New York Securities Lawyers Blog

An intriguing new instance of whistleblowing has emerged from Clifford Jagodzinski, an ex-employee of Morgan Stanley Smith Barney LLC who claims that at least one highly successful broker for the firm was churning preferred securities in 2011. Churning in this case would violate not only state law, but also rules in place under the Dodd-Frank Act. For a further definition of churning, visit the Investors section of our company website. The Whistleblowers section of the site additionally identifies the nature of such cases and the firm's unique interest in them.

The accused broker, wealth manager Harvey Kadden, was allegedly making tens of thousands of dollars in commissions despite supposedly taking actions which created minimal advances or even losses for his clients. Mr. Jagodzinski claims these moves "were obviously designed to bilk customers". Mr. Kadden is said to have been recruited from Bank of America/Merrill Lynch, where he had worked for 30 years to great success, often appearing in Barron's list of the Top 100 Financial Advisors.

Jagodzinski claims he was told to stop investigating Kadden by higher-ups within Morgan Stanley. Kadden is reported to have run a team of four brokers who had brought $14 million in profits to the company within the last 12 months, while managing a total of over $1 billion in customer portfolios.

Expectations for Kadden were said to have run high. Despite pressure from some within Morgan Stanley to drop the case, Jagodzinski's complaint allegedly cites his reported supervising managers David Turetzky and Ben Firestein as disingenuously appreciative to Jagodzinski for having Kadden's alleged "flipping [of] these preferreds".

Turetsky allegedly discouraged Jagodzinski from bringing legal action against a different broker - within Morgan Stanley but separate from Kadden - who claimed to have made as many as eighty unauthorized trades when Jagodzinski informed the broker that he had found one such instance in his research into company fraud. Jagodzinski's claim argues that Turetzky feared firing the broker would cause the company to be leveled with unwanted fines and penalties, and do harm to the broker, whom he is said to have considered a fair and decent employee.

Jagodzinski was allegedly fired in April of this year after having reported several breaches of the law to Turetzky since December of 2011. The range of such alleged violations includes alleged failure to register home offices as work locations, improper trading, and even drug abuse. Jagodzinski is said to have been fired just ten days after initially suggesting to Turetzky that the offenses in question be reported.

It is the right of any and all professionals and investors alike who believe they may have suffered losses as a result of engaging in whistleblowing actions to contact our offices to explore their legal rights and options. If you or a family member feels they have been unjustly fired or persecuted for whistleblowing activities, contact the securities fraud lawyers at Malecki Law for a free consultation and case evaluation at (212) 943-1233.

A headline of the New York Times' Sunday Business section published May 19th, Gretchen Morgenson asks "Is Insider Trading Part of the Fabric?", raising a potentially distressing question for regulators and market analysts alike. Morgenson profiles the woes of one Ted Parmigiani, a Lehman Brothers investment analyst whose career was apparently placed in peril in 2004, when his research was allegedly leaked by a colleague in his research department. Parmigiani was then planning to raise his assessment of computer chip producers Amkor Technology. The leak was apparently discovered by Parmigiani on the planned date of his announcement, when Amkor's price quickly shot up that morning, an hour before his new assessment was to be broadcast. Such are the dangers those working in investment too often face, and therein lies the potential for such figures to become brave whistleblowers. Visit the Practice Areas section of Malecki Law's website to learn more about the firm's work in aiding whistleblowers of fraud and further financial corruption.

Parmigiani responded by spending years providing information to the Securities and Exchange Commission (SEC) about the trading and research climate at Lehman, where suspicious trades were all too common, and sales reps and analysts illegally shared both office space and data. As part of 1.4 billion collective settlement paid by Lehman and nine other firms following an Eliot Spitzer-induced inquiry into insider trading, Lehman agreed to separate analysts from sales teams. Parmigiani says he was asked to ignore this supposed divide, write praise for investment banks whether it was merited or not, and explicitly told not to make negative comments about Lehman-favored companies and executives.

Parmigiani alleged that Lehman traders were often advised of changes to analysts' company ratings before the revisions were publicly announced, and that traders were tipped off by analysts so that they would make hedge bets with Lehman's own money. According to reports, announcement of Parmigiani's recommendations were delayed by sales management for days at a time for no justified reason. In the Times article Parmigiani compares his actions to his time in the U.S. military, where the duty to disobey unlawful orders was instilled. Following his outrage over the Amkor incident, Parmigiani was fired from Lehman and found himself unable to find work at comparable Wall Street firms.

Despite assertions from regulators that insider trading is today prosecuted with greater frequency and accuracy, Mr. Parmigiani's story speaks to what many authorities consider to be a system-wide epidemic. Such observers might argue that for every SEC conviction of a notorious inside trader - such as billionaire Galleon hedge fund manager Raj Rajaratnam - there is an instance such as that of Bernard Madoff, whose financial crimes went unprosecuted for years despite alarming warning signs.

To their credit, the SEC takes a contrary public stance on Parmigiani's claims. Spokesman John Nester asserts that the SEC performed an extensive review of the claims against Lehman, reviewing "nearly 100,000 e-mails" and conducting numerous interviews with Lehman employees before determining that there "simply was not any evidence in this case to support the conclusion that Lehman, its employees or its clients had committed insider trading." Morgenson further notes that for critics, the issue is not the number of SEC prosecutions of insider trading, but the typically minor targets and sums fined. The article notes two major exceptions: a recent $22 million dollar fine to Goldman Sachs, and a 2007 case against a researcher at Swiss bank UBS that resulted in charges against eight individuals, one of whom went to prison.

Parmigiani cites the 2008 financial crisis, coupled with Lehman's subsequent insolvency, as the point at which the SEC's interest in his case faltered. Independent analysis from Babson College professor of finance Steven Feinstein was presented by Parmigiani to the SEC in 2010. Feinstein's report concluded that Lehman had engaged in "tipping" that directly changed the stock price and caused damages for investors. Yet Nester again argues in favor of the SEC's inquiry with direct company sources over autonomous investigations such as Feinstein's. "Our staff can and does interrogate witnesses, review contemporaneous documents, including e-mails, and scrutinize records," says Nester. "That is evidence, and that is what determines whether insider trading has occurred."

The degree to which investors and insiders alike rely upon the SEC to act as the most steadfast regulatory body it can be is apparent. As the stakes of investment grow only larger, the temptations of many such brokers and hedge managers toward gaining illegally obtained information loom large. It seems that whether Ted Parmigiani and like-minded critics of these regulatory efforts are correct in believing that the Commission is failing to correct preventable damages will be confirmed or denied by the SEC's tenacity amidst growing concerns of insider trading, and as always in the passing of legislature that further regulates practices that place investors in unreasonable harm.

Today, the SEC's new whistleblower program under the Dodd-Frank Act becomes effective, and is on the minds of many New York securities lawyers. These new rules were devised in such a way to provide an incentive for would-be whistleblowers to come forward and assist the SEC with investigations of possible securities law violations. Under these new rules, if an individual provides the SEC with original information about possible federal securities laws violations, and that information leads to a recovery by the SEC of $1 million or more, that individual would be entitled to receive up to 30% of the sanctions received by the SEC.

Under the new rules, internal reporting is encouraged, but it is not required. Individuals may instead go directly to the SEC. However, the value of internal compliance programs is addressed in the release, and there are incentives in place in the new rules to urge whistleblowers to report internally first.

There are also a few groups of individual who, for public policy reasons, are excluded from participation under the new rules. These include: compliance and internal audit personnel; officers, directors, trustees and partners who only discover the violations as a result of internal compliance procedures; public auditors who learn of the violations in the course of an engagement. However, these people may be eligible under certain circumstances, such as: they reasonably believe that disclosure is necessary to prevent the company from causing substantial injury to the property or financial interests of the company or investors; they reasonably believe that the company is impeding an investigation of the misconduct; or at least 120 days have passed since the initial internal report. Attorneys are also excluded, provided that they learned of the violations directly from attorney-client communications.

The new rules also provide substantial protection for individuals who do come forward, in order to prevent retaliation from their employer. Even if a whistleblower's tip only relates to possible violations and the SEC investigation is unsuccessful, that individual is now protected from retaliation by a new express private right of action. Whistleblowers may sue their employer and seek remedies including two times their back pay and reinstatement. However, this protection is only for individuals who go directly to the SEC, not for those who report only internally.

Given these new rules, it is now much safer for individuals who have information about suspected federal securities law violations to come forward, and whistleblowers now have the opportunity to be compensated for their efforts in aiding the SEC. Yet it is important for potential whistleblowers to ensure that they proceed through the appropriate channels. For that reason, individuals who wish to contact the SEC to report securities violations should consult with an attorney before doing so to ensure that their rights are protected.

Continue reading "New SEC Whistleblower Rules Become Effective" »

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.

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.