New York Securities Lawyer Blog

Published on: November 19, 2009

Goldman Sachs’ Public Image

By justia.admin

There’s a very good piece in the Financial Times today about Goldman Sachs by Francesco Guerrera and Tom Braithwaite. It’s available online at http://www.ft.com/cms/s/0/1eb0ea18-d497-11de-a935-00144feabdc0.html?nclick_check=1

The authors explain how competitive Goldman is and how profits and risk management drive the firm. They go on to explain how difficult it will be for Goldman to handle the backlash of paying out huge bonuses in an environment of double digit unemployment rates.

For a long time, Goldman was by far the gold standard of investment firms. Much of the financial crisis stems from every other firm trying to be like Goldman and making huge, leveraged bets with proprietary capital. The difference has been that Goldman has always one stop ahead of the rest of the Street. Partly due to the “market color” it receives as an investment bank, prime broker, clearing firm, counter party, and trader, Goldman somehow is nimble enough to know when to stop on a dime and bet the other way. Merrill, Citi, Morgan and the rest could never do that. Merrill, especially, was three steps behind and was late to the CDO game just like it was late to the prop trading game and the internet craze.

Published on: November 18, 2009

FINRA Will Permanently Disclose Disciplinary Actions Against Former Brokers on BrokerCheck

By justia.admin

FINRA announced yesterday that it won approval from the SEC to expand its BrokerCheck service to make records of final regulatory actions against brokers permanently available to the public, regardless of whether the broker continues to be employed in the securities industry.

The FINRA press release states disclosure records for former brokers will be available on BrokerCheck beginning November 30. It goes on to state, “This is an important step for investors and for investor protection,” said FINRA Chairman and CEO Richard Ketchum. “Individuals previously barred by FINRA and other regulators have surfaced in a number of recent frauds in other parts of the financial industry that cost unsuspecting investors millions of dollars. It has never been more critical for investors to research the backgrounds of the financial professionals they deal with than it is today.”

This is an important addition to the publicly available regulatory records of former brokers. Often times, permanently barred brokers, traders and salesmen will attempt to work at unregistered entities such as hedge funds. It is difficult for potential investors to do due diligence on a hedge fund manager without the historical BrokerCheck information. In the past, if a registered representative was out of the business for more than two years, a public investor had no access to the broker’s disciplinary record.

Published on: November 17, 2009

Securities Fraud Content – What I’m Reading, Part One (Newspapers)

By justia.admin

I’m often asked what I read on a regular basis regarding securities and investment fraud. Back in the day (say, pre-Enron), there was limited print and online coverage of investment misconduct. In fact, when I told people what I did for a living, some would actually question whether our niche practice was even viable, “you mean there’s fraud going on on Wall Street?” Ah, how the world has changed. First Sam Israel, then the Bear Stearns High Grade Funds, and finally, the big whale of the Bernie Madoff affair.

Now, financial fraud news is general business news. Just look how Vanity Fair has scored huge every month with one strong financial story after another (Madoff, Fairfield Greenwich, Marc Dreier, Goldman Sachs and Morgan Stanley survival, etc.). Here is a little a look at what I’m presently reading, for better or worse. Today, I’ll focus on newspapers.

I start with the Financial Times. Worldly, smart, a cut above the rest for global coverage of finance. I particularly like Gillian Tett’s column and Greg Farrell’s Street coverage. I read the NY Times business section (mostly because it’s attached to the Sports section, but that’s a whole other issue). Gretchen Morgenson, Jenny Anderson, and newly appointed wonder kid Andrew Ross Sorkin, are all strong. No one covers investor protection better than Gretchen. And I love Ben Stein. However, it’s too bad the Times won’t throw more resources at its Street coverage. I also read the Wall Street Journal daily, especially on breaking finance news issues. Kate Kelley’s coverage of Bear Stearns collapse was award winning stuff. When the Journal sends its entire squadron on a topic, no one can top its finance coverage. I used to read the Post’s coverage but since Roddy Boyd left, it’s not as interesting.

Published on: November 17, 2009

Lehman Sues Barclays for $5 Billion

By justia.admin

Lehman Brothers Holdings Inc. filed a lawsuit against Barclays Capital in New York federal court alleging the British bank took control of excess assets in collusion with Lehman executives when it bought its U.S. brokerage business in 2008. The Lehman bankruptcy is the largest U.S. bankruptcy in history. The claim alleges that Barclays Capital received a $8.2 billion “windfall profit” due to an undisclosed $5 billion discount on the sale of certain securities. The complaint alleges, “The windfall to Barclays was not disclosed to the Court, the Lehman Boards or Lehman’s lawyers so as to allow the transfer to Barclays of billions of dollars in excess assets, without consideration, in a manner designed to avoid judicial, corporate and creditor oversight.”

Bankruptcy litigation is booming amidst the flood of major bankruptcies filed in the U.S. We have seen more and more battles between bankruptcy trustees and receivers against the major worldwide banks. Since many of these cases are filed by and defended by law firms which often represent bulge bracket investment banks and broker dealers, it will be interesting to see how many international law firms will be conflicted out of handling such cases.

In the Lehman v. Barclays case, Jones Day represents the Debtor, Lehman in the Barclays matter. Weil, Gotshal & Manges, is Lehman’s lead bankruptcy counsel, but is not handling the Barclays litigation. Boies, Schiller & Flexner is representing Barclays. David Boies’ firm’s website states, “We have been described by The Wall Street Journal as a “national litigation power–house” and by the National Law Journal as “unafraid to venture into controversial” and “high risk” matters.” This certainly qualifies.

Published on: November 17, 2009

SEC Will Pursue Case Against Cioffi and Tannin

By justia.admin

The SEC announced that it will continue to pursue its civil enforcement case against former Bear Stearns High Grade Fund portfolio managers Ralph Cioffi and Matthew Tannin, after the recent acquittal of criminal charges against Messrs. Cioffi and Tannin. According to recent news reports, Robert Khuzami, head of enforcement at the SEC, told Reuters TV, “We filed a case based on the evidence from our investigation.” Mr. Khuzami added, “we have a different standard of proof.”

The SEC’s complaint (available on its website) is indeed far more broad than the charges lodged by the U.S. Attorneys’ Office in Brooklyn. It also reaches all of the way back to the beginning of the High Grade Fund’s existence as opposed to just the late 2006, early 2007 time period the prosecutors focused on. The prosecutors’ standard of proof of “beyond a reasonable doubt” is much stiffer than the SEC’s and civil litigants’ standard of “by a preponderance of evidence.” In order for Messrs. Cioffi and Tannin to re-enter the securities industry, they will have to defend the SEC action as well.

Published on: October 28, 2009

Morgan Keegan Loses Another Bond Fund FINRA Arbitration

By justia.admin

A former president of a Memphis gas company won a $51,000 arbitration award against Morgan Keegan & Co. related to the Morgan Keegan bond funds. It was approximately 64% of the investor’s out of pocket losses. This is just another in a string of victories by public customers against Morgan Keegan related to the funds.

According to news reports, the statement of claim alleged that the funds were not managed conservatively and that Morgan Keegan misrepresented their volatility. Jim Kelsoe, the funds manager allegedly made numerous representations to the investor that the RMK funds were safe.

Morgan Keegan received a Wells notice in July from the SEC and the tide has seemingly changed in the arbitration forum. Our firm represent investors with RMK claims. According to a Morgan Keegan spokesman, despite the loss, Morgan Keegan will continue a vigorous defense of all claims. We shall see.

Published on: October 26, 2009

Morgan Keegan Loses Another Bond Fund Arbitration

By justia.admin

Morgan Keegan, a division of Regions Financial Group, lost yet another FINRA arbitration related to its Bond Funds. The case is allegedly the first successful arbitration on behalf of an investor who was not direct customer of Morgan Keegan. According the law firm who won the arbitration, the elderly investor was awarded complete damages, including interest and fees.

Morgan Keegan has now lost many FINRA arbitrations in the last six months related to the Regions Morgan Keegan funds which lost significant value in 2008. Many law firms around the U.S., including our firm, have been retained by investors who lost money in the Regions Morgan Keegan funds.

The funds were run by Jim Kelsoe, the chief-fixed income investment officer of the Memphis-based brokerage’s Morgan Asset Management. The seven mutual funds include four Regions Morgan Keegan closed-end funds: Advantage Income Fund, High Income Fund, Multi-Sector High Income Fund and Strategic Income Fund; and three open-end funds: Regions Morgan Keegan Select Short Term Bond Fund, Intermediate Bond Fund and High Income Fund.

Published on: October 26, 2009

Galleon Wiretaps Rattle Hedge Funds

By justia.admin

Katherine Burton and David Glovin wrote a good piece on Galleon on Friday. Here it is.

Galleon Wiretaps Rattle Hedge Funds as Insider Trading Targeted
Oct. 26 (Bloomberg) — First came the biggest bear market since the 1930s, then Bernard Madoff’s $65 billion Ponzi scheme and the threat of increased regulation. Now hedge funds have a new concern: getting caught on tape as the government expands its use of wiretaps to ferret out insider trading.

Prosecutors, using secretly recorded phone conversations for the first time against hedge funds, alleged Oct. 16 that billionaire Raj Rajaratnam and five others made $20 million by swapping material inside information on companies such as Hilton Hotels Corp. and Google Inc. They may charge at least 10 more people soon, people familiar with the matter said last week.

Rajaratnam, founder of New York-based Galleon Group LLC, regularly talked to hundreds of contacts, including other traders, according to people who know him. His arrest rattled hedge-fund managers, who are questioning whether legitimate discussions caught on the tapped lines will draw scrutiny, say lawyers who’ve fielded such queries. A broader worry: whose phones are being monitored as prosecutors and U.S. Securities and Exchange Commission continue their probes?

“The word wiretap strikes fear in the hearts of everyone, even the innocent,” said Brad Balter, who runs Balter Capital Management LLC, a Boston-based firm that allocates clients’ money to hedge funds.

Ross Intelisano, an attorney with Rich & Intelisano LLP in New York, said he received a call from an executive at a $1 billion hedge fund who was considering hiring a company to test his firm’s phones for listening devices. The client asked what to do if the firm found any. “Do we go to the police?” the executive asked, according to Intelisano.

The executive instructed his colleagues to be extra careful about what they say on the phone, not because they are breaking the law, but because they are fearful that any conversation about stocks could be misconstrued, Intelisano said.

Calls Aren’t Safe
“After the Bear Stearns case, e-mails aren’t safe, and now phone calls aren’t safe,” Intelisano said. “From now on, people are going to be meeting for lunch.”

Prosecutors used e-mails to build their case against former Bear Stearns Cos. hedge-fund mangers Ralph Cioffi and Matthew Tannin, who are currently on trial in Brooklyn for misleading investors about the health of two funds that collapsed in 2007. It’s the biggest trial stemming from a U.S. probe of banks and mortgage firms whose losses in subprime loans and related securities total at least $396 billion.

For hedge-fund managers whose knowledge of wiretaps may have been limited to “The Wire,” the HBO drama in which Baltimore police eavesdrop on drug dealers, electronic bugging is a new reality of their industry as U.S. Attorney Preet Bharara’s new Complex Frauds Unit targets white-collar crime.
Continue reading

Published on: October 16, 2009

Charles Schwab Hit with SEC Wells Notice for YieldPlus Funds

By justia.admin

Charles Schwab acknowledged that the SEC served it with a Wells Notice related to its sale of

two funds, the YieldPlus Fund and Total Bond Market Fund. A Wells Notice advises the firm that the SEC staff intends to recommend civil charges for possible securities violations.

The additional heat from the SEC may force Schwab to think about settling the many pending FINRA arbitrations against the firm. There is also a pending class action which was certified by a federal court in California in August. The litigation bills are growing.

Published on: October 14, 2009

Charles Schwab YieldPlus Fund – Decisions To Make

By justia.admin

The Charles Schwab YieldPlus Fund class action suit has generated some serious questions for investors to consider. The U.S. District Court in San Francisco issued a Notice of Pendency to class members which includes important information about how to opt out as a class member. Opt out requests must be received by the claims administrator no later than Monday, December 28, 2009. Investors therefore have to decide whether they intend to file individual arbitration claims against Schwab or whether they would like to remain in the class action. As we wrote about last week, investors around the country have recently won a string of FINRA arbitrations against Schwab based upon allegations that the Fund was over concentrated in mortgage backed securities.