November 2011 Archives

Watching the Watchers: Charting the SEC's Increased Pursuit of Negligent Execs

November 4, 2011,

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The Securities and Exchange Commission (SEC) has in recent weeks seemingly broadened its pursuit of wrongdoers by filing cases against defendants on the charge of negligence alone. Negligence can be defined as a situation in which one should have known that information given to investors was inadequate. In recent years, negligence fines have been what accused bigwigs would accept and pay to avoid more severe charges of fraud, which carry heavy costs and the potential to be banned from the finance industry. Such admissions were usually made out of court and out the public eye. Readers looking to learn more about the role of negligence in securities law proceedings can visit our firm's informational Practice Areas and Investors sections.

As of today, these ramped-up regulations have been sparsely utilized, though the Wall Street Journal speculates that more actions against negligence are forthcoming. It's the SEC's recently united "Structured and New-Products Enforcement" unit that's claiming to be newly insistent about information being more fairly provided to investors.

Criticism of the SEC's post-2008 methods has come in part because they have seemingly failed to catch many financial criminals in the act. Detractors believe that in many cases, outright fraud or recklessness is the issue: branding such failures as negligence would then only diminish or downplay their severity. The penalties for fraud are far more severe, but are in turn more challenging to obtain, as they require proof of intentional malfeasance. The charge of "Recklessness" falls between fraud and negligence in severity, and can be defined as one turning a blind eye to potentially harmful activity.

Today's SEC is in other ways all too familiar with allegations of negligence: the commission itself was sued on the same charge earlier this year by a group of Texas fraud victims for allegedly failing to take proper actions against Fort Worth based Ponzi schemer Allen Stanford.

Concern from SEC's critics stems from the idea that the commission will be too easily satisfied with issuing negligence as a kind of "slap on the wrist", and that it is too often favored over more intensive measures that require greater time, money, and research. In 2010, Citigroup paid $180,000 in fines that kept them from facing SEC civil charges for alleged failure to disclose $40 billion worth of dicey mortgage assets.

The most noteworthy instance of SEC proactivity to date has been a civil lawsuit filed against Edward Steffelin, an executive who managed the assets of Squared, a series of J.P Morgan backed mortgage bonds that went under in 2007. Steffelin is accused of failing to inform investors that J.P. Morgan had placed a hedge fund bet that the deal would fail, despite being on paper the group trying to make it succeed. J.P. Morgan, while refusing to admit or deny culpability, paid the SEC $153.6 million to settle civil fraud charges. Says Steffelin's lawyer Alex Lipman, "We understand the SEC's desire to burnish its reputation in light of recent scandals... But this is not the right case and certainly the wrong defendant to target as a means to redress these failures."

Regardless of whether or not Steffelin is at fault, the SEC is at the center of a pivotal moment: one in which many Americans seek increased regulations on financial institutions, while those same institutions argue that such legislation will limit national growth and profit. The commission taking action against single defendants also bares unique challenges, as individuals are more apt to fight such charges in court than a corporation, which is typically willing to pay fines to avoid litigation.

Credit rating firms like Standard & Poor, Moody's, and Fitch Ratings have also been under higher scrutiny from the SEC after the commission found errors in S&P's analysis of over a thousand mortgage-backed bonds. Like J.P. Morgan and other investment firms, these rating groups have also struggled with public image in the wake of the financial crisis. The SEC's findings were part of an annual review of such rating firms instated by the Dodd-Frank Act. SEC has furthermore notified Standard and Poor that it may be face charges of fraud for inappropriately rating a $1.6 billion mortgage deal that collapsed shortly thereafter.

It seems possible that some of this heightened monitoring of S&P is a result of a the rating group's recent downgrading of U.S. debt, an action that has made them no friends on Capitol Hill. The SEC is additionally looking into potential insider trading from S&P employees that may have occurred just prior to the downgrade, and the potential for S&P ratings to be leaked to the companies in question prior to their publication.

This alleged effort towards tighter regulation comes as a new criminal enforcement office this month opens its doors: the New York State Department of Financial Services, run by newly appointed regulator Benjamin Lawsky, a longtime financial advisor to Governor Andrew Cuomo. The unit is a merging of the state's banking and insurance regulators, entities typically separate in state law coming together to rein in New York's massive and unique financial sector. Lawsky is being painted as no favorite among corporate executives: WSJ notes that it was he who closely examined and criticized bonuses paid to executives of companies receiving federal bailouts.

The formation of such watchdog committees is but the first step towards resonant progress in financial regulation. Ribbon cutting ceremonies make headlines, but on their own garner no convictions. If the goal is increased expectations of transparency toward the consumer, we can only hope that charges of negligence will deter those who seek to defraud us. How the SEC's role in reform evolves in the months and years to come will tell us much about what a bailed out financial sector can offer its post-crisis nation, and whether decreases in fraud have been hard fought and achieved.

Malecki Law Announces Investigation into Leveraged and Inverse ETFs

November 2, 2011,

Malecki Law is currently investigating Financial Industry Regulatory Authority (FINRA) brokerage firms who have advised customers to purchase leveraged and inverse ETFs (Exchange Traded Funds), including those issued by Direxion, ProFunds (ProShares) and Rydex. Some of these ETFs trade under the symbols FAS, FAZ, UPRO, SDOW, SPXU, UDOW, RSU and RSU, among many others.

From 2007 through 2010, the market for inverse and leveraged ETFs such as these has grown from $1 billion to $30 billion, in large part due to these products being solicited in the accounts of normal, unsophisticated investors.

These products are highly complex, using various trading strategies in an attempt to deliver their promised returns, and are oftentimes not suitable for the investment portfolio of a conservative or retired investor.

Unfortunately, many brokers and brokerage firms fail to properly inform their clients about the complex nature of these investments and the associated risks involved. Hence, these investors do not understand the complex structure of the investment or the risks involved. Since these products are highly leveraged and structured to perform only in the very short term, they generally only suitable for speculative day trading, not long-term investment.

Compounding the problem with these investments is the use of margin in an investors account by his or her stock broker. By borrowing on margin to purchase leveraged ETFs, an investor can be exposed to extreme risk and market volatility. Such volatility could result in the investor receiving a margin call, which if not met, can devastate the account.

It is the right of any and all investors who believe they may have suffered losses to contact our offices to explore their legal rights and options. If you or a family member suffered losses in leveraged or inverse ETFs, such as those listed above, contact the securities fraud lawyers at Malecki Law for a free consultation and case evaluation.

Malecki Law Announces Investigation of Citigroup's FALCON and ASTA-MAT Hedge Funds

November 2, 2011,

Malecki Law takes a proactive and informed approach to the financial news of today: actively engaging in fact-finding analysis on prospective cases from around the world. Our thorough knowledge of securities law's history and fine points makes us ideal consultants for investors who have suffered losses due to misadvice from their broker or other financial counsel. Information on a selection of funds and companies currently under investigation by Malecki Law can be found below. Our pursuit of excellence is constant, but our opportunities to make lasting positive change to the securities industry begin and end with determined clients who seek justice.

Malecki Law is currently investigating the potential for recovery of losses from Citigroup's FALCON and ASTA-MAT hedge funds, as sold by its broker-dealer Smith Barney in the years spanning from 2005 to 2008. It is alleged that Citigroup presented the funds as affordable options, with fair-to-little risk and low volatility.

If the group failed to disclose crucial information about dangerous aspects of the funds and potential for severe losses, a claim may be warranted. Both funds were increasingly and excessively invested in real estate, leading to both funds reporting upward of 80% losses in 2008. Investors' legal claims against Citigroup have included but are not limited to Fraud, Failure to Supervise, Unsuitability, Misrepresentations & Omissions, Breach of Contract, and Breach of Fiduciary Duty.

It is the right of any and all investors who believe they may have suffered losses as a result of recommendations of their financial advisor to contact our offices to explore their legal rights and options. If you or a family member invested in Citigroup's FALCON and/or ASTA-MAT hedge funds, contact the securities fraud lawyers at Malecki Law for a free consultation and case evaluation at (212) 943-1233.

Malecki Law Announces Investigation of 1861 Capital Management

November 2, 2011,

Malecki Law takes a proactive and informed approach to the financial news of today: actively engaging in fact-finding analysis on prospective cases from around the world. Our thorough knowledge of securities law's history and fine points makes us ideal consultants for investors who have suffered losses due to misadvice from their broker or other financial counsel. Information on a selection of funds and companies currently under investigation by Malecki Law can be found below. Our pursuit of excellence is constant, but our opportunities to make lasting positive change to the securities industry begin and end with determined clients who seek justice.

Malecki Law is currently investigating the potential for recovery of losses from 1861 Capital municipal bond arbitrage funds sold by brokerage firm UBS. 1861 Capital Management is an investment firm based in New York, NY. It has been alleged that 1861 Capital Discovery Domestic Fund, LP was marketed and sold by UBS and other broker dealers as a sound and secure addition to a portfolio of municipal bonds. It may be more accurate to say, however, that 1861 would be better described as a leveraged municipal arbitrage fund.

In marketing such funds to investors, it has been alleged that UBS and their peers sought investors who were not only wealthy, but also cautious: those avoiding risk, making slow-but-steady investments, who would be drawn to the tax free municipal bonds to which the leveraged fund was coupled.

If these allegations are correct, the approach employed by 1861 was not only questionably deceptive, but dangerous in risking for its investors severe or total losses from a truly volatile fund. Such endeavors would be inconsistent with guarantees made about the safety and security of these investments.

It is the right of any and all investors who believe they may have suffered losses as a result of recommendations of their financial advisor to contact our offices to explore their legal rights and options. If you or a family member invested in 1861 Capital Management, contact the securities fraud lawyers at Malecki Law for a free consultation and case evaluation at (212) 943-1233.

Malecki Law Announces Investigation of Reverse Convertible Notes

November 2, 2011,

Malecki Law takes a proactive and informed approach to the financial news of today: actively engaging in fact-finding analysis on prospective cases from around the world. Our thorough knowledge of securities law's history and fine points makes us ideal consultants for investors who have suffered losses due to misadvice from their broker or other financial counsel. Information on a selection of funds and companies currently under investigation by Malecki Law can be found below. Our pursuit of excellence is constant, but our opportunities to make lasting positive change to the securities industry begin and end with determined clients who seek justice.

Malecki Law is currently investigating the potential for recovery of losses from reverse convertible securities. Reverse convertible notes can be defined as complex, short-term bonds. At the end of one year, the owner receives either a 100% return on their investment or a predetermined amount of stock should the value of the note drop by a set figure (typically 70-80%). Their high-interest rates (recently set at as much as 13%) make them an alluring prospect for quick and significant gains.

Such notes are widely discussed in the finance industry today, both because of their popularity ($6.76 billion worth of reverse convertibles were sold in the U.S. in 2010) and because of growing concerns that the industry is selling such notes to unsuitable investors, and failing to supervise investments properly once funds have been transferred. RCNs have thus received increased regulatory attention from FINRA and other regulators.

In July of 2011 the SEC filed a report targeting several areas in which an array of brokerage firms were failing to provide investors with necessary information, to the unwarranted risk and detriment of investment funds. These areas included but are not limited to: a failure to ensure that the sales were suitable, a lack of training procedures, and a failure to properly supervise secondary market activity.

In conjunction with the SEC's findings, FINRA Notice to Members 11-25 concisely states that due diligence is required from brokers when it comes to their own understanding of the securities they are selling, particularly material as potentially precarious an RCN. When a broker has failed to become properly educated in the securities being sold, or is willfully misrepresenting such products, legal recourse can be taken.

It is the right of any and all investors who believe they may have suffered losses as a result of recommendations of their financial advisor to contact our offices to explore their legal rights and options. If you or a family member invested in reverse convertible notes, contact the securities fraud lawyers at Malecki Law for a free consultation and case evaluation at (212) 943-1233.

Malecki Law Announces Investigation of Desert Capital REIT

November 2, 2011,

Malecki Law takes a proactive and informed approach to the financial news of today: actively engaging in fact-finding analysis on prospective cases from around the world. Our thorough knowledge of securities law's history and fine points makes us ideal consultants for investors who have suffered losses due to misadvice from their broker or other financial counsel. Information on a selection of funds and companies currently under investigation by Malecki Law can be found below. Our pursuit of excellence is constant, but our opportunities to make lasting positive change to the securities industry begin and end with determined clients who seek justice.

Malecki Law is currently investigating the potential for recovery of losses in Desert Capital REIT, a Henderson, Nevada based real estate investor, and its co-owned brokerage firm CM Securities.

Desert Capital is a real estate investment trust (REIT) that is believed to have been financing short-term high interest mortgage loans. These types of loans and any dividends are believed to have been paid to investors through real estate transactions, and are today generally thought to be risky investments, with potential for high gains due to their interest rates, but with equal if not unwarranted potential for resolute failure, and a possible lack of accountability toward investors.

Whereas such loans would have been more apt to be endorsed by brokers, the housing crisis has left Desert Capital with ten of millions of dollars in annual losses. The Las Vegas Review-Journal reports that the company lost $26 million in the third quarter of 2010 alone: the SEC has since issued a subpoena. CM Securities functioned as a brokerage firm owned by the same management as Desert Capital, and heavily marketed the REIT as a sound investment.

Given its current state, Desert Capital has issued statements declaring a likely inability to continue, with the concern of liquidation on their horizon. No stock in the company is traded on any exchange, leaving those who've invested in the company with what may be illiquid, worthless shares of an insolvent organization.

It is the right of any and all investors who believe they may have suffered losses as a result of recommendations of their financial advisor to contact our offices to explore their legal rights and options. If you or a family member invested in Desert Capital's REIT or made transactions through CM Securities, contact the securities fraud lawyers at Malecki Law for a free consultation and case evaluation at (212) 943-1233.

FINRA Fines Merrill Lynch $1 Million for Supervisory Failures that Permitted a Registered Representative to Operate a Ponzi Scheme

November 2, 2011,

Person Pyramid.jpgThe Financial Industry Regulatory Authority ("FINRA"), issued a news release on October 4, 2011 announcing that it had fined the broker-dealer Merrill Lynch for failing to have a supervisory system in place that would properly monitor employee accounts. FINRA stated that Bruce Hammonds, who at the time was a registered representative of Merrill Lynch, was permitted to open a business account but failed to supervise funds that customers deposited and Hammonds withdrew. Mr. Hammonds ended up "convincing more than 11 individuals to invest more than $1 million in a Ponzi scheme" run through the business account, FINRA disclosed.

FINRA further reported that Merrill Lynch's "inadequate supervisory system and the firm's reliance on employee self-reporting enabled Hammonds to facilitate his Ponzi scheme, to the detriment of investors." Merrill Lynch's system, one that could only be effective if an employee did not properly set their social security number as the primary number associated with the account was found by FINRA to properly capture the account, which allowed Mr. Hammonds to perpetuate his scheme.

Firms' failures to properly supervise their registered representatives is something Malecki Law takes very seriously, and we have launched investigations into several such alleged schemes, including one allegedly perpetrated by Carr Miller Capital, LLC and the Van Zandt Agency.

If you have questions or regarding these or other questionable business schemes with broker-dealers, contact the attorneys at Malecki Law for the confidential consultation.

FINRA's September 7, 2011 News Release can be found here.

Malecki Law Announces Investigation of Fannie Mae and Freddie Mac "Preferred Stock"

November 2, 2011,

Malecki Law takes a proactive and informed approach to the financial news of today: actively engaging in fact-finding analysis on prospective cases from around the world. Our thorough knowledge of securities law's history and fine points makes us ideal consultants for investors who have suffered losses due to misadvice from their broker or other financial counsel. Information on a selection of funds and companies currently under investigation by Malecki Law can be found below. Our pursuit of excellence is constant, but our opportunities to make lasting positive change to the securities industry begin and end with determined clients who seek justice.

Malecki Law is currently investigating preferred stock of Fannie Mae and Freddie Mac, as sold by an array of investment firms throughout 2007 and 2008, including but not limited to UBS, CitiGroup, Morgan Stanley, and Merrill Lynch.

Preferred stock can be defined as a hybrid of equity and debt instruments: it is prioritized over common stock when paying dividends and/or after liquidation. Preferred stock has been considered an appealing financing tool: selling such stock allows companies to defer dividends without affecting their credit or defaulting.

Claims filed by investors allege that the aforementioned firms and others like them failed to disclose crucial information about the quickly deteriorating status and financial security of Fannie and Freddie. The poor condition of the companies is today said to have sprang from excessive lending, offering loans that could not be properly repaid, and investment in "toxic" assets. The term "Toxic asset" describes mortgage-backed securities, credit default swaps, collateral debt obligations, and other risky means of borrowing and lending money for real estate that perpetuated a housing crisis once the companies lending such funds became insolvent.

Malecki Law Announces Investigation of Carr Miller Capital LLC

November 2, 2011,

Malecki Law takes a proactive and informed approach to the financial news of today: actively engaging in fact-finding analysis on prospective cases from around the world. Our thorough knowledge of securities law's history and fine points makes us ideal consultants for investors who have suffered losses due to misadvice from their broker or other financial counsel. Information on a selection of funds and companies currently under investigation by Malecki Law can be found below. Our pursuit of excellence is constant, but our opportunities to make lasting positive change to the securities industry begin and end with determined clients who seek justice.

Malecki Law is currently investigating allegations against Carr Miller Capital LLC, a New Jersey investment firm, accused in a lawsuit by the state Attorney General's office of creating a Ponzi scheme that defrauded investors of over $40 million. Company CEO Carr Miller has since been banned from practicing within the securities industry by state legislators.

Companies who shared investments with Carr Miller have been named as defendants. Among those cited is energy company Indigo-Energy ("Indigo"), a group in which Carr Miller had previously invested. Indigo has been named in the lawsuit against Carr Miller because Carr Miller invested in the energy company, who was then deemed by the state to be unjustly enhanced by Carr Miller's money, obtained through illegal actions taken by the firm.

The Attorney General further claims that Carr Miller did not provide investors with material information about the investments and falsely represented to clients where their money would be invested. According to an investigation into Carr Miller's actions, conducted by the New Jersey State Bureau of Securities, investors in New Jersey, Texas, Arkansas and North Carolina were sold promissory notes. Click here for our detailed definition of promissory notes and their suitable use.

It is the right of any and all investors who believe they may have suffered losses as a result of recommendations of their financial advisor to contact our offices to explore their legal rights and options. If you or a family member invested in Carr Miller Capital, contact the securities fraud lawyers at Malecki Law for a free consultation and case evaluation at (212) 943-1233.

Malecki Law Announces Investigation of David Lerner Associates and Apple REITS

November 2, 2011,

Malecki Law takes a proactive and informed approach to the financial news of today: actively engaging in fact-finding analysis on prospective cases from around the world. Our thorough knowledge of securities law's history and fine points makes us ideal consultants for investors who have suffered losses due to misadvice from their broker or other financial counsel. Information on a selection of funds and companies currently under investigation by Malecki Law can be found below. Our pursuit of excellence is constant, but our opportunities to make lasting positive change to the securities industry begin and end with determined clients who seek justice.

Malecki Law is investigating possible unsuitability claims against David Lerner Associates (DLA), a New York based real estate firm based in Syosset, NY. In May of 2011, FINRA regulators accused the brokerage entity of selling shares in illiquid real estate investment trusts, or REITs, to unsophisticated and elderly customers.

In addition, FINRA's suit against the firm argues that DLA's trusts were unsuitable for the consumer to whom the group was targeting. It is alleged that Lerner provided misleading information that failed to show that distributions far exceeded income and were financed by debt.

FINRA's notice further states that DLA lacked due diligence in failing to "sufficiently investigate valuation and distribution irregularities" made by the accountants of their real estate funds, who are said to have been dispensing returns greater than the value of the funds in full. More about FINRA's complaint against DLA and the options for recourse for those with actionable claims against this and other REITs can be found in Malecki Law attorney Adam Nicolazzo's posting on our New York Securities Lawyer's Blog from June, 2011.

It is the right of any and all investors who believe they may have suffered losses as a result of recommendations of their financial advisor to contact our offices to explore their legal rights and options. If you or a family member invested in Apple REITS from David Lerner Associates, contact the securities fraud lawyers at Malecki Law for a free consultation and case evaluation at (212) 943-1233.

Malecki Law Announces Investigation of LaeRoc Income Funds, LP

November 2, 2011,

Malecki Law takes a proactive and informed approach to the financial news of today: actively engaging in fact-finding analysis on prospective cases from around the world. Our thorough knowledge of securities law's history and fine points makes us ideal consultants for investors who have suffered losses due to misadvice from their broker or other financial counsel. Information on a selection of funds and companies currently under investigation by Malecki Law can be found below. Our pursuit of excellence is constant, but our opportunities to make lasting positive change to the securities industry begin and end with determined clients who seek justice.

Malecki Law is currently investigating Financial Industry Regulatory Authority (FINRA) brokerage firms who have advised customers to purchase a private placement called LaeRoc Income Funds, LP. LaeRoc is a real estate investment firm started in 1988, creating and owning property throughout the United States. Among those who sold the funds to investors are LPL Financial and Commonwealth Financial Network. We believe these investments were often marketed as modest, fixed income products.

The LaeRoc 2005-2006 Income Fund, LP is presumed to be at least $49 million in debt and presently aims to raise $12 million to $15 million, with lenders threatening foreclosure. The Fund currently owes $105 million dollars in total mortgage debt. Such an urgent pursuit of fast cash is a foreboding sign for investors. Malecki Law is researching a potential failure on the part of brokerage firms to properly disclose risk.

The Securities Act of 1933 require brokerage firms issuing private placements such as LaeRoc's funds to conduct reasonable investigations into the liability of such placements. Failure to do so may produce cause for action against the firm who issued the fund to its customer.

It is the right of any and all investors who believe they may have suffered losses as a result of recommendations of their financial advisor to contact our offices to explore their legal rights and options. If you or a family member invested in LaeRoc Income Funds, LP, contact the securities fraud lawyers at Malecki Law for a free consultation and case evaluation at (212) 943-1233.