Friday, June 24, 2011

Did JP Morgan Get a Break in CDO Case?

The SEC has filed a complaint against JPMorgan Securities for failing to disclose a material fact in connection with the creation, sale and distribution of a product. We commented on it earlier this week - JP Morgan to Pay $153.6 Million to Settle SEC Charges. In essence, the Commission alleged that JP Morgan failed to inform investorsin a CDO that it created that a hedge fund helped to select the assets in in the CDO portfolio, and the hedge fund was short those same assets. As a result, according to the SEC, the hedge fund was poised to benefit if the CDO assets defaulted.

The allegation was familiar, since the Commission brought almost identical charges against Goldman Sachs last year. We discussed that case at -The Impact of the SEC CDO Fraud Complaint against Goldman Sachs and here - Goldman's Defense to SEC Fraud Case

JP Morgan settled by paying $153.6 million (and no executives were harmed in the settlement). Goldman initially fought the case, and ultimately settled for $550 million.

Now commentators are questioning the disparity between the two penalties. Bloomberg's Jason Weil writes that JP Morgan caught a break. Aside from the money, the charges against JP Morgan were for negligence, the charges against Goldman Sachs were for fraud.

Without knowing the intimate details of the two cases, if there was a difference in the scienter, or intent, part of the violation, then that would explain the disparity in the fine. Also, as litigators are well aware, defendants often get a better deal settling early.

But that doesn't explain the signficant difference in the fines, nor does it explain why there was no individual at JP Morgan included in the sanctions, whereas individuals were included in the Goldman Sachs case.

Bloomberg says that the SEC won't explain the disparity, but also notes that the Commission will have to have the approval of United States District Judge Richard Berman before the settlement is effective. If Judge Berman asks, the SEC will be forced to explain.

JPMorgan Gets a Break Where Goldman Got Nailed: Jonathan Weil - Bloomberg

SEC Says Congressional Insider Trading Not Illegal

It is always nice to be told you are right, and having the SEC tell a securities attorney that he is right about a securities law issue is even nicer. Senators buying stock based on non-public information regarding pending legislation is not illegal, and it is not insider trading.

But isn't this the entire point? Why is it permissible for a Senator who is on a committee and who knows, before a public announcement, that the Senate is going to approve a billion dollar program for solar energy, and then buys stock in the two largest solar energy companies?

I am not so sure that the actual instances of this type of trading is as prevalent as the media is making it out to be, but it is certainly outrageous.

Congressional Trading on Advance Info Not Illegal: SEC - CNBC

SEC Adopts Rule Under Dodd-Frank Act Defining “Family Offices”; 2011-134; June 22, 2011

The SEC approved a new rule to define “family offices” that are to be excluded from the Investment Advisers Act of 1940.
“Family offices” are entities established by wealthy families to manage their wealth and provide other services to family members, such as tax and estate planning services. Historically, family offices have not been required to register with the SEC under the Advisers Act because of an exemption provided to investment advisers with fewer than 15 clients.

The Dodd-Frank Act removed that exemption so the SEC can regulate hedge fund and other private fund advisers. However, Dodd-Frank also included a new provision requiring the SEC to define family offices in order to exempt them from regulation under the Advisers Act.

The new rule adopted by the SEC enables those managing their own family’s financial portfolios to determine whether their “family offices” can continue to be excluded from the Investment Advisers Act.

The rule is effective 60 days after its publication in the Federal Register."

SEC Adopts Rule Under Dodd-Frank Act Defining “Family Offices”

Small Broker-Dealers Closing At Fast Pace

Over 500 broker-dealers are expected to close in the coming year. That is not a good sign for the industry or for our collective financial health. If investors are limited to dealing with the banks for their investment and financial lives we will see more travesties like Lehman Principal Protection Notes, auction rate securities, CDOs and other "products" that allow the firms to take a position that is opposite what they are telling clients to do.

A large part of the problem, if not the entire problem, is over zealous regulation. While FINRA talks a good game, that message has not filtered down to the field, and there is far too much of a "gotcha" mentality. Its the regulations and overzealous enforcement that is going to put the firms out of business. I just wrote about this problem - FINRA Targeting Small Firms and Brokers?

FINRA needs to wake up. Smaller firms provide the advice, attention and real-deal financial counseling that individual clients need. Sure, there are some great financial advisers at the wire-houses - I represent tons of wire house reps all of whom care deeply for their clients - but the firms themselves are just poorly run machines with no regard for anything other than making a buck. Driving the small firms and brokers out of business with expensive and unnecessary compliance programs, coupled with outrageous fines and penalties for bookkeeping errors is harming our economy, not helping it.

Broker-dealer shrinkage: Closures rapidly outpacing new entrants

Thursday, June 23, 2011

PLI's Securities Arbitration Program Announced

Professor Jill Gross over at the ADR Blog has a post announcing that registration is open for PLI's program on Securities Arbitration, which she chairs. I have been on a few panels at this event, and it is a great program.

From Professor Gross' post:

Annual PLI Securities Arbitration Program


In the past year, FINRA sought SEC approval of major rule changes empowering customers to choose an all-public panel in their cases and significantly improving the Discovery Guide, and the Supreme Court once again reaffirmed its interpretation of the Federal Arbitration Act as codifying a strong national policy favoring arbitration. To get the latest information on FINRA Dispute Resolution’s rule changes, website changes and updates to arbitrator training materials, don’t miss Securities Arbitration 2011.

This year’s program will once again include an expanded series of panels featuring FINRA’s Director of Arbitration and his staff. You’ll also receive practical tips from arbitrators, mediators, experienced attorneys who represent both customers and industry players, and regulators and academics on:

  • Drafting claims and answers
  • Preparing witnesses and exhibits
  • Using pre- and post-hearing briefs
  • Initiating settlement discussions



SEC's Insider Trading Loss Story Has Legs

We posted last week about Sallah & Cox's jury verdict in the SEC insider trading case against Dr. De La Maza. Sallah and Cox defended Dr. De La Maza in the SEC trial after he was charged with insider trading by the Commission.

The defense verdict is a bit unusual - after all, the SEC gets to pick and choose the cases it brings, so it has, almost by definition, a high success rate. However, new reports are coming out criticizing the SEC for the way it handled this matter - and the defamation of Dr. De La Maza.

Walter Pavlo at the Forbes While Collar Crime Blog points out today that at the time of the filing of the complaints the SEC staff made some very strong comments about Dr. De La Maza, comments which might actually be defamatory, including:  “[t]hese individuals traded on confidential information with reckless disregard for the fairness of the markets and utter disrespect for their jobs or close-knit relationships. But their greed left a trail for investigators to follow” and "[t]hese individuals chose money over integrity as they abused their positions of trust and misused privileged information. Whether they learned about the pending mergers through business, family, or friends, they exploited those relationships to make an easy buck.”

I am certainly not an expert on tort law or defamation, but at a minimum, someone owes Dr. De La Maza an apology.

SEC Loses Insider Trading Case — You Can’t Win’em All - Walter Pavlo - White-Collar Crime - Forbes

Wednesday, June 22, 2011

Insider Trading Probe Sparks Paranoia in Traders

The trader in this article needs a securities lawyer, or at least some time on my sites to understand what insider trading really is. Best line of the piece - the paranoia is a feature, not a bug.

Insider Trading Probe Sparks Paranoia in Traders - CNBC

Hat tip to Securities Docket.

Tuesday, June 21, 2011

J.P. Morgan to Pay $153.6 Million to Settle SEC Charges

The SEC announced that J.P. Morgan Securities LLC will pay $153.6 million to settle charges that it misled investors in a complex mortgage securities transaction just as the housing market was starting to plummet. Under the settlement, harmed investors will receive all of their money back.

In settling the SEC’s fraud charges against the firm, J.P. Morgan also agreed to improve the way it reviews and approves mortgage securities transactions.

The SEC alleges that J.P. Morgan structured and marketed a synthetic collateralized debt obligation (CDO) without informing investors that a hedge fund helped select the assets in the CDO portfolio and had a short position in more than half of those assets. As a result, the hedge fund was poised to benefit if the CDO assets it was selecting for the portfolio defaulted.

The SEC separately charged Edward S. Steffelin, who headed the team at an investment advisory firm that the deal’s marketing materials misleadingly represented had selected the CDO’s portfolio.

It appears that the SEC did not charge any individuals at JP Morgan Securities who were involved. Bloomberg reported back in April that an executive had received a Wells Notice related to the investigation, but our search was unable to find any case or settlement against him.

FINRA Targeting Small Firms and Individual Brokers?

John Crudele at the NY Post recently penned a column Small Firms Claim FINRA Targets Them that is generating quite a reaction. We represent a large number of small firms, ranging from firms with 5 registered representatives to approximately 300 registered representatives, and our clients are the ones who originally alerted us to the article. There is a fair amount of truth to the article - FINRA is much more aggressive with small firms than it is with big firms.

Anyone who follows FINRA enforcement proceedings has a hint of the disparity, when we see wirehouses like Merrill Lynch and Bank of America receive the equivalent of wrist-slap fines for their violations. What the general public does not know is that for the same violation at any of the other 4,000 firms in the country the fine would be multiples, on a percentage basis, against the small firm, and the charges would include charges against individuals at the firm, not just the firm. When was the last time you saw FINRA name Ken Lewis or John Thain in an enforcement proceeding? Don't bother looking, it has never happened, but take a look at how often they name the president or senior executive of a BD with hundreds of brokers as a respondent.

The simple fact is that FINRA is out to show how tough it is which causes numerous problems. FINRA examiners simply love to spend months at a firm during a routine audit - yes, I said months. Imagine trying to run your business while you have to dedicate a conference room to two examiners, provide them with a staff member to fetch documents and make copies for them, and make yourself available on a moments notice to answer questions. Now imagine that going on for 4 or 5 or 8 months, every day.

This of course is in addition to the hours spent complying with the morass of rules and regulations that often do not apply to your particular business model, knowing all the while that one missed form, one account not verified, or one other slip up could cost you a fine starting at $2,500.00. It is not a pleasant existence.
And FINRA knows that the small broker-dealers, and individual brokers, cannot afford the fight - so FINRA brings the fight, but brings it against the small broker-dealers and individual brokers, betting on the fact that the firm cannot afford to fight and will therefore settle the charges, regardless of how questionable the charges. It happens every day.

But now smaller firms and individuals are starting to fight back and are devoting the resources to defend themselves against the FINRA onslaught. And we are starting to see a turn in the statistics.
The heavy-handed issue remains, and Mr. Crudele has now posted a followup, - Tales from Wall St. about heavy-handed Finra detailing the reaction he has received to the original article and promising more articles on FINRA's apparent desire to destroy the small broker-dealer industry.
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Monday, June 20, 2011

The Securities Investor Protection Corporation, email and telephone phishing scam targeting investors, SIPC warns of investor phishing scam, protecting financial information from phishers - Financial Planning

The Securities Investor Protection Corporation (SIPC) is warning investors that a scammer -- or perhaps a group of scammers -- is preying on people who have already been victimized by previous investment scams, calling them or sending them unsolicited emails in an attempt to steal their money and their most sensitive personal and financial information.

SIPC officials said a number of individuals who have been targeted in this new phishing scam claim someone posing as an SIPC investigator called or emailed them, telling them that the agency had seized the assets of a company that had defrauded the potential victim. The scammer then asks the would-be, two-time victim to pay a fee and to provide certain personal information, after which the caller promises to return the investor’s lost money.

More at Financial

Friday, June 17, 2011

Dear Congress: Please Stop Robbing Us

A little dramatic, but it's the headline at The Motley Fool for an article on insider trading by Congress. While not insider trading in the sense of the term as securities attorneys would use the term, what Congress is being accused of is every bit the same.

Today, if a congressman learns that his committee is about to pass a rule that would affect a particular company or group of companies, he can trade on that information because he is not required to keep that information confidential. If anyone else on this green earth was in a similar situation, the SEC would be on them in a flash, with a civil suit for disgorgement and a penalty equal to two times the profit they earned.

Once we agree as a society with the concept that insider trading is bad for the markets, bad for the economy and bad for investors, this Congressional loophole in the securities regulations is an outrage. Take a look at the Motley Fool article, the examples that they have provided are outrageous examples of amazing market timing by specific members of Congress.

It's time for a change in the law. Either we amend the current securities laws to encompass and prohibit this conduct, or force Congress to put their investments in blind trusts. The problem is, who is going to force them to pass that law? The only one who can force Congress to stop this conduct is Congress!

And there is virtually no chance of that ever happening.



Thursday, June 16, 2011

Merrill Loses Another Promissory Note Case

As most readers are aware, brokerage firms structure their signing bonuses for producing brokers as long term loans which are forgiven over time. When the broker leaves the firm, regardless of the reason, the firm sues to collect the balance on the loans.

Those claims are often met with significant counterclaims by the broker - after all, the broker left the firm for a reason, usually a significant breach by the firm.

While the brokerage firms often win in those cases, since the promissory note is just that, Merrill Lynch has been losing these cases lately, as it appears that Merrill's mistreatment of its brokers over recent years is finally coming home to roost.

Last month, a FINRA Panel refused to enforce a promissory note at Merrill's request. This month, another  FINRA arbitration panel denied Merrill Lynch's request to enforce a million dollar note, and ordered Merrill Lynch to pay the broker 1.5 million dollars.

The broker keeps the one million dollars represented by the note, and Merrill pays him an additional 1.5 million dollars.

 And, to add insult to injury, the Panel assessed all forum fees against Merrill.

I have represented numerous Bank of America and Merrill Lynch brokers in employment related cases, including the defense of claims on promissory notes. While I do not know anything about this case, in my view of the world, these cases are simply an outgrowth of the poor management of Merrill Lynch which led to its financial demise, and the nearly incompetent management of the brokerage firm by Bank of America. Management of both firms took steps in their own self-interest, regardless of the impact on employees and brokers and destroyed careers in the process.

Sometimes damage to employees in management decisions is unavoidable. A reputable company compensates the employees harmed by those management decisions. Merrill Lynch and Bank of America do not compensate the employees; they sue the employees.

No wonder Bank of America/Merrill lynch finds itself in financial ruin. BofA's stock traded at over $50 a share a few years ago. Today it hovers around $10.

A copy of the award is available here.

Tuesday, June 14, 2011

SEC Loses Insider Trading Trial

My good friends and colleagues Jim Sallah and Jeff Cox from Sallah & Cox, LLC have just proved that SEC complaints contain allegations, not facts. Jim and Jeff just finished a two week trial in Miami, and after an hour of deliberations, the jury cleared their client of any wrongdoing.

According to their press release, the jury found that Dr. Sebastian De La Maza, age 73, did not engage in insider trading by purchasing stock issued by Miami-based Neff Corp. only weeks before the company was acquired by Odyssey Investment Partners in 2005. Dr. De La Maza, according to the SEC’s complaint, allegedly learned about the acquisition from his daughter, who is married to Neff’s former CEO.

The trial was one of the first insider trading cases to be heard by a jury sitting in the Southern District of Florida in nearly a decade. Dr. De La Maza adamantly denied the allegations and presented evidence at trial that he had a seven-year history of closely following and trading Neff, and that his purchases prior to Neff’s acquisition were consistent with his trading history.

Despite the SEC’s arguments, it took the jury a little more than one hour to determine that Dr. De La Maza was not liable for insider trading. The defense verdict is the culmination of a federal investigation and litigation spanning nearly half of a decade.

Earlier this year, Sallah & Cox also successfully defended Dr. De La Maza in a private, shareholder suit in federal court in Miami based on the same allegations, which was dismissed by the Court on different grounds. (Kamin et al. v. Acord, et al., Case No. 09-22829-Civ-Jordan).

Jim and Jeff are partners in Sallah & Cox, LLC. Mark Astarita, the author of this blog, has a working relationship with the firm, whose web site is at

Wednesday, June 8, 2011

SEC Suspends Trading in 17 Penny Stocks

Yesterday the SEC suspended trading in 17 microcap stocks because of questions about the adequacy and accuracy of publicly available information about the companies, which trade in the over-the-counter (OTC) market.

The trading suspensions spring from a joint effort by SEC regional offices in Los Angeles, Miami, New York, and Philadelphia; its Office of Market Intelligence; and its new Microcap Fraud Working Group, which uses a coordinated, proactive approach to detecting and deterring fraud involving microcap securities. The trading suspensions follow a similar suspension last week against Uniontown Energy Inc. (UTOG), based in Henderson, Nev., and Vancouver, Canada.

The 17 companies and their ticker symbols are:

  • American Pacific Rim Commerce Group (APRM), based in Citra, Fla.
  • Anywhere MD, Inc. (ANWM), based in Altascadero, Calif.
  • Calypso Wireless Inc. (CLYW), based in Houston.
  • Cascadia Investments, Inc. (CDIV), based in Tacoma, Wash.
  • CytoGenix Inc. (CYGX), based in Houston.
  • Emerging Healthcare Solutions Inc. (EHSI), based in Houston.
  • Evolution Solar Corp. (EVSO), based in The Woodlands, Texas.
  • Global Resource Corp. (GBRC), based in Morrisville, N.C.
  • Go Solar USA Inc. (GSLO), based in New Orleans.
  • Kore Nutrition Inc. (KORE), based in Henderson, Nev.
  • Laidlaw Energy Group Inc. (LLEG), based in New York City.
  • Mind Technologies Inc. (METK), based in Cardiff, Calif.
  • Montvale Technologies Inc. (IVVI), based in Montvale, N.J.
  • MSGI Security Solutions Inc. (MSGI), based in New York City.
  • Prime Star Group Inc. (PSGI), based in Las Vegas, Nev.
  • Solar Park Initiatives Inc. (SOPV), based in Ponte Verde Beach, Fla.
  • United States Oil & Gas Corp. (USOG), based in Austin, Texas.

SEC Suspends Trading in 17 Companies in Proactive Effort to Combat Microcap Stock Fraud


SCOTUS Makes Securities Fraud Suits Easier

Halliburton Loses As Supreme Court Backs Securities Suits

The U.S. Supreme Court made it easier for investors to press securities fraud suits, ruling for shareholders who accuse Halliburton Co. of misrepresenting its financial condition while under Dick Cheney’s leadership.

The justices today unanimously said the shareholders can sue as a group without first establishing that they lost money as a result of the alleged fraud.

Tuesday, June 7, 2011

2nd Circuit Affirms $400 Million FINRA Arbitration Award

Professor Jill Gross at the ADR Prof Blog provides the details - the Second Circuit affirmed a denial of a vacatur motion in the context of a $400 million FINRA arbitration award. In STMicroelectronics, N.V. v. Credit Suisse Securities (USA), LLC, Docket No. 10-3847-cv (2d Cir. June 2, 2011), Credit Suisse moved to vacate an award against it arising out of its sale of auction-rate securities (“ARS”) to STMicroelectronics (“ST”), a semiconductor manufacturer. Credit Suisse sold ARS to ST, and, when the ARS market froze in August 2007, more than $400 million of ARS owned by ST failed at auction, rendering them illiquid and significantly lower in value.

Second Circuit Affirms $400 Million FINRA Arbitration Award

But He Said He Did It Alone - SEC Charges Longtime Madoff Employee With Fraud

No one believed Madoff when he claimed that he conducted his massive fraud by himself without any help. now the SEC has charged Eric Lipkin, with helping Bernard L. Madoff and his firm deceive and defraud investors and regulators about the massive Ponzi scheme.

“Eric Lipkin helped create the detailed and entirely phony trading and business records that contributed to the success of Madoff’s fraud,” said George S. Canellos, Director of the SEC's New York Regional Office. “The SEC is committed to holding accountable those who helped to perpetrate and conceal Madoff’s scheme.”

Additional Materials

The SEC’s complaint, filed in U.S. District Court for the Southern District of New York, alleges that for more than a decade, Lipkin helped Madoff defraud investors and mislead auditors and regulators about Madoff’s fraudulent, multi-billion dollar advisory operations. According to the complaint, Lipkin processed payroll records for “no-show” employees, falsified records of investors’ account holdings, and played a role in executing the entirely fictitious investment strategy that Madoff and BMIS claimed to be pursuing on behalf of its clients. In fact, Madoff used investors’ funds to enrich himself, his family, and his associates, and to pay off other investors. Lipkin also helped Madoff deceive regulators by preparing fake Depository Trust Clearing Corporation (DTCC) reports showing the sham investments for clients. Lipkin received annual bonuses from the firm, including for his work to mislead auditors and examiners, and he received $720,000 from Madoff to purchase a house, an amount he never paid back.

Without admitting or denying the allegations of the SEC’s complaint, Lipkin has consented to a proposed partial judgment, which, if entered by the court, will impose a permanent injunction against Lipkin and require him to disgorge ill-gotten gains and pay a fine in an amount to be determined by the court at a later time.

The SEC’s complaint against Lipkin alleges that he violated Section 17(a) of the Securities Act of 1933; violated and aided and abetted violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; aided and abetted violations of Sections 204, 206(1) and 206(2) of the Investment Advisers Act of 1940 and Rule 204-2 thereunder, and Sections 15(c) and 17(a) of the Exchange Act and Rules 10b-3 and 17a-3 thereunder.

The SEC Press Release and Related Documents


Friday, June 3, 2011

Principal Protection Notes: Timely Warning from the SEC?

For the past two years we have been investigating investor claims regarding principal protection notes and the litigation and arbitrations that have followed. Millions of dollars have been lost in these notes.

Today the SEC demonstrated one of the more significant issues with its regulatory program - closing the barn door after the horses are gone. Today, years after these sales of principal protection notes to thousands of investors, the SEC's  Office of Investor Education and Advocacy and the Financial Industry Regulatory Authority (FINRA) has issued an investor alert regarding the product. Years after the fact.

The alert, called Structured Notes with Principal Protection: Note the Terms of Your Investment is intended to educate investors about the risks of structured notes with principal protection, and to help them understand how these complex financial products work. While the SEC correctly notes that the retail market for these notes has grown in recent years, it completely overlooks the fact that thousands of investors have already lost hundreds of millions of dollars in these notes.

Structured notes with principal protection typically combine a zero-coupon bond – which pays no interest until the bond matures — with an option or other derivative product whose payoff is linked to an underlying asset, index or benchmark. The underlying asset, index or benchmark can vary widely, from commonly cited market benchmarks to currencies, commodities and spreads between interest rates. The investor is entitled to participate in a return that is linked to a specified change in the value of the underlying asset. However, investors should know that these notes might be structured in a way such that their upside exposure to the underlying asset, index or benchmark is limited or capped.

Investors who hold these notes until maturity will typically get back at least some of their investment, even if the underlying asset, index or benchmark declines. But protection levels vary, with some of these products guaranteeing as little as 10 percent — and any guarantee is only as good as the financial strength of the company that makes that promise.

“Structured notes with principal protection contain risks that may surprise many investors and can have payout structures that are difficult to understand,” said Lori J. Schock, Director of the SEC’s Office of Investor Education and Advocacy. “This alert is a ‘must read’ for investors considering these products, especially those with the mistaken belief that these investments offer complete downside protection.”

“The current low interest rate environment might make the potentially higher yields offered by structured notes with principal protection enticing to investors,” said FINRA Senior Vice President for Investor Education John Gannon. “But retail investors should realize that chasing a higher yield by investing in these products could mean winding up with an expensive, risky, complex and illiquid investment.”

Our firm has been advising investors and financial advisors who were mislead by the wirehouses regarding the safety of principal protection notes since 2008, and continues to do so. If you have any questions about such cases, feel free to contact us at