified inside information coming from various sources.
Saturday, November 7, 2009
California Broker Barred from Securities Industry for Insider Trading
A former employee of Piper Jaffray & Co., Abhishek Uppal, has been barred from the securities industry for engaging in insider trading. The Financial Industry Regulatory Authority (FINRA) made this decision following actions taken by Uppal in June of this year.
Uppal, a resident of the San Francisco area, purchased shares of SoftBrands days before the company announced it was being acquired by Golden Gate Capital and Infor Global Solutions. The resulting announcement of acquisition resulted in a doubling of SoftBrands stock price. Uppal made his purchase while he was in possession of material, nonpublic information about the pending SoftBrand acquisition. The business day following the announcement of acquisition, Uppal sold all shares of SoftBrands, therefore netting a profit.
To mask his actions from his employer, Uppal used an undisclosed securities account he held at another broker-dealer to conduct his illegal activities.
Abhishnek Uppal has neither affirmed nor denied the charges made against him, but nevertheless, is bound by the terms of FINRA’s decision.
Uppal, a resident of the San Francisco area, purchased shares of SoftBrands days before the company announced it was being acquired by Golden Gate Capital and Infor Global Solutions. The resulting announcement of acquisition resulted in a doubling of SoftBrands stock price. Uppal made his purchase while he was in possession of material, nonpublic information about the pending SoftBrand acquisition. The business day following the announcement of acquisition, Uppal sold all shares of SoftBrands, therefore netting a profit.
To mask his actions from his employer, Uppal used an undisclosed securities account he held at another broker-dealer to conduct his illegal activities.
Abhishnek Uppal has neither affirmed nor denied the charges made against him, but nevertheless, is bound by the terms of FINRA’s decision.
Friday, November 6, 2009
Florida Government Agency Target of SEC Fraud Investigation
The St. Petersburg Times has reported today that a Florida government agency is the subject of a Securities and Exchange Commission (SEC) fraud investigation. The Florida State Board of Administration (FSBA), an agency charged with managing over $100 billion in public investments including that of local governments and one million current and future retirees, is at the center of the inquiry.
The SEC is investigating whether the FSBA, in conjunction with JPMorgan Chase, Credit Suisse, and Lehman Brothers, misled the public with false statements about the liquidity and risk of some FSBA investments. The involvement of a government agency on the receiving end of an SEC inquiry is an unusual occurrence.
Though the investigation has been ongoing for over a year now, the FSBA never made public its involvement in any such SEC inquiry. The only reason it is now being reported is because of a St. Petersburg Times public records request.
The FSBA has been subpoenaed to hand over documents in connection with this ongoing investigation.
The SEC is investigating whether the FSBA, in conjunction with JPMorgan Chase, Credit Suisse, and Lehman Brothers, misled the public with false statements about the liquidity and risk of some FSBA investments. The involvement of a government agency on the receiving end of an SEC inquiry is an unusual occurrence.
Though the investigation has been ongoing for over a year now, the FSBA never made public its involvement in any such SEC inquiry. The only reason it is now being reported is because of a St. Petersburg Times public records request.
The FSBA has been subpoenaed to hand over documents in connection with this ongoing investigation.
Thursday, November 5, 2009
J.P. Morgan Settles Unlawful Payment Scheme in Alamaba Bond Failure
J.P. Morgan Securities Inc. and two of its former managing directors have been charged with committing unlawful actions in connection with the Jefferson County, Alabama bond failure. The charges, which stem from a Securities and Exchange Commission (SEC) investigation, are the second instance of SEC enforcement actions arising out of the Jefferson County’s bond offerings and swap transactions.
The former J.P. Morgan managing directors, Charles LeCroy and Douglas MacFaddin, made more than $8 million in payments to friends of Jefferson County commissioners. After these payments had been made, said County commissioners voted to select J.P. Morgan as managing underwriter of the Jefferson County bond offering. In addition, J.P. Morgan’s affiliated bank was given the contract as swap provider for the transactions.
The situation was exacerbated by J.P. Morgan failing to disclose the payments or the conflicts of interest in any confirmation agreements or offering documents. The cost of the $8 million in payments, however, was passed on to the county in the form of higher interest rates on the swap transactions.
As summed up by Robert Khuzami, Director of the SEC’s Division of Enforcement, “The transactions were complex but the scheme was simple. Senior J.P. Morgan bankers made unlawful payments to win business and earn fees.” The business and earned fees, however, have cost J.P. Morgan quite a substantial sum.
This particular SEC charge was settled with J.P. Morgan with the broker-dealer firm paying a penalty of $25 million. In addition, J.P. Morgan will make a payment of $50 million to Jefferson County and forfeit over $647 million in claims it says the County owes under the swap transactions.
Birmingham Mayor Larry Langford and two others were the target of the prior enforcement action arising out of the SEC investigation. Langford has been found guilty in a parallel case and is currently awaiting sentencing.
For more information on Aidikoff, Uhl, & Bakhtiari’s current investigation regarding this matter, please click here.
The former J.P. Morgan managing directors, Charles LeCroy and Douglas MacFaddin, made more than $8 million in payments to friends of Jefferson County commissioners. After these payments had been made, said County commissioners voted to select J.P. Morgan as managing underwriter of the Jefferson County bond offering. In addition, J.P. Morgan’s affiliated bank was given the contract as swap provider for the transactions.
The situation was exacerbated by J.P. Morgan failing to disclose the payments or the conflicts of interest in any confirmation agreements or offering documents. The cost of the $8 million in payments, however, was passed on to the county in the form of higher interest rates on the swap transactions.
As summed up by Robert Khuzami, Director of the SEC’s Division of Enforcement, “The transactions were complex but the scheme was simple. Senior J.P. Morgan bankers made unlawful payments to win business and earn fees.” The business and earned fees, however, have cost J.P. Morgan quite a substantial sum.
This particular SEC charge was settled with J.P. Morgan with the broker-dealer firm paying a penalty of $25 million. In addition, J.P. Morgan will make a payment of $50 million to Jefferson County and forfeit over $647 million in claims it says the County owes under the swap transactions.
Birmingham Mayor Larry Langford and two others were the target of the prior enforcement action arising out of the SEC investigation. Langford has been found guilty in a parallel case and is currently awaiting sentencing.
For more information on Aidikoff, Uhl, & Bakhtiari’s current investigation regarding this matter, please click here.
Wednesday, November 4, 2009
Kenneth Neely - Ponzi Scheme Operator Pleads Guilty
A former St. Charles County stockbroker has admitted to a Ponzi scheme that cost investors hundreds of thousands of dollars.
The stockbroker, 56-year-old Kenneth Neely of St. Peters, pleaded guilty Wednesday to mail fraud in U.S. District Court in St. Louis. He will be sentenced in January.
Meanwhile, Secretary of State Robin Carnahan announced that her office has issued a cease and desist order shutting down the Ponzi scheme.
Carnahan says Neely directed his clients from two different brokerage firms to invest in a nonexistent real estate investment trust.
Regulators have accused Neely of defrauding at least 25 investors of more than $600,000.
The stockbroker, 56-year-old Kenneth Neely of St. Peters, pleaded guilty Wednesday to mail fraud in U.S. District Court in St. Louis. He will be sentenced in January.
Meanwhile, Secretary of State Robin Carnahan announced that her office has issued a cease and desist order shutting down the Ponzi scheme.
Carnahan says Neely directed his clients from two different brokerage firms to invest in a nonexistent real estate investment trust.
Regulators have accused Neely of defrauding at least 25 investors of more than $600,000.
CIT Group Seen as Lost Cause by Government, Even After Move to Generate Capital
Though taxpayer money has thus far kept embattled financial institution CIT Group, Inc. alive, the government is faced with the reality that it has made a bad investment. The company has finally filed for bankruptcy after unsuccessfully attempting to generate capital from the government, and generating capital from individual investors.
The reality that the government has lost over $2 billion in taxpayer TARP funds though its investment in CIT Group is regrettable. What is increasingly disturbing is the loss that individual investors have taken in this entire debacle. As noted in other articles on this site, CIT had traditionally looked to institutional investors for capital. As their finances become more and more questionable, institutional funds dried up and CIT was forced to look to other venues for much needed capital. That venue was retail investors, and third party broker-dealers are how investors were convinced to invest their funds.
Third party broker-dealers did an exceptional job at convincing individuals, especially those in and reaching retirement, to invest in CIT InterNotes. These notes were marketed as investment grade products, and had a much publicized, “death put,” or “survivor’s option,” feature. This feature, in theory, allows the beneficiary of a recently passed bondholder to sell that bond back to the lender at face value. InCapital, the firm who underwrote CIT InterNotes, even put a feature on its website allowing prospective clients to zoom in on the content of the offering.
The positive characteristics of this investment product were touted to investors by broker-dealers. The possible drawbacks of CIT InterNotes, however, were often left out. This marketing strategy worked and more than $800 million in CIT backed debt was sold to clients.
Even with the capital raised through broker-dealers, CIT was unable to stave off bankruptcy. With this bankruptcy filing, millions in individual investors’ funds are virtually guaranteed as being lost. With such a large loss, many are looking to their brokers and asking, how did this happen?
The reality that the government has lost over $2 billion in taxpayer TARP funds though its investment in CIT Group is regrettable. What is increasingly disturbing is the loss that individual investors have taken in this entire debacle. As noted in other articles on this site, CIT had traditionally looked to institutional investors for capital. As their finances become more and more questionable, institutional funds dried up and CIT was forced to look to other venues for much needed capital. That venue was retail investors, and third party broker-dealers are how investors were convinced to invest their funds.
Third party broker-dealers did an exceptional job at convincing individuals, especially those in and reaching retirement, to invest in CIT InterNotes. These notes were marketed as investment grade products, and had a much publicized, “death put,” or “survivor’s option,” feature. This feature, in theory, allows the beneficiary of a recently passed bondholder to sell that bond back to the lender at face value. InCapital, the firm who underwrote CIT InterNotes, even put a feature on its website allowing prospective clients to zoom in on the content of the offering.
The positive characteristics of this investment product were touted to investors by broker-dealers. The possible drawbacks of CIT InterNotes, however, were often left out. This marketing strategy worked and more than $800 million in CIT backed debt was sold to clients.
Even with the capital raised through broker-dealers, CIT was unable to stave off bankruptcy. With this bankruptcy filing, millions in individual investors’ funds are virtually guaranteed as being lost. With such a large loss, many are looking to their brokers and asking, how did this happen?
Madoff Auditors Consent to Partial Judgment According to Securities and Exchange Commission
The Securities and Exchange Commission today announced that Bernard Madoff's auditors have agreed not to contest the SEC's charges that they enabled Madoff's fraud by falsely stating they audited the convicted fraudster's financial statements in accordance with the relevant accounting and auditing standards.
On November 3, 2009, the SEC submitted to the Honorable Judge Louis L. Stanton, a federal judge in the Southern District of New York, the consents of David G. Friehling and Friehling & Horowitz, CPA'S, P.C. ("F&H") to a proposed partial judgment imposing permanent injunctions against them. Friehling and F&H consented to the partial judgment without admitting or denying the allegations of the SEC's complaint, filed on March 19, 2009. If the partial judgment is entered by the Court, the permanent injunction will restrain Friehling and F&H from violating certain antifraud provisions of the federal securities laws.
The proposed partial judgment would leave the issues of the amount of disgorgement, prejudgment interest and civil penalty to be imposed against Friehling and F&H to be decided at a later time. For purposes of determining Friehling's and F&H's obligations to pay disgorgement, prejudgment interest and/or a civil penalty, the proposed partial judgment precludes Friehling and F&H from arguing that they did not violate the federal securities laws as alleged in the Complaint.
In its complaint, the SEC alleges that Friehling and F&H enabled Madoff's Ponzi scheme by falsely stating, in annual audit reports, that F&H audited Bernard L. Madoff Investment Securities LLC's ("BMIS") financial statements pursuant to Generally Accepted Auditing Standards (GAAS). F&H also made representations that BMIS' financial statements were presented in conformity with Generally Accepted Accounting Principles (GAAP) and that Friehling reviewed internal controls at BMIS. The complaint alleges that all of these statements were materially false because Friehling and F&H did not perform a meaningful audit of BMIS and therefore had no basis to form an opinion about the firm's financial condition or internal controls.
On November 3, 2009, the SEC submitted to the Honorable Judge Louis L. Stanton, a federal judge in the Southern District of New York, the consents of David G. Friehling and Friehling & Horowitz, CPA'S, P.C. ("F&H") to a proposed partial judgment imposing permanent injunctions against them. Friehling and F&H consented to the partial judgment without admitting or denying the allegations of the SEC's complaint, filed on March 19, 2009. If the partial judgment is entered by the Court, the permanent injunction will restrain Friehling and F&H from violating certain antifraud provisions of the federal securities laws.
The proposed partial judgment would leave the issues of the amount of disgorgement, prejudgment interest and civil penalty to be imposed against Friehling and F&H to be decided at a later time. For purposes of determining Friehling's and F&H's obligations to pay disgorgement, prejudgment interest and/or a civil penalty, the proposed partial judgment precludes Friehling and F&H from arguing that they did not violate the federal securities laws as alleged in the Complaint.
In its complaint, the SEC alleges that Friehling and F&H enabled Madoff's Ponzi scheme by falsely stating, in annual audit reports, that F&H audited Bernard L. Madoff Investment Securities LLC's ("BMIS") financial statements pursuant to Generally Accepted Auditing Standards (GAAS). F&H also made representations that BMIS' financial statements were presented in conformity with Generally Accepted Accounting Principles (GAAP) and that Friehling reviewed internal controls at BMIS. The complaint alleges that all of these statements were materially false because Friehling and F&H did not perform a meaningful audit of BMIS and therefore had no basis to form an opinion about the firm's financial condition or internal controls.
Tuesday, November 3, 2009
Inland Western and Inland American REIT In Trouble
With $1.4 billion of debt maturing in the second half of 2009, observers expected Inland Western Retail Real Estate Trust to cut its dividend to conserve cash to help refinance this debt. This nonlisted REIT had been paying an annualized dividend of $0.64 per share which translates to a 6.4% yield based on the price ($10) at which the company sold shares in its public offerings. Sure enough, the REIT has reported in an S.E.C. filing that it will be cutting its annualized dividend rate by 70% to only about $0.19 per year. This is a much larger reduction than some analysts had anticipated and is sure to alarm these shareholders who will be made aware of this change in mid-April. The extent of this pay-out cut was apparently required to amend the REIT’s credit agreement which permits it to pay out only the minimum amount required to maintain its REIT status. Another amendment to the credit agreement prohibits the REIT from redeeming any shares until March 31, 2010.
The REIT had already suspended share redemptions “indefinitely” in October 2008 upon reaching the 5% buyback limit. At this point, the only place these shareholders can sell these shares is the secondary market. But shares prices for Inland Western have plummeted in recent months, and the price will only go lower with the dividend being slashed.
An Inland Western related company, Inland American has left investors with little recourse. Inland American has become less than liquid with secondary price quotes much lower than the $10 per share the company was offering through a buyback program.
The REIT had already suspended share redemptions “indefinitely” in October 2008 upon reaching the 5% buyback limit. At this point, the only place these shareholders can sell these shares is the secondary market. But shares prices for Inland Western have plummeted in recent months, and the price will only go lower with the dividend being slashed.
An Inland Western related company, Inland American has left investors with little recourse. Inland American has become less than liquid with secondary price quotes much lower than the $10 per share the company was offering through a buyback program.
Monday, November 2, 2009
McGinn, Smith & Co., Inc. Income Notes
We are investigating the issuance and sale of certain income notes by McGinn, Smith & Co., Inc., including:
McGinn, Smith & Co., Inc.
Capital Center, 99 Pine St., 5th Fl., Albany, NY 12207
Security(ies) — 6.0% secured senior notes due 2006
Issuer of security(ies) — First Advisory Income Notes, LLC
Address of issuer — Same as above
State or country in which organized — New York
McGinn, Smith & Co., Inc.
Capital Center, 99 Pine St., 5th Fl., Albany, NY 12207
Security(ies) — 7.75% secured senior subordinated notes due 2008
Issuer of security(ies) — First Advisory Income Notes, LLC
Address of issuer — Same as above
State or country in which organized — New York
McGinn, Smith & Co., Inc.
Capital Center, 99 Pine St., 5th Fl., Albany, NY 12207
Security(ies) — 10.25% secured junior notes due 2010
Issuer of security(ies) — First Advisory Income Notes, LLC
Address of issuer — Same as above
State or country in which organized — New York
McGinn, Smith & Co., Inc.
Capital Center, 99 Pine St., 5th Fl., Albany, NY 12207
Security(ies) — One unit consisting of secured senior and unsecured
junior notes
Issuer of security(ies) — First Independent Income Notes, LLC
Address of issuer — Same as above
State or country in which organized — New York
McGinn, Smith & Co., Inc.
Capital Center, 99 Pine St., 5th Fl., Albany, NY 12207
Security(ies) — 6.0% secured senior notes due 2006
Issuer of security(ies) — First Advisory Income Notes, LLC
Address of issuer — Same as above
State or country in which organized — New York
McGinn, Smith & Co., Inc.
Capital Center, 99 Pine St., 5th Fl., Albany, NY 12207
Security(ies) — 7.75% secured senior subordinated notes due 2008
Issuer of security(ies) — First Advisory Income Notes, LLC
Address of issuer — Same as above
State or country in which organized — New York
McGinn, Smith & Co., Inc.
Capital Center, 99 Pine St., 5th Fl., Albany, NY 12207
Security(ies) — 10.25% secured junior notes due 2010
Issuer of security(ies) — First Advisory Income Notes, LLC
Address of issuer — Same as above
State or country in which organized — New York
McGinn, Smith & Co., Inc.
Capital Center, 99 Pine St., 5th Fl., Albany, NY 12207
Security(ies) — One unit consisting of secured senior and unsecured
junior notes
Issuer of security(ies) — First Independent Income Notes, LLC
Address of issuer — Same as above
State or country in which organized — New York
Insider Trading Exposed in San Francisco
Yet another insider trading scheme has purportedly been uncovered by the Securities and Exchange Commission (SEC), this time in San Francisco, California. In a civil suit filed by the SEC on Friday, a former CFO and six others were charged with using nonpublic information to obtain over $8 million in illegal trading profits.
Chen Tang, the former CFO of an unnamed private equity fund, allegedly used confidential and private information available to him in his professional capacity in order to help generate the illegal trading profits. This was in addition to information gathered from his brother-in-law, Ronald Yee, who was employed at ValueAct Capital, a hedge fund. With the information from Yee and Tang, the seven now charged were able to generate the total aforementioned profit.
The SEC named as defendants three traders it says were acquaintances of Tang: Joseph Seto, Ming Siu and Zisen Yu. It also names his brother, James Tang, and Yee's brother, Eddie Yu.
Chen Tang, the former CFO of an unnamed private equity fund, allegedly used confidential and private information available to him in his professional capacity in order to help generate the illegal trading profits. This was in addition to information gathered from his brother-in-law, Ronald Yee, who was employed at ValueAct Capital, a hedge fund. With the information from Yee and Tang, the seven now charged were able to generate the total aforementioned profit.
The SEC named as defendants three traders it says were acquaintances of Tang: Joseph Seto, Ming Siu and Zisen Yu. It also names his brother, James Tang, and Yee's brother, Eddie Yu.
CIT Bankruptcy Filing
Lender CIT Group has filed for Chapter 11 bankruptcy protection, in an effort to restructure its debt while trying to keep loans flowing to the thousands of mid-sized and small businesses.
CIT's move will wipe out current holders of its common and preferred stock, likely meaning the U.S. government and taxpayers will lose the $2.3 billion sunk into CIT last year to prop up the ailing company. Goldman Sachs however, will gain $1 billion because of CIT's bankruptcy, according to a report published Oct. 4 by theFinancial Times.
The $2.3 billion lost in taxpayer funds is the largest amount lost since the government began infusing banks with capital, according to the Financial Times.
CIT made the filing in New York bankruptcy court Sunday, after a debt-exchange offer to bondholders failed. CIT said in a statement that its bondholders have overwhelmingly approved a prepackaged reorganization plan which will reduce total debt by $10 billion while allowing the company to continue to do business.
The Chapter 11 filing is one of the biggest in U.S. corporate history. CIT's bankruptcy filing shows $71 billion in finance and leasing assets against total debt of $64.9 billion. Its collapse is the latest in a string of huge cases driven by the financial crisis over the past two years, as bailed out industry heavyweights like General Motors and Chrysler both entered bankruptcy court.
CIT has been trying to fend off disaster for several months and narrowly avoided collapse in July. It has struggled to find funding as sources it previously relied on, such as short-term debt, evaporated during the credit crisis.
It received $4.5 billion in credit from its own lenders and bondholders last week, reportedly made a deal with Goldman Sachs to lower debt payments, and negotiated a $1 billion line of credit from billionaire investor and bondholder Carl Icahn. But the company failed to convince bondholders to support a debt-exchange offer, a step that would have trimmed at least $5.7 billion from its debt burden and given CIT more time to pay off what it owes.
CIT's move will wipe out current holders of its common and preferred stock, likely meaning the U.S. government and taxpayers will lose the $2.3 billion sunk into CIT last year to prop up the ailing company. Goldman Sachs however, will gain $1 billion because of CIT's bankruptcy, according to a report published Oct. 4 by theFinancial Times.
The $2.3 billion lost in taxpayer funds is the largest amount lost since the government began infusing banks with capital, according to the Financial Times.
CIT made the filing in New York bankruptcy court Sunday, after a debt-exchange offer to bondholders failed. CIT said in a statement that its bondholders have overwhelmingly approved a prepackaged reorganization plan which will reduce total debt by $10 billion while allowing the company to continue to do business.
The Chapter 11 filing is one of the biggest in U.S. corporate history. CIT's bankruptcy filing shows $71 billion in finance and leasing assets against total debt of $64.9 billion. Its collapse is the latest in a string of huge cases driven by the financial crisis over the past two years, as bailed out industry heavyweights like General Motors and Chrysler both entered bankruptcy court.
CIT has been trying to fend off disaster for several months and narrowly avoided collapse in July. It has struggled to find funding as sources it previously relied on, such as short-term debt, evaporated during the credit crisis.
It received $4.5 billion in credit from its own lenders and bondholders last week, reportedly made a deal with Goldman Sachs to lower debt payments, and negotiated a $1 billion line of credit from billionaire investor and bondholder Carl Icahn. But the company failed to convince bondholders to support a debt-exchange offer, a step that would have trimmed at least $5.7 billion from its debt burden and given CIT more time to pay off what it owes.
Sunday, November 1, 2009
DBSI Losses Part of Elaborate Scheme
DBSI which went bankrupt last fall, was "doomed to fail," said Joshua R. Hochberg, an examiner appointed by a bankruptcy court to examine DBSI's business affairs.
But the company's troubles did not stop founder and president Douglas Swenson and other officers, directors, owners and top employees from giving "significant amounts of money to themselves," according to the report.
Since 2000, the company paid out $75.1 million in what the examiner called "excessive insider distributions" to 14 people, with more than half of it - $38.6 million - going to Swenson. The payments included salaries, bonuses and redemption of ownership interests.
DBSI managed commercial property investments for investors around the country. Before filing for bankruptcy in November, the company controlled 244 commercial properties and had more than 8,500 investors. Its holdings include several shopping centers and office buildings in the Treasure Valley.
DBSI collapsed as real estate values fell and lending dried up. Investors sued in October 2008 after DBSI stopped paying them. Idaho securities regulators also filed suit in February. Those lawsuits are pending.
DBSI has denied the state's fraud allegations, but the examiner's report will provide fuel for investors and Idaho regulators in their claims.
But the company's troubles did not stop founder and president Douglas Swenson and other officers, directors, owners and top employees from giving "significant amounts of money to themselves," according to the report.
Since 2000, the company paid out $75.1 million in what the examiner called "excessive insider distributions" to 14 people, with more than half of it - $38.6 million - going to Swenson. The payments included salaries, bonuses and redemption of ownership interests.
DBSI managed commercial property investments for investors around the country. Before filing for bankruptcy in November, the company controlled 244 commercial properties and had more than 8,500 investors. Its holdings include several shopping centers and office buildings in the Treasure Valley.
DBSI collapsed as real estate values fell and lending dried up. Investors sued in October 2008 after DBSI stopped paying them. Idaho securities regulators also filed suit in February. Those lawsuits are pending.
DBSI has denied the state's fraud allegations, but the examiner's report will provide fuel for investors and Idaho regulators in their claims.
Saturday, October 31, 2009
GunnAllen, Frank Bluestein and E-M Management Company
The Securities and Exchange Commission today charged Detroit-area stock broker Frank Bluestein with fraud, alleging that he lured elderly investors into refinancing the mortgages on their homes in order to fund their investments in a $250 million Ponzi scheme.
The SEC alleges that Bluestein acted as the single largest salesperson in the Ponzi scheme operated by Edward May and his company, E-M Management Company LLC (E-M). The SEC previously filed charges against May and E-M in connection with the fraudulent scheme.
The SEC alleges that Bluestein specifically targeted potential investors who were retired or elderly and conducted so-called “investment seminars” in Michigan and California to lure them into investing in E-M securities.
The SEC’s complaint, filed in the U.S. District Court for the Eastern District of Michigan, alleges that Bluestein facilitated May’s fraudulent scheme by raising approximately $74 million from more than 800 investors through the sale of E-M securities over a five-year period. Bluestein, through his company Maximum Financial, conducted numerous investment seminars to find new E-M investors.
According to the SEC’s complaint, Bluestein was very methodical and careful not to discuss the E-M offerings openly during these “seminars” in a way that would alert attendees to the fact that they were actually forums to pitch the E-M offerings. Bluestein first gained the trust of potential investors in attendance by discussing generic financial planning topics and other investment products. But under the guise of informal conversations, Bluestein would generate talks among attendees who already had invested in E-M offerings. For instance, Bluestein would often ask if they had “received their Ed May checks?” or “How do you like those Ed Mays?” in order to drum up discussion of the investments and attract the interest of other potential investors attending the seminars.
The SEC alleges that Bluestein acted as the single largest salesperson in the Ponzi scheme operated by Edward May and his company, E-M Management Company LLC (E-M). The SEC previously filed charges against May and E-M in connection with the fraudulent scheme.
The SEC alleges that Bluestein specifically targeted potential investors who were retired or elderly and conducted so-called “investment seminars” in Michigan and California to lure them into investing in E-M securities.
The SEC’s complaint, filed in the U.S. District Court for the Eastern District of Michigan, alleges that Bluestein facilitated May’s fraudulent scheme by raising approximately $74 million from more than 800 investors through the sale of E-M securities over a five-year period. Bluestein, through his company Maximum Financial, conducted numerous investment seminars to find new E-M investors.
According to the SEC’s complaint, Bluestein was very methodical and careful not to discuss the E-M offerings openly during these “seminars” in a way that would alert attendees to the fact that they were actually forums to pitch the E-M offerings. Bluestein first gained the trust of potential investors in attendance by discussing generic financial planning topics and other investment products. But under the guise of informal conversations, Bluestein would generate talks among attendees who already had invested in E-M offerings. For instance, Bluestein would often ask if they had “received their Ed May checks?” or “How do you like those Ed Mays?” in order to drum up discussion of the investments and attract the interest of other potential investors attending the seminars.
Friday, October 30, 2009
Ameriprise Reaches Settlement in Broker Misconduct Case
Ameriprise Financial has reached a settlement with the Commonwealth of Massachusetts in connection with allegations of deceptive sales practices. The settlement requires the Minnesota-based broker-dealer to pay fines in the amount of $200,000. The government complaint contended that Ameriprise failed to adequately supervise its financial representatives, thus allowing this instance of broker misconduct to take place..
The government alleged that financial representatives were charging fees for financial plans that were never delivered to clients. Further, the financial reps failed to disclose the fees associated with the aforementioned financial plans in the first place.
This instance of misconduct was limited to six Ameriprise representatives, some of whom had had prior customer complaints. At this time, five of those six have either resigned or been terminated, with the sixth remaining on suspension. In addition to paying the fine, Ameriprise must compensate customers who were affected by these deceptive sales practices and develop new procedures that will hopefully prevent this type of situation from arising in the future.
The government alleged that financial representatives were charging fees for financial plans that were never delivered to clients. Further, the financial reps failed to disclose the fees associated with the aforementioned financial plans in the first place.
This instance of misconduct was limited to six Ameriprise representatives, some of whom had had prior customer complaints. At this time, five of those six have either resigned or been terminated, with the sixth remaining on suspension. In addition to paying the fine, Ameriprise must compensate customers who were affected by these deceptive sales practices and develop new procedures that will hopefully prevent this type of situation from arising in the future.
Thursday, October 29, 2009
New Provision in Investors Protection Act to Provide FINRA with Additional Power
In a recently added amendment to the Investor Protection Act (IPA) of 2009, the Securities and Exchange Commission (SEC) would have the power to allow the Financial Industry Regulatory Authority (FINRA) to carry out oversight on investment advisers working at broker-dealer firms.
Though some agree with this move while others oppose, it came as a shock to both sides that the amendment was added so easily to the language of the bill. If the IPA passes in its current iteration, FINRA would in essence have the power to oversee any adviser associated with a registered broker-dealer. That power, if exercised, would include a major percentage of the investment advisory business.
The amendment was submitted by Republican Representative Spencer Bachus, R-Alabama. The entire bill, which also includes a single fiduciary standard for registered investment advisers and independent broker-dealers, is one part of a move by Congress to reform the financial industry. The complete bill is expected to be approved for full House consideration by Wednesday.
Though some agree with this move while others oppose, it came as a shock to both sides that the amendment was added so easily to the language of the bill. If the IPA passes in its current iteration, FINRA would in essence have the power to oversee any adviser associated with a registered broker-dealer. That power, if exercised, would include a major percentage of the investment advisory business.
The amendment was submitted by Republican Representative Spencer Bachus, R-Alabama. The entire bill, which also includes a single fiduciary standard for registered investment advisers and independent broker-dealers, is one part of a move by Congress to reform the financial industry. The complete bill is expected to be approved for full House consideration by Wednesday.
Wednesday, October 28, 2009
SEC Chairman Shapiro on the Future of Investment
Mary Shapiro, Chairman of the U.S. Securities and Exchange Commission (SEC), gave a speech at the Securities Industry and Financial Markets Association (SIFMA) annual meeting yesterday signaling the agency’s priorities in the coming months and years. Key issues raised by Chairman Shapiro include revitalizing enforcement efforts, the need for forthrightness in consumer products, as well as filling gaps in regulation, among others. The message for her audience was clear, reforms are coming, they are going to be game changers, and investors are to be the raison d’etre of each and every change.
Enforcement is a key feature in Chairman Shapiro’s drive to restore investor confidence in the financial sector. The SEC is currently in the process of internal restructuring, the goal of which is to increase the SEC’s capacity to investigate wayward broker-dealers and investment advisors. Rob Khuzami, head of enforcement at the SEC has removed an entire layer of management, thus allowing the redistribution of dozens of attorneys back to the, “front lines.”
In addition to the need for greater enforcement, Chairman Shapiro clearly has her eye on new rules and regulations aimed at helping investors understand the very products in which they are putting their hard-earned capital. All too often, new and innovative financial products are failing to provide simple, clear disclosures of risk to investors. In Chairman Shapiro’s words, “America’s investors and future retirees deserve products that they can understand and evaluate.” Specifically, target date funds and securitized life settlements will be thoroughly scrutinized.
Regulatory gaps are one issue that many advocates for investor’s rights hope Chairman Shapiro will address posthaste. Hedge funds have been largely unregulated in the past, and many have been hit with sharp declines in assets in response to the current economic crisis. Sadly, due to lack of regulation, it has been next to impossible to monitor the risk and potential illicit activity perpetrated by hedge fund managers. Recent headlines, such as the Galleon Group scandal, may have been avoided if sufficient regulations existed.
The SEC also sees a need for a common fiduciary standard for broker-dealers and independent advisors. As Chairman Shapiro points out, “investors don’t make a distinction between the two [brokers and advisors] – and neither should we.” While many have echoed such sentiments, among them Richard Ketchum, Chairman of the Financial Industry Regulatory Authority (FINRA) as well as countless securities attorneys, it remains to be seen if words will beget action. Her words were forceful, however, and being that her audience included many leaders of the very financial firms she hopes to greater regulate, one can hope they take note.
Enforcement is a key feature in Chairman Shapiro’s drive to restore investor confidence in the financial sector. The SEC is currently in the process of internal restructuring, the goal of which is to increase the SEC’s capacity to investigate wayward broker-dealers and investment advisors. Rob Khuzami, head of enforcement at the SEC has removed an entire layer of management, thus allowing the redistribution of dozens of attorneys back to the, “front lines.”
In addition to the need for greater enforcement, Chairman Shapiro clearly has her eye on new rules and regulations aimed at helping investors understand the very products in which they are putting their hard-earned capital. All too often, new and innovative financial products are failing to provide simple, clear disclosures of risk to investors. In Chairman Shapiro’s words, “America’s investors and future retirees deserve products that they can understand and evaluate.” Specifically, target date funds and securitized life settlements will be thoroughly scrutinized.
Regulatory gaps are one issue that many advocates for investor’s rights hope Chairman Shapiro will address posthaste. Hedge funds have been largely unregulated in the past, and many have been hit with sharp declines in assets in response to the current economic crisis. Sadly, due to lack of regulation, it has been next to impossible to monitor the risk and potential illicit activity perpetrated by hedge fund managers. Recent headlines, such as the Galleon Group scandal, may have been avoided if sufficient regulations existed.
The SEC also sees a need for a common fiduciary standard for broker-dealers and independent advisors. As Chairman Shapiro points out, “investors don’t make a distinction between the two [brokers and advisors] – and neither should we.” While many have echoed such sentiments, among them Richard Ketchum, Chairman of the Financial Industry Regulatory Authority (FINRA) as well as countless securities attorneys, it remains to be seen if words will beget action. Her words were forceful, however, and being that her audience included many leaders of the very financial firms she hopes to greater regulate, one can hope they take note.
Tuesday, October 27, 2009
Scottrade Fined for Deficiencies in Anti-Money Laundering Program
Scottrade has been handed a $600,000 fine by the Financial Industry Regulatory Authority (FINRA) for failing to implement an adequate anti-money laundering (AML) program. By failing to implement an effective AML program, Scottrade violated certain sections of the Bank Secrecy Act and FINRA rules.
In this specific case, Scottrade is being fined for three main reasons:
1. There was only a semblance of an AML system employed at Scottrade from 2003-2005 that lacked many characteristics required given Scottrade’s business model. When creating and implementing an effective AML program that is in compliance with all regulatory body regulations, firms must take into account their specific business model.
2. Although a systemic/automated surveillance AML program was implemented after 2005, it was still lacking. Scottrade’s AML system only flagged suspicious money movement in and out of accounts. However, AML systems are required to report any violation that could aim to circumvent laws and/or regulations.
3. Scottrade's AML procedures failed to provide adequate guidance to employees as to how to detect or review transactions for potentially suspicious activity and failed to provide adequate guidance to its AML analysts for detecting and investigating potential suspicious trading.
By imposing fines, regulatory bodies have a punitive means of enforcing applicable rules and regulations designed to increase confidence in markets and make markets safer for investors. As is consistent with industry practice, Scottrade neither affirmed not denied wrongdoing when levied the $600,000 fine from FINRA.
In this specific case, Scottrade is being fined for three main reasons:
1. There was only a semblance of an AML system employed at Scottrade from 2003-2005 that lacked many characteristics required given Scottrade’s business model. When creating and implementing an effective AML program that is in compliance with all regulatory body regulations, firms must take into account their specific business model.
2. Although a systemic/automated surveillance AML program was implemented after 2005, it was still lacking. Scottrade’s AML system only flagged suspicious money movement in and out of accounts. However, AML systems are required to report any violation that could aim to circumvent laws and/or regulations.
3. Scottrade's AML procedures failed to provide adequate guidance to employees as to how to detect or review transactions for potentially suspicious activity and failed to provide adequate guidance to its AML analysts for detecting and investigating potential suspicious trading.
By imposing fines, regulatory bodies have a punitive means of enforcing applicable rules and regulations designed to increase confidence in markets and make markets safer for investors. As is consistent with industry practice, Scottrade neither affirmed not denied wrongdoing when levied the $600,000 fine from FINRA.
Subscribe to:
Posts (Atom)