Chicago Securities Lawyer Blog

The Federal Reserve's QE Infinity program may be finite rather than "infinite" after all. QE Infinity has been the tongue-in-cheek term given the Fed's Quantitative Easing program, which has expanded into their purchasing $85 billion per month in mortgage-backed securities and Treasuries. But the winds of change may be blowing. Investors have been abuzz as the Wall Street Journal recently reported that officials at the central bank are considering an exit strategy from the massive stimulus measures that have been driving the U.S. economy for nearly the last five years.

A senior interest rate strategist at Columbia Management said "Faced with conflicting information on the economy, Fed officials have decided to see the glass as half full." They are thinking about making an exit rather than continuing to boost the economy with their automatic, huge monthly outlay. Instead, it may begin to "increase or reduce the pace" of those purchases in response to economic activity.

The news that the Fed may begin to tighten its monetary policies resulted in U.S. Treasuries reaching a two-month high for the ten-year yields, simultaneously reducing their price. Meanwhile, the Dow Jones closed down nearly 27 points yesterday after late trading caused it to fall below the 15,100 mark.

Continue reading "Investors Watch as Federal Reserve's Mood May Be Changing" »

The Wall Street Journal, Bloomberg, and Reuters have all reported that the Commodity Futures Trading Commission ("CFTC") is allegedly examining whether high-frequency-trading firms are violating rules by using wash trades to artificially inflate volume and distort markets in futures contracts. Wash trading is the buying and selling of identical futures contracts through different futures commission merchants at the same time. Repeated wash trading is done to manipulate the market and induce others to trade.

Wash trades are banned under U.S. futures law. When wash trades occur, "it might appear to be liquidity, but it is not. It isn't really there. It's fantasy liquidity," Bart Chilton of the CFTC was to say in a speech last Sunday.

The CFTC investigation centers on trading related to crude oil, precious metals, agricultural commodities and the Standard & Poor's 500 stock index. The two primary exchange operators that handle such trades are the CME Group Inc. ("CME") and IntercontinentalExchange Inc. ("ICE"). Regulators reportedly are examining whether these exchanges' systems are sophisticated enough to prevent such trades from occurring.

Continue reading "Commodity Futures Trading Commission Investigating Wash Sales of Futures Contracts at CME Group, Inc. and IntercontinentalExchange, Inc." »

When it comes to selling stock, companies must be aware of their obligations to their investors. Among the most important of these obligations is the necessity of properly representing to investors the financial and legal status of the company and how that might affect the company's stocks.

One company that recently failed to do this is YPF Sociedad Anonima. In November, 2010, YPF filed a Form F-3 Registration Statement for their offering with the SEC. In March, 2011, the Prospectus with respect to the offering went into effect and more than 26.2 million shares of YPF American Depositary Shares were sold to the public at a rate of $41 per share. This put the total value of the offering at more than $1 billion.

However, there are certain important facts about YPF which the company failed to disclose or misrepresented in its Registration Statement. These facts include, among others:
1) that the YPF faced a risk of nationalization by the Argentinean government;
2) that the company's risk of nationalization had increased due to its failure to adequately produce oil and gas within Argentina as well as its failure to reinvest a certain portion of its profits back into the company;
3) that the company was in breach of its concession contracts with various Argentinean provinces; and
4) that nationalization by the Argentinean government would likely have a drastic, adverse effect on shareholders and the company's market value.
Had this information been made available to investors, a number of them would not have purchased the stock. These are the allegations laid forth in a complaint filed in a class action lawsuit against YPF. Anyone who purchased YPF's American Depositary Shares is eligible to participate in the class action.

It seems particularly heinous when the victim of a stockbroker scam is a senior citizen. Recently, a stockbroker was sentenced to five years in prison for fraud and filing a false tax return after stealing more than $1 million from an elderly client and his heirs.

The stockbroker, Michael Montgomery, started as an investment advisor for the elderly man living in Lake Tacoma and later became the trustee of the man's living trust. He also gained power of attorney over his client. From 2003 through 2007, Montgomery misappropriated money from the elderly man's bank and investment accounts and sent $654,600 from the client's Charles Schwab account to another bank account, whereupon Montgomery took the money for his own personal spending.

Montgomery wrote a further $598,916 in checks to himself from his client's account from January 2004 to July 2006, supposedly as payment for services to his client. After the client died on July 18, 2006, Montgomery wrote an additional $243,745 in checks to himself from the client's estate for "estate services". However, he never told the client's surviving family members what any of these services were, nor did he report the income on his tax returns.

U.S. District Judge Robert J. Bryan thinks that Montgomery may have been committing fraud even before 2003. According to the judge, there is a "high probability" that Montgomery has been stealing from his victims since 2001.

Continue reading "Stockbroker Sentenced to prison for scamming Senior Citizens" »

After the housing crash of 2009, many people sought someone to blame. Wall Street has become a bad word and the greed of the people who work there has largely been blamed for the current economic downturn. A new lawsuit against Standard & Poor's, the nations largest credit ratings agency, will reveal if they are, in fact, to blame. The Justice Department has filed charges against the firm for allegedly inflating the ratings of mortgage investments and setting them up for a crash when the financial crisis struck. More than a dozen state prosecutors are expected to join the federal suit, and the New York attorney general is preparing its own action against the firm. Additionally, the Securities and Exchange Commission has also been investigating possible wrongdoing at S & P.

The lawsuit includes S & P's parent company, McGraw-Hill Companies, as a defendant and covers the period from September 2004 through October 2007. So far, it is unclear whether the authorities are looking at the two other major ratings agencies, Moody's Investor's Services and Fitch. According to the lawsuit, the high ratings given to investments by companies such as S & P made investments appear safer than they actually were and thereby contributed to the ensuing financial crisis.

Allegedly, S & P issued artificially high ratings knowingly and "with intent to defraud, devised ... a scheme to defraud investors". It also alleges that S & P presented its ratings as "objective, independent", and "uninfluenced by any conflicts of interest" when that was not actually the case. In fact, the three major ratings agencies were usually paid by the issuers of the securities they rate - in this case, the banks that had packaged and wanted to market the securities.

Continue reading "Justice Department sues Standard & Poor's for inflating the ratings of mortgage investments" »

Early in 2012, the National Futures Association ("NFA"), seeking to better protect customer funds, approved a proposal to develop a daily segregation confirmation system that would require all depositories holding customer funds, including banks, clearing Futures Commission Merchants ("FCMs"), broker-dealers and money market accounts to file daily reports reflecting the funds held in segregated and secured amount accounts with each FCMs designated self-regulatory organization ("DSRO"). Each DSRO would then perform an automated comparison of that information with the daily segregation and secured amount reports filed by the FCMs to ensure that the figures corroborate each other.

In November, the NFA Board of Directors approved an amendment to Financial Requirements Section 4, requiring each FCM to instruct its depositories holding segregated, secured amount and cleared swaps customer collateral to report those balances on a daily basis to a third party designated by NFA. The first phase of the daily confirmation system, which relates to banks, was expected to be fully implemented by December 31, 2012. Other categories of depositories will be added in 2013.

Another amendment approved by the NFA Board of Directors in November of 2012 was to increase the capital requirements for FCMs acting as counterparties in FOREX transactions in off-exchange foreign currency transactions with eligible contract participants ("ECPs"). NFA noted that three FCMs ceased to act as FOREX dealer members and were almost exclusively acting as counterparties to FOREX transactions with ECPs. NFA had concerns that these firms could be subject to inadequate capital requirements. Additionally, NFA could not find a rationalization that an FCM that acts as a counterparty to a retail FOREX transaction must maintain at least $20 million in adjusted net capital while an FCM that engages in an identical type of transaction with an ECP must only maintain a minimum of $1 million in capital. NFA has submitted the amendment to the Commodity Futures Trading Commission for approval.

Exchange-traded funds, commonly called ETFs, are investment funds that trade like stocks on stock exchanges. Most ETFs track an index, such as a stock index or a bond index. Exchange-traded funds began trading in 1993, but in recent years they've been gaining in popularity against more mature mutual funds. The number of existing ETFs has increased dramatically so now investors can choose from hundreds of them.

Only authorized participants, large institutional investors, buy or sell shares of an ETF directly from the fund manager. Individuals can buy and sell ETFs through a broker or a brokerage account.

When shares of a traditional mutual fund are purchased, the net asset value serves much like a stock price -- it's the price at which shares are bought or sold from the fund company. At a traditional fund, the NAV is set at the end of each trading day. ETFs work differently. Since ETFs trade like a stock, you buy and sell shares on an exchange at a price determined by supply and demand. That's why an ETF's market price can differ from its net asset value (the value of all securities inside minus liabilities, divided by the total number of shares outstanding).

Continue reading "Four Reasons Why Exchange Traded Funds Gain In Popularity Over Mutual Funds" »

James Zweig of the Wall Street Journal had an interesting article in the October 6-7, 2012 Business and Finance Section. He reported that the Financial Industry Regulatory Authority ("FINRA") is examining how major banks and brokerage firms define and deal with conflicts of interest between themselves and their clients. In the next few weeks, FINRA will conduct an examination of 14 big firms to discover and mitigate conflicts of interest.

As everyone knows, a broker makes his money by getting his/her clients to make purchases in the marketplace. In some instances, brokerage firms have encouraged clients to tap into the equity in their homes to speculate, have unloaded underperforming or toxic portfolios on clients and have manipulated interest rates for their own benefit.

What caught my attention in the article was a discussion of a recently published study conducted by Carnegie Mellon University which involved hundreds of physicians and financial planners. They were asked to evaluate proposed rules concerning conflict of interest policies. Half of each group evaluated proposed rules relating to doctors and half evaluated proposed rules relating to financial planners. Each set of proposed rules had almost identical wording. The doctors thought that financial planners should not be accepting gifts of pens, coffee mugs, free meals or educational junkets from investment companies, yet saw no conflict with accepting pens, coffee mugs, free meals and educational junkets from drug companies. The financial planners had the identical mirror image view that doctors should not be accepting gifts from drug companies but saw no conflict with accepting gifts from investment companies themselves.

So what does this tell us about how individuals are able to weigh conflicts of interest? It tells us that most people expect everyone else to be very aware of conflicts of interest but at the same time cannot understand or admit that such standards should apply to them as well.

There is an abundance of laws, rules and regulations in place that require financial advisors to only make recommendations that are in the best interest of their clients. As the study demonstrated, it may be difficult for any financial advisor to objectively determine whether or not an investment recommendation is suitable for his/her clients. Let's hope that FINRA discovers that the major banks and brokerage houses have adequate procedures in place. Let's also not forget that each investor has the right to ask for an explanation of the reasons why any investment is the right one for him/her.

Continue reading "Your Broker and You - A Conflict of Interest" »

The Securities and Exchange Commission ("SEC") has accepted the Offer of Settlement from Advanced Equities, Inc. ("AEI"), Dwight Badger ("Badger") and Keith Daubenspeck ("Daubenspeck"), which consented to an Order Instituting Administrative and Cease-and-Desist Proceedings pursuant to Section 8A of the Securities Act of 1933, Section 15(b) of ;the Securities Exchange Act of 1934 and Sections 203(e) and 203(f) of the Investment Advisors Act of 1940. The SEC found that in 2006, after AEI completed a private equity offering for Company A, they were allowed by Company A to attend its board of directors meetings, whereby they were privy to hear and view confidential information

At Company A's December 2008 Board Meeting, Badger and Daubenspeck made a presentation to the board to allow them to raise $150 Million in a Series F offering. They told Company A that they hoped to complete the Series F Offering during the month of January 2009 by targeting a small number of high-net-worth individuals. They intended to raise the funds by offering shares of stock at $18.52.

Badger and Daubenspeck began their efforts to raise capital for Company A in December of 2008. By mid-January of 2009, they realized that they would not be able to meet their stated goals and began targeting smaller investors. Since Company A did not accept direct investments of less than $2 Million, AEI formed two limited liability companies, Greentech III and Greentech IV, on January 23, 2009. These companies would allow accredited investors (Greentech III) and qualified purchasers (Greentech IV) to invest as little as $25,000 in Company A. These investors would deal with AEI, rather than with Company A.

Company A placed strict restrictions on information that AEI could provide to potential investors. Badger took personal control of contacts with potential investors in the Greentech companies. He alleged that he made over 200 personal calls to investors. Daubenspeck, along with several AEI brokers and investment bankers traveled to Company A's headquarters. Between early January and late March of 2009, AEI raised approximately $122 Million from 609 investors.

Badger made misrepresentations about Company A to AEI brokers in an email when he stated that Company A had an order for the sale of 2,000 units to the CIA. This order would have generated approximately $2 Billion in revenue for Company A. In reality, Company A did not have any orders with the CIA. Badger and Daubenspeck also misrepresented Company A's projected revenue to AEI brokers during an internal sales call on February 2, 2009. They stated that Company A had projected revenue from contracts and backorders of $2 Billion when in fact Company A had between $10 Million and $42 Million under contract as order backlog.

Badger continued to make fraudulent misrepresentations to AEI brokers in February and March of 2009. During one internal sales call, he stated that Company A had a $1 Billion contract with a well- known national grocery chain when the actual contract number was $2 Million. He also stated that Company A was getting funded by the Department of Energy with $300 Million of revenue when Company A had only applied for a loan of $96.8 Million but had not even received notice if its application would be granted. Daubenspeck remained silent during the call.

Continue reading "Advanced Equities, Inc., Badger and Daubenspeck settle fraud charges with SEC " »

Peregrine Financial Group, Inc. ("PFG") has been shut down by enforcement actions filed against it by the Commodity Futures Trading Commission ("CFTC") and the National Futures Association ("NFA") on July 9, 2012. The regulators discovered that the firm's founder, Russell Wasendorf, Sr., had been falsifying bank statements about the amount of funds held by PFG. It is estimated that more than $200,000,000 in customer funds are missing. Wasendorf Sr. claims that he has spent the vast majority of that money. PFG filed for bankruptcy protection on July 10, 2012.

The scheme came to a head when the NFA required PFG to confirm its capital electronically rather than to submit bank statements. Wasendorf Sr. unsuccessfully attempted to commit suicide the next day by hooking a hose up to the tailpipe of his car. A suicide note found by the FBI in Wasendorf Sr.'s car stated that he had been lying to regulators for twenty years and he admitted to stealing $100,000,000 dollars.

Wasendorf Sr. was arrested on July 13, 2012. Wasendorf Sr. is charged criminally with making false statements to Commodity Futures Trading Commission regulators about how much client money the firm had on deposit. He, along with his son, Russell Wasendorf , Jr. and two other executives at PFG have been named in a class action case.

This is the second major case with missing customer segregated funds in the last year, following the collapse of MF Global. In January of this year, the CFTC conducted an audit of futures commission merchants and found no irregularities with PFG.

Most people perceive the securities industry as being unfair to the average investor and in favor of the large brokerage houses and the people who work in the industry. There are constant headlines in the newspapers relating to insider trading (Raj Rajaratnam), unexplained missing funds (MF Global Holdings, Peregrine Financial Group) and market manipulation (LIBOR). Add to this list that any arbitrator in a Financial Industry Regulatory Association ("FINRA") arbitration who rules against one of the large brokerage houses may be blackballed and ousted as a FINRA arbitrator for any future cases. In other words, the deck will be stacked against the average investor and in favor of the brokerage houses since any noncompliant arbitrators will be weeded out of the FINRA arbitration selection process.

In December of 2009, Robert C. Postell and Joan Postell filed an action against Merrill Lynch, seeking damages of $640,000.00 plus attorney fees. The claim was based on "a failure to adequately monitor" the accounts, "breach of contract" and "breach of fiduciary duty". Merrill Lynch, through its attorney, denied having any liability for the claims.

In May of 20011, the Postell's claim was heard in seven sessions over four days by a three person panel assigned by FINRA to hear the case. The three arbitrators were Ilene Gormly (chairperson), Daniel Kolber and Fred Pinckney. During the final hearing session, the panel was informed that Robert Postell had committed suicide in February and that his wife, Joan and his estate would substitute as claimants. According to Pinckney, it was at this final session that Terry Weiss, the attorney for Merrill Lynch, sensed that he was losing the case and repeatedly "exploded at the panel" and accused them of being biased against Merrill Lynch. The panel immediately contacted FINRA about Weiss' accusations and was told to proceed with final arguments and conclude the matter. The panel subsequently ruled in favor of the Postells and awarded damages of $520,000.00.

Approximately two months after the ruling, arbitrator Kolber received a letter from FINRA advising him that he would no longer be listed as an arbitrator with FINRA. In January of 2012, arbitrator Gormly, who had twenty years experience as an arbitrator, received the same letter from FINRA informing her that she would no longer be listed as an arbitrator with FINRA. In June of 2012, Pinckney received the letter from FINRA informing him that he was no longer a listed arbitrator with FINRA. Kolbert requested a meeting with FINRA executives which was denied. Gormly filed a "whistle blower" letter to the Securities Exchange Commission ("SEC") setting forth the events relating to the matter. The SEC has yet to respond to her letter.

Continue reading "FINRA Blackballing Arbitrators For Customer Awards" »

The new Financial Industry Regulatory Authority ("FINRA") Rule 2090 "Know Your Customer" and Rule 2111 "Suitability" will become effective on July 9, 2012. The new rules are based on former National Association of Securities Dealers ("NASD") and New York Stock Exchange ("NYSE") Rules.

New FINRA Rule 2090 is derived from former NYSE Rule 405(1). The new rule requires every member to use reasonable diligence, in regard to the opening and maintenance of every account, to know (and retain) the essential facts concerning every customer. For purposes of the Rule, the "essential facts" concerning a customer are those that enable the member to effectively service the customer's account, in accordance with any specific handling instructions and in compliance with all applicable laws, regulations and rules. In other words, the new Rule requires each member to gather essential information about the customer, retain the information, and update it while maintaining the account. This requirement must be adhered to by the member even if the broker has not yet made a recommendation to the customer.

New FINRA Rule 2011 is modeled after NASD Rule 2310. The new rule requires that every member or associated person of a member have a reasonable basis to believe that a recommended transaction or investment strategy is suitable for the customer based on the information diligently obtained pertaining to the customer's profile. Factors relating to a customer's profile which must be considered, which have been expanded from NASD Rule 2310, are set forth in the new FINRA Rule. There is no definition of what constitutes a "recommendation" in FINRA Rules. It has been defined by the facts and circumstances of the communication on a case by case basis. Factors to be considered are the the communication's content, context, and presentation to determine if the associated person was suggesting that the customer take action or refrain from taking action. Also important is the degree that the associated person tailored the conversations to the customer. Furthermore, a series of conversations relating to multiple actions can amount to a recommendation.

Continue reading "The New Know Your Customer and Suitability Rule" »