New Trends in Securities Class Action Suits

The Harvard Law School Forum provides an analysis of a study of class actions through 2012.  At the end of November, 195 securities class actions were filed in federal courts—a pace that, if continued through December, would lead to a total of 213 cases for the full year. According to the study, that would put 2012 filings just slightly below their average rate over the previous five years.

The article, and the underlying study provide an excellent analysis of those cases, and the trend over the years of filings, settlements and awards.

The full details are at 2012 Trends in Securities Class Actions

SEC Charges Miami-Based Adviser with Hiding Trading Losses and Diverting Client Funds

In a complaint filed last week, the SEC charged a Miami-based investment adviser for defrauding his clients by concealing trading losses and diverting investor funds for personal use.

The SEC alleges that Anand Sekaran and his firm Wasson Capital Advisors Ltd. fabricated documents showing illusory profits after his trading strategy became unprofitable in 2008 and produced substantial losses for clients. The Commission also alleges that Sekaran also misused client funds to pay various personal and business expenses, and he collected fees in excess of what he was due under the arrangements he had with clients.

 According to the press release from the SEC, Sekaran and Wasson agreed to resolve the SEC’s charges as well as a parallel criminal action announced today by the U.S. Attorney’s Office for the Southern District of New York.

“An investment adviser’s fiduciary duty applies equally in good times and bad,” said Bruce Karpati, Chief of the SEC Enforcement Division’s Asset Management Unit. “Sekaran breached that duty when he concealed trading losses and misled clients rather than simply admitting that his investment strategy was unsuccessful.”

In settling the SEC’s charges, Sekaran and Wasson consented to a final judgment imposing permanent injunctions from future violations of the anti-fraud provisions of the federal securities laws. Sekaran separately consented to an SEC order barring him from the securities industry and penny stock industry. Sekaran is required to pay $2.3 million to satisfy restitution and forfeiture orders in the criminal matter.

For more details see the SEC's complaint and press release. If you believe you have been defrauded in a securities related matter, our attorneys, located in New York, New Jersey and Boca Raton, Florida, are available for a free consultation by phone. Email our office at info@beamlaw.com and we will connect you with the appropriate attorney. You can visit our web site - Securities Enforcement Attorneys and SECLaw.com - The Securities Law Home Page, for more information about our firm, and the securities laws in general.

Yahoo Executive and Mutual Fund Manager Charged With Insider Trading - Civil and Criminal.

Sometimes clients and prospective clients express disbelief when I tell them that violations of the securities acts can have criminal ramifications, and that simply because you do not often see criminal cases, that does not mean that violations of the acts are not crimes.
The most recent case in point came with the SEC's announcement on Monday that it charged a former executive at Yahoo! Inc. and a former mutual fund manager at a subsidiary of Ameriprise Financial Inc. with insider trading on confidential information about a search engine partnership between Yahoo and Microsoft Corporation.
The SEC alleged that Robert W. Kwok, who was Yahoo's senior director of business management, breached his duty to the company when he told Reema D. Shah in July 2009 that a deal between Yahoo and Microsoft would be announced soon. Shah had reached out to Kwok amid market rumors of an impending partnership between the two companies, and Kwok told her the information was kept quiet at Yahoo and only a few people knew of the coming announcement. Based on Kwok's illegal tip, Shah prompted the mutual funds she managed to buy more than 700,000 shares of Yahoo stock that were later sold for profits of approximately $389,000.
The SEC further alleges that a year earlier, the roles were reversed. Shah tipped Kwok with material nonpublic information about an impending acquisition announcement between two other companies. Kwok traded in a personal account based on the confidential information for profits of $4,754.
The SEC's press release reflects that Kwok and Shah have agreed to settle the SEC's charges. Although financial penalties and disgorgement will be determined by the court at a later date, Shah will be permanently barred from the securities industry and Kwok will be permanently barred from serving as an officer or director of a public company.
At the end of the press release, the SEC added that in a parallel criminal case Kwok has pled guilty to conspiracy to commit securities fraud, and Shah has pled guilty to both a primary and conspiracy charge. Both are awaiting sentencing.
The financial penalties alone will be interesting, since there are no allegations that Kwok received any money or benefit from tipping Shah, and there is no allegation that Shah directly profited from the tip, since the purchase was made in a mutual fund that Shah managed. However, the Commission may be attempting to use the profits from the reverse tip, of Shah to Kwok and the $4,000 profit there, as the basis for the fines.
SEC Charges Former Yahoo Executive and Former Ameriprise Manager With Insider Trading

Facebook IPO Opportunity for Fraudsters?

From the Sun-Sentinel, as the Facebook IPO arrives, not only are investors lining up for what they hope will be a golden opportunity, but so are scammers. The combination of heavy hype, potentially lucrative returns and starry-eyed novice players in the equities market have created ripe conditions for con artists to operate, according to financial regulators and securities attorneys. People are being warned to be especially careful about offers to purchase private shares of Facebook before the initial public offering (IPO) of stock expected later this week.

'It's the hottest IPO in years and anything that is hot will be exploited by scammers," said Jim Sallah, a Boca Raton securities attorney. "If you want to raise a quick $5 million, the quickest thing to do is start marketing Facebook pre-IPO shares."

Facebook's looming IPO a juicy opportunity for South Florida fraudsters, authorities say - South Florida Sun-Sentinel.com

Two Executives Sued in Texas to Recover Bonuses and Stock Profits Received During Accounting Fraud

Two former executives at an Austin, Texas-based surgical products manufacturer were sued today by the SEC to recover bonus compensation and stock sale profits they received during an accounting fraud at the company. The CEO and CFO of the company have not been charged with personal misconduct, but are still required to reimburse the manufacturer for bonuses and stock profits that they received after the company filed fraudulent financial statements..

"Clawback of incentive compensation and stock sale profits as authorized under the Sarbanes-Oxley Act is yet another reason for CEOs and CFOs to be vigilant in preventing misconduct and requiring that companies comply with financial reporting obligations," said Robert Khuzami, Director of the SEC’s Division of Enforcement.


Two Executives Sued in Texas to Recover Bonuses and Stock Profits Received During Accounting Fraud

SEC Obtains Emergency Relief Against St. Louis-Based Private Investment Funds after Charging Them and Their Principal with Fraud

The SEC has obtained an emergency court order to freeze the assets of St. Louis-based private investment funds and management firms after suing them and their principal for a scheme to defraud investors. It is alleged that the principal diverted more than $9 million of investors’ money to himself without their knowledge or consent. He recorded the transfers as ‘loans” in his companies’ books. He raised $88 million from investors who were told their funds would be invested in emerging financial services and technology companies.

“Morriss attempted to hide his illegal transfers of investor funds by calling them ‘loans’ when in reality he had no intention of paying back the money and instead went on a spending spree,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office. “It is fraud, pure and simple.”

SEC Obtains Emergency Relief Against St. Louis-Based Private Investment Funds after Charging Them and Their Principal with Fraud

SEC Charges Florida Bank Holding Company and CEO with Misleading Investors about Loan Risks During Financial Crisis

The SEC charged a holding company for one of Florida’s largest banks and its top executive with misleading investors about growing problems in one of its significant loan portfolios early in the financial crisis. It is alleged that BankAtlantic Bancorp and it's CEO made misleading statements in public filings and earnings calls so as to hide the deteriorating state of a large portion of the bank’s commercial residential real estate land acquisition and development portfolio in 2007. BankAtlantic and the CEO then committed accounting fraud when they schemed to minimize BankAtlantic’s losses on their books by improperly recording loans.

“BankAtlantic and Levan used accounting gimmicks to conceal from investors the losses in a critical loan portfolio," said Robert Khuzami, Director of the SEC's Division of Enforcement. "This is exactly the type of information that is important to investors, and corporate executives who fail to make that required disclosure will face severe consequences."

SEC Charges Florida Bank Holding Company and CEO with Misleading Investors about Loan Risks During Financial Crisis

SEC Charges Executives at Clean Coal Technology Company for Misstatements to Investors

The SEC charged the former CEO and CFO at a Minnesota-based clean coal technology company for making false and misleading statements to investors. The SEC separately charged a network of brokers who sold the company’s securities without being registered with the SEC to do so. Bixby Energy Systems raised at least $43 million from more than 1,800 investors through a series of purported private placement offerings of stocks, warrants, and promissory notes during a nine-year period. The company used this capital raising activity to help fund operations, pay salaries, and pay commissions to brokers that sold Bixby securities.

The SEC alleges that Bixby’s former CEO and former CFO made repeated misstatements both verbally and in writing to investors about the company’s core product – a machine that supposedly produced synthetic natural gas through a proprietary clean coal technology. They told investors that Bixby’s coal gasification machine was proven and operating when in fact it had substantial technological defects, did not function properly, and was at risk of self-destruction. The CEO and CFO never disclosed these problems to investors.

SEC Charges Executives at Clean Coal Technology Company for Misstatements to Investors

SEC Halts Father-Son Ponzi Scheme in Utah Involving Purported Real Estate Investments

The SEC charged a father and son in Utah with securities fraud for selling purported investments in their real estate business that in reality was just a $220 million Ponzi scheme.

It is alleged that the father and son operated from a base in Fountain Green, Utah. They offered investors the opportunity to invest in LLCs to share ownership of large apartment complexes in eight states. The investors were solicited by word of mouth and through religious affiliation. The duo presented plans to buy apartment complexes, renovate and revamp, and then sell for a high profit. The investors were told they would share in the profit from the sales and also from rental income. The truth of the matter was that the investors money was really being depositing into large bank accounts, which were used for company and personal expenses, and to pay other investors. Since the complaint has been filed, the SEC obtained an emergency court order freezing the father and son's assets and companies. The scheme began in 2008 and involved 225 investors and more than $220 million.

SEC Halts Father-Son Ponzi Scheme in Utah Involving Purported Real Estate Investments

SEC Charges Former CEO in Tulsa With Misleading Investors about Liquidity Risks

The SEC has charged the co-founder and CEO of a Tulsa-based energy company with misleading investors in one of its subsidiaries about liquidity risks they faced from his energy trading. According to the SEC’s complaint filed in federal court in Tulsa, the individual was CEO and president of SemGroup L.P., which bought, transported and sold petroleum products and traded crude oil and related commodities and derivatives. The trading activities were managed by the CEO. In addition to these responsibilities, he was also a director of SemGroup’s subsidiary, SemGroup Energy Partners L.P. (SGLP), which owns midstream oil and gas assets such as pipelines and storage facilities. SGLP issues publicly-traded limited partnership units, and the CEO signed certain corporate filings that SGLP made with the SEC. 

The SEC alleges that the filings assured investors that its revenue stream from SemGroup was “stable and predictable” and protected from volatility in oil prices. However, below the surface, the CEO's energy trading was increasingly draining SemGroup’s credit facilities and other liquidity sources and jeopardizing the company’s ability to fulfill its commitments to SGLP. Investors were never warned of these risks, which came to a head in July 2008 when SemGroup’s lenders canceled the credit facility and the company filed for bankruptcy. The price of SGLP’s limited partnership units subsequently declined more than 60 percent. It is alleged that the CEO should have been aware that filings he had signed were misleading about the reliability of SGLP's revenue stream and therefore did not adequately inform the investors of the risks.

The accused CEO has agreed to settle the SEC’s charges without admitting or denying the allegations by paying a $225,000 penalty and forfeiting his rights to SGLP limited partnership units currently worth more than $1.1 million. He also consented to entry of a final judgment permanently enjoining him from violating the antifraud provisions of the Securities Act of 1933.

SEC Charges Former CEO in Tulsa with Misleading Investors about Liquidity Risks

Citigroup to pay $285 Million for Misleading Investors

The SEC has charged Citigroup Global Markets Inc. with misleading investors about a $1 billion CDO called Class V Funding III. When the U.S. housing market was showing signs of distress, Citigroup structured and marketed Class V III and exercised significant influence over the selection of $500 million of the assets included in the CDO. Citigroup then took a proprietary short position with respect to those $500 million of assets. That short position allowed Citigroup to profit in the event of a downturn in the housing market and gave Citigroup economic interests in the Class V III transaction that were adverse to the interests of investors. Without admitting or denying the SEC’s allegations, Citigroup has consented to settle.

“The securities laws demand that investors receive more care and candor than Citigroup provided to these CDO investors,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Investors were not informed that Citgroup had decided to bet against them and had helped choose the assets that would determine who won or lost.”

The SEC has also instituted settled administrative proceedings against Credit Suisse Asset Alternative Capital, LLC (CSAC), Credit Suisse Asset Management, LLC , and the Credit Suisse protfolio manager responsible for the transaction, based on their conduct in the Class V III transaction. The SEC has also brought a litigated civil action against a former Citigroup employee.

Citigroup To Pay $285 Million to Settle SEC Charges For Misleading Investors About CDO Company Profited From Proprietary Short Position Former Citigroup Employee Sued For His Role In Transaction

SEC Charges California-based Investment Adviser with Fraud and Breach of Fiduciary Duty

On October 18, 2011, the SEC filed a complaint in United States District Court in Riverside, California against Copeland Wealth Management (a financial advisory corporation), Copeland Wealth Management (a real estate corporation), and a certified public accountant (Copeland's founder), for fraud and breach of fiduciary duty. As an investment adviser registered with the SEC, the financial advisory corporation manages approximately $125 million in assets under management. The assets under management are primarily mutual funds and real estate funds. The involved real estate company, an unregistered investment adviser, is the general partner for 21 limited partnerships primarily invested in real estate. Lastly, the certified public accountant involved, is the founder, co-owner and officer of both the corporation and the real estate company.

It is alleged that the three parties made material misrepresentations and omissions regarding: the use of investor funds, conflicts of interest, guaranteed returns, the unauthorized trading of put options, and the payment of undisclosed real estate commissions and other related compensation. The parties have not yet admitted or denied the allegations.

SEC Charges California-based Investment Adviser with Fraud and Breach of Fiduciary Duty

SEC Files Action to Halt Green-Product Ponzi Scheme

The SEC’s complaint, filed in U.S. District Court for the Southern District of New York, alleges that a convicted felon and others defrauded investors in PermaPave Companies, a group of firms based on Long Island, N.Y.

About 140 individuals, many working in the construction or landscaping business, invested in the scheme between 2006 and 2010, the SEC alleged. Investors were told that PermaPave Companies had a tremendous backlog of orders for pavers imported from Australia, which could be sold in the U.S. at a substantial mark-up, yielding monthly returns to investors of 7.8% to 33%. In reality, the complaint states that there was little demand for the product, and the cost of the pavers far exceeded the revenue from sales.

The defendant and two other accomplices used new investments to make payments to earlier investors and then siphoned off much of the rest, buying luxury cars, gambling trips to Las Vegas, and jewelry. In addition, the complaint alleges that the defendant used investors’ money to make court-ordered restitution payments to victims of a previous scheme to which he pleaded guilty to conducting in 2000.

The three men were arrested earlier today and criminal charges have been filed.

SEC Files Emergency Action to Halt Green-Product Themed Ponzi Scheme

Investment Adviser Charged With Fraud in NY Real Estate Funds

The SEC has charged a Monticello, N.Y.-based investment adviser with fraudulently offering and selling securities in two upstate New York real estate funds he managed.

The SEC alleges that the adviser told investors in the Gaffken & Barriger Fund (G&B Fund) that it was a relatively safe and liquid investment that generated a minimum return of 8 percent per year. However, the fund’s actual performance did not justify these performance claims. The SEC further alleges that he defrauded investors in Campus Capital Corp. by raising money from them to prop up the ailing G&B Fund without disclosing that was how their money was actually being used. The Commission also alleges that the adviser caused Campus to engage in other transactions that personally benefitted him, unbeknownst to Campus investors.

According to the SEC’s complaint filed in federal court in Manhattan, the G&B Fund raised approximately $20 million from January 1998 to March 2008, and Campus raised approximately $12 million from October 2001 to July 2008. Barriger froze the G&B Fund in March 2008 and disclosed its true financial condition to investors.

The press release contains a link to the complaint - SEC Charges Investment Adviser With Defrauding Investors in Two Upstate New York Real Estate Funds

 

Facebook Pre-IPO Stock A Scam

(Bloomberg News) Facebook Inc.’s privately held shares that are trading before an initial public offering may be attracting con artists who exploit investor demand by selling bogus stock, the main U.S. brokerage regulator said.

“While most pre-IPO offerings are legitimate, some are frauds in which con artists sell shares they do not actually have,” the Financial Industry Regulatory Authority said Tuesday in a statement. The watchdog learned of some “potentially fraudulent schemes to sell purported shares” of Palo Alto, California-based Facebook, it said, without elaborating.

More...

State of NJ Settles Securities Fraud Charges

Well, here is something I have never seen. The State of New Jersey has settled securities fraud charges brought against it by the SEC. But there is a reason why I have never seen it; it has never happened before. According to the NJ Star Ledger, the State was accused of securities fraud for failing to tell bond investors it was underfunding its pension funds. The charges were settled immediately, without fines or penalties. Nice outcome for a securities fraud case. More...

SEC To Distribute $106 Million in HealthSouth Fraud

The Securities and Exchange Commission today announced a Fair Fund distribution of more than $106 million to investors harmed in a financial fraud at HealthSouth Corporation.

The Fair Fund for HealthSouth Corporation fraud victims resulted from an SEC enforcement action in March 2003 after which HealthSouth paid $100 million to settle SEC charges that it falsely inflated earnings to meet Wall Street expectations. The U.S. District Court of the Northern District of Alabama entered a final judgment against HealthSouth in June 2005, and the court approved the establishment of the Fair Fund in April 2006.

This Fair Fund distribution to 67,695 individual investors, pension plans and other victims represents the entirety of the money HealthSouth paid to settle the SEC's fraud charges, plus interest.

Questions regarding the Fair Fund distribution should be directed to the Claims Administrator, Rust Consulting, Inc. at www.HLSSettlement.com More...

Goldman's Defense to SEC Fraud Case

The WSJ has copies of Goldman's Wells Submission and its Wells Supplement on line. While the Wells Submission is not Goldman's answer to the complaint, it does offer insight into Goldman's defense of the SEC's claims. (See my article on Wells Notices at SECLaw.com for more background information).

The most interesting part of the submission is the claim that everyone in the transaction knew the facts that the SEC claims were misrepresented or omitted:

There was nothing unusual or remarkable about the transaction or the portfolio of assets it referenced. Like countless similar transactions during that period, the synthetic portfolio consisted of dozens of Baa2-rated subprime residential mortgage-backed securities (“RMBS”) issued in 2006 and early 2007 that were identified in the offering materials (the “Reference Portfolio”). As in other synthetic CDO transactions, by definition someone had to assume the opposite side of the portfolio risk, and the offering documents made clear that Goldman Sachs, which took on that risk in the first instance, might transfer some or all of it through a hedging and trading strategies using derivatives. Like other transactions of this type, all participants were highly sophisticated institutions that were knowledgeable about subprime securitization products and had both the resources and the expertise to perform due diligence, demand any information that was important to them, analyze the portfolio, form their own market views and negotiate forcefully at arm‟s length.

And this:

All participants in the transaction understood that someone had to take the other side of the portfolio risk, and the offering documents clearly stated that Goldman Sachs might lay off some or all of the short exposure to the portfolio that it had taken on. A disclosure that the relatively unknown Paulson was the entity to which Goldman Sachs transferred that risk would have been immaterial to investors in April 2007.

As always, there are two sides to every story, and the other side of this one is still developing.

SEC Charges Father-Son Team in Hedge Fund Fraud

According to the lead paragraph in the SEC's press release, they are charging an investment adviser with securities fraud for misleading investors about the financial condition of their funds, and that they were controlling the investment decisions of the funds, when same were controlled by a third party.

Overstating your asset values by as much as $160 million certainly smells like a fraud, but not telling investors who is actually managing the investments is a fraud? It certainly can be, but is it.

If the person controlling the investments has been charged with securities fraud, and has had his assets frozen, that omission may very well be fraud. It could be a material part of an investor's decision to invest, and depending on the circumstances; a fraud.

We will have to see if the SEC can prove its allegations, but for now, the complaint is linked at its press release.  More>>>

SEC Blocks Early-Stage Ponzi Scheme

Sometimes good things come from a massive failure. Ever since the mis-steps of the SEC have come to light, the SEC has been pouncing on various frauds and schemes and taking swift action. It was typical for the SEC to be the last one on the scene, franticly trying to close the barn door after all of the horses had left and were scattered to parts unknown.

In the last few months we have seen at least four cases where the SEC shut down a scheme as it was getting started. Today the SEC announced that it has halted a Ponzi scheme involving a New York firm that solicited investments involving personal injury lawsuit settlements but instead shipped the money overseas. The SEC obtained a court order freezing the assets of the firm, its president, and several companies holding money from the scam that began several months ago.

Kudos to the Commission for taking swift action. Let's just hope that this swiftness is the result of increased market survelliance, retention of experienced and motivated staff and an renewed vigor, and not the result of a rush to judgment and press releases without evidence or foundation. Time will tell.  More>>>