May 2011 Archives

Two More Financial Professionals Plead Guilty in Insider Trading Scheme

May 31, 2011,

Federal prosecutors in New York obtained two more guilty pleas stemming from an investigation into supposed "expert network" firms, a hallmark of New York securities fraud in which connect investors to industry experts for a fee.

Samir Barai, a former hedge fund manager, and Sonny Nguyen, a former financial analyst at Nvidia Corp., were the seventh and eighth individuals to plead guilty to a variety of conspiracy and securities fraud charges. So far a total of 13 people have been charged in the scheme.

Mr. Barai admitted to receiving confidential inside information about a publicly traded technology company and sharing it with two other hedge fund managers. He also admitted to trying to conceal his crimes by ordering a research analyst at his firm to shred documents and destroy electronic files related to trading in November 2010, after learning about the government's insider trading crackdown.

In his hearing, Mr. Nguyen admitted to taking part in a conspiracy to commit securities fraud. For his part in the conspiracy, Mr. Nguyen provided inside information about Nvidia's finances in return for similar stock tips about other companies.
Cases such as this remind us that the scales of the financial markets are far too often tipped in favor of insiders, and regulators are often unable to discover these crimes until long after they have been committed.

This unfortunately, leaves smaller investors in a difficult situation. Many smaller investors want to invest in the markets in the hopes that they can grow their savings for their future retirement, or to provide income to support them now.

However, the financial markets can be a treacherous place for an inexperienced investor, and many people find themselves the victims of fraud committed by their stockbroker or other financial professional.

Therefore, investors should be very careful in selecting an investment professional, and even more so before investing on their own. provides useful information if you are choosing a financial advisor or if you believe you have been the victim of securities fraud.

Former Heads of Jenkins & Gilchrist and BDO Seidman LLP Convicted of Tax Shelter Fraud in New York Federal Court

May 27, 2011,

On May 24, 2011, several attorneys from now-defunct law firm Jenkins & Gilchrist and a former executive of BDO Seidman, LLP were convicted in the United States District Court for the Southern District of New York for their roles in developing, promoting, marketing and implementing fraudulent tax shelters, and drawing unwanted attention from New York securities lawyers in the process. A press release (link below) from the United States Attorney for the Southern District of New York stated that the convicted individuals made profits of approximately $130 million over ten years with the fraudulent tax shelters. The Department of Justice worked with the Internal Revenue Service (IRS) to investigate and prosecute the action.

Federal prosecutors had alleged that the tax shelters at issue generated more than $1 billion in false tax losses for high net worth individuals.

Tax shelters are generally understood to be schemes that reduce one's tax liability, and are not necessarily illegal. In fact, it is entirely within one's rights to minimize their tax liability, albeit legally. The development of tax shelters that skirted and sometimes flagrantly flouted the United States Tax Code occurred mainly in the late 1990s and early 2000s and have led to convictions of professionals from some of the Country's most well-respected law firms, and the world's largest banks and accounting firms.

Law firms were often involved in the tax shelter schemes, and helped with development and marketing of the shelters, and often provided investors with a legal opinion that was claimed to provide the investor with legal protection from individual responsibility for assessment of penalties, interest and sanctions if the IRS did audit the transactions. With varying success, the IRS has prosecuted high net worth individuals who invested in the tax shelter schemes by alleging that those legal opinions did not shield the investors from penalties, interest and sanctions because of the law firms' role as "promoters" of the tax shelters. Essentially, the IRS claimed that the law firms did not represent the individual investors and instead churned out legal opinions as part of the scheme.

Investors in these fraudulent tax shelters may have actionable claims for fraud, breach of fiduciary duty and breach of contract against the involved banks, accountants and law firms. Often, a claim for fraud will lie where any of the involved professionals made misrepresentations to the investor regarding the tax shelter transaction. A claim for breach of fiduciary duty may exist where certain duties, owed by fiduciaries such as accountants or lawyers, were not strictly adhered to.

U.S. Attorney for the Southern District of New York's Press Release

SEC Approves New Whistleblower Rules to Provide Cash Award to Insiders Who Report Securities Fraud

May 26, 2011,

On Wednesday May 25, 2011, the SEC approved new rules to flesh out a provision of the Dodd-Frank Act which provides for large cash rewards for employees who report suspected securities fraud through internal compliance programs or directly to the SEC. Under the new law, employees who report securities fraud either directly to the SEC or internally may be eligible, provided the firm passes on the information to the agency. The provision is thought by many a victory for New York whistleblowers and whistleblower attorneys alike.

Many firms were concerned that direct reporting to the SEC would make the large compliance programs these firms put in place in response to Sarbanes-Oxley essentially obsolete. In response, the SEC agreed to consider an employee's participation in her company's internal compliance program as a factor that could increase the amount of the reward. Under these new rules, some rewards can be as high as 30% of the penalty paid.

To be eligible for the reward, an individual must be a whistleblower. To be treated as a whistleblower from the date they report violations internally, an employee must also report the information to the SEC within 120 days.

SEC Chairman Mary Schapiro properly recognized that these new rules "strike the correct balance" in giving the whistleblower the choice to report her suspicions internally or directly to the SEC.

While choosing to be a whistleblower can be a difficult decision to make, in many cases, it is the only way to effectively stop widespread fraud and wrongdoing. Therefore, by providing financial incentives to encourage people with knowledge to come forward, the SEC has made a large step in combating the fraud that compromises the integrity of our markets and hurts investors.