FINRA (the Financial Industry Regulatory Authority) has issued its publication, “Improving Examination Results” to highlight “examination priorities”. Many of the examination priorities relate to investor protection issues, including guidance regarding the recommendation of, and required risk disclosures for, purchases of auction rate securities. Let’s examine three of the more important investor protection issues.
The Securities and Exchange Commission has published for public comment a proposed new rule that would protect seniors and other investors from fraudulent and abusive practices in the sale of equity indexed annuities. Equity indexed annuities are often sold to seniors, for whom they may be unsuitable investments due to substantial early surrender charges that lock up older investors' money for many years.
The SEC voted unanimously on June 25, 2008 to issue the proposed rule for public comment. The proposed rule would establish the standards for determining when equity indexed annuities may be considered securities subject to the investor protections afforded by the securities laws.
"Working with the North American Securities Administrators Association, the SEC has made cracking down on fraud in this area a top priority," said SEC Chairman Christopher Cox. "This is truly a joint federal-state partnership, and the SEC is proud to be working shoulder-to-shoulder with state securities regulators on this vital investor protection issue."
The SEC's proposed rule would define the terms "annuity contract" and "optional annuity contract" under the Securities Act of 1933. The proposed rule is intended to clarify the status under the federal securities laws of indexed annuities, under which payments to the purchaser are dependent on the performance of a securities index.
Section 3(a)(8) of the Securities Act provides an exemption under the Securities Act for certain insurance and annuity contracts. The proposed rule would provide that an indexed annuity is not an "annuity contract" under this insurance exemption if the amounts payable by the insurer under the contract are more likely than not to exceed the amounts guaranteed under the contract.
If adopted, the proposed new definition would apply prospectively - that is, only to indexed annuities issued on or after the effective date of a final rule. The recommended effective date for a final rule, if adopted, would be 12 months after its publication in the Federal Register.
Source: Knowledge Mosaic
The SEC's docket of probes stemming from the subprime-mortgage crisis has grown at least 40 percent since January amid mounting investor losses and the collapse of Bear Stearns.
The SEC has more than 50 open inquiries relating to the credit-market turmoil, compared with about 3 dozen in January. The SEC is examining suspected fraud, market manipulation and breaches of fiduciary duty.
Global credit markets froze last year amid rising defaults on mortgages to the least creditworthy borrowers, triggering almost $400 billion in losses and writedowns at the world's biggest banks and securities firms. Still, the surging caseload may not lead to a wave of civil and criminal charges, as many inquiries are in early stages and hinge on accounting questions.
In March, the SEC opened probes into whether investors, including hedge funds, spread lies about Bear Stearns and Lehman Brothers to profit from declines in the firms' shares. Speculation that Bear Stearns was facing a cash shortage spurred client withdrawals at the 85-year-old firm, forcing its sale to JPMorgan Chase.
The FBI has struggled to keep pace with the growing number of cases. The agency this month told 26 of its 56 field offices to focus on the subprime crisis and stop opening investigations into other financial crimes including price fixing, mass marketing and wire fraud.
FBI officials said last week they are probing 19 companies, including investment banks and hedge funds, for suspected accounting fraud or other white-collar crimes related to mortgage securities. It had 14 such cases in January.
SNSFE continues to investigate subprime loss cases and those with information should contact SNSFE attorneys.
Source: Bloomberg.com
SNSFE is investigating mutual fund losses sustained in the Evergreen Ultra Short Opportunities Fund.
SNSFE is investigating Wachovia's solicitation of thousands of investors to invest in the firm's proprietary bond funds. These funds were sold as Class A,B,C, and I shares.
Evergreen and Wachovia represented the Evergreen Ultra Short Opportunities Fund to thousands of investors as being safe, conservative, and as being an alternative to money markets and depository accounts. Unfortunately for Wachovia clients, the advisers failed to meaningfully inform investors about the speculative nature of this Fund and failed to inform investors that their investments in the Evergreen Ultra Short Fund were subject to substantial principal risk.
In part, these Funds contain substantial market and credit risk, as well as invested in illiquid securities that affected the Net Asset Value.
Those investors with information concerning these funds should contact attorneys at SNSFE.
UBS e-mails show conflicts with auction-rate clients. UBS was attempting to liquidate an $11 billion "albatross" of auction-rate bonds by selling the debt to individual investors as the market for the securities started to collapse, according to company e-mails.
While executives at the Zurich-based bank identified the hazards of auction-rate securities in August, they simultaneously began to "mobilize the troops," holding more than a dozen conference calls with salesmen and giving them new marketing materials to promote the bonds, according to e-mails from David Shulman, the head of UBS's municipal securities group. "The pressure is on to move inventory," he said in an August 30th note.
The e-mails between Shulman and UBS executives were disclosed in a lawsuit filed last week by Massachusetts securities regulator William Galvin, who claimed the bank committed fraud by selling the bonds as the equivalent of money market securities without disclosing to investors that the $330 billion market was lurching toward a breakdown. Investors who own the bonds now can't get their money.
According to Galvin, "The thing that is most amazing to me is what a comprehensive and deliberate strategy this was by UBS. They wanted to reduce their inventory, so they decided to gear up their sales campaign using cash-like arguments deliberately."
SNSFE has followed this crisis and continues to investigate claims against UBS, as well as claims against other sellers of auction-rate securities. Those who have invested should feel free to contact lawyers at SNSFE.
Sources: Bloomberg; The New York Times
SNSFE attorneys are investigating potential claims against Lehman Brothers Holding (NYSE: LEH) for violations of ERISA.
The investigation involves investments in the Lehman Brothers Savings Plan and whether Lehman Brothers and other administrators of the Plan might have breached their ERISA-mandated fiduciary duties of loyalty and prudence to participants and beneficiaries of the Plan. A breach might have occurred if the fiduciaries failed to manage the assets of the Plan prudently and loyally by investing the assets in Company stock when it was no longer a prudent investment for participants' retirement savings.
Specifically, Lehman Brothers and the Plan's other fiduciaries continued to invest in and hold Lehman Brothers stock in the Plan despite the Company's apparent mismanagement of the risk of assets held by the Company and its failure to maintain adequate capital and liquidity.
Lehman Brothers employees who own Lehman Brothers stock through the Plan may be able to recover some of their losses. SNSFE continues to investigate and if you have suffered loss as a result of participation in the Plan, please contact attorneys at SNSFE.
Source: Lawyers and Settlements
Next Financial Group has been ordered by an SEC administrative-law judge to pay a $125,000 penalty as well as cease and desist from any recruiting tactics that violate privacy laws -- known in the industry as Reg S-P.
In his decision, Judge James Kelly scolded Next Financial of Houston for some of its past recruiting tactics that involved private information of clients.
For example, Next Financial asked recruits to provide their user identification and password so the firm could access the computer systems of the recruits' brokerage firm and take non-public personal information of clients.
The judge wrote, "Both of Next's expert witnesses conceded that using recruits' user identifications and passwords in this fashion was not consistent with industry practice and that they did not know of any brokerage firms, other than Next, that had done so."
SNSFE guides financial advisers who wish to transition from firm to firm and not violate the law.
Source: InvestmentNews
In a recent speech entitled, "Frequently-Asked Questions About SEC Examinations", Lori Richards, Director of the SEC's Office of Compliance Inspections and Examinations, shared helpful information for financial services firms. Ms. Richards answered the following questions: will my firm be examined; what issues are SEC examiners focusing on now; what kind of information and documents will examiners request; what are the possible outcomes of an SEC examination; and what can one do to ensure that an examination goes smoothly. Let's examine the more important points of the speech.
Continue...
The Securities and Exchange Commission has announced that is has charged two former Sentinel Management Group executives, Eric Bloom and Charles Mosley, for their roles in devising and carrying out a fraud that has resulted in several hundred million dollars in losses to Sentinel's clients.
Prior to its August 2007 bankruptcy, Sentinel was a registered investment adviser that primarily managed short-term cash investment portfolios for various types of advisory clients, including Futures Commission Merchants, hedge funds, financial institutions, pension funds, and individuals.
In an amended complaint filed in federal court in Chicago, the SEC added Bloom and Mosley as defendants in the action it instituted against Sentinel August 20, 2007. Bloom was the President and Chief Executive Officer of Sentinel from approximately October 1988 until August 2007. He controlled the day-to-day operations at Sentinel. Mosley was Senior Vice President, head trader and portfolio manager of Sentinel from approximately October 2002 until August 2007. He was responsible for Sentinel's investing and trading activities. The SEC's amended complaint also added new causes of action against Sentinel, which is now under the control of a bankruptcy trustee, in connection with Sentinel's pre-bankruptcy conduct.
The Commission's amended complaint alleges that from approximately 2003 through August 2007, Sentinel, through the actions of Bloom and Mosley, exposed its clients to substantial risks by engaging in an undisclosed investment strategy that relied extensively on leverage and repurchase transactions.
Additionally, the SEC's amended complaint alleges that Sentinel, Bloom, and Mosley misused client portfolio assets to finance risky leveraged trading for the benefit of Sentinel's house portfolio which was owned by Sentinel insiders, including Mosley and Bloom. The amended complaint also alleges that Mosley, with the knowledge and approval of Bloom, caused Sentinel to record huge returns -- annualized gains of 100% or more -- for its leveraged trading in the house portfolio, partly through misuse of client portfolio assets.
The Commission's amended complaint also alleges that as part of their fraud, Bloom and Mosley improperly used client portfolio assets to collateralize a bank line of credit to Sentinel, thus subjecting clients to the risk that the lender would assert a security interest in the assets and sell them if Sentinel could not meet its loan obligations.
SNSFE continues to investigate this matter. Those with information should feel free to contact lawyers at SNSFE.
The Securities and Exchange Commission has charged two former Bear Stearns Asset Management portfolio managers for fraudulently misleading investors about the financial state of the firm's two largest hedge funds and their exposure to subprime mortgage-backed securities before the collapse of the funds in June 2007.
The SEC's complaint alleges that when the hedge funds took increasing hits to the value of their portfolios during the first five months of 2007 and faced escalating redemptions and margin calls, then-BSAM senior managing directors Ralph Cioffi and Matt Tannin deceived their own investors and certain institutional counterparties about the funds' growing troubles until they collapsed and caused investor losses of approximately $1.8 billion.
The SEC's action was conducted through its Enforcement Division's subprime working group, which is aggressively investigating possible fraud, market manipulation, and breaches of fiduciary duty that may have contributed to the recent turmoil in the credit markets.
In a related criminal action, the U.S. Attorney's Office for the Eastern District of New York announced the indictment of Cioffi and Tannin on conspiracy and fraud charges.
According to the SEC's complaint, filed in the U.S. District Court for the Eastern District of New York, the Bear Stearns High-Grade Structured Credit Strategies Fund and the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Fund collapsed after taking highly leveraged positions in structured securities based largely on subprime mortgage-backed securities.
SNSFE attorneys continue to investigate these hedge funds and welcome investors comments.
Source: SEC News Digest
FinancialCounsel.com, hosted by James J. Eccleston, is the companion website to this blog. It contains complimentary material of general interest to investors and financial services professionals. Investors will find material on securities arbitration to recover investment losses; industry and financial markets intelligence; and strategies for estate planning. Professionals have access to material on broker/adviser registration, regulation, compliance and disciplinary proceedings; industry and financial markets intelligence; strategies for estate planning; and broker/adviser employment litigation and injunctions, including defamation and non-competition/solicitation issues. 
James J. Eccleston heads the securities group at Shaheen, Novoselsky, Staat, Filipowski & Eccleston, P.C., a business law firm dedicated to closely-held business owners, senior executives and high net worth individuals. With three core practice groups - securities, general litigation, and corporate / transactional - and many subspecialties, SNSFE provides our clients a full spectrum of legal services, from start-up to succession planning. Visit us at snsfe-law.com or call 312.621.4400 for more information. 