Recover Preferred Stock Losses in Fannie Mae and Freddie Mac

Clients of financial service firms may be able to recover some, or all, of their investment losses in Fannie Mae and Freddie Mac preferred stocks.

Financial advisors and brokers at firms like Merrill Lynch, Citigroup Smith Barney, Wachovia and AG Edwards pitched preferred stocks in Fannie Mae and Freddie Mac to over 1 million investors nationally as an conservative investment that was appropriate and suitable for elderly clients or clients in or nearing retirement. The preferred shares also paid a regular dividend.

Clients were often told that they either could not lose money, or would not lose investment principal in the Fannie Mae and Freddie Mac preferred stocks. These types of representations were made to investors as an inducement to invest significant sums into these preferred stocks. Would be investors were told by their full service brokers that in the unlikely event Fannie Mae or Freddie Mac defaulted, the U.S. government would step in and make investors whole or otherwise cover their investment losses. This simply wasn’t the case. While bond holders in Fannie Mae and Freddie Mac would be protected, the common share holders and the preferred shareholders would not be offered any protections. To state otherwise is highly misleading and a misrepresentation under most state security laws.

The real, undisclosed risks to Fannie Mae and Freddie Mac preferred stocks holders were not properly discosed to may investors who may have recourse.

SEC Halts Foreign Exchange Offering Fraud by College Professor and Houston-Based Lawyer

The Securities and Exchange Commission has obtained an emergency court order to freeze the assets of Texas A&M finance professor Robert D. Watson, who resigned from that position last month, as well as Houston lawyer and certified public accountant Daniel J. Petroski and two firms. They are charged with defrauding U.S. investors by using forged bank records to make it appear they were earning spectacular returns in foreign exchange trading.

The SEC’s complaint, filed in federal court in Houston, alleges that Watson and Petroski raised more than $19 million from investors and claimed they would earn profits through “Alpha One,” a foreign-currency trading software program purportedly owned by their firm PrivateFX Global One Ltd. They claimed they would employ the services of 36 Holdings Ltd., a so-called “deal clearing company” owned and controlled by Watson. The SEC alleges that Watson and Petroski misrepresented to investors that it had millions of dollars in bank accounts in the U.S. and Switzerland and that their foreign exchange trading business had achieved an annual return of more than 23 percent since its inception and has never had a losing month. The SEC alleges that the defendants’ historical performance claims are not supported by valid financial records.

Massive Ponzi Scheme Halted

The Securities and Exchange Commission has obtained an emergency court order halting a $68 million Ponzi scheme involving the sale of fictitious high-yield certificates of deposit (CDs) by Caribbean-based Millennium Bank.

The SEC alleges that the scheme targeted U.S. investors and misled them into believing they were putting their money in supposedly safe and secure CDs that purportedly offered returns that were up to 321 percent higher than legitimate bank-issued CDs. The SEC's complaint alleges that William J. Wise of Raleigh, N.C., and Kristi M. Hoegel of Napa, Calif., orchestrated the scheme through Millennium Bank, its Geneva, Switzerland-based parent United Trust of Switzerland S.A., and U.S.-based affiliates UT of S, LLC and Millennium Financial Group. In addition to Wise and Kristi Hoegel and these entities, the SEC has charged Jacqueline S. Hoegel (who is the mother of Kristi Hoegel), Brijesh Chopra, and Philippe Angeloni for their roles in the scheme.

According to the SEC's complaint, at least $68 million was raised from more than 375 investors since July 2004. Millennium Bank, a licensed St. Vincent and the Grenadines bank, solicited new investors for its CD program through blatant misrepresentations and glaring omissions in its online solicitations and in advertising campaigns targeting high net-worth individuals. For example, in offering materials, Millennium Bank claimed that its parent, United Trust of Switzerland S.A., provides Millennium Bank with "over 75 years of banking experience, correspondent banking relationships, decades of knowledge in privacy and confidentiality as well as extensive training for our customer services professionals." In fact, the SEC alleges, United Trust of Switzerland S.A. is not a Swiss-licensed bank or securities dealer. Potential investors visiting Millennium Bank's Web site also were falsely informed that Millennium Bank is not affected by the global financial crisis and has a 100 percent client satisfaction record going back close to 10 years, and has its own affiliate asset management company with highly seasoned professionals who invest meticulously.

Freeze Of Wisconsin-Based Investment Adviser Charged in Kickback Scheme

The Securities and Exchange Commission has obtained an emergency court order to freeze the assets of an Appleton, Wisc.-based investment adviser charged with engaging in a kickback scheme and other fraudulent conduct involving six unregistered investment pools it managed.

According to the SEC's complaint, Wealth Management, Putman, and Fevola caused clients to invest in the pools throughout the period of May 2003 through August 2008, and Wealth Management claims to currently have approximately $102 million of its clients' assets invested in these pools. The SEC's complaint alleges that the pools' assets are largely illiquid, the reported values of their assets appear to be substantially overstated, and Wealth Management and Putman have been providing redemptions to investors based on likely overstated valuations.

The SEC's complaint charges each of the defendants with violations of the antifraud provisions of the federal securities laws, and Putman and Fevola with aiding and abetting Wealth Management's violations. In addition to seeking emergency relief, the SEC's complaint seeks permanent injunctions barring future violations of the charged provisions of the federal securities laws, disgorgement of the defendants' ill-gotten gains plus pre-judgment interest, and financial penalties from the defendants.

Monster to Settle SEC Backdating Claim

Monster Worldwide Inc., the world’s largest online- recruiting company, will pay $2.5 million to settle a Securities and Exchange Commission lawsuit for making misleading public statements about stock options it issued.

The suit and settlement were filed yesterday in Manhattan federal court. A federal jury last week found former Monster Chief Operating Officer James Treacy, 51, guilty in a criminal trial of defrauding investors by improperly accounting for backdated stock options at the New York-based company.

Monster reported in 2001 that net income was $69 million when it was really $3.4 million after options expenses were recorded, prosecutors said in the Treacy case. The company said in December 2006 that it overstated earnings by $271.9 million in the previous nine years because of improperly recorded option grants. Prosecutors said the company understated compensation by $339 million.

Monster last year agreed to pay $47.5 million to resolve an investor lawsuit over its options accounting. The agreement represented a recovery of 27.5 percent of potential damages allegedly suffered by investors, a lawyer said at the time.

UBS Sued By Spanish Investor Over Madoff

A Spanish investor asked a court to order UBS AG’s Luxembourg unit to release documents to help show alleged wrongdoing by the bank over losses tied to Bernard Madoff.

UBS’s Luxembourg unit, custodian bank of now defunct Luxembourg Investment Fund, should hand over documents including “an operational memorandum” mentioning UBS, the fund and Bernard L. Madoff Investment Securities LLC, Guy Perrot, lawyer for Spanish investment firm Castalia Ahorro Sicav, told a Luxembourg court yesterday.

The lawsuit is one among dozens of similar cases that investors have filed against the local unit of the Swiss bank since Madoff’s arrest on Dec. 11. Rulings involving UBS in similar cases over documents connected to LuxAlpha Sicav- American Selection have been mixed.

Mozillo Receives Wells Letter -- SEC Charges May Follow

The Securities and Exchange Commission staff is readying civil fraud charges against Countrywide Financial Corp. co-founder Angelo Mozilo, in what would be the highest-profile government legal action against a chief executive connected to the financial crisis.

The SEC staff sent a so-called Wells notice to Mr. Mozilo several weeks ago alerting him to the potential charges, people familiar with the matter said. Mr. Mozilo's lawyers could still persuade the SEC's commissioners that there isn't sufficient evidence to bring a case.

David Siegel, a lawyer for the 70-year-old Mr. Mozilo, declined to comment on the investigation and said there is no "fair basis" for any allegations against the former Countrywide chief executive.

The charges the SEC is considering include alleged violations of insider-trading laws and alleged failure to disclose material information to shareholders, according to people familiar with the matter.

9,000 Madoff Claims and Counting....

A court-appointed trustee unraveling Bernard Madoff's massive fraud signaled Thursday that he may go after the disgraced financier's family to pay victim claims, which have grown to almost 9,000.

Legal action against the family "is a matter that's being looked into," trustee Irving Picard said during a telephone conference call with reporters.

Picard already has filed lawsuits in bankruptcy court in Manhattan to try to force hedge funds and other large investors to return $10.1 billion in fictitious profits paid by Madoff's firm, alleging they should have known about the fraud. As of Wednesday, there were 8,848 customers claiming losses, he said.

"I have a duty to investigate and to go to court to recover from persons and entities who received more than their share," he said. "In actual fact, persons who are subject to these recovery efforts actually received money stolen from others."

Stephen Harbeck, head of Securities Investor Protection Corp. or SIPC, also vowed to get tough with anyone else in on the scheme, including Madoff family members.

"Wrongdoers should pay for their wrongdoing," Harbeck, who's working with Picard, said during the call.

In court filings, Picard has alleged that Madoff's inner circle — his wife, two sons, brother and key employees — wantonly used investor money to fuel a lavish lifestyle. Madoff has claimed the others were in the dark, and their lawyers also have denied that they were complicit.

Madoff, 70, pleaded guilty in March to charges his secretive investment advisory operation was a massive Ponzi scheme — what Picard called "the largest and most complex securities fraud in history."

In his plea, Madoff admitted that he never invested the billions of dollars given to him by thousands of clients. Instead, he used the money from new investors to pay returns to existing clients.

The investors were told in phony statements from last November that their accounts had grown to nearly $65 billion. Picard said Thursday that so far he has only identified about $1 billion in assets that can be used to help cover claims.

Regions Financial May Face Regulators

The U.S. Securities and Exchange Commission may launch a civil proceeding against the Morgan Keegan & Co brokerage unit of Regions Financial Corp over the alleged improper sale of auction-rate securities, Regions said on Monday.

In its quarterly report filed with the SEC, Regions said the regulator filed a "Wells Notice" in March against Morgan Keegan. Such a notice indicates that civil action is possible, and gives the recipient a chance to mount a defense.

Regions said the SEC is investigating the adequacy of Morgan Keegan's disclosures of liquidity risks associated with auction-rate debt, and whether it sold a large volume of the debt after its ability to support the auctions was diminished. It said Morgan Keegan has cooperated with the SEC, and is buying back auction-rate debt it sold to retail customers.

Rates on auction-rate debt reset in periodic auctions. Regulators say brokerages misled investors into believing the debt was safe and the equivalent of cash. After the $330 billion market seized up in February 2008, many investors could not sell the debt or could sell it only at a loss.

The Original Ponzi Scheme

In the summer of 1920, William H. McMasters, one of Boston’s top publicists, was in a pickle. A new client, a dapper and charming Italian immigrant named Charles Ponzi, was raking in millions on promises to pay investors 50 percent interest in 45 days.

As fate would have it, Mr. McMasters decided that Ponzi was indeed a fraud and wrote a newspaper exposé in The Boston Post. The front-page article declaring that Ponzi was insolvent and had used incoming deposits to pay off earlier investors proved instrumental in unmasking him as history’s most infamous swindler — at least until Bernard L. Madoff came along.

Mr. McMasters remained convinced of his service to humanity — “I do not anticipate that another Charles Ponzi will ever appear in the financial world,” he wrote.

Now that bittersweet narrative, so far known only in fragments, has emerged, offering insights into Ponzi’s downfall, the machinations of the press, and one momentous week that rocked the financial world nearly 90 years ago.

Colorado Settles ARS Dispute With Wachovia

Colorado settled with Wachovia Securities, which is changing its name to Wells Fargo Advisors this month, regarding its sale of auction-rate securities, the state’s securities commissioner announced.

St. Louis-based Wachovia, formerly A.G. Edwards & Sons Inc., agreed to buy back $157 million of auction-rate securities from Colorado investors by June 30, Commissioner Fred Joseph said in a news release. The settlement followed an investigation into allegations that Wachovia misled investors by telling them the securities were as safe and accessible as cash.

Investors in some of the $330 billion of auction-rate securities, long-term debt with the interest rate reset weekly or monthly, have been caught with bonds they couldn’t sell since the market collapsed in February 2008. Colorado’s accord is part of a $13 billion multistate agreement first reached in August.

Wells Faro announced May 4 that Wachovia Securities is changing its name to Wells Fargo Advisors. On Dec. 31 Wells Fargo & Co. acquired Wachovia Corp., parent of Wachovia Securities.

FINRA Settles ARS Complaint With Four Firms

The Financial Industry Regulatory Authority (FINRA) announced today that it has entered into final settlements with four additional firms to settle charges relating to the sale of Auction Rate Securities (ARS) that became illiquid when auctions froze in February 2008. To date, FINRA has concluded final settlements with nine firms, imposing a total of $2.6 million in fines and guaranteeing the return of more than $1.2 billion to investors. Investigations continue at a number of additional firms.

The settlements announced today are with NatCity Investments, Inc. of Cleveland, which was fined $300,000; M&T Securities, Inc. of Buffalo, which was fined $200,000; Janney Montgomery Scott LLC of Philadelphia, which was fined $200,000 and M&I Financial Advisors, Inc. of Milwaukee, which was fined $150,000. All four firms agreed to initiate or complete offers to repurchase ARS sold to their customers where the auctions for the ARS had failed.

FINRA also announced that SunTrust Investment Services, Inc. and SunTrust Robinson Humphrey, Inc., both of Atlanta, determined not to finalize previously announced settlements in principle with FINRA. FINRA’s investigation into both firms’ ARS-related activities is continuing.

"Firms have an obligation to use fair and balanced marketing materials when selling any security, including Auction Rate Securities," said Susan L. Merrill, FINRA Executive Vice President and Chief of Enforcement. “This includes full disclosure of liquidity risks, which unfortunately became a reality in the ARS market last year. As with our previous ARS settlements, FINRA’s top priority was to assure investors' access to the millions of dollars they invested in ARS.”

FINRA's investigation found that each firm sold ARS using advertising, marketing materials or other internal communications with its sales force that were not fair and balanced and therefore did not provide a sound basis for investors to evaluate the benefits and risks of purchasing ARS. In particular, the firms failed to adequately disclose to customers the potential for ARS auctions to fail and the consequences of such failures. FINRA's investigation also found evidence that each firm failed to establish and maintain a supervisory system reasonably designed to achieve compliance with the securities laws and FINRA rules with respect to the marketing and sale of ARS.

In the actions announced today, the firms agreed to a comprehensive settlement plan that has been applied in FINRA’s previous ARS settlements. That plan includes several elements, including offers to repurchase at par ARS that were purchased by individual investors and some institutions between May 31, 2006, and Feb. 28, 2008. The firms have also agreed to make whole individual investors who sold ARS below par after Feb. 28, 2008.

In addition to individual retail ARS investors, the buy-back offers include non-profit charitable organizations and religious corporations or entities, trusts, corporate trusts, corporations, pension plans, educational institutions, incorporated non-profit organizations, limited liability companies, limited partnerships, non-public companies, partnerships, personal holding companies and unincorporated associations that made individual ARS purchases and whose account value did not exceed $10 million.

Each firm is required to provide notice to its eligible customers promptly. Repurchases must begin no later than 30 days after the settlement is approved and must be completed no later than 60 days after settlement approval. Beginning no later than six months after settlement approval, each firm has also agreed to make its best efforts to provide liquidity to all other investors who purchased ARS during the same time period but who were not eligible for the initial repurchase.

NY City Bar Event On Securities Arbitration

Titled Securities Arbitration & Mediation Hot Topics 2009: "The" Program For Attorneys, In-House Counsel, Experts, Arbitrators & Mediators, this seminar has been scheduled by the NY City Bar Association to take place on Tuesday, June 9 from 9 a.m. to noon, at 42 West 44th Street, NY City.

Chaired by Roger M. Deitz, a well-respected expert on Dispute Resolution, a premier faculty of experienced practitioners and the North East Regional Director of FINRA Dispute Resolution will examine rule changes, decisions, and events. This program will deliver practical suggestions and tested advice on prosecuting and defending securities arbitrations and mediations. Interactive audience participation is a key feature of this annual event.

New York Appellate Division Refuses to Enforce Portion of Employee Arbitration Agreement

Dividing 3-2, New York's Appellate Division, 1st Department, has refused to enforce as "violative of public policy" an agreed-upon provision requiring parties to an arbitration to split the costs.

The ruling in Brady v. Williams Capital, 114198/06, allows a saleswoman who was fired after six years at an investment bank to take her discrimination claims to arbitration without having to front the cost of compensating the arbitrator.

Lorraine C. Brady, who sold fixed-income securities at Williams Capital Group, filed for arbitration after she was fired in 2005, claiming sex discrimination in violation of state and federal law.

In 2000, Williams Capital required all of its employees, including Brady, to agree to the terms outlined in an employee manual as a condition of continued employment. The terms provided that all disputes between the bank and its workers had to be taken to arbitration and that the two sides must share evenly the fees charged by the arbitrator.

After three months of prehearing discovery, the arbitrator, who had been selected by the American Arbitration Association, submitted a bill for $42,300.

Brady refused to pay her share, contending that enforcement of the fee-splitting provision was void as against public policy because she was financially unable to meet the "prohibitive" cost of the arbitration.

Williams Capital, relying on the fee-splitting provision, refused to shoulder the entire cost with the result that the American Arbitration Association put the arbitration on hold. Five months later it "cancelled" the proceeding.

Brady then filed suit in Manhattan Supreme Court to force Williams Capital to pay all the costs and kickstart the arbitration.

Brady contended she was unable to shoulder her $21,150 share because she had been unemployed since her firing 18 months earlier.

The trial judge, Supreme Court Justice Nicholas Figueroa, dismissed her suit, finding she had the wherewithal to pay her half of the fee. Brady had been paid a total of $609,500 in the two years before her termination.

The appellate panel, looking to applicable federal law, reversed. It found that Brady had established that her finances were "precarious" and that requiring her to pay for the arbitrator "effectively precluded her from vindicating her rights" in the arbitration.

Former Morgan Stanley Broker Pleads Not Guilty

Du Jun pleaded not guilty May 3 to insider trading of shares in Citic Resources Holdings Ltd. in 2007 in Hong Kong, where regulators are cracking down on the offense.

Du, who faces as many as seven years in prison, told Judge Andrew Chan at Hong Kong’s district court through a Chinese translator that he was innocent of nine counts of insider dealing and one count of counseling his wife to deal in Citic shares before it announced a plan to buy oil field assets.

Hong Kong’s Securities and Futures Commission this year secured the Chinese city’s first jail sentences for the offence, with former BNP Paribas Peregrine Capital Ltd. banker Ma Hon- yeung sentenced to 26 months in April. That was followed with the imprisonment of an accountant. The offense was only punishable with fines until 2003.

SEC to Consider Short Selling Rules

The head of the Securities and Exchange Commission said Tuesday she is making the issue of new rules restricting short-selling a priority as the agency heard from an array of interests about ways to limit trades that bet against a stock.

Investors and lawmakers have been clamoring for the SEC to put new brakes on trading moves they say worsened the market's downturn.

Short-selling involves borrowing a company's shares, selling them, then buying them back when the stock falls and returning them to the lender. The short seller pockets the difference.

Investor confidence has been shaken as the market has plunged and new constraints against abusive trading are needed, say proponents of restoring a Depression-era rule that prohibits short sellers from making their trades until a stock ticks at least one penny above its previous trading price.

SEC and Stanford Victims Oppose Standford Request For Money

Stanford Group Co. investors and U.S. regulators are opposing Texas billionaire R. Allen Stanford’s request to unlock $10 million in frozen assets to defend against allegations he ran an $8 billion Ponzi scheme.

The U.S. Securities and Exchange Commission sued Stanford, two associates and three of his companies on Feb. 17, alleging they defrauded investors through the sale of high-yield certificates of deposit by Antigua-based Stanford International Bank. All of Stanford’s personal and corporate assets were frozen by court order, pending the outcome of the case.

Stanford, 59, has denied any wrongdoing and last month filed court papers asking to unfreeze assets so he can hire a legal defense team. He also filed a notice that he will appeal the preliminary injunction freezing his assets and placing his Stanford Financial Group of companies in receivership.

FINRA Arbitration Filings Up 86% Compared to 2008

FINRA Dispute Resolution Statistics

Summary Arbitration Statistics March 2009


New Case Filings through March:

2007......825
2008......922
2009......1,715

2009 Vs 2008......86% increase

SEC Halts Bevrly Hills California Hedge Fund

The Securities and Exchange Commission today obtained a court order halting a fraudulent scheme in Beverly Hills, Calif., in which investors were coaxed into investing in two hedge funds that purportedly held more than $800 million in assets when in fact the funds lost money and have less than $1 million in assets.

The SEC alleges that Bradley L. Ruderman raised at least $38 million from investors through his two hedge funds, Ruderman Capital Partners and Ruderman Capital Partners A. Through fake and misleading account statements, Ruderman assured investors that the hedge funds had earned positive returns as high as 60 percent per year. He falsely claimed that the funds held positions in well-known securities such as Apple, Microsoft Corp., Qualcomm, and Wal-Mart Stores, and he obtained money from at least one investor by claiming that some prominent people were investors in his funds when in fact they were not.

SEC Charges Investment Banker in Insider Trading Case

The Securities and Exchange Commission today charged a former Citigroup investment banker for repeatedly tipping his brother about upcoming merger deals in an insider trading scheme that involved friends and family throughout Northern California and the Midwest and reaped more than $6 million in illicit profits.

The SEC alleges that Maher Kara, a former director in Citigroup Global Markets' investment banking division in New York, repeatedly told his brother Michael Kara of Walnut Creek, Calif., about upcoming deals involving Citigroup's health care industry clients. The SEC further alleges that Michael Kara, in addition to buying stock and options in target companies that were the subject of the Citigroup deals, leaked the information to a network of friends and family who also traded in advance of the deals. The SEC has charged the Kara brothers and six others in the case.