Florida Securities Fraud Lawyer Blog

Next Financial Group, Inc. (Next) submitted a Letter of Acceptance, Waiver and Consent (AWC) to settle claims by the Financial Industry Regulatory Authority (FINRA) that Next's due diligence was lacking in connection with its sale of more than $20 million of Provident Royalties, LLC private placements. In 2009, the Securities and Exchange Commission (SEC) accused Provident Royalties, LLC of fraud.

According to the AWC, Next received a specific fee for purportedly performing due diligence on each offering. However, the principal of Next responsible for performing the due diligence did nothing beyond reviewing the private placement memoranda. He did not travel to Provident's headquarters and failed to review any financial information beyond what was contained in the offering memoranda. Due diligence reports prepared by outside sources raised numerous red flags about the Provident offerings which he would have discovered had adequate due diligence been done.

In the AWC, Next agreed to pay $2 million in restitution to investors in the Provident offerings as well as pay a $50,000 fine.

A federal judge in New York struck down a settlement previously agreed to between the Securities and Exchange Commission (SEC) and Citigroup. In his ruling, U.S. District Judge Jed Rakoff cited the public's need for clarity about the financial markets.

The settlement stemmed from the SEC's allegations that Citigroup misled investors about a complex mortgage investment which resulted in a $160 Million profit to Citigroup and millions in losses to investors. Judge Rakoff stated that the SEC has an inherent duty to see that the truth emerges.

Trial in the case is set for July 16.

The U.S. Securities and Exchange Commission (SEC) announced that Randall Merk (Merk), former Executive Vice President of Charles Schwab & Co., Inc. and President of Charles Schwab Investment Management, has agreed to pay a $150,000 fine to settle charges brought against him in connection with Schwab's YieldPlus Fund.

The SEC's complaint filed in January 2011 alleged that Merk, and former YieldPlus Fund manager Kimon Daifotis, committed securities law violations in connection with the offer, sale and management of the YieldPlus Fund including misleading investors about the risks of the ultra-short bond fund. The complaint also claims that Merk approved other Schwab funds' redemptions of their YieldPlus holdings when Merk knew, or should have known, that the portfolio managers for those funds had received material, non-public information about the YieldPlus Fund.

According to Bloomberg, the YieldPlus Fund had $13.5 billion in assets at its peak in 2007 before tumbling to $1.8 billion 8 months later after fund managers deviated from the fund's stated investment policies.

The SEC reports that the litigation against Kimon Daifotis continues.

The Daily Business Review reported that separate lawsuits have been filed in Broward, Miami-Dade and Palm Beach counties by former NFL players Terrell Owens, Clinton Portis and Duane Starks against the law firm Greenberg Traurig and one of its West Palm Beach shareholders, Pamela Linden.

According to the Daily Business Review, the players claim that the Miami-based Greenberg Traurig firm and Ms. Linden failed to advise them against investing in an Alabama casino that turned out to be a scam, resulting in millions of dollars in losses. According to the complaint, Terrell Owens alone invested $2 million and was promised a return of 15%.

The complaints allege that Ms. Linden and Pro Sports Financial used powers of attorney granted them by the athletes to invest in the proposed Alabama casino project know as Country Crossing.

The lawsuits claim that the players were not advised by Ms. Linden or Pro Sports that charity fundraisers are the only form of legalized gambling in Alabama and that NFL rules prohibit investments in gambling ventures. The Daily Business Review reported that the project developer, Ronnie Gilley, previously entered a guilty plea in response to federal charges involving a scheme to buy votes in Alabama for gambling legislation.

A complaint filed on November 17, 2011 in Manhattan federal court, by the Securities and Exchange Commission (SEC) alleges that Florida residents John A. Mattera (Mattera) and John R. Arnold (Arnold) and several others engaged in a scheme to defraud investors across the country out of at least $12 million during the past 15 months.

The complaint charges the defendants with numerous federal securities violations and fraud and seeks an emergency court order to freeze the assets of Mattera, Arnold, Joseph Almazon of Hicksville, NY, David E. Howard II of New York City, Bradford Van Siclen of Montclair, N.J. and eight different entities, as well as injunctive relief, financial penalties and disgorgement of the defendants' ill-gotten gains.

According to the SEC's press release, the U.S. Attorney's Office for the Southern District of New York conducted a parallel criminal investigation which resulted in the arrest of Mattera at his Ft. Lauderdale home on Thursday.

The SEC complaint alleges that Mattera and several others used a hedge fund registered in the British Virgin Islands, The Praetorian Global Fund, Ltd. (Praetorian), to solicit funds from investors. According to the SEC, prospective investors were led to believe that Praetorian and its affiliated entities owned tens of millions of dollars worth of shares in privately-held companies such as Facebook, Twitter, and Groupon that were expected to soon hold initial public offerings (IPOs).

The SEC complaint asserts that Praetorian never owned the pre-IPO shares. The complaint further alleges that Mattera and others gave investors a false sense of security by telling them their money would be held by a Florida escrow agent (Arnold) at his firm First American Service Transmittals, Inc. (FAST) when in reality; Arnold simply transferred the investors' money to personal accounts owned by Mattera and Arnold. According to the SEC, investor funds were misappropriated by Arnold and Mattera to pay their co-conspirators for their roles in the scheme and to finance private jets, luxury cars, art, jewelry and other lavish expenses.

The case is SEC v. John A. Mattera, Bradford Van Siclen, The Praetorian Global Fund, et al., (United States District Court for the Southern District of New York, Civil Action No. 11-CV-8323).

The Securities and Exchange Commission (SEC) has begun scrutinizing registration documents submitted by investment advisers to uncover misrepresentations they have made regarding their education, assets under management and other aspects of their firm. The intent behind the crackdown is to uncover and address misconduct before it balloons into a threat to investor protection. What action the SEC will take regarding advisers who are found to have filed misleading forms is unclear.

In testimony before the Senate Banking Subcommittee on Securities, Insurance and Investment, Robert Khuzami, Director of the SEC's Division of Enforcement, stated "If they [advisers with misleading information on their forms] come face to face with inspectors early on...they're going to know that we're watching, and they're going to be unlikely to graduate to larger fraud."

The SEC faces quite a challenge in carrying out its mission. Carlo di Florio, Director of the SEC's Office of Compliance Inspections and Examinations, testified that, in fiscal year 2011 which ended September 30, the SEC conducted examinations of only 8% of the nearly 12,000 registered investment advisers. In addition, approximately 38% of registered investment advisers have never been subjected to an SEC review.

The Financial Industry Regulatory Authority (FINRA) issued Regulatory Notice 11-52 (Notice) reminding its member firms of their supervisory obligations regarding the use of designations by their brokers that imply expertise, additional training or a specialty in advising elderly investors (senior designations).

In early 2011, FINRA surveyed 157 brokerage firms regarding the use of senior designations and the supervisory procedures in place regarding the use of such designations. 68% of the firms surveyed indicated that they permit the use of senior designations. Of those, only 66% required approval and verification of a broker's credentials prior to the use of the designation. The remaining 34% of firms did not verify the credentials of the brokers using the senior designation. In some instances, widely used senior designations did not require rigorous qualification standards.

According to the Notice, FINRA is particularly concerned that "the existence of qualification standards to obtain a designation did not ensure that those registered persons holding the designation possessed financial services skills that were unique or valuable to senior investors."

The Notice reminds brokerage firms that they must have supervisory procedures in place to ensure fair dealings with senior investors, as well as to prevent the unethical or misleading use of senior designations.

The Financial Industry Regulatory Authority (FINRA) has fined Chase Investment Services Corporation (Chase) $1.7 million and ordered it to pay more than $1.9 million to customers as restitution for losses caused by its recommendation of unsuitable unit investment trusts (UITs) and floating-rate loan funds.

A UIT is an investment which contains a diversified mix of securities which may include risky, speculative products like high-yield, below investment-grade "junk" bonds. Similarly, floating-rate loan funds are mutual funds that generally contain secured senior loans made to companies whose credit quality is rated below investment-grade.

FINRA's investigation revealed that Chase's brokers recommended and sold UITs and floating-rate loan funds to unsophisticated, risk-averse investors without having reasonable grounds to believe that the investments were suitable for the customers. In addition, FINRA found that Chase lacked the proper supervisory controls to oversee its brokers' sales of UITs and floating-rate loan funds.

Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, "With the growing number of complex products in the market today, it is incumbent upon firms to properly train and provide guidance to their brokers about the products that they sell and supervise the sales practices of their brokers."

Chase consented to the entry of FINRA's findings without admitting or denying the charges.

On November 10, 2011, the SEC brought charges against a San Diego-based investment advisory firm and its president for securities fraud based on its failure to disclose a conflict of interest to investors and falsely represented the liquidity of a hedge fund they managed.

The SEC claims that Western Pacific Capital Management LLC and its president, Kevin James O'Rourke, encouraged investors to purchase a security without informing them that Western Pacific received a 10% commission. Western Pacific and O'Rourke also (1) failed to register as a broker, (2) failed to give required written disclosures to investors, (2) wrongly redeemed one hedge fund client's interest before another's, and (4) materially misrepresented to clients about the fund's liquidity.

According to Marshall Strung, an Assistant Director within SEC Enforcement Division, "Investment advisers have a fiduciary duty to act in the best interests of their clients and be forthcoming with them. Western Pacific and O'Rourke fraudulently breached that duty by failing to disclose the commissions they would receive for the recommended investments and lying to clients about the liquidity of the fund they managed."

Specifically, the SEC alleges that Western Pacific and O'Rourke acted as brokers in the non-public stock offering by Ameranth Inc. during 2005 and 2006. In return, Ameranth paid Western Pacific a 10% "success fee." Although Western Pacific and O'Rourke told investors to invest in Ameranth, they failed to advise each investor that they would make money off these investments, and failed to give investors the mandatory written disclosures as to their role in the offering.

Further, the SEC claims that from 2005-2008, Western Pacific and O'Rourke falsely represented the liquidity of The Lighthouse Fund LP, a hedge fund that they formed and managed. Western Pacific and O'Rourke always maintained that illiquid assets comprised only 25% of the Lighthouse Fund, when in reality 90 percent of the fund's assets were comprised of illiquid securities.

The Financial Industry Regulatory Authority (FINRA) has fined Morgan Stanley Smith Barney (Morgan Stanley) $1 million and ordered restitution for excessive markups and markdowns charged to customers on bond transactions.

FINRA's investigation revealed that customers were charged markups and markdowns on corporate and municipal bond transactions ranging from below 5% to 13.8%. FINRA found that this range was higher than reasonable based on several factors including market conditions, the cost of execution and the value of services rendered to the customers.

Thomas Gira, Executive Vice President, FINRA Market Regulation said, "Firms must ensure that customers who buy and sell securities, including corporate and municipal bonds, receive fair and reasonable prices regardless of whether a markup is above or below 5 percent. Morgan Stanley clearly violated fair pricing standards and FINRA will continue to require firms that violate such standards to make their customers whole."

Morgan Stanley consented to the entry of FINRA's findings without admitting or denying the charges.

It is estimated that one out of every five Americans over the age of 65 have been the victim of a financial scam.

Now, help for potential financial swindle victims has arrived. A national toll-free hotline for seniors and adult children of the elderly will be launched on November 10 to provide seniors with advice on general financial matters as well as ways to prevent becoming the victim of financial fraud. Of particular concern are seniors with mild cognitive impairment who can perform most daily functions, but have trouble with managing their finances.

The hotline is a collaboration of the National Adult Protective Services Association (NAPSA), the Financial Planning Association (FPA), the Investor Protection Trust (IPT) and the Investor Protection Institute (IPI).

The toll-free hotline will operate from 9:00 a.m. to 6:00 p.m. EST.

For general finance questions: (888-227-1776) Callers can speak to experts from the Financial Planning Association about their family financial security.

For financial abuse questions: (888-303-3297) Callers to this number will speak with an adult protective services professional about elder financial abuse and strategies for keeping themselves or older loved ones independent.

"The FPA and its members are pleased to participate in a national hotline initiative that will help protect our vulnerable senior population,'' said FPA Executive Director and CEO Marvin W. Tuttle, Jr., "We applaud the Investor Protection Institute for recognizing a serious issue in our society and bringing us together to provide much needed assistance to the elderly.''

The Joint Select Committee on Deficit Reduction, tasked with finding $1.5 trillion in spending cuts or revenue increases to reduce the ballooning U.S. deficit, is considering a proposal to end the tax exemption for the $2.9 trillion municipal bond market.

Municipal bonds are an opportunity for state and local governments to carry out their capital projects in the most cost-effective manner. Currently, the tax exemption on municipal bond interest allows municipalities to borrow money by offering yields below treasury rates. Investors are willing to accept the lower rates because they don't face taxes on the bond payments.

Elimination of the tax exemption could result in rapid price adjustments for some municipal bonds resulting in a major challenge for bond fund managers who oversee $480 billion in nearly 600 separate municipal bond funds. If investors start jumping ship in search of better returns, fund managers will be pressured into selling to meet redemptions. The highest quality bonds are typically liquidated first creating a downward spiral for the fund.

Financial research firm Morningstar, Inc. will begin offering ratings for non-traded real estate investment trust (REITs) as early as the end of the first quarter next year. It is unknown whether Morningstar will apply its well-known star ratings system to the non-listed REITs. Morningstar research is utilized by over 4,000 institutional and advisory clients, along with 7.3 million retail investors. Coverage by Morningstar marks the first time a national financial services firm has performed due-diligence analysis on the $10 billion-a-year industry. Currently, the brokerage firms that sell REITs to clients control the flow of information around the investments.

"It's more scrutiny, research, evaluation and analysis around the industry, and I think that will ultimately be a very positive thing," Kevin Hogan, executive director of the IPA, a trade group for non-traded REIT sponsors and the broker-dealers who sell them said in an interview. "I would have thought the [REIT sponsors] would have more anxiety over it, but to a person, every sponsor has said [Morningstar's coverage] brings non-traded REITs into the mainstream."

Congress is considering a bill that would impose a 3% tax on financial transactions in stocks and bonds at their market value, as well as on derivative contracts, options, puts, forward contracts and swaps at their purchase price. Under the proposal, the broker dealer that places the order for a stock or mutual fund would be responsible for paying the tax.

The bill was written by Senator Tom Harkin, D-Iowa, and Representative Peter DeFazio, D-Oregon. In a press conference, Sen. Harkin stated the revenue generated by the tax is necessary to "reduce the deficit and maintain critical investments in education, infrastructure and job creation." Proponents of the plan estimate that the new tax could generate around $100 billion annually.

However, critics of the bill say it amounts to what is essentially a sales tax on investors and retirees will be hurt when the costs of the tax are passed along in 401(k) fees and other charges.

MF Global Holdings Ltd. and its broker-dealer arm MF Global, Inc. filed for bankruptcy protection earlier this week in New York after dealings with the firms were suspended by the Federal Reserve Bank of New York and the major exchanges. JPMorgan Chase was listed in the bankruptcy filing as the largest unsecured creditor with $1.2 billion in outstanding debt.

MF Global, formerly part of Man Group Plc, was founded in England in 1793 and is lead by Chief Executive Officer Jon S. Corzine, the former head of Goldman Sachs, prior U.S. senator and past governor of New Jersey.

Prior to Corzine's arrival in 2010, MF Global's business was largely limited to arranging and processing trades for banks, corporations and investors. Corzine began to diversify the firm in pursuit of his vision that MF Global be a junior version of Goldman Sachs. To accomplish this, MF Global borrowed $40 for every $1 in capital, according to Egan Jones, a rating service. That is more leverage than Lehman Brothers Holdings had at the time of its demise in 2008. MF Global made large bets on commodities, European sovereign debt, futures and derivatives.

Seeing the writing on the wall, in September, the Financial Industry Regulatory Authority required MF Global to reduce its leverage by setting aside more capital. The following month short-term lenders began demanding more collateral for their loans and ratings companies downgraded the firm. On October 25, MF Global reported a net loss of almost $192 million in the last quarter. On October 28, when Bloomberg News reported that MF Global had tapped out two of its credit lines, its shares plummeted and the firm was virtually dead.

Shortly after the filing by MF Global, the Securities Investor Protection Corporation filed an application with the United States District Court for the Southern District of New York seeking a declaration that the customers of MF Global Inc. are in need of the protections available under the Securities Investor Protection Act. The court granted the application and appointed James W. Giddens as trustee for the liquidation.

SIPC board chairman Orlan Johnson, stated, "When the customers of a failed SIPC member brokerage firm have left their securities in the custody of that firm, SIPC acts as quickly as possible to protect those customers. In this case, SIPC initiated the liquidation proceeding within hours of being notified by the SEC that a SIPC case was necessary to protect the investing public."

The Financial Industry Regulatory Authority (FINRA) has fined UBS Securities LLC $12 million for violation of Regulation SHO and its failure to adequately supervise its brokers regarding short sale transactions. A short sale involves the sale of a security the seller does not presently own. When delivery of the security is required, the seller then purchases the security and makes the delivery. Reg. SHO requires a brokerage firm to have a reasonable basis to believe the security will be available for purchase by the seller before the firm accepts a short sale order. Requiring firms to document this "locate" information prior to entry of the short sale reduces the chance that delivery of the security will fail. Reg. SHO also requires that all equity securities sales be marked as long or short.

FINRA found significant violations of Reg. SHO by UBS. UBS placed millions of short sale orders without documenting the locate information, including in securities that were known to be difficult to obtain. In addition, UBS mismarked millions of short sale order tickets as "long." UBS consented to the entry of FINRA's findings without admitting or denying the charges.

Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, "Firms must ensure their trading and supervisory systems are designed to prevent the release of short sale orders without valid locates, and properly mark sale orders, in order to prevent potentially abusive naked short selling. The duration, scope and volume of UBS' locate and order-marking violations created a potential for harm to the integrity of the market."

The Securities and Exchange Commission announced that it has ordered the Financial Industry Regulatory Authority (FINRA) to hire an independent consultant to evaluate and recommend improvements to FINRA's compliance policies, procedures and staff training regarding the integrity of documents produced to the SEC. The Order came about when it was learned that on August 7, 2008, the Director of FINRA's Kansas City District Office caused the alteration of documents requested during an SEC audit just hours prior to producing them to the SEC investigator. Without admitting or denying the findings, FINRA consented to the SEC's Order and agreed to engage an independent consultant within 30 days to conduct a comprehensive review of FINRA's policies, procedures and training. A copy of the Order may be viewed at http://sec.gov/news/press/2011/2011-227.htm.

McCabe Rabin, P.A. is investigating losses caused by investments in church bonds pitched by various brokerage firms to religious-minded investors. The church bonds were purportedly used to provide various Christian mega-churches with financing for construction projects and other large expenses. Financial advisors preyed on the churches' own congregations and other religious supporters in selling these inherently risky and illiquid products. Investors were not always told that church bonds are very risky because there is no reliable source of repayment and the likelihood of default is high. In addition, there is virtually no secondary market in which to sell the bonds.