New York Securities Lawyers Blog

It has been difficult to not hear about the recent events surrounding MF Global Holdings Ltd and former Senator and New Jersey Governor, John Corzine. However, many investors do not really understand what happened or why. A recent article in Forbes Online titled "MF Global: Were the Risks Clear?" helps to break down just how these events transpired. The article details how overexposure to European sovereign debt (government bonds) leveraged by using borrowed money (called "margin") coupled with declines in the value of those bonds caused the downfall of the fund.

The almost overnight collapse of such a prominent and public investment fund as MF Global has brought many issues to light, and the Forbes article characterizes this "as the latest reminder to investors that it's important - and sometimes very difficult - to understand the entire spectrum of risk they're exposed to." These events also raise many questions that should be asked by investors, such as "Do I really understand how my advisor is managing my savings?" and "Have the risks in my portfolio been adequately explained to me?".

Many investors in MF Global have said that they did not understand what their money was being invested into, but rather trusted that the firm would do the right thing by them. One investor cited by the article said on his blog that "I am supposed to know the difference between an ethical operator and one that is not. The truth is that it often is very difficult to tell them apart." This has unfortunately come to be a fairly common sentiment by many individual investors, in reference to their personal broker and the funds they invested in.

In the present day, individual investors as well as large institutions and investment funds can all be equally at risk of the volatility in the European markets, like MF Global was. Investments directly in European bonds and others with exposure to the European markets may not be appropriate for conservative investors, including senior citizens and retirees, especially if these investments were made on margin. Individuals with these investments may have already lost or may be at risk of losing large portions or possibly all of their investments.

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 unsuitable or risky investments, such as those in European debt, contact the securities fraud lawyers at Malecki Law for a free consultation and case evaluation.

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.

New York securities law saw quite the news day, as the Financial Industry Regulatory Authority (FINRA) issued a news release on September 7, 2011 announcing fines against five Broker-Dealers, three of them based in New York, for mischaracterizing fees charged to customers. The three New York based firms were John Thomas Financial of New York, NY, A&F Financial Securities, Inc. of Syosset, NY and Salomon Whitney, LLC of Babylon Village, NY. FINRA alleged that the firms understated commissions but charged additional handling fees to make up transaction based income for the firm. FINRA found that by structuring their fees this way, the firms ended up charging fees significantly higher than the actual cost of the services the firms provided.

In making their findings, FINRA reiterated that broker-dealers must accurately disclose commissions earned. By settling these charges with FINRA, the firms did not admit or deny wrongdoing, but they did consent to the entry of FINRA's findings and also agreed to implement actions sufficient to remedy the handling-fees violations.

Such mischaracterization of handling-fees is one example of how broker-dealers can put their own interests ahead of the interests of their clients, and represent what is essentially securities fraud. If you held an account with one of these firms or you think your broker-dealer may have charged fees in excess of what they disclosed to you, your entire portfolio may need a thorough review for suitability.

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

Malecki Law, a New York securities law firm based in Manhattan, is currently investigating claims against IRA Services Trust Company and Fiserv, Inc. arising out of investments solicited and promissory notes issued through the Van Zandt Agency in relation to real estate investments in the Bronx, New York and elsewhere.

The Attorney General of the State of New York is currently investigating the practices of the Van Zandts and on April 6, 2011, filed an application in the Supreme Court of the State of New York for an order of discovery and preliminary injunction against the Van Zandts and other related agencies.

Based on the initial inquiry of the securities fraud lawyers of Malecki Law and the Attorney General's investigation, there are questions about whether or not the Van Zandt Agency broke the law by engaging in the fraudulent issuance, promotion offer and sale of securities to the public in the State of New York. It is believed that hundreds and possibly thousands of investors may have lost money invested with the Van Zandts.

There may be claims against IRA Services and Fiserv for failing in their due diligence, supervision and providing a facility for an alleged fraud by an unregistered investment advisor that was also not a broker dealer. The lawyers at Malecki Law are focusing on potential claims against IRA Services and Fiserv, who may have breached various duties to individual investors, as they may be the only hope of a recovery for those who lost money.

Continue reading "Malecki Law Announces Investigation of IRA Services Trust Company and Fiserv, Inc. Arising Out of Investments with the Van Zandt Agency" »

The talk among New York securities lawyers this week was all about the Financial Industry Regulatory Authority (FINRA) release of Regulatory Notice 11-39 addressing business use of social media website in the wake of surging popularity of social media tools such as Facebook and Google+. These social media tools make connecting with friends, colleagues and third-parties easy, but also raise novel questions related to the extent to which associated persons may use these sites for business use and registered principals must supervise such use.

Securities Exchange Act Rule 17a-4(b)(4), which requires the retention of copies of communications between members, brokers or dealers and the public of "business as such," underlies Regulatory Notice 11-39. Thus, a firm's or an associated person's communications with the public through social media posts may require pre-approval by the firm and/or registered principal, and be subject to regulation by FINRA, depending on whether the communication is related to the firm's "business as such" and is "static" as opposed to "interactive." Generally, all communications related to a firm's business as such must be recorded and preserved, while all static posting is deemed an advertisement requiring the firm's pre-approval under NASD Rule 2210.

Regulatory Notice 11-39 begins to address the grey area of posting to message boards. Associated persons, be they advertising in the first place or responding to questions via such message boards, are limited to what they can say and claim. Thus, postings in static forums or blogs on websites would require pre-approval of all statements made relating to the firm's business.

In today's brave new electronic world, it is not uncommon to have introduction to brokers and registered representatives through the use of social media websites. If such an acquaintance has made boasts or promises of business performance, such statements may violate FINRA and SEC laws and regulations and may constitute "red flags" of further inappropriate behavior.

FINRA Regulatory Notice 11-39 is available here.

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" »