New York Securities Fraud Lawyers Blog

Bitcoin Appears Headed for Regulation

March 6, 2014 | Malecki Law Team

As the old adage goes, one good deed deserves another. And so it is for bitcoin, which the Wall Street Journal reported may receive regulatory oversight in the not-too-distant future. It seems that enough people complained about what appears to have been a hacker-theft that led to the bankruptcy filing by Mt. Gox, until recently one of the major bitcoin exchanges. While the Federal Reserve appear unwilling, the WSJ noted that the Federal Trade Commission recently stated their goal “is to protect consumers, whether they pay by credit card, check, by some sort of virtual currency.” Despite Mt. Gox’s bankruptcy filing, the market for bitcoin continues to be routed through exchanges that up until now have operated with minimal to no oversight and bitcoins continue to be used to purchase services and goods, and likely, as a basis for investment.

The nature of Mt. Gox’s collapse is noteworthy. As reported on Tech Crunch, over the course of approximately one month, a supposed software bug caused Mt. Gox to lose approximately $500 million worth of bitcoin, including 750,000 bitcoin owned by investors and 100,000 bitcoin owned by Mt. Gox itself. Realizing the theft, Mt. Gox ceased investor transfers and shut down at the end of February 2014 and applied for bankruptcy protection from creditors. The WSJ reported on March 5, 2014 that the shutdown may have been caused by Mt. Gox’s bank refusing to process wire transfers after its repeated requests that Mt. Gox close its account.

Mt. Gox’s predicament may be the most publicized, but it certainly is not alone. According to the WSJ article on March 3, 2014, a recent study found that of 40 bitcoin exchanges, 18 have closed in the past three years, generally causing customer accounts to be completely wiped out. The WSJ reported that fraud is sometimes the cause of such closures. In other related bitcoin news, it was reported by the New York Post on March 5, 2014 that Autumn Radke, the CEO of bitcoin exchange firm First Meta, as a result of what may have been suicide.

Berthel Fisher and PNC Fined In Connection With The Sale Of ETFs

February 25, 2014 | Malecki Law Team

Just yesterday, FINRA announced that it has fined Iowa-based broker-dealer Berthel Fisher $775,000 for failures to adequately train and supervise brokers selling alternative investments, such as real estate investment trusts (“REITs”), and non-traditional exchange traded funds (“ETFs”), including leveraged and inverse ETFs.

In addition to REITs and ETFs, Berthel brokers also reportedly sold managed futures, oil and gas investments, equipment leasing programs and business developments companies, all while having “inadequate supervisory systems and written procedures for sales” of these investments.

Firms are required to have sufficient supervisory systems and written procedures for the sale of such investments to help ensure that these potentially risky and illiquid investments are only sold to investors for whom they are suitable and appropriate. Oftentimes, these investments are not appropriate for your average investor.

Credit Suisse Group AG Admits to Providing Brokerage and Investment Advisory Services Without Registering with the SEC

February 24, 2014 | Malecki Law Team

Money makes the world go ’round and apparently also makes Credit Suisse employees work faster or slower, as the case may be. The Wall Street Journal reported on Friday February 21, 2014 that Credit Suisse Group AG (Credit Suisse) agreed to pay $196 million to settle charges brought by the Securities and Exchange Commission that it provided brokerage and investment services to U.S. clients without registering with the SEC. According to the SEC’s Order, Credit Suisse willfully violated the Exchange Act and Investment Advisors Act by failing to register, in violation of Section 15 of the Securities Exchange Act of 1934 and Section 203 of the Investment Advisors Act of 1940. The SEC announced in a news release on Friday that Credit Suisse admitted to the violations.

In the Order, the SEC noted that Credit Suisse apparently knew the services its relationship managers were providing across borders to U.S. clients was improper, and set up a properly registered entity to transfer the U.S. business. However, the Order went on to detail that the transfers took far more time than was initially planned, partly because Credit Suisse did not properly incentivize its employees to timely transfer the accounts. This, in addition to other wrongful conduct led the Commission to conclude that Credit Suisse failed to implement its own policies and procedures to efficiently move the accounts. The Order and the WSJ article both noted that Credit Suisse has subsidiaries that are properly registered to provide both brokerage business and investment advisory business to U.S. clients. Until the bank completed its exit from its cross-border business, it continued to charge brokerage and advisory fees to the U.S. clients it served.

Registration by brokers, dealers and investment advisors with the SEC or state regulators is a bedrock principle of the securities laws and is designed to protect investors. Section 203 of the Investment Advisors Act regulates and requires registration of brokers, dealers and investment advisors, with limited exception. The SEC regularly fines individuals and entities such as Credit Suisse for failing to follow these laws.

All Eyes On The SEC After Recent Losses

February 21, 2014 | Malecki Law Team

In recent weeks, attention has turned to the Securities and Exchange Commission‘s declining success rate when going to trial against alleged wrongdoers. Publications such as the New York Times and Wall Street Journal have run multiple articles recently about this surprising decline. Per the Wall Street Journal, the SEC’s success rate has dropped to 55% since October, as opposed to the more than 75% success rate in the three consecutive years prior.

While the cases at the center of this decline were in the works well before Mary Jo White took the helm at the SEC, many are beginning to speculate how the Commission will react. Ms. White recently touted the then 80% success rate last year, citing it as a potential reason why attorneys counsel their clients to settle rather than face trial. However, this may be on the verge of changing. Emboldened by the newfound success of defendants in defending trials against the Commission, those who may find themselves in the SEC’s crosshairs may begin to opt to go to trial.

Recent cases, such as the insider-trading investigation and trial of billionaire Dallas Mavericks owner, Mark Cuban, have only intensified the public interest in the Commission and the work it does to investigate violations of the securities laws.

Buyers Should Beware when Considering Investments Involving Bitcoin

February 12, 2014 | Malecki Law Team

Bitcoin, and the exchanges that provide a space for trading Bitcoin, have received a lot of press lately. The Wall Street Journal reported on February 11, 2014 that the price of a Bitcoin dropped to approximately $650. This would be a significant drop from a trading high of over $1,100 per Bitcoin in mid-December 2013, according to CoinDesk’s Bitcoin Price Index.

As the Journal reported, the Slovenia-based Bitcoin-trading exchange Bitstamp halted customer withdrawals while Bulgaria-based BTC-e had delays in crediting transactions. This, apparently, came as a result of a hacker attack on the exchanges. Recently, Mt. Gox, a Tokyo-based Bitcoin trading exchange recently reported that it was halting withdrawals for a period of time after it discovered a software glitch that “could give rogue traders a way to falsify transactions,” as reported by the Journal. Incidentally, according to Wired, Mt. Gox stands for “Magic: The Gathering Online Exchange” and prior to 2011 was a digital trading exchange for Magic playing cards. According to that Wired article, in 2011, the website was changed to handle transactions exchanging Bitcoin.

Back in 2011, it was reported by Daily Tech that Mt. Gox was forced to shut down trading and “roll back” trades after 478 accounts were allegedly hacked, resulting in the withdrawal of a total of 25,000 Bitcoins. Mt. Gox reportedly informed investors that they “assume no responsibility should your funds be stolen by someone using your password,” and that the hacker made off with only 1,000 of the Bitcoins stolen. According to the Daily Tech article, the hacker gained access to the investors’ passwords by hacking Mt. Gox’s database.

I Just Got An SEC Subpoena: Now What Happens?

February 7, 2014 | Malecki Law Team

The recent string of cases brought by the Securities and Exchange Commission in connection with the US Attorney’s Office against members of SAC Capital for insider trading has shone a bright light on the world of SEC investigations. Though all financial professionals surely hope that they will never be involved in an SEC investigation, the truth of the matter is that many unfortunately will.

Receiving a subpoena from any government agency can be a worrisome event in anyone’s life, but for a financial professional, receiving a subpoena from the Securities and Exchange Commission can be especially intimidating. More often than not, the recipient may be confused as to, “Why is the SEC contacting me?”

Individuals are typically contacted by the SEC for two reasons: 1) You are the subject of its investigation; or 2) The SEC believes you may have valuable information related to its investigation of an entity or someone else.

Steep Market Selloffs May Uncover Risks in Accounts Such as Adverse Consequences of Margin

January 27, 2014 | Malecki Law Team

It was reported by Bloomberg News on Friday January 24, 2014 that there was a “massive selloff” in emerging markets that led to a decline of approximately 2% to the Dow Jones Industrial Average and S&P 500. It is during such fast and sudden selloffs that underlying problems in public investors’ brokerage accounts are typically uncovered.

At Malecki Law, we have seen an increase in claims arising from margin in investors’ accounts. Overwhelmingly, investors were not informed about the risks of buying securities on margin and were only told that they could make more money by leveraging their accounts to buy more securities. However, without fully understanding the risks of products and services such as margin, public investors cannot make a fully informed decision about whether it is suitable for them.

Margin is essentially a loan from the brokerage firm to the investor. The effect of margin is not similar to that of a typical home mortgage, because the securities or cash in the investor’s brokerage account serves as collateral for the loan and large market drops can cause margin calls, request for more money or collateral or a sell-off of positions. Investors may use margin to increase their purchasing power or “buying power,” as some brokers like to say. However, it is very important that the investor is fully informed of all risks associated with the use of margin, including that they can lose more than they borrow.

Leveraged and Inverse ETFs Can Spell Trouble for Investors Who Buy Them and Brokerage Firms Who Sell Them

January 15, 2014 | Malecki Law Team

Just this past week, two brokerages units of Stifel Financial were ordered by the Financial Industry Regulatory Authority (“FINRA”) to pay more than $1 million related to the sale of leveraged and inverse exchange-traded funds (“ETFs”). Of the more than $1 million to be paid, $550,000 comes in the form of a fine to be split by Stifel, Nicolaus & Co., Inc. and Century Securities Associates Inc. The firms were also ordered to pay more than $475,000 in restitution to 65 customers to compensate them for losses incurred on ETF purchases.

According to the Wall Street Journal, FINRA said that some of the brokers who were selling the ETFs did not have a full understanding of the products they were selling, including the risks associated with them.

Brokerage firms can be fined and/or sued when they allow their brokers to sell unsuitable, or inappropriate, investments to customers, especially when the brokers have not been properly trained. Industry regulations require that a broker understand both the product they are selling and the customer to whom they are selling the product. Most importantly a broker must understand the risks of the products being sold and appreciate the customer’s ability (or inability) to tolerate risk. Brokerage firms are also required to train their brokers properly, including what qualifies as a suitable, or appropriate, recommendation to a customer.

Jenice Malecki to Appear on Fox Business News with Dennis Kneale

November 19, 2013 | Malecki Law Team

Jenice Malecki of Malecki Law will be appearing on Fox Business News at 12pm today, speaking with Dennis Kneale to revisit the $13 billion settlement announced by JP Morgan today.

The focus of the discussion will be the aftermath of the settlement, and what it means for JP Morgan moving forward. The settlement was for conduct that occurred from 2005 to 2008, largely predating the financial crisis and acquisitions of Bear Stearns and Washington Mutual. In fact, according to the Department of Justice, as reported by Fox Business News, JP Morgan regularly represented that the loans it bundled and sold to investors complied with underwriting guidelines, when they actually did not.

It remains to be seen whether this will impact other litigation that JP Morgan continues to defend against private litigation, or in future criminal proceedings arising from the conduct of JP Morgan’s employees. It also remains to be seen whether JP Morgan will provide liquidity for a fire sale, as it did with Bear Stearns during the financial crisis.

Jenice Malecki to Appear on Fox Business Channel

October 21, 2013 | Malecki Law Team

Jenice Malecki of Malecki Law will be appearing at 10:45 am on Varney & Co. on Fox Business on Tuesday, October 22, to discuss the proposed $13 billion J.P. Morgan Chase settlement.

Ms. Malecki will be discussing whether J.P. Morgan and others should be surprised that the firm is being subjected to penalties relating to conduct that occurred at Bear Stearns and Washington Mutual, which J.P. Morgan acquired during the recent financial crisis.

Ms. Malecki will speak on central issues at the heart of the present debate such as the role of the government in these two acquisitions, including what promises, if any, were made to J.P. Morgan by government officials, as well as the overall price paid for the two companies relative to their actual value.