Florida Securities Fraud Lawyer Blog

A federal court has held that Schwab's mutual fund managers contradicted its policy of limiting money invested in a particular industry to 25 percent. This required shareholder consent under federal securities laws. The case is now set to go to trial.

In the lawsuit, the investors' nationwide damages approximate over $80 million.

Schwab also has tried to persuade the SEC from suing Schwab. YieldPlus investors shareholders suffered millions of dollars in losses when the fund invested much of its assets in mortgage-backed securities that were not insured. When real estate crashed, so did the fund.

Investors argue that Schwab misled them by pitching the mutual fund as "marginally" riskier than CDs. The fund omitted that mortgage-related securities comprised more than 50% of the fund's assets.

While the case is venued in the Northern District of California, In Re Charles Schwab Corp. Securities Litigation, 08-cv-01510, many Florida investors were induced by their brokers to invest in this fund.

The SEC has charged Goldman Sachs & Co. ("Goldman") and a Vice President, for misleading investors by misstating and omitting material facts about a derivative product tied to sub-prime mortgages.

The SEC complaint alleges that Goldman structured and marketed a synthetic collateralized debt obligation ("CDO") tied to sub-prime residential mortgage-backed securities ("RMBS"). Goldman failed to notify investors of essential information about the CDO, including the role that a large hedge fund, Paulson & Co. ("Paulson") played in portfolio selection and the fund took a short-sale position on the CDO.

The SEC is continuing to study investment banks' practices and others involved in the securitization of complex financial products, including derivatives, tied to the national housing market.

Paulson apparently paid Goldman to structure a transaction in which the fund would take short positions against mortgage securities chosen by Paulson, based on the belief that the securities would experience credit problems.

The marketing materials for the CDO - known as ABACUS 2007-AC1 (ABACUS) - represented that the RMBS portfolio underlying the CDO was selected by ACA Management LLC ("ACA"), a third party with expertise in analyzing credit risk in RMBS. Omitted from the marketing materials, however, was that Paulson would benefit if the RMBS defaulted and played a significant role in selecting which RMBS comprised the portfolio.

Paulson, therefore, had an economic incentive to select RMBS in that it expected to experience credit events. Goldman did not disclose Paulson's short position, or its role in the collateral selection process.

The SEC alleges that Goldman Vice President Fabrice Tourre was responsible for the ABACUS 2007-AC1 transaction, and that he misled ACA into believing that Paulson invested approximately $200 million in the equity of ABACUS, stating that Paulson interests in the collateral selection process were closely aligned with ACA's interests. Their interests, however, were sharply conflicting.

Goldman received approximately $15 million for marketing and structuring ABACUS. Investors in ABACUS are believed to have lost more than $1 billion.

If you or someone you know has incurred losses in the Goldman fraud, you or they should seek the counsel of a qualified securities attorney.

The sentence is substantially lower than the 335 years sought by prosecutors. When Mr. Petters' massive empire unraveled, the losses were $3.6 billion. Investors include pastors, missionaries, retirees and nursing home residents, among others. Several months ago, a jury convicted the prior owner of Polaroid on 20 counts of mail and wire fraud, money laundering, and conspiracy.

The scheme has been compared to the Ponzi run by Bernie Madoff, who received a sentence of 150 years in prison after pleading guilty to a scheme that cost investors billions of dollars.

Petters intends to file an appeal. He also disputes that what happened was a Ponzi scheme. Petters testified that he had thought Petters Co. Inc., an arm of his now bankrupt Petters Group Worldwide, was doing legitimate deals.

PCI apparently used fake purchase orders and bogus bank records to persuade investors to finance what they were told would be purchases of electronics such as big-screen televisions that PCI would resell to discount retailer. But the merchandise never existed and the sales never took place.

Petters blamed other business associates, who all pleaded guilty in hopes of leniency and said his biggest mistake was trusting them.

This is an example of yet another Ponzi scheme that was able to operate during the last decade of weak securities regulation.

The SEC has charged Morgan Keegan with failure to use proper procedures to the securities in five managed funds and for its failure to correctly calculate the "net asset values" (NAVs) for the funds. Morgan Keegan sold shares in the funds to the public, including Florida investors, based on the inaccurate prices.

The SEC alleges that the portfolio manager and a Morgan Keegan employee directed the firm's Fund Accounting department to make "price adjustments" that increased the values of specific securities. The price adjustments ignored lower values for those same securities quoted by various dealers. The employee apparently screened and manipulated the pricing quotes obtained from at least one brokerage firm.

The SEC also alleges that Joseph Thompson Weller, a CPA who was in charge of the Fund Accounting Department, did little to correct the deficiencies in Morgan Keegan's valuation procedures and did not make sure that fair-valued securities were being accurately priced.

According to the SEC's order initiating proceedings, Morgan Keegan priced each portfolio's securities and calculated its daily NAV through its Fund Accounting Department. The NAV of an investment company is its total assets minus its total liabilities. An investment company calculates the NAV of a single share by dividing its NAV by the number of shares that are outstanding.

The employee directed his assistant to send approximately 262 price adjustments to Fund Accounting. The adjustments, however, were arbitrary and did not reflect fair value. The employee's adjustments were entered into a spreadsheet used to calculate the NAVs of the funds and he routinely instructed Fund Accounting to ignore month-end quotes from broker-dealers that were supposed to be used to validate the prices the firm had assigned to the funds' securities.

The SEC's case and investigation against Morgan Keegan and the employees are ongoing.

If the Senate adopts the financial reform legislation, many investment advisory firms regulated by the SEC will be regulated by state securities regulators.

Industry observers do not know of any opposition to raising the asset threshold, while concerns have been asserted about states' ability to regulate additional advisory firms.

Furthermore, the core idea of financial reform has some bipartisan support in Congress. Within days after the health reform legislation prevailed in March, Democratic and Republican key players announced that they expected the Senate to pass a financial reform bill.

The National Securities Market Improvement Act of 1996 gave the SEC the power to increase the asset threshold, but the SEC has never done so.

The Investment Adviser Association estimates that an additional 4,000 plus advisory firms would fall under state jurisdiction with a higher ceiling. Proponents of the higher ceiling have claimed that it would lighten some of the burden on an over-taxed SEC.

For its fiscal year ended last September, the SEC examined less than 10% of federally registered advisers. In a normal year, the SEC examines about 33% of firms that have been identified as high-risk, but in fiscal 2009, only 22% of high-risk firms were reviewed.

Overall, if this legislation passes the Senate and becomes law, this should prove a good day for the public investor. The last several years have taught us that investment advisory firms require more and better regulation.