Articles Posted in Securities Fraud

The stock market has been tumbling since announcements by HSBC and other banks that there is great concern about exposure to subprime mortgage defaults. Could this be the beginning of a potential giant mortgage securities fraud investigation? Maybe.

Subprime mortgages are loans given to potential home buyers who are not creditworthy or have almost no cash to put down as collateral. According to some reports, up to 35 percent of all mortgage securities issued in 2006 were of the subprime variety which to us seems very high.

These subprime mortgages are then packaged with investment grade mortgages and sold as securities by banks to investors. The loan originators, banks, attorneys and everyone else who is involved have been reaping huge returns in recent years on mortgage securities. However, owners of pooled mortgage securities only mark the securities to market when a rating agency changes its rating. There are whispers on the Street that institutional investors may be reporting inflated values for their pooled mortgage securities.

Trustees have fiduciary duties to trusts. When stockbroker fraud has potentially been committed in a trust, what should the trustee do? Investigate.

A trustee has the duty to investigate red flags of fraud or wrongdoing by stockbrokers and to pursue any legitimate claims for the trust’s benefit. Failure to investigate may make the trustee liable to the trust’s beneficiaries.

Trustees should review the brokerage statements and new account documents of the trust’s brokerage account immediately. If the trustee does not have the expertise to decipher potential fraud, he should speak to an attorney who represents investors in securities fraud cases. If there’s a claim, the trustee should commence an arbitration.

We thought huge, brazen insider trading cases went out with Gordon Gekko and Ivan Boesky in the eighties. Apparently not. The SEC charged 14 defendants with securities fraud in one of the boldest insider trading rings in recent years. A total of $15 million was misappropriated.

UBS, Morgan Stanley and a few hedge funds were front and center. Mitchel Guttenberg, an executive director of research at UBS, allegedly provided inside information about UBS research analysts changing opinions on stocks to a hedge fund manager named Erik Franklin. Not only did Franklin trade on the inside information since 2001, his broker buddies at Bear Stearns did too.

Meanwhile, at Morgan Stanley, a lawyer in the compliance department allegedly tipped off her attorney husband and a high school friend about impending mergers. They traded on the inside information and also tipped the same broker buddies at Bear Stearns. The SEC figured out the overlapping schemes because of unusual trading in Adobe, one of the stocks involved in a merger handled by Morgan.