Thursday, February 26, 2009

Citigroup Hit with ARS Lawsuit from KV Pharmaceutical Company

Mega bank Citigroup Global Markets is still facing tough times as the company was hit with a lawsuit from major drug company, KV Pharmaceutical. The complaint alleges that the bank misrepresented the risks associated with auction-rate securities (ARS). As a result, KV is now holding $72 million worth of illiquid auction-rate securities and has been forced to eliminate some 700 jobs.

The St. Louis-based drug company filed the lawsuit against Citigroup on Feb. 25. 2009. According to the complaint, Citibank intentionally lied about the ARS investments, characterizing them as safe and adhering to KV’s conservative investing objectives of liquidity and capital preservation.

Between May 2005 and February 2008, Citigroup allegedly advised KV Pharmaceutical to invest in student loan-backed auction-rate securities as an alternative to money-market funds. KV says Citigroup never informed the drug maker that the liquidity of auction-rate securities may be uncertain or that auction failures were a possibility.

The complaint goes on to claim that in late summer 2007, an internal Citigroup e-mail acknowledged severe “disruptions in the ARS market” and that “failed auctions had reached at an all-time high.” These facts were never disclosed to KV Pharmaceutical, however. Instead, KV says Citigroup recommended buying even more auction securities. Following that advice, KV purchased nearly $28 million of auction-rate securities in late November 2007.

The lawsuit filed against Citigroup by an institutional investor, KV Pharmaceutical, is the second following a complaint filed by American Eagle Outfitters on February 6, 2009. The clothing and accessories retailer also sued the bank for fraudulently inducing it to buy $258 million worth of auction-rate securities that can now only be sold at a major loss.

Monday, February 23, 2009

Stanford Financial Sued by Charity

Stanford Financial Group Co. and its chairman, Houston billionaire R. Allen Stanford, were sued by a Colorado investor over claims the company’s alleged $8 billion fraud may have wiped out a charity’s investment.

Johan Dahler, the trustee for a Colorado-based charity benefiting poor people in Mexico and Central America, alleged Stanford employees engaged in fraud and conspiracy by lying about returns on investments at Antigua-based Stanford International Bank, according to a complaint filed Feb. 19 in state court in Harris County, Texas. The suit doesn’t specify money damages.

Stanford and two of his officers “knowingly and recklessly made false and material misrepresentations” about certificates of deposit, and failed “to state material facts which made their representations misleading,” claimed Dahler, who directed the investment of more than $772,000 from 2004 to 2007 for the Rocky Mountain Trust.

The U.S. Securities and Exchange Commission sued Stanford and three of his companies on Feb. 17, accusing the financier of running a “massive” fraud that touted “improbable, if not impossible” returns at the bank. No criminal charges have been filed against Stanford, who was found Feb. 19 by the FBI in the Fredericksburg, Virginia, area. He was served with a subpoena from the SEC.

Friday, February 20, 2009

UBS AG to Disclose Names of Swiss Bank Clients and Pay $780 Million Fine

UBS AG, Switzerland’s largest bank, will pay $780 million and disclose the names of some secret account holders to avoid U.S. prosecution on a charge that it helped thousands of wealthy Americans evade taxes.

The Justice Department accused UBS of conspiring to defraud the U.S. by helping 17,000 Americans hide accounts from the Internal Revenue Service. The U.S. will drop the charge in 18 months if the bank reforms its practices, helps prosecutors and makes payments. UBS will immediately turn over names of about 250 clients, according to people familiar with the matter.

By gaining those names, the U.S. will pierce the veil of Swiss bank secrecy. The IRS, which has sought the names of all U.S. account holders since July, has met resistance from the Swiss government. The final number of account holders Zurich- based UBS must disclose will hinge on future legal battles, according to the agreement.

The Securities and Exchange Commission also reached an agreement to resolve claims that UBS acted as an unregistered broker-dealer and investment adviser to U.S. citizens who held accounts directly or in the names of others.

The $780 million is lower than previous settlement estimates, which exceeded $1 billion. The U.S. government agreed to the lower amount because of the bank’s eroding financial condition, according to a person familiar with the matter.

Thursday, February 19, 2009

Former Morgan Stanley Broker Prosecuted for Theft

A former Morgan Stanley vice president was arraigned on a 43-count indictment for stealing $2.5 million from the company over a seven-year period.

Richard Garaventa Jr., an ex-vice president in operations, wrote 50 company checks between Sept. 5, 2001, and Dec. 24, 2008, ranging from $8,670 to $74,812, made out to a firm he created, according to the indictment obtained by Manhattan District Attorney Robert Morgenthau and filed Feb. 17 in state court. Garaventa is being held on $1 million bail, prosecutors said.

Garaventa, 36, of Manalapan, New Jersey, incorporated an entity in New York in August 2001 called NY Transfer Corp., prosecutors said in a statement. He then opened a checking account at JPMorgan Chase & Co., depositing 50 checks from an in- house Morgan Stanley account to a NY Transfer account. Prosecutors said he used the money on airfare to Aruba and Florida and at least $30,000 worth of jewelry, and made tens of thousands of dollars in cash withdrawals.

Garaventa “admitted creating the NY Transfer Corp. entity and using dozens of checks to steal over $2 million,” prosecutors alleged in court papers. Garaventa made the admission to a Morgan Stanley representative in the company’s New York offices on Jan. 6, according to the documents.

Monday, February 16, 2009

ARS Arbitration Filed Against Merrill Lynch by Downstream Broker

Amegy Bank NA of Houston, and its broker-dealer affiliate, Amegy Investments Inc., have filed an arbitration claim against Merrill Lynch & Co. Inc. of New York.
The bank is one of the so-called “downstream” firms that sold auction rate securities issued and managed by Merrill Lynch.

“As far as we know, this is the first arbitration or lawsuit filed by a downstream firm against one of the majors,” said Paul Yetter, a partner at Yetter Warden & Coleman LLP of Houston, Amegy's attorney.

The suit, filed last month, claims Merrill knew by as early as August 2007 that the ARS market would fail but did not disclose that risk to Amegy or the public.

The ARS market froze up in February 2008 after all the major underwriters stopped supporting auctions for the securities.

Amegy claims it purchased more than $240 million of ARS from Merrill, which it then sold to its clients. The suit seeks rescission of the remaining $140 million that Amegy clients still hold, plus unspecified damages.

Sunday, February 15, 2009

Credit Suisse Found Liable and Order to Pay Institutional Investor $400 Million for Auction Rate Recomendation

Credit Suisse Group was ordered to pay a $400 million arbitration award to STMicroelectronics NV, after the Swiss semiconductor maker alleged Credit Suisse mishandled its investment in auction-rate securities, according to the Financial Industry Regulatory Authority.

Finra -- formed by the merger of the National Association of Securities Dealers and a New York Stock Exchange regulatory arm -- also ordered the bank to pay $3 million in attorney and expert-witness fees, $1.5 million in financing fees and interest on the original value of the ARS until the award is paid.

An STMicro spokesman declined to comment.

In a statement, Credit Suisse said: "We respectfully disagree with the arbitration panel's award and are reviewing our legal options."

According to its complaint to Finra, STMicro wanted to invest in student-loan securities backed by U.S. government guarantees. Instead, its funds were put into collateralized debt obligations, some of which were backed by subprime real-estate loans.

Two former Credit Suisse brokers last year were indicted on fraud charges based on allegations they lied to investors, including STMicro, about how they placed their money in ARS tied to subprime mortgages. They pleaded not guilty.

Wednesday, February 11, 2009

Oppenheimer California Municipal Fund Sued By Investors

Ronald Fielding’s Oppenheimer California Municipal Fund was sued by investors claiming they were misled about the risks the fund took when it lost 41 percent of its value last year.

The fund violated securities laws with documents saying its objective is to preserve capital and seek income, according to a news release distributed yesterday by San Francisco-based Sparer Law Group. The firm represents a plaintiff in the suit, which was filed in federal court in San Francisco Feb. 4.

Fielding, the top fund manager in the municipal bond market for four years by betting on tobacco and airline bonds, was the worst in 2008 as prices fell amid the global credit crisis. From 2003 to 2006, his funds generated average returns of 11.6 percent. Last year, the market’s biggest loser was his Oppenheimer Rochester National Municipals Fund.

Monday, February 9, 2009

Bernard L. Madoff Consents to Partial Judgment Imposing Permanent Injunction and Continuing Other Relief

The United States Securities and Exchange Commission announced that on February 9, 2009, it submitted to the Honorable Judge Louis L. Stanton, a federal judge in the Southern District of New York, the consent of Bernard L. Madoff to a proposed partial judgment imposing a permanent injunction and continuing relief previously imposed in the preliminary injunction order, entered on December 18, 2008. Madoff consented to the partial judgment without admitting or denying the allegations of the SEC's complaint, filed on December 11, 2008. If the partial judgment is entered by the Court, the permanent injunction will continue to restrain Madoff from violating certain antifraud provisions of the federal securities laws. Also, the proposed partial judgment would continue against Madoff the relief imposed in the December 18, 2008 Order, including the order freezing assets. The proposed partial judgment would leave the issues of the amount of disgorgement, prejudgment interest and civil penalty to be imposed against Madoff to be decided at a later time. For purposes of determining Madoff's obligation to pay disgorgement, prejudgment interest and/or a civil penalty, the proposed partial judgment deems the facts of the complaint are established and cannot be contested by Madoff.

Thursday, February 5, 2009

B of A Sued Over Merrill Lynch Purchase

Bank of America Corp., the largest U.S. lender by assets, was sued last week by investors who claim they were misled in a deal to buy Merrill Lynch & Co., the New York Times reported.

Shareholders allege Bank of America Chief Executive Officer Kenneth D. Lewis, Chief Financial Officer Joe L. Price and former Merrill CEO John Thain deceived investors by issuing false and misleading statements about Merrill’s financial health, the Times reported.

The investors assert that the defendants “concealed BofA’s failure to engage in proper due diligence in determining the fairness of its proposed merger with Merrill Lynch,” the Times reported, citing court documents. The $33 billion stock-swap buyout was completed last month.

Wednesday, February 4, 2009

FINRA Fines Brokerage Firm for Sale of Unregistered Securities

The Financial Industry Regulatory Authority (FINRA) announced today that it has fined Leonard & Co. of Troy, MI, $225,000 for numerous violations, including the illegal sale of more than two million shares of penny stock on behalf of customers. FINRA also required the firm to retain an independent consultant to review its supervisory systems and procedures.

In addition, FINRA has barred Robert J. Cole, formerly a registered representative with Leonard & Co., for his role in the illegal sales.

In a related action, FINRA today issued Regulatory Notice 09-05, Unregistered Resales of Restricted Securities, to remind firms and brokers of their obligations to determine whether securities are eligible for public sale before participating in what may be illegal distributions. It also discusses the importance of recognizing "red flags" of possible illegal, unregistered distributions and reiterates firms' obligations to conduct searching inquiries in certain circumstances to avoid participating in illegal distributions.

"This action, and the accompanying Regulatory Notice, demonstrate FINRA's continuing commitment to ensuring that brokerage firms live up to their responsibilities as gatekeepers to the securities markets," said Susan L. Merrill, Executive Vice President and Chief of Enforcement. "FINRA will aggressively pursue firms and individuals who ignore those responsibilities and participate in illegal sales of unregistered securities."

FINRA found that Leonard & Co. and Cole participated in an illegal distribution of a penny stock, Shallbetter Industries, by selling over 2.2 million unregistered shares of the stock into the public markets from three related customer accounts. Cole, who handled the accounts, was aware that trading in the accounts was directed by a "control person" of Shallbetter. A control person is generally an individual who owns 10 percent or more of the stock of a company and can influence its policies and decision-making.