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.
Saturday, October 31, 2009
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.
Monday, October 26, 2009
Investors Who Lost in Schwab Yield Plus Continue to Win in Arbitration
Charles Schwab’s embattled bond funds, Schwab Yield Plus Fund Select Shares (SWYSX) and Schwab Yield Plus Investor Shares (SWYPX) continue to lose money for the San Francisco-based independent broker-dealer. Investors were misled into the idea that these investments were conservative and similar in risk and interest appreciation to money markets. The reality was much different, and investors suffered huge financial losses because of misrepresentations and mismanagement by Charles Schwab.
Though the situation is regrettable, thousands of investors are seeking redress through the Financial Industry Regulatory Authority (FINRA). Through FINRA arbitration, many have been successful in their pursuit against Charles Schwab. Below is a list of recent cases (within the last two months) tried by Aidikoff, Uhl, & Bakhtiari that illustrates this fact.
Eliot – 9/25/2009, Claimant was awarded $80,000 in compensatory damages and an additional $16,000 in expert witness fees. The panel also assessed the entire cost of the arbitration proceeding against Charles Schwab.
Nasatir – 9/25/2009, Claimant was awarded $125,729 in compensatory damages. FINRA also assessed arbitration costs of $3,375 against Charles Schwab.
Chang – 9/11/2009, Claimant was awarded 100% of market adjusted damages of $74,745 and $13,500 for expert witness fees. FINRA also assessed the entire cost of the arbitration proceeding, $3,750, against Charles Schwab.
Though the situation is regrettable, thousands of investors are seeking redress through the Financial Industry Regulatory Authority (FINRA). Through FINRA arbitration, many have been successful in their pursuit against Charles Schwab. Below is a list of recent cases (within the last two months) tried by Aidikoff, Uhl, & Bakhtiari that illustrates this fact.
Eliot – 9/25/2009, Claimant was awarded $80,000 in compensatory damages and an additional $16,000 in expert witness fees. The panel also assessed the entire cost of the arbitration proceeding against Charles Schwab.
Nasatir – 9/25/2009, Claimant was awarded $125,729 in compensatory damages. FINRA also assessed arbitration costs of $3,375 against Charles Schwab.
Chang – 9/11/2009, Claimant was awarded 100% of market adjusted damages of $74,745 and $13,500 for expert witness fees. FINRA also assessed the entire cost of the arbitration proceeding, $3,750, against Charles Schwab.
Thursday, October 22, 2009
UBS Seeks to Thwart Swiss Investors' Arbitration Attempt
UBS Securities filed a lawsuit in the U.S. District Court in Manhattan on Tuesday seeking to thwart an attempted arbitration claim by a group of Swiss investors. The arbitration claim was filed with the Financial Industry Regulatory Authority in relation to alleged losses suffered by the Swiss UBS clients.
The arbitration claim hopes to recover $41 million in damages from UBS in connection with an investment made in a company called HealtheTech Inc. UBS states that the investors in question never had a direct relationship with UBS, as UBS was only advising HealtheTech on its initial public offering.
A hearing date in the arbitration is scheduled for some time in June.
The arbitration claim hopes to recover $41 million in damages from UBS in connection with an investment made in a company called HealtheTech Inc. UBS states that the investors in question never had a direct relationship with UBS, as UBS was only advising HealtheTech on its initial public offering.
A hearing date in the arbitration is scheduled for some time in June.
Wednesday, October 21, 2009
New Website Aims to Further Investor Protection
Tomorrow the Securities and Exchange Commission will be launching a website devoted to educating investors. Interested parties should visit www.investor.gov to investigate the information available. This website will join others, namely that of the Financial Industry Regulatory Authority: http://www.finra.org/Investors.
Such sites aim to educate investors in the hopes that they will be armed with the knowledge to invest in suitable products. Also, with education, investors will be more able to avoid situations in which they are taken advantage. These sites have information and tips for those just beginning to invest as well as for those reaching retirement and beyond.
One useful tool available on FINRA’s website, which is also accessible through the SEC’s new site, is BrokerCheck®. This tool allows you to do an investment specific background check on any registered broker. With this information, you are able to make a more informed decision as to whom you entrust with your money.
For more information on this and other tools and tips, please visit the abovementioned sites.
Such sites aim to educate investors in the hopes that they will be armed with the knowledge to invest in suitable products. Also, with education, investors will be more able to avoid situations in which they are taken advantage. These sites have information and tips for those just beginning to invest as well as for those reaching retirement and beyond.
One useful tool available on FINRA’s website, which is also accessible through the SEC’s new site, is BrokerCheck®. This tool allows you to do an investment specific background check on any registered broker. With this information, you are able to make a more informed decision as to whom you entrust with your money.
For more information on this and other tools and tips, please visit the abovementioned sites.
Tuesday, October 20, 2009
FINRA Fines Morgan Stanley in Pricing Case
The Financial Industry Regulatory Authority has fined Morgan Stanley $90,000 fine in settlement of charges that it traded municipal bonds at unfair rates. This sum is in addition to the $41,000 the firm will pay to investors in restitution.
The unfair rates include markups and markdowns ranging from 5.25% to 24.3%. These unfair rates, which were detrimental to investors, were made on 11 corporate bond trades and three municipal securities trades.
As is typical in settlement agreements, Morgan Stanley neither confirmed nor denied the allegations.
The unfair rates include markups and markdowns ranging from 5.25% to 24.3%. These unfair rates, which were detrimental to investors, were made on 11 corporate bond trades and three municipal securities trades.
As is typical in settlement agreements, Morgan Stanley neither confirmed nor denied the allegations.
Monday, October 19, 2009
SEC Charges Three Men in South Florida with Operating a Ponzi Scheme and Committing Affinity Fraud
Three South Florida men have been charged with operating a Ponzi scheme as well as committing affinity fraud through their two companies: HomePals Investment Club LLC and HomePals LLC.
Ronnie Eugene Bass Jr., Abner Alabre, and Brian J. Taglieri are charged with defrauding investors in the amount of $14.3 million. As with many Ponzi schemes, the terms of this, “investment opportunity,” turned out to be too good to be true. The aforementioned individuals promised investors that their money would be doubled every 90 days. Such stellar returns were purportedly possible due to Bass’ expertise in trading stock options and commodities. Contrary to such assertions, the scheme only invested $1.2 million of the capital made available to them, and even then, operated at a 19% trading loss.
As is typical with Ponzi schemes, HomePals used the majority of investor funds to repay earlier investors. In addition to this regrettable activity, the proprietors of HomePals embezzled over $500,000 of available investment funds.
As was stated above, Bass, Alabre, and Brian are also charged with affinity fraud. This is a particularly damaging activity where an identifiable group is targeted and exploited on the basis of the mutual trust between members of that group. In this case, the alleged criminals preyed on the Haitian American community, both in South Florida and New Jersey.
Taglieri has already agreed to settle the SEC’s charges against him. He has consented to the judgment of the court and consented to returning ill-gotten gains as well as being subject to yet to be determined financial penalties.
Ronnie Eugene Bass Jr., Abner Alabre, and Brian J. Taglieri are charged with defrauding investors in the amount of $14.3 million. As with many Ponzi schemes, the terms of this, “investment opportunity,” turned out to be too good to be true. The aforementioned individuals promised investors that their money would be doubled every 90 days. Such stellar returns were purportedly possible due to Bass’ expertise in trading stock options and commodities. Contrary to such assertions, the scheme only invested $1.2 million of the capital made available to them, and even then, operated at a 19% trading loss.
As is typical with Ponzi schemes, HomePals used the majority of investor funds to repay earlier investors. In addition to this regrettable activity, the proprietors of HomePals embezzled over $500,000 of available investment funds.
As was stated above, Bass, Alabre, and Brian are also charged with affinity fraud. This is a particularly damaging activity where an identifiable group is targeted and exploited on the basis of the mutual trust between members of that group. In this case, the alleged criminals preyed on the Haitian American community, both in South Florida and New Jersey.
Taglieri has already agreed to settle the SEC’s charges against him. He has consented to the judgment of the court and consented to returning ill-gotten gains as well as being subject to yet to be determined financial penalties.
Saturday, October 17, 2009
Raj Rajaratnam and Six Others Charged in Insider Trading Case
Seven hedge fund managers and executives were arrested yesterday in connection with an insider trading case investigated by the Securities and Exchange Commission (SEC), the U.S. Attorney’s Office, and the Federal Bureau of Investigation (FBI). Among those arrested was heavyweight portfolio manager Raj Rajaratnam of the Galleon Group. He and the others are charged with conspiring to use insider information to trade securities in several publicly traded companies, among them Google Inc. Authorities say that because of their actions, these arrested individuals generated upwards of $25 million in illegal profits.
This case is the first where authorities used court-authorized wiretaps to capture conversations in connection to an insider trading case. Officials see this as a game changer in an unapologetically secretive industry.
The SEC’s complaint charges the defendants with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, the laws which, in essence, bar insider trading and similar activities. The others charged in connection with this investigation are as follows:
• Danielle Chiesi of New York, N.Y. — a portfolio manager at New Castle Funds.
• Rajiv Goel of Los Altos, Calif. — a managing director at Intel Capital, an Intel subsidiary.
• Anil Kumar of Saratoga, Calif. — a director at McKinsey & Company.
• Mark Kurland of Mount Kisco, N.Y. — a Senior Managing Director and General Partner at New Castle.
• Robert Moffat of Ridgefield, Conn. — a senior vice president at IBM.
• New Castle Funds LLC — a New York-based hedge fund
This case is the first where authorities used court-authorized wiretaps to capture conversations in connection to an insider trading case. Officials see this as a game changer in an unapologetically secretive industry.
The SEC’s complaint charges the defendants with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, the laws which, in essence, bar insider trading and similar activities. The others charged in connection with this investigation are as follows:
• Danielle Chiesi of New York, N.Y. — a portfolio manager at New Castle Funds.
• Rajiv Goel of Los Altos, Calif. — a managing director at Intel Capital, an Intel subsidiary.
• Anil Kumar of Saratoga, Calif. — a director at McKinsey & Company.
• Mark Kurland of Mount Kisco, N.Y. — a Senior Managing Director and General Partner at New Castle.
• Robert Moffat of Ridgefield, Conn. — a senior vice president at IBM.
• New Castle Funds LLC — a New York-based hedge fund
Friday, October 16, 2009
Medical Capital Attempts to Sell Assets after Fraud Allegation
Medical Capital Holdings, the California health finance company facing allegations of fraud by the Securities and Exchange Commission (SEC) has negotiated a tentative deal to sell its interest in Integrated Healthcare Holdings of Santa Ana, California.
In a monthly report to U.S. Judge David Carter, the court appointed receiver for Medical Capital, Thomas Seaman, stated that Integrated Healthcare's interest is valued at $81.4 million under three separate agreements. Under the deal, all three of them would be sold for $55 million.
Integrated Healthcare has asked for the court's permission to sue Medical Capital for breach of contract when Medical Capital defaulted on a $12.7 million financing commitment to Integrated, putting its four area hospitals at risk. Integrated owns Western Medical Center-Santa Ana, Western Medical Center-Anaheim, Coastal Communities Hospital in Santa Ana, and Orange County's Chapman Medical Center.
A letter of intent to sell Medical Capital's interest in Integrated Healthcare is expected in the next few days.
In a monthly report to U.S. Judge David Carter, the court appointed receiver for Medical Capital, Thomas Seaman, stated that Integrated Healthcare's interest is valued at $81.4 million under three separate agreements. Under the deal, all three of them would be sold for $55 million.
Integrated Healthcare has asked for the court's permission to sue Medical Capital for breach of contract when Medical Capital defaulted on a $12.7 million financing commitment to Integrated, putting its four area hospitals at risk. Integrated owns Western Medical Center-Santa Ana, Western Medical Center-Anaheim, Coastal Communities Hospital in Santa Ana, and Orange County's Chapman Medical Center.
A letter of intent to sell Medical Capital's interest in Integrated Healthcare is expected in the next few days.
Thursday, October 15, 2009
Bankruptcy Threat amid Investor Loss
CIT Group Inc. failure to secure a second government bailout has prompted renewed bankruptcy fears. The New York based lender who traditionally looked to institutional investors for capital is coming under increased scrutiny from retail investors for its offering of corporate notes marketed under the name, “InterNotes.”
Some have wondered what a company that traditionally looked to institutional investors for capital was doing looking to retail investors for capital. The reality is, CIT Group needed capital badly, and the institutional investors that customarily were the source of CIT’s business were wary of the U.S. lender. While under CEO Jeffrey Peek, CIT went from a profitable entity to one that has seen nine quarters of consecutive loss totaling more than $3 billion.
Unfortunately for investors, third party broker-dealers were given the task of selling the CIT-backed debt, InterNotes. Trusting investors, not knowing what many institutional investors had known for quite some time, were sold this debt by their brokers while CIT was already heading for trouble. When the troubles facing CIT became more public, InterNote investors looking to sell were faced, and continue to face, difficulty in find buyers and negative returns when they do.
Though the U.S. lender was able to secure $2.3 billion in TARP funds in the last weeks of President Bush’s administration, it has still failed to emerge from the red. With the recent failure of the company to gain additional taxpayer funds from the government, many are certain that bankruptcy protection is in the foreseeable future. Though small and medium-sized businesses could loss a longtime lender if such an action took place, the damage to InterNote holders has already been done.
Some have wondered what a company that traditionally looked to institutional investors for capital was doing looking to retail investors for capital. The reality is, CIT Group needed capital badly, and the institutional investors that customarily were the source of CIT’s business were wary of the U.S. lender. While under CEO Jeffrey Peek, CIT went from a profitable entity to one that has seen nine quarters of consecutive loss totaling more than $3 billion.
Unfortunately for investors, third party broker-dealers were given the task of selling the CIT-backed debt, InterNotes. Trusting investors, not knowing what many institutional investors had known for quite some time, were sold this debt by their brokers while CIT was already heading for trouble. When the troubles facing CIT became more public, InterNote investors looking to sell were faced, and continue to face, difficulty in find buyers and negative returns when they do.
Though the U.S. lender was able to secure $2.3 billion in TARP funds in the last weeks of President Bush’s administration, it has still failed to emerge from the red. With the recent failure of the company to gain additional taxpayer funds from the government, many are certain that bankruptcy protection is in the foreseeable future. Though small and medium-sized businesses could loss a longtime lender if such an action took place, the damage to InterNote holders has already been done.
Charles Schwab may face SEC Charges Stemming from the Handling of Two Funds
The Securities and Exchange Commission (SEC) has issued a Wells notice to Charles Schwab Corporation of San Francisco, California. A Wells notice is sent by the SEC to notify a company that civil actions may be brought against them. This notice concerns the handling of two mutual funds, Schwab YieldPlus Fund and the Schwab Total Bond Market Fund.
Investors in the two funds charge that they were deceived by Charles Schwab. Indeed, investors lost millions when the funds experienced a near total loss amid the subprime market collapse. In addition to the potential SEC civil charges, Charles Schwab has been hit by a multitude of FINRA arbitration claims as investors attempt to recover losses stemming from the now disreputable funds.
Now that Charles Schwab has received a Wells notice, it has the opportunity to comment, and attempt to dissuade the SEC from proceeding.
Investors in the two funds charge that they were deceived by Charles Schwab. Indeed, investors lost millions when the funds experienced a near total loss amid the subprime market collapse. In addition to the potential SEC civil charges, Charles Schwab has been hit by a multitude of FINRA arbitration claims as investors attempt to recover losses stemming from the now disreputable funds.
Now that Charles Schwab has received a Wells notice, it has the opportunity to comment, and attempt to dissuade the SEC from proceeding.
Wednesday, October 14, 2009
Prosecution begins Opening Statements in Case Against Former Bear Sterns Hedge Fund Managers
Opening statements by the prosecution began today in the trial of one time Bear Stern employees Ralph Cioffi and Matthew Tannin. The former hedge fund managers are the first to be tried in connection with a federal probe into the subprime market collapse.
The men are charged with misleading clients who invested into two separate hedge funds that collapsed. The collapse resulted in losses amounting to somewhere in the area of $1.4 billion. The charges against Cioffi and Tannin include conspiracy, securities fraud, and wire fraud. If convicted, the men face up to 20 years in prison.
Cioffi, the individual who managed the two defunct hedge funds, and Tannin, his chief operating officer, followed an investment policy heavily reliant on the performance of subprime mortgage and related securities. In July 2007, when collateralized debt obligations tanked in response to market conditions, this strategy proved deadly for those invested in these funds.
As investors became anxious, Cioffi and Tannin allegedly lied to investors, stating that they were still putting their personal money into the funds. Cioffi, however, had in actuality withdrawn $2 million of his own money. Prosecutors allege that he did this via the use of nonpublic information, making his actions tantamount to insider trading.
The hedge funds, which filed for bankruptcy in July 2007, were the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund Ltd. and the Bear Stearns High- Grade Structured Credit Strategies Master Fund Ltd.
The men are charged with misleading clients who invested into two separate hedge funds that collapsed. The collapse resulted in losses amounting to somewhere in the area of $1.4 billion. The charges against Cioffi and Tannin include conspiracy, securities fraud, and wire fraud. If convicted, the men face up to 20 years in prison.
Cioffi, the individual who managed the two defunct hedge funds, and Tannin, his chief operating officer, followed an investment policy heavily reliant on the performance of subprime mortgage and related securities. In July 2007, when collateralized debt obligations tanked in response to market conditions, this strategy proved deadly for those invested in these funds.
As investors became anxious, Cioffi and Tannin allegedly lied to investors, stating that they were still putting their personal money into the funds. Cioffi, however, had in actuality withdrawn $2 million of his own money. Prosecutors allege that he did this via the use of nonpublic information, making his actions tantamount to insider trading.
The hedge funds, which filed for bankruptcy in July 2007, were the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund Ltd. and the Bear Stearns High- Grade Structured Credit Strategies Master Fund Ltd.
Tuesday, October 13, 2009
Citigroup Fined by FINRA for Tax Evasion Strategies
The Financial Industry Regulatory Authority (FINRA) has fined Citigroup Global Markets Inc. $600,000 and censured the brokerage firm for tax evasion trading strategies found to be operating among its affiliates. The first scheme involved international clients of Citigroup circumventing US tax laws, allowing them to increase their respective returns. The second scheme was a complex trading strategy that allowed Citigroup to increase its own after tax profits. Citigroup, for its part, failed to supervise its brokers who were involved in these illicit trading strategies.
Further, Citigroup failed to adequately monitor Bloomberg messages and report to an exchange, trades executed under these complex trading strategies. If the firm had in place procedures designed to detect and prevent improper trades between itself and others, this situation may never have developed.
The first trading strategy operated in the following manner:
1. Citigroup’s equity finance desk in New York purchased U.S. equities (stock) from foreign Citigroup clients, acting as custodian of this dividend-earning stock for Citigroup’s London affiliate.
2. The London affiliate would then use the US equity as the underlying equity hedge in a total return swap agreement with the client.
3. The client would be paid a total return under the swap agreement, including any appreciation of the stock as well as the amount equivalent to the dividend.
4. The client would then pay Citigroup’s London affiliate interest as well as any decline in the share price, if applicable.
5. Once these actions had been completed, the swap was terminated and Citigroup’s equity finance desk in New York sold the stock on behalf of the London affiliate.
The legal issue this trading strategy brings about is that when dividends on U.S. equities are paid to foreign investors, these dividends may be subject to withholding taxes. This is subject to the applicable treaty between the U.S. and the foreign investor's home country. The, “dividend equivalent,” (# 3) however, allowed Citigroup bypass any U.S. withholding taxes, regardless of applicable treaties.
Approximately two years after this trading strategy was implemented, Citigroup finally produced written procedures to govern it. However, trading staff committed actions in violation of these procedures. In addition to the aforementioned strategy, Citigroup was doubly fined for conducting a second strategy aimed at enhancing Citigroup’s own after-tax yield on Italian stocks.
The Italian trading strategy operated as follows:
1. Citigroup’s London affiliate corresponded with the New York equity finance desk as to which Italian companies were likely to pay out dividends in the near future.
2. The New York desk then loaned stock in those Italian companies, and then turned around and loaned that stock to their Swiss affiliate.
3. The Swiss affiliate would then sell that stock back to New York.
4. The New York desk would then sell this stock to a third-party inter-dealer broker, who would then sell the stock to the London affiliate.
5. The London affiliate would then enter into a swap agreement with the Swiss affiliate, with one taking a long position and the other taking the short position, in essence covering the risk on the stock.
6. The dividend would then be paid out, and the trades would be reversed.
By having the London affiliate hold the Italian stocks and therefore collect the dividend (in conjunction with the Swiss swap agreement), Citigroup was able to take advantage of favorable tax treaties between the United Kingdom and the Republic of Italy.
The legal issue raised is that Citigroup failed to prevent improper relationships from developing between its affiliated units. In addition to this, Citigroup failed to establish policies and procedures in order to regulate this type of trading strategy.
Both of these trading strategies involving the New York office, in addition to their respective legal pitfalls, at times involved trades that were not reported to an exchange, a requirement under securities regulations.
In its imposition of fines, FINRA took into consideration the fact that Citigroup discovered and then reported the abovementioned violations. Also, the firm sought outside counsel to review the devious trading strategies, as well as to assist in reconciliatory efforts. Citigroup neither admitted nor denied the validity of the charges brought against them in this matter.
Further, Citigroup failed to adequately monitor Bloomberg messages and report to an exchange, trades executed under these complex trading strategies. If the firm had in place procedures designed to detect and prevent improper trades between itself and others, this situation may never have developed.
The first trading strategy operated in the following manner:
1. Citigroup’s equity finance desk in New York purchased U.S. equities (stock) from foreign Citigroup clients, acting as custodian of this dividend-earning stock for Citigroup’s London affiliate.
2. The London affiliate would then use the US equity as the underlying equity hedge in a total return swap agreement with the client.
3. The client would be paid a total return under the swap agreement, including any appreciation of the stock as well as the amount equivalent to the dividend.
4. The client would then pay Citigroup’s London affiliate interest as well as any decline in the share price, if applicable.
5. Once these actions had been completed, the swap was terminated and Citigroup’s equity finance desk in New York sold the stock on behalf of the London affiliate.
The legal issue this trading strategy brings about is that when dividends on U.S. equities are paid to foreign investors, these dividends may be subject to withholding taxes. This is subject to the applicable treaty between the U.S. and the foreign investor's home country. The, “dividend equivalent,” (# 3) however, allowed Citigroup bypass any U.S. withholding taxes, regardless of applicable treaties.
Approximately two years after this trading strategy was implemented, Citigroup finally produced written procedures to govern it. However, trading staff committed actions in violation of these procedures. In addition to the aforementioned strategy, Citigroup was doubly fined for conducting a second strategy aimed at enhancing Citigroup’s own after-tax yield on Italian stocks.
The Italian trading strategy operated as follows:
1. Citigroup’s London affiliate corresponded with the New York equity finance desk as to which Italian companies were likely to pay out dividends in the near future.
2. The New York desk then loaned stock in those Italian companies, and then turned around and loaned that stock to their Swiss affiliate.
3. The Swiss affiliate would then sell that stock back to New York.
4. The New York desk would then sell this stock to a third-party inter-dealer broker, who would then sell the stock to the London affiliate.
5. The London affiliate would then enter into a swap agreement with the Swiss affiliate, with one taking a long position and the other taking the short position, in essence covering the risk on the stock.
6. The dividend would then be paid out, and the trades would be reversed.
By having the London affiliate hold the Italian stocks and therefore collect the dividend (in conjunction with the Swiss swap agreement), Citigroup was able to take advantage of favorable tax treaties between the United Kingdom and the Republic of Italy.
The legal issue raised is that Citigroup failed to prevent improper relationships from developing between its affiliated units. In addition to this, Citigroup failed to establish policies and procedures in order to regulate this type of trading strategy.
Both of these trading strategies involving the New York office, in addition to their respective legal pitfalls, at times involved trades that were not reported to an exchange, a requirement under securities regulations.
In its imposition of fines, FINRA took into consideration the fact that Citigroup discovered and then reported the abovementioned violations. Also, the firm sought outside counsel to review the devious trading strategies, as well as to assist in reconciliatory efforts. Citigroup neither admitted nor denied the validity of the charges brought against them in this matter.
Monday, October 12, 2009
IMH Secured Loan Fund, LLC
Private commercial real estate lender IMH Corp. has laid off nearly one-third of its work force since Oct. 13, 2008 and suspended the payout of redemption requests from some investors.
The Scottsdale-based company, which specializes in equity fractions of larger real estate construction and acquisition loans made by other institutional lenders, will make no more loans this year from its only fund, IMH Secured Loan Fund LLC.
The Scottsdale-based company, which specializes in equity fractions of larger real estate construction and acquisition loans made by other institutional lenders, will make no more loans this year from its only fund, IMH Secured Loan Fund LLC.
New Suit Alleges Securities America Sold Notes it Knew to be Questionable
In a recently filed lawsuit, Securities America Inc. is charged with continuing to sell offerings of a faulty private placement after an executive at the firm sounded the alarm bell concerning the problem investment last year.
In addition to this allegation, the lawsuit further charges that Securities America sold millions of dollars’ worth of notes of Medical Capital Holdings, Inc. In July, the SEC charged Medical Capital with fraud in the sale of $77 million of private securities in the form of notes. Since that time, a court-appointed receiver has questioned the value of the company's assets, throwing into question the structure of the six deals it sold from 2003 to 2008.
W. Thomas Cross, an executive at Securities America, wrote to a Medical Capital official that he feared a run on the bank because of issues at Medical Capital. Allegedly, this written comment was made months before Securities America ceased selling the now infamous private placement.
An official with Securities America said the claim that the company continued selling Medical Capital notes after Mr. Cross' raised concerns is preposterous.
In total, Medical Capital raised $2.2 billion from investors. Given the legal circumstances surrounding Medical Capital Holdings Inc, this is undoubtedly only the beginning salvo of lawsuits brought about by defrauded investors.
In addition to this allegation, the lawsuit further charges that Securities America sold millions of dollars’ worth of notes of Medical Capital Holdings, Inc. In July, the SEC charged Medical Capital with fraud in the sale of $77 million of private securities in the form of notes. Since that time, a court-appointed receiver has questioned the value of the company's assets, throwing into question the structure of the six deals it sold from 2003 to 2008.
W. Thomas Cross, an executive at Securities America, wrote to a Medical Capital official that he feared a run on the bank because of issues at Medical Capital. Allegedly, this written comment was made months before Securities America ceased selling the now infamous private placement.
An official with Securities America said the claim that the company continued selling Medical Capital notes after Mr. Cross' raised concerns is preposterous.
In total, Medical Capital raised $2.2 billion from investors. Given the legal circumstances surrounding Medical Capital Holdings Inc, this is undoubtedly only the beginning salvo of lawsuits brought about by defrauded investors.
Friday, October 9, 2009
California Man Sentenced to 100 Years for Operating Ponzi Scheme
Richard Monroe Harkless of Riverside, Calif., has been sentenced to 100 years in prison for operating a Ponzi scheme that fleeced investors of nearly $40 million. The 65-year-old man is on the receiving end of what is believed to be the longest sentence ever handed down for a financial crime in Southern California.
From 2000 to 2003, he collected more than $60 million from hundreds of investors, causing an eventual loss of roughly $40 million through a Ponzi scheme. His operation was fronted through an investment company known as MX Factors LLC.
Judge Phillips, who handed down the sentence, stated that because of his actions, Harkless had caused every kind of loss and grief imaginable. Further, he felt that if given the opportunity, Harkless would undoubtedly commit his crimes all over again.
Mr. Harkless was convicted in July of three counts of mail fraud, three counts of wire fraud and one count of money laundering. Instead of investing in a manner consistent with his stated objectives, Harkless used investor money to finance a Mexican crab-fishing business, pay personal expenses and fund overseas bank accounts.
From 2000 to 2003, he collected more than $60 million from hundreds of investors, causing an eventual loss of roughly $40 million through a Ponzi scheme. His operation was fronted through an investment company known as MX Factors LLC.
Judge Phillips, who handed down the sentence, stated that because of his actions, Harkless had caused every kind of loss and grief imaginable. Further, he felt that if given the opportunity, Harkless would undoubtedly commit his crimes all over again.
Mr. Harkless was convicted in July of three counts of mail fraud, three counts of wire fraud and one count of money laundering. Instead of investing in a manner consistent with his stated objectives, Harkless used investor money to finance a Mexican crab-fishing business, pay personal expenses and fund overseas bank accounts.
Tuesday, October 6, 2009
FINRA Supports Mandatory Arbitration Clause Removal
Richard Ketchum, Chairman and Chief Executive of FINRA, testified before the House Financial Services Committee today in support of allowing the SEC to ban mandatory arbitration clauses in securities contracts. It is common practice for broker dealers to stipulate a mandatory dispute resolution forum in the event of a broker/client dispute. Such clauses, normally found within new brokerage account applications, have become a contentious subject as Congress and the SEC move to reform the securities industry in the wake of the subprime meltdown.
FINRA, who counts among its member many in the securities industry, does not object to a proposal spearheaded by the Obama administration and undertaken by House Capital Markets Subcommittee Chairman Paul Kanjorski, D-Pa., that would give the SEC the authority to prohibit or limit mandatory arbitration clauses.
As expected, the securities industry has seen the move to ban such clauses as a negative development, bad for both broker and client. For those that hold such a view, these arbitration clauses are touted as ensuring fairness and cost effectiveness for all involved.
The move by FINRA to support allowing the SEC this new power greatly weakens the position of the securities industry. Indeed, the proposal is far more likely to be enacted by Congress with Ketchum’s support, where some want an outright ban on all mandatory arbitration clauses.
FINRA, who counts among its member many in the securities industry, does not object to a proposal spearheaded by the Obama administration and undertaken by House Capital Markets Subcommittee Chairman Paul Kanjorski, D-Pa., that would give the SEC the authority to prohibit or limit mandatory arbitration clauses.
As expected, the securities industry has seen the move to ban such clauses as a negative development, bad for both broker and client. For those that hold such a view, these arbitration clauses are touted as ensuring fairness and cost effectiveness for all involved.
The move by FINRA to support allowing the SEC this new power greatly weakens the position of the securities industry. Indeed, the proposal is far more likely to be enacted by Congress with Ketchum’s support, where some want an outright ban on all mandatory arbitration clauses.
Monday, October 5, 2009
FINRA Announces Pilot Program Extension
FINRA announced today that its pilot program will be expanded to 14 broker dealers and 411 cases, this being an expansion from 11 broker dealers and 276 cases. The pilot program is an experiment relating to the composition of the arbitration panel used in FINRA cases. In cases that require three arbitrators, the arbitration panel is typically composed of two public arbitrators (those that have no connection to the securities industry) and one industry arbitrator (an individual with employment history within the securities industry). However, in pilot program cases all three of the arbitrators are public arbitrators.
The pilot program began on Oct. 6, 2008, with investors having the choice of whether they wished to participate in the program or not. FINRA hopes that by increasing the amount of broker dealer firms and cases involved, a better analysis of using three public arbitrators will result at the completion of the pilot program.
The new firms joining the pilot program include Chase Investment Services Corp., Oppenheimer & Co., and Raymond James Financial Services Inc/Raymond James & Associates Inc.
The pilot program began on Oct. 6, 2008, with investors having the choice of whether they wished to participate in the program or not. FINRA hopes that by increasing the amount of broker dealer firms and cases involved, a better analysis of using three public arbitrators will result at the completion of the pilot program.
The new firms joining the pilot program include Chase Investment Services Corp., Oppenheimer & Co., and Raymond James Financial Services Inc/Raymond James & Associates Inc.
Charles Schwab Found Liable In YieldPlus FINRA Arbitration
A Los Angeles based Financial Industry Regulatory Authority (FINRA) arbitration panel awarded damages to the Chang family who invested in the Charles Schwab YieldPlus fund. The panel awarded the Chang claimants 100 percent of their losses plus what they would have earned had their money been properly invested. The panel also awarded expert witness costs and assessed the entire cost of the arbitration proceeding against Charles Schwab (Nasdaq:SCHW).
"Although Charles Schwab recommended the purchase of the Schwab YieldPlus Fund Select Shares (Nasdaq:SWYSX) and the Schwab YieldPlus Investor Shares (Nasdaq:SWYPX) (the "YieldPlus Funds") as safe conservative cash alternatives to investors, the evidence established that the YieldPlus funds were over concentrated in mortgage backed securities," said attorney Ryan K. Bakhtiari.
The portfolio manager of the YieldPlus fund sold 2.9 million shares of the YieldPlus fund between January 31, 2008, and April 1, 2008, on behalf of certain Schwab Target retirement mutual funds that held YieldPlus. At the same time, Charles Schwab encouraged investors to hold YieldPlus and expressed confidence in the fund.
"We are continuing to pursue FINRA arbitrations claims on behalf of investors who suffered losses in the YieldPlus Funds," added attorney Philip M. Aidikoff. "Investors should be aware of the pending class action and of their right to pursue individual claims outside of the class action. Investors need to be aware of the consequences of pursuing a specific remedy and course of action."
"Although Charles Schwab recommended the purchase of the Schwab YieldPlus Fund Select Shares (Nasdaq:SWYSX) and the Schwab YieldPlus Investor Shares (Nasdaq:SWYPX) (the "YieldPlus Funds") as safe conservative cash alternatives to investors, the evidence established that the YieldPlus funds were over concentrated in mortgage backed securities," said attorney Ryan K. Bakhtiari.
The portfolio manager of the YieldPlus fund sold 2.9 million shares of the YieldPlus fund between January 31, 2008, and April 1, 2008, on behalf of certain Schwab Target retirement mutual funds that held YieldPlus. At the same time, Charles Schwab encouraged investors to hold YieldPlus and expressed confidence in the fund.
"We are continuing to pursue FINRA arbitrations claims on behalf of investors who suffered losses in the YieldPlus Funds," added attorney Philip M. Aidikoff. "Investors should be aware of the pending class action and of their right to pursue individual claims outside of the class action. Investors need to be aware of the consequences of pursuing a specific remedy and course of action."
Sunday, October 4, 2009
Judge Approves Sunwest Distribution Plan
U.S. District Court Judge Michael Hogan has approved the Distribution Plan jointly filed last month by the federal equity receiver and the chief restructuring officer (CRO) overseeing the reorganization of Sunwest Management (Sunwest,) an Oregon-based senior living provider. Judge Hogan’s decision enables Sunwest to proceed with plans to reorganize by equitably consolidating the claims and distributions related to ownership of hundreds of properties under an umbrella structure. Restructuring will capitalize on economies of scale, favorable financing terms and greater business flexibility.
“This plan resolves the separate ownership issues and maximizes the asset values by allowing them to be managed, transferred or sold as a group,” said Sunwest’s receiver Michael Grassmueck. “I believe we have created substantial value through the Court’s approval of this Plan. The Plan provides a fair and equitable way to distribute funds to the various people who have lost money in connection with Sunwest.”
Decision on Harder Settlement Deferred by the Court
As part of its approval order, the Court deferred the settlement reached by the receiver and CRO with former CEO Jon Harder and other Sunwest insiders to the Chapter 11 case slated to follow approval of the Distribution Plan. The settlement provisions came out of mediation meetings in August and were included in the Distribution Plan. Settlement terms drew heat from various quarters for allowing the insider group a chance to retain an ownership stake in the company once claimants received $500 million in distributions.
The Harder settlement led the Securities and Exchange Commission (SEC) and the Oregon Department of Consumer and Business Services to oppose the Plan. “We believe that deferral of the Court’s consideration of the settlement will enable the SEC to support the Plan,” said CRO Clyde Hamstreet.
The court also deferred decisions on certain other plan provisions, including non-commingled property exceptions, third party claims, and the investor bare land election. Objections by secured creditors with regard to the allowance and treatment of their claims will be dealt with in connection with the follow-on reorganization process.
Chapter 11 Process Underway
Implementation of the approved Plan will take place through a follow-on Chapter 11 reorganization case, whose filing begins Friday. All Sunwest entities, including those already in Chapter 11, will be administered pursuant to a single proceeding. The bankruptcy process will be orderly and brief. While in Chapter 11, Sunwest will initiate proceedings to transfer its core senior living assets to a newly-created entity or to a buyer. Sunwest will also employ Chapter 11 provisions to restructure its secured debt on more stable terms. If no sale of the core assets takes place, Sunwest will issue securities for distribution to approved claim holders through the bankruptcy.
“The Chapter 11 plan allows for approximately 150 good senior living facilities to be consolidated into one strong company with corporate governance, management and reporting structure,” said Hamstreet. “This plan will create significantly more value than the sum of the previous parts. Within a brief period of time, we can effect significant changes that maximize asset values without derailing the financial progress Sunwest has made recently.”
Blackstone Offer Remains on the Table
Blackstone Real Estate Advisors unveiled plans earlier this month to purchase 148 Sunwest core properties, and the private equity firm continues to perform due diligence as transaction terms are negotiated. The potential sale could occur as part of the Chapter 11 proceeding, with bankruptcy rules governing the sale process and the Court reviewing and deciding upon terms and procedures. Unsold assets would be held by the receiver or other designated entity to be liquidated over time. Proceeds from sales would be distributed to claimants pursuant to the Reorganization Plan.
If Blackstone’s offer to purchase Sunwest’s core properties is approved, the Court would provide for public bids and an auction to ensure the highest value to investors and creditors. Other qualified bidders would have at least six weeks to conduct due diligence and submit bids. Potential buyers would be required to propose similar terms to the Blackstone offer and meet a superior bid threshold.
Whether the Chapter 11 process ends with a sale or with the creation of a new operating structure will be determined on the basis of further negotiations among the parties and through Court proceedings. Investors and other interested parties will have the opportunity to provide input through the bankruptcy process as it unfolds.
“This plan resolves the separate ownership issues and maximizes the asset values by allowing them to be managed, transferred or sold as a group,” said Sunwest’s receiver Michael Grassmueck. “I believe we have created substantial value through the Court’s approval of this Plan. The Plan provides a fair and equitable way to distribute funds to the various people who have lost money in connection with Sunwest.”
Decision on Harder Settlement Deferred by the Court
As part of its approval order, the Court deferred the settlement reached by the receiver and CRO with former CEO Jon Harder and other Sunwest insiders to the Chapter 11 case slated to follow approval of the Distribution Plan. The settlement provisions came out of mediation meetings in August and were included in the Distribution Plan. Settlement terms drew heat from various quarters for allowing the insider group a chance to retain an ownership stake in the company once claimants received $500 million in distributions.
The Harder settlement led the Securities and Exchange Commission (SEC) and the Oregon Department of Consumer and Business Services to oppose the Plan. “We believe that deferral of the Court’s consideration of the settlement will enable the SEC to support the Plan,” said CRO Clyde Hamstreet.
The court also deferred decisions on certain other plan provisions, including non-commingled property exceptions, third party claims, and the investor bare land election. Objections by secured creditors with regard to the allowance and treatment of their claims will be dealt with in connection with the follow-on reorganization process.
Chapter 11 Process Underway
Implementation of the approved Plan will take place through a follow-on Chapter 11 reorganization case, whose filing begins Friday. All Sunwest entities, including those already in Chapter 11, will be administered pursuant to a single proceeding. The bankruptcy process will be orderly and brief. While in Chapter 11, Sunwest will initiate proceedings to transfer its core senior living assets to a newly-created entity or to a buyer. Sunwest will also employ Chapter 11 provisions to restructure its secured debt on more stable terms. If no sale of the core assets takes place, Sunwest will issue securities for distribution to approved claim holders through the bankruptcy.
“The Chapter 11 plan allows for approximately 150 good senior living facilities to be consolidated into one strong company with corporate governance, management and reporting structure,” said Hamstreet. “This plan will create significantly more value than the sum of the previous parts. Within a brief period of time, we can effect significant changes that maximize asset values without derailing the financial progress Sunwest has made recently.”
Blackstone Offer Remains on the Table
Blackstone Real Estate Advisors unveiled plans earlier this month to purchase 148 Sunwest core properties, and the private equity firm continues to perform due diligence as transaction terms are negotiated. The potential sale could occur as part of the Chapter 11 proceeding, with bankruptcy rules governing the sale process and the Court reviewing and deciding upon terms and procedures. Unsold assets would be held by the receiver or other designated entity to be liquidated over time. Proceeds from sales would be distributed to claimants pursuant to the Reorganization Plan.
If Blackstone’s offer to purchase Sunwest’s core properties is approved, the Court would provide for public bids and an auction to ensure the highest value to investors and creditors. Other qualified bidders would have at least six weeks to conduct due diligence and submit bids. Potential buyers would be required to propose similar terms to the Blackstone offer and meet a superior bid threshold.
Whether the Chapter 11 process ends with a sale or with the creation of a new operating structure will be determined on the basis of further negotiations among the parties and through Court proceedings. Investors and other interested parties will have the opportunity to provide input through the bankruptcy process as it unfolds.
FINRA Investor Alert
An Investor Alert has been issued by FINRA in reaction to a, “phishing,” scam. Phishing is the attempt of a fraudulent entity to collect sensitive information while masquerading as a legitimate body. This particular email promises compensation from ARS settlements in exchange for personal information. The email, which appears to be from FINRA, claims to inform the recipient of regulatory actions. It states that the recipient is due $1.5 million regardless of their ARS investment or loss. As with other phishing scams, it then asks for personal information in order to complete the transaction. For more information on this Investor Alert please follow this link to FINRA’s website.
Saturday, October 3, 2009
Leveraged ETF's May Not Be Suitable For All Investors
ProFunds Group is warning investors that some of its inverse and leveraged mutual funds mightn't be suitable for all investors and should be used only by knowledgeable investors.
The Bethesda, Md., asset manager added the strong language in a key descriptive filing it made with the Securities and Exchange Commission in the past week.
Michael Sapir, chief executive of ProFund Advisors, said, "We have always placed a high value on educating investors and providing full and complete disclosure, as we have in adapting our disclosure to the new summary prospectus format." Mutual-fund companies are beginning to adopt new rules authorizing summary prospectuses, which seek to simplify key investment information.
Earlier this year, ProFunds, the largest provider of leveraged exchange-traded funds, revised risk descriptions in prospectuses for its ProShares ETFs, adding additional details on returns to help show the effects of compounding.
Suitability Issue
That move came as regulatory concerns were raised about the suitability of inverse and leveraged exchange-traded funds, or ETFs. Leveraged ETFs use futures or derivatives to multiply the daily return of an index, sometimes striving to double or triple the return. Because they reset each day, their results over longer terms can diverge widely from the index. Inverse ETFs seek to return the opposite of the index.
Added Warnings
In the latest filing, ProFunds added warnings on its Ultra ProFunds, which provide leveraged exposure to indexes, and on its Inverse ProFunds, which seek daily investment results that either match or double the opposite of the daily performance of their benchmark indexes.
"The Fund is different from most funds in that it seeks leveraged returns and only on a daily basis. The Fund also is riskier than similarly benchmarked funds that do not use leverage," the document warns for UltraBull ProFund, for example. "Accordingly, the Fund may not be suitable for all investors and should be used only by knowledgeable investors who understand the potential consequences of seeking daily leveraged investment results."
The Bethesda, Md., asset manager added the strong language in a key descriptive filing it made with the Securities and Exchange Commission in the past week.
Michael Sapir, chief executive of ProFund Advisors, said, "We have always placed a high value on educating investors and providing full and complete disclosure, as we have in adapting our disclosure to the new summary prospectus format." Mutual-fund companies are beginning to adopt new rules authorizing summary prospectuses, which seek to simplify key investment information.
Earlier this year, ProFunds, the largest provider of leveraged exchange-traded funds, revised risk descriptions in prospectuses for its ProShares ETFs, adding additional details on returns to help show the effects of compounding.
Suitability Issue
That move came as regulatory concerns were raised about the suitability of inverse and leveraged exchange-traded funds, or ETFs. Leveraged ETFs use futures or derivatives to multiply the daily return of an index, sometimes striving to double or triple the return. Because they reset each day, their results over longer terms can diverge widely from the index. Inverse ETFs seek to return the opposite of the index.
Added Warnings
In the latest filing, ProFunds added warnings on its Ultra ProFunds, which provide leveraged exposure to indexes, and on its Inverse ProFunds, which seek daily investment results that either match or double the opposite of the daily performance of their benchmark indexes.
"The Fund is different from most funds in that it seeks leveraged returns and only on a daily basis. The Fund also is riskier than similarly benchmarked funds that do not use leverage," the document warns for UltraBull ProFund, for example. "Accordingly, the Fund may not be suitable for all investors and should be used only by knowledgeable investors who understand the potential consequences of seeking daily leveraged investment results."
Friday, October 2, 2009
Regulators Attempting to Derail Stifel in Colorado
On Thursday October 1st, 2009, Colorado state securities regulators filed a complaint against Stifel, Nicolaus & Co. seeking to strip or suspend that company’s state security license. This action is being taken in connection with Stifel’s sale of securities products known as auction-rate securities (ARS). State regulators are alleging that Stifel fraudulently marketed these debt instruments as safe and liquid cash alternatives. Unfortunately for investors, the reality of the situation revealed that ARS products were anything but safe and liquid investments.
As a remedy to the current situation, regulators want the firm to return approximately $14 million in ARS notes sold to Colorado investors.
The ARS market operated without issue for several years, using investment banks as buyers for notes when retail investors were in short supply. However, as investment banks saw their capital disappear in the economic climate of early 2008, the inherent flaws in the ARS market were exposed as investment banks stopped purchasing ARS notes. Without buyers for these notes, such investors were left without buyers, essentially making their notes worthless.
Colorado state regulators argue that retail investors, who were seeking short term liquid investments, were not informed of the risk involved.
Stifel has 30 days to respond to the complaint. A hearing date will be set November 17th.
As a remedy to the current situation, regulators want the firm to return approximately $14 million in ARS notes sold to Colorado investors.
The ARS market operated without issue for several years, using investment banks as buyers for notes when retail investors were in short supply. However, as investment banks saw their capital disappear in the economic climate of early 2008, the inherent flaws in the ARS market were exposed as investment banks stopped purchasing ARS notes. Without buyers for these notes, such investors were left without buyers, essentially making their notes worthless.
Colorado state regulators argue that retail investors, who were seeking short term liquid investments, were not informed of the risk involved.
Stifel has 30 days to respond to the complaint. A hearing date will be set November 17th.
Thursday, October 1, 2009
FINRA Arbitration Filed Against Securities America
Aidikoff, Uhl & Bakhtiari (www.securitiesarbitration.com) announces the filing of a FINRA arbitration claim against Securities America on behalf of investors in Medical Capital securities.
The law firm has been contacted by investors and is preparing to file additional FINRA arbitration claims against broker dealers for losses incurred based on the recommendation to purchase Medical Capital securities.
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.
On August 3, 2009 the Securities and Exchange Commission (SEC) sought emergency relief. The SEC has alleged that investors were defrauded among other things, by Medical Capital's misappropriation of approximately $18.5 million of the $76.9 million raised through the sale of MP VI notes to pay administrative fees to MCC.
"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 unlikely ever to be made
whole in 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.
Aidikoff, Uhl & Bakhtiari represents retail and institutional investors around the world in securities arbitration and litigation matters.
The law firm has been contacted by investors and is preparing to file additional FINRA arbitration claims against broker dealers for losses incurred based on the recommendation to purchase Medical Capital securities.
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.
On August 3, 2009 the Securities and Exchange Commission (SEC) sought emergency relief. The SEC has alleged that investors were defrauded among other things, by Medical Capital's misappropriation of approximately $18.5 million of the $76.9 million raised through the sale of MP VI notes to pay administrative fees to MCC.
"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 unlikely ever to be made
whole in 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.
Aidikoff, Uhl & Bakhtiari represents retail and institutional investors around the world in securities arbitration and litigation matters.
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