New York Securities Fraud Lawyers Blog

Embedded Regulators Increase Wall Street Enforcement Efforts

June 24, 2011 | Jenice L. Malecki, Esq.

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.

A New York Resident’s Intervention Helps Bring Settlement With Hedge Funds

June 15, 2011 | Malecki Law Team

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?

HSBC Pays $62.5 Million to Settle Allegations of Securities Fraud in New York

June 9, 2011 | Jenice L. Malecki, Esq.

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.

SEC Warns of Investment Risk Involving Reverse Merger Companies

June 9, 2011 | Jenice L. Malecki, Esq.

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.

Goldman Sachs Pays $10 Million to Settle Allegations of Questionable Investor Relations

June 9, 2011 | Jenice L. Malecki, Esq.

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.

Outrageous ETFs: Not Appropriate for All Investors

June 7, 2011 | Malecki Law Team

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.

Tourre/Goldman Sachs Face New York Securities Fraud Case with More Questions than Answers

June 3, 2011 | Jenice L. Malecki, Esq.

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.

Two More Financial Professionals Plead Guilty in Insider Trading Scheme

May 31, 2011 | Malecki Law Team

Federal prosecutors in New York obtained two more guilty pleas stemming from an investigation into supposed “expert network” firms, a hallmark of New York securities fraud in which connect investors to industry experts for a fee.

Samir Barai, a former hedge fund manager, and Sonny Nguyen, a former financial analyst at Nvidia Corp., were the seventh and eighth individuals to plead guilty to a variety of conspiracy and securities fraud charges. So far a total of 13 people have been charged in the scheme.

Mr. Barai admitted to receiving confidential inside information about a publicly traded technology company and sharing it with two other hedge fund managers. He also admitted to trying to conceal his crimes by ordering a research analyst at his firm to shred documents and destroy electronic files related to trading in November 2010, after learning about the government’s insider trading crackdown.

Former Heads of Jenkins & Gilchrist and BDO Seidman LLP Convicted of Tax Shelter Fraud in New York Federal Court

May 27, 2011 | Malecki Law Team

On May 24, 2011, several attorneys from now-defunct law firm Jenkins & Gilchrist and a former executive of BDO Seidman, LLP were convicted in the United States District Court for the Southern District of New York for their roles in developing, promoting, marketing and implementing fraudulent tax shelters, and drawing unwanted attention from New York securities lawyers in the process. A press release (link below) from the United States Attorney for the Southern District of New York stated that the convicted individuals made profits of approximately $130 million over ten years with the fraudulent tax shelters. The Department of Justice worked with the Internal Revenue Service (IRS) to investigate and prosecute the action.

Federal prosecutors had alleged that the tax shelters at issue generated more than $1 billion in false tax losses for high net worth individuals.

Tax shelters are generally understood to be schemes that reduce one’s tax liability, and are not necessarily illegal. In fact, it is entirely within one’s rights to minimize their tax liability, albeit legally. The development of tax shelters that skirted and sometimes flagrantly flouted the United States Tax Code occurred mainly in the late 1990s and early 2000s and have led to convictions of professionals from some of the Country’s most well-respected law firms, and the world’s largest banks and accounting firms.

SEC Approves New Whistleblower Rules to Provide Cash Award to Insiders Who Report Securities Fraud

May 26, 2011 | Malecki Law Team

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.