Florida Securities Fraud Lawyer Blog

A Colorado federal judge upheld a $54.1 million arbitration award against Citigroup Global Markets, Inc. (Citigroup) issued by a Financial Industry Regulatory Authority (FINRA) arbitration panel in April. In her order, U.S. District Judge Christine Arguello stated that maximum deference is owed to arbitrators because parties have contracted to bring their dispute to binding arbitration.

The FINRA arbitration award ordered Citigroup to pay compensatory damages of $34.1 million, punitive damages of $17 million, legal fees of $3 million and costs of about $80,000 in connection with losses in a series of municipal bond funds Citigroup sold through a group called MAT Finance, LLC. MAT (municipal arbitrage trust) created funds that borrowed at low, short term rates and used the proceeds to invest in longer-term municipal bonds. According to published reports, these investments incurred losses of up to 80% in 2007 and 2008.

The claimants in the FINRA arbitration claimed that Citigroup misrepresented the risks involved in the products.

The Financial Industry Regulatory Authority (FINRA) has fined Barclays Capital $3 Million for misrepresentations it made regarding historical delinquency data in connection with the issuance of residential subprime mortgage securitizations (RMBS) and its failure to adequately supervise the maintenance and updating of relevant disclosures on its website.

Issuers of RMBS must disclose the historical performance information for past securitizations that held similar mortgages to those in the current offering. In assessing the value of the RMBS being offered, the historical delinquency rates are materials to investors.

FINRA found that Barclays made material misrepresentations about the historical delinquency rates for three RMBS that it underwrote and sold from 2007 to 2010. The inaccurate data was posted on Barclays' website and was referenced as the historical data for five subsequent RMBS investments. FINRA found the errors significant enough to affect an investor's evaluation of the RMBS.

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

The Financial Industry Regulatory Authority (FINRA) has fined Credit Suisse Securities $1.75 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 Credit Suisse. According to FINRA, from June 2006 to December 2010, Credit Suisse placed millions of short sale orders without documenting the locate information, including in securities that were known to be difficult to obtain. In addition, Credit Suisse mismarked tens of thousands of short sale order tickets as "long."

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

Investor demand for variable annuities has grown as a result of significant market downturns. In the third quarter, net sales of variable annuities reached a record $8.8 billion with $2.27 billion in sales by Raymond James Financial Services, Inc. alone.

Many investors looking for a steady stream of retirement income have turned to variable annuities. However, the volatile equities market as well as, the extended low-interest environment has made it difficult and expensive for life insurance companies to hedge variable annuities with living benefits. As such, 2011 found multiple life insurers exiting the variable annuity market or doing away with many of the living benefits that made variable annuities attractive to investors.

Genworth Financial, Inc. and Sun Life Financial, Inc. both announced that they would no longer be involved in variable annuities sales. Similarly, Jackson National Life Insurance Co., MetLife, Inc., Prudential Financial, Inc. and John Hancock Life Insurance Co. announced a significant scale back or elimination of many of the living benefits that made the products so attractive to investors.

These moves by insurers will mean less price competition among the companies still in the variable annuity market. Increased investor interest in the product coupled with a decrease in the products available surely looks to make 2012 a seller's market for variable annuities.

The Financial Industry Regulatory Authority (FINRA) announced that is has fined Wells Fargo Investments, LLC (Wells Fargo) $2 million related to the sales of unsuitable reverse convertible notes to elderly customers. The sales were made by one of Wells Fargo's former brokers to 21 customers, most of whom were in their 80's and 90's.

Reverse convertible notes are complex structured products that consist of a short-term, interest bearing note in which repayment of the principal is linked to the performance of an unrelated asset such as a stock or basket of stocks. If the underlying asset falls below a certain level, an investor risks incurring a substantial loss.

According to FINRA, the investigation revealed that the broker recommended hundreds of unsuitable reverse convertible notes to 21 unsophisticated, elderly clients with a low-risk tolerance which exposed the customers to risk inconsistent with their investments profiles. FINRA also stated that the sales of the reverse convertibles generated in excess of $1 million in commissions to the broker and firm. According to FINRA, Wells Fargo failed to review the reverse convertible transactions to make sure they were suitable for the customers.

Wells Fargo consented to the entry of FINRA's findings but neither admitted nor denied the allegations.

Wells Fargo & Co. has agreed to pay $148 million to settle charges against Wachovia Bank, which Wells Fargo acquired in 2008. The charges stem from investigations by the Securities and Exchange Commission, the Justice Department and 26 states' attorneys general into how several banks rigged purportedly competitive auctions in order to receive excessive fees on investment contracts sold to municipalities. The investigations revealed that Wachovia and several of its former employees were involved with manipulating more than 58 transactions worth approximately $9 billion during an eight year period.

The allegations relate to investment contracts purchased by state and local municipalities which allow them to earn a return on the proceeds of municipal bonds sales until funds are needed for a public works project. Typically, municipalities receive multiple bids from various banks at auctions arranged by financial advisers, with the bank offering the highest return winning the contract. However, investigators say advisers manipulated the auctions to steer business to a favored bidder in return for kickbacks.

Wells Fargo neither admitted nor denied the allegations. Previously, JPMorgan Chase & Co., UBS AG and Bank of America Corp. settled similar charges.

The Securities and Exchange Commission (SEC) announced the settlement of separate complaints related to compliance failures by Feltl & Company, Inc. (Feltl) and Omni Investment Advisors, Inc. (Omni). Omni's former chief compliance officer, Gary R. Beynon was also named in the SEC's complaint.

Firms are required by law to have written compliance policies and procedures in place.

The SEC alleged that from September 2008 to August 2011, Omni had no compliance procedures whatsoever. In addition, the SEC claimed its advisors were completely unsupervised. Beynon, the chief compliance officer, actually resided in Brazil. The SEC asserted that client agreements requiring the review and approval of Beynon as chief compliance officer, were signed by Beynon and backdated one day before they were produced to the SEC in response to a subpoena. Omni and Beynon agreed to settle the SEC's charges with payment of a $50,000 penalty and Beynon's permanent bar from acting in any compliance or supervisory capacity within the securities industry.

The SEC alleged that Feltl failed to have written compliance policies and procedures in place. In addition, the SEC claimed that Feltl advisors engaged in hundreds of principal transactions without obtaining their clients' consent as required by law. The SEC also alleged that Feltl charged undisclosed commissions. Feltl agreed to settle the SEC's charges with payment of a $50,000 penalty and the return more than $142,000 to its clients.