New York Securities Lawyers Blog

In Why Your CPA Might Blab, by Arden Dale, the Wall Street Journal reports what your CPA knows could be subject to disclosure. As New York business lawyers know from experience, your accountant is not your attorney and he or she is not your priest.

Certainly when facing an audit or investigation, the first order of business is to consult an experienced New York business attorney to help protect your rights. As a decision we secured earlier this month illustrates (Salt Aire Trading LLC v. Enterprise Financial Services Corp.), communications involving your accountant may be privileged if assisting your law firm in your defense.

In that case, plaintiffs submitted to an in camera review of IRS audit documents for which attorney-client privilege was claimed. Plaintiffs claimed the documents were produced by plaintiffs' attorneys and accountants for the purpose of legal advice. Defendants in the case contested attorney-client privilege. As the court noted, generally attorney-client privilege cannot be asserted in the presence of a third party, in this case the accountant. An exception would be if the accountant was facilitating attorney-client conversation, such as acting as an interpreter.

The court found in this case that the accountant did act as a facilitator and that the plaintiffs met their burden of proof. Still, the court ruled portions of the documents not covered by attorney-client privilege must be disclosed.

As The Journal reports, the Internal Revenue Service is more often challenging attorney-client privilege when tax attorneys try to extend such protection to CPAs. Known as the Kovel Rule, such protections have been in place for half a century. However, the IRS and the courts continue to limit such protections.

Advocates warn taxpayers to beware a false sense of security. Conversations with your accountant are not automatically protected. In more and more cases, courts are taking a look at the extent to which the accountant's work was done to facilitate the attorney-client privilege. Thus, having an attorney at the outset of such cases can be critical in both preparing a defense and determining whether the accountant's work product will be subject to disclosure.

The Kovel Rule stems from the case of Louis Kovel, a former IRS agent who went to work for a tax law firm and was sent to prison in 1961 after refusing to answer grand jury questions about a client. The decision was ultimately overturned by an appeals court decision.

Continue reading "Kovel Rule no Guarantee of Accounting Privacy in New York Audits and Investigations " »

The state of today's real estate market can differ from neighborhood to neighborhood, let alone market to market. Whether negotiating a commercial real estate transaction in New York, or making a real estate investment, knowing the market and having a New York real estate law firm with the experience to protect your rights can be critical to the long-term financial well-being of any endeavor.

As the Wall Street Journal reports, the college towns of Cambridge, Massachusetts and Denton, Texas would appear to have little in common. Yet both have seen substantial recovery in the real estate market. Using information available through the real estate site Zillow, The Journal determined 25 communities have rebounded nearly to pre-recession levels. However, none of these locations experienced the huge run-ups common in Florida, Nevada and California.

Some common indicators are the strength of the employment and rental markets. The healthier communities also have fewer foreclosures flooding the market. New York real estate investment attorneys continue to see terrific opportunity in the market. However, the many competing factors make it more complex than ever; consulting an experienced law firm can help ensure you avoid many of the pitfalls inherent in today's real estate market.

In other markets, The Journal reports housing prices are not likely to see substantial recovery until 2014.

A big part of the reason is the rising requirement for down payments. Combined with the negative-equity situation of many homeowners; the market is facing headwinds likely to keep it from rising substantially for some time. Many other homeowners are trapped by underwater mortgages, which contributes to a number of complications, including the inability to move for employment.

The heavy involvement of the feds in the mortgage market is another variable that could play a role in the timing of the recovery. Taxpayers have already propped up Fannie Mae and Freddie Mac to the tune of $138 billion. Federal agencies are now behind 9 of every 10 new mortgages. Congress has already increased the size of loans the agency can buy -- but such guarantees have been partly to blame for crowding out the private sector. Loan limits are set to decline modestly later this year, from $729,750 to $625,500 in the nation's highest-priced areas, including New York and Los Angeles.

An additional challenge to the market is simple math: Bundling mortgage-backed securities is not working because interest rates are low and investors are demanding higher returns. The securitization market is critical to the overall health of the real estate market because the banking sector is not large enough to hold more mortgages without increasing its deposit base.

Continue reading "Market Fundamentals Make Experienced Real Estate Advice Essential for New York Investments" »

William S. Burroughs famously said "Sometimes paranoia's just having all the facts."

And the fact of the matter is in today's regulatory environment you might be surrounded by regulators in the elevator, as the Wall Street Journal so aptly put it. Our New York Securities Lawyers understand the added pressure faced by many banks and investment companies in the wake of the economic collapse. In true government fashion, the increased scrutiny does not necessarily mean increased training or increased resources. Instead, it's just as likely to mean "rush to judgment." As an employee, it's more important than ever to keep proper documentation, to avoid shortcuts, and to not give in to pressure.

For investors weary of the seemingly weekly stories about Ponzi schemes and cases of securities fraud in New York and elsewhere, increased regulatory enforcement is a step in the right direction. However, possible conflict-of-interests continue to exist, as evidenced by the often cozy relationship between regulators and their charges. Restrictions are needed to prevent investigators from taking high-paying jobs from the very people they have been charged with regulating.

The Journal reports the Federal Reserve Bank of New York and the Office of the Comptroller of the Currency are increasing the number of examiners who go to work every day for the companies they regulate. Such regulators embed themselves at companies like Bank of America and Goldman Sachs Group.

The New York fed has deployed some 150 such regulators; a total that is expected to double this fall. The number of such regulators is up 40 percent nationwide to 1,948 since 2006.

And for every action there is an equal and opposite reaction; it wasn't a week ago that The Wall Street Journal reported Republicans at the New Hampshire debate were busy running against the need for financial regulations. Candidates called for the repeal of Wall Street regulations enacted by the Obama Administration as well as Sarbanes-Oxley, the law enacted in the wake of the implosions at WorldCom and Enron.

The efforts of embedded regulators at Goldman and Morgan Stanley have redoubled since 2008, when Wall Street's last two independent investment banks became holding companies. The move gave them access to the Fed's discount window. Since then, the number of embedded regulators at both firms has increased substantially.

Continue reading "Embedded Regulators Increase Wall Street Enforcement Efforts" »

The Wall Street Journal reported over the weekend about how one New York resident investor who lost his small stake in Washington Mutual once it was seized by the United States government in 2008 played a pivotal role in protecting the rights of similarly places investors. New York securities and whistleblower lawyers know there too be all too many investors in the same boat.

Nate Thoma, a self-taught trader who was wiped out when the U.S. government intervened in WaMu, discovered that he could recoup his losses by investing in trust preferred securities, which he bought through online trading account when they became available. The trust preferred securities essentially places the holder in the front of the line for any money distributed from WaMu's estate once it emerged from bankruptcy. The Wall Street Journal reported that Mr. Thoma suspected hedge funds were buying substantially more blocks of these trust preferred shares while also owning the bank's bonds.

And in December 2010, Mr. Thoma explained his theory to the Delaware bankruptcy court judge in the case In re Washington Mutual, Inc.: since the hedge funds were both bond holders in settlement talks, and owners of substantial swaths of trust preferred shares, were the hedge funds acting in the trust preferred holders' best interest when they negotiated on their behalf?

Mr. Thoma's argument, who was unrepresented for his objection and has no formal legal training, factored into the judge's resulting decision to disallow settlement of the case, and led to a settlement between the hedge funds and individual investors.

Such individual investor intervention in bankruptcy proceedings is rare. However, Mr. Thoma's intervention is instructive. It is important to keep a watchful eye over your investments. If you suspect that your wishes are not being considered by your broker, or your suspect that foul play is occurring in your account, you are best served to investigate the matter immediately.

The Wall Street Journal article can be found here.

The Delaware Bankruptcy Court's decision can be found here.

New York securities lawyers are taking notice at the decision rendered to have HSBC pay $62.5 million in a class-action lawsuit claiming the bank was negligent as the custodian of client money lost in Bernie Madoff's investment scam, according to Erik Larson and Linda Sandler's article "HSBC Agrees to Pay $62.5 Million to End Madoff Civil Case" in Bloomberg's Businessweek.

The civil securities fraud claim in New York was filed against HSBC and other defendants by investors in the Ireland-based Thema International Fund Plc. HSBC admitted no wrongdoing as a result of the settlement.

New York securities attorneys have seen a slew of cases alleging investment fraud since the beginning of the economic downturn. Of course, the Madoff scandal has made international news. But there have been hundreds of others involving securities, real estate investments and other investment vehicles. In many cases, people simply made bad investments or were caught holding an investment when the bottom fell out of the market.

In other cases, mid-level executives are facing allegations of failure to supervise, failure to execute or breach of fiduciary duty. In all cases, the best defense is to bring in a New York securities law firm as early as possible once allegations have been made or an investigation has been initiated.

HSBC is also facing Madoff-related lawsuits in Germany, Luxembourg and other countries. The London-based financial institution says it has good defenses against those allegations. In this case, the lawsuit alleged HSBC acted as a custodian for Therma and other funds and that the bank funneled money to Madoff.

The trustee liquidating the Madoff estate sued HSBC and a dozen feeder funds for $9 billion in U.S. Bankruptcy Court in Manhattan -- claiming the bank should have known of the fraud. In seeking dismissal of the lawsuit, the bank said it lost $1 billion of its own money and had no knowledge of the fraud. However, the bank was twice warned by auditors that entrusting $8 billion in client funds to Madoff was leaving the bank exposed to "fraud and operational risks."

The lawsuit by investors claimed the bank failed to act on those warnings.

Two other funds sued by the Madoff estate trustee have since countersued HSBC, claiming hundreds of millions of dollars of losses associated with the fraud. A group of 650 German investors has also sued the bank, claiming $36.6 million in damages.

In other fallout from the scandal, Madoff's former payroll manager pleaded guilty this month to assisting the ponzi scam by working to conceal it from regulators, according to UPI's "Madoff's payroll manager pleads guilty‎." According to the New York Daily News, the 37-year-old paid no-show employees and invented a fraudulent account so he could qualify for a construction loan. He faces 70 years in prison on a host of charges.

Madoff is serving a 150-year prison sentence for operating the scam, which lost $65 billion.

Continue reading "HSBC Pays $62.5 Million to Settle Allegations of Securities Fraud in New York" »

The Securities and Exchange Commission has issued a bulletin warning of potential securities fraud among companies that went public through a reverse merger, which New York securities lawyers can recognize as a too common cause for alarm.

A New York Investment Fraud Attorney should be consulted whenever a firm becomes aware of a state or federal investigation. If you are an employee who has been a whistleblower or wants to cooperate with an investigation, the earlier professional legal advice is engaged, the better the chances of a positive outcome. Likewise, those who believe they have been victimized by stock fraud need to proactively seek quality legal representation as early as possible. Multiple competing claims, criminal investigations, bankruptcy and other complications may or may not ever permit investors to be made whole. But those at the front of the line generally stand the best chance of making a financial recovery.

The Street reporter Scott Eden reports in "SEC Warns on Reverse Merger Stocks" that the bulletin comes amid a growing stock scandal involving Chinese small-cap stocks that used the controversial process. News reports of fraud and theft of capital have plagued the Chinese small-cap stock sector since early spring. Several companies have reported auditors resigning or refusing to sign off on 2010 financials, which must be filed in annual 10-K reports with the SEC. Trading has been suspended for more than 15 Chinese companies -- tens of billions of market capital have evaporated as many stocks in the sector have lost at least half their value.

In a reverse merger, a privately held business obtains a registered listing by combining with a listed shell company. While legal, the process has been criticized as a means of bypassing the scrutiny of regulators, who more rigorously review bigger issues by companies looking to raise significant amounts of capital. Since 2009, there has been an uptick of Chinese companies using the process to list shares on major exchanges; in some cases, the companies have been affiliated with the same stock promoters, investment banks, auditors and attorneys.

"Given the potential risks, investors should be especially careful when considering investing in the stock of reverse merger companies," said Lori J. Schock, Director of the SEC's Office of Investor Education and Advocacy. "As with any investment, investors should thoroughly research the company - including ensuring there is accurate and up-to-date information - before making a decision to invest."

Short sellers had warned the SEC of the potential for fraud in the sector for two years before the government took action. The probe is looking not only at the Chinese companies but also at the professionals on this side of the Pacific who have assisted the companies in raising capital.

Dena Aubin with Reuters News reports in "SEC warns investors on reverse merger companies" that the companies are often audited by small U.S. accounting firms , which may lack the resources to track a company to another country.

Continue reading "SEC Warns of Investment Risk Involving Reverse Merger Companies" »

Goldman Sachs Group Inc. will pay $10 million after Massachusetts securities regulators contended its "research huddles" were dishonest and unethical, according to a Wall Street Journal article "Goldman Fined $10 Mln By Massachusetts Over Research 'Huddles'" by Liz Moyer that has New York securities lawyers singing the court's praises.

The state said the "huddles," which included communications between top analysts and top clients, gave special access, information and tips to select clients, which other clients did not receive. Goldman admitted no wrongdoing; investigations by the Securities and Exchange Commission and the Financial Industry Regulatory Authority are ongoing.

New York securities attorneys note the increasing number of investigations into the advice investment firms are doling out in the wake of the economic collapse; some have been accused of touting the safety of real estate securities even as they were moving top clients and funds out of real-estate-backed products.

An experienced law firm should be brought in to handle audits and investigations in New York at the earliest possible stages of such cases. In many cases, how you handle requests for information and respond to investigative entities -- both formally and informally -- can have a dramatic effect on the outcome of your case. As Peter Henning at the New York Times recently reported in "Zealous Advocacy vs. Obstructive Conduct", there can be a fine line between zealous advocacy and obstruction -- a fact both executives and their attorneys must always be aware. At the same time, you need a law firm with the knowledge, experience and resources to stand up for your rights -- not to cave to government intimidation.

In this case, the Goldman probe began two years ago. Massachusetts regulators did not conclude there was any fraud -- nor did they accuse Goldman of previewing rating changes with clients. The allegations came in the wake of a $1.4 billion settlement the company reached in 2003, after regulators accused its research division of being too cozy with top investors. In revamping Goldman's Research Division, it developed initiatives referred to internally as "asymmetric service initiative" and "client prioritization."

Massachusetts regulators point to a profit motive when the huddles began in 2006. The groups included traders, analysts and sales people. Clients were tiered according to their revenue-generating potential. Top clients were reportedly given access to those who had attended the huddle; information included short-term trading ideas.

A consent order with Massachusetts reveals revenue in the asymmetrical service initiative rose 40 percent -- generating $17.9 million.

The company reportedly split clients into tiers, with tier 1 and tier 2 clients being given access to those in the huddle, while tier 3 clients -- which included several state mutual funds and pension funds -- were made to go through traditional channels.

As Christine Harper with Bloomberg News reports in "Goldman Sachs Settles Massachusetts Probe of 'Huddles'" the settlement ends the two-year investigation into New York-based Goldman Sachs' Asymmetric Service Initiative. The company will discontinue the practice as part of the agreement.

Continue reading "Goldman Sachs Pays $10 Million to Settle Allegations of Questionable Investor Relations" »

Forbes.com recently published an article entitled "The 15 Most Outrageous ETFs". The article highlights the explosion in the Exchange Traded Fund ("ETF") market and the growing trends in ETF development: the kinds of funds that have New York securities attorneys up in arms.

Since 2006, over 900 new ETFs have been launched. These funds utilize various complex structured products and derivatives to help their performance track their target index. Many funds also employ various techniques to increase their returns, called "leveraging". However, these techniques also increase the risk of these investments.

Some ETFs on the market today that employ leveraging include Direxion Daily Semiconductor Bull 3x Shares, Direxion Daily Financial Bull 3x, Direxion Daily Small Cap Bear 3x, and Direxion Daily Energy Bear 3x. While these funds promise to return three times the return of their target index, many fall short. For example, during a seven month period just this past year, the Direxion Daily Semiconductor Bull 3x ETF returned a loss of 6.25% despite a positive return of 5% on its target index.

Many ETFs also will not track large indices like the S&P 500 or the Dow Jones, but will instead track narrower indices like the energy sector or agribusiness, which further exposes investors to the risks of overconcentration. Both leveraging and a narrow sector focus, individually, can be very dangerous for common investors, but when combined, the results can prove disastrous.

For these reasons, most ETFs on the market are actually designed for experience day traders, not for the common "buy and hold" investor. However, with the boom in the creation of ETFs recently, many common investors have found themselves holding these products in their portfolios. The high risk of these investments can have disastrous consequences.

But this potential for disaster has not gone unnoticed. In fact, the SEC has suspended the launch of any new leveraged ETFs. "There has been a lot of concern generally about derivatives in the last few years, and specifically in our division about the use of derivatives by investment companies, including ETFs," says Elizabeth Osterman, head of the exemptive applications office of SEC's Division of Investment Management. "Our decision to defer the review of exemptive applications for derivatives-based ETFs reflects concerns about whether granting exemptive relief for those funds would be consistent with required regulatory standards in light of those concerns."

However, the SEC has not taken existing ETFs off the market. Unfortunately, many investors have suffered substantial losses in the past and may suffer more in the future because they never understood the product their broker was buying in their account or the associated risks. Many investors who suffer losses as a result of unsuitable recommendations by their broker may be entitled to compensation.

Continue reading "Outrageous ETFs: Not Appropriate for All Investors " »

The New York securities fraud case against Fabrice Tourre stands out for a number of reasons -- not the least of which is because he is the only person charged with connection with the sale of mortgage-backed securities, which were instrumental in the nation's economic collapse. Now, evidence apparently found on a trashed laptop raises all kinds of legal and ethical issues.

As HuffPost Tech reports, it's a cautionary tale that data never dies. To say nothing of the fact that the case creates a poster child for the worst way of disposing of old computers with sensitive information.

But a New York Securities Lawyer would be quick to note that there is a big difference between what might be found in the trash -- or published in the newspaper -- and what makes it into a court of law. In this case, the computer was found in the trash and was still importing e-mails between Tourre and his attorney, as they discussed how to handle the criminal and civil accusations surrounding him. Such communications would also be protected under attorney-client privilege.

Editor and Publisher reports the New York Times has denied hacking Tourre's e-mail account.

The saga of the former Goldman Sach's trader also illustrates how a criminal investigation can focus on one or two employees -- often unfairly -- and why each should seek experienced legal advice as early as possible in such cases. As the New York Times reports, hundreds of employees worked in teams to devise and sell the securities, which were examined by lawyers and approved by management. The buyers included hedge funds, banks and insurance companies.

In this case, the 28-year-old trader was little known -- even inside the firm. And yet he has the dubious distinction of being the only person on Wall Street sued by the Securities and Exchange Commission in connection with the sale of mortgage-backed securities.

Naturally, it raises questions about the diligence of government investigators. As former New York attorney general G. Oliver Koppell put it, "it's impossible that only one person was involved with fraudulent activities in connection to the sales of these mortgage securities."

From a defense standpoint, it should be noted that the pressure on regulators has led the U.S. Attorney General's Office to announce it was widening the probe -- years after the fact now. Such politically motivated investigations often lead to questionable charges that can ruin reputations regardless of how weak the case.

Tourre received a Wells notice in the fall of 2009 -- a notice from the SEC that he was likely to be named in a civil fraud lawsuit for his role in the mortgage deals. His lawyers have quietly argued that singling him out is unreasonable. Those arguments were non-public but were among the materials given to the Times by a New York artist. The woman said she found the information on a laptop given to her by a friend in 2006.

The friend claims the laptop was in the trash.

Continue reading "Tourre/Goldman Sachs Face New York Securities Fraud Case with More Questions than Answers" »