FinancialCounsel

SNSFE Investigating London-Based Hedge Fund CSO Partners

SNSFE is investigating the London-based fund CSO Partners after Citigroup has suspended investor withdrawals from it.  This $500 million credit hedge fund has lost 10 percent since November and the manager has resigned. 

Investor redemptions have been suspended so that the fund can "stabilize" according to a Citigroup spokesman.  In addition to suspending investor exits, Citigroup told investors that it had put up $100 million into the fund in recent weeks and is looking for other funding sources.

According to one expert, Ferenc Sanderson, senior hedge fund analyst for Lipper, "If they are invested in illiquid assets, chances are they cannot get out an equivalent amount of money investors are demanding without materially damaging the portfolio." 

Sanderson said the fact that it is happening in a fund managed by one of the world's largest banks means that "even having a big name and a big brand doesn't leave investors immune to potential issues when they try to redeem."

Investors with information about CSO Partners are urged to contact attorneys at SNSFE.

SNSFE Continuing To Investigate Illinois Resident Robert Loffredi, Raymond Financial Group And Linsco Private Ledger After SEC Bars Loffredi From Securities Industry

In connection with its continuing investigation of Hinsdale, Illinois-based adviser Robert Loffredi, SNSFE reports that on February 22, the Securities and Exchange Commission issued an Order Instituting Administrative Proceedings against Robert Loffredi. 

The Order finds that a civil action had been filed and that he has been permanently enjoined from future violations of the securities laws and that he has been permanently barred from the securities industry.  The Order finds that from at least August 2003 to October 3, 2007, Loffredi was a registered representative associated with Linsco/Private Ledger Corp., a broker-dealer registered with the SEC. 

Loffredi is the President of Raymond Financial Group, which until October 2007 operated as a branch office of Linsco.  The Order also finds that the Commission's complaint alleged that from at least August 2003 through October 2007, Loffredi, through Raymond Financial, raised at least $2.8 million from at least fourteen customers by falsely representing that he would invest their funds in securities, primarily in the form of purported certificates of deposit.  Instead of using the customers' money to purchase securities, Loffredi used the customers' funds to pay his personal and business expenses, to make payments to a company owned by his wife, Advanced Sales and Marketing Corp., to make disbursements to other customers who had invested in the fictitious securities, and on at least one occasion to make payments on behalf of his wife. 

SNSFE continues to investigate Loffredi and Raymond Financial and Linsco Private Ledger for this wrongdoing.

Lancer Group Hedge Fund Manager Michael Lauer And Others Indicted For Fraud And Conspiracy

Former Lancer Group hedge fund manager Michael Lauer and four others who defrauded hedge fund investors of more than $200 million have been indicted on conspiracy and wire fraud charges, the U.S. Justice Department has reported.

"Lauer was named in an indictment unsealed in Miami, along with two co-owners of management companies that directed the hedge funds and two men who had had financial interests in Boca Raton, Florida-based 'shell' companies in which the hedge funds invested, the Justice department said.

According to the indictment, from October 1999 to July 2003, Lauer and his co-defendants manipulated the closing market price of thinly traded shell company securities to falsely inflate the value of Lancer Group hedge funds.

The indictment alleges Lauer also created fake portfolios of the securities supposedly held by Lancer Group and obtained falsely inflated appraisals of the shell companies to cover up and perpetuate the scheme.

If convicted, all five men could face a maximum sentence of 20 years for wire fraud, five years for conspiracy and up to $500,000 in fines."

Source:  Reuters

SNSFE Investigating Former A.G. Edwards Broker Luis Cespedes For Selling Unsuitable Investments Following NYSE's 10 Year Suspension

Attorneys at SNSFE are investigating a broker who has been barred for 10 years by the New York Stock Exchange.  The New York Stock Exchange announced last week that it had banned Luis Miguel Cespedes who worked for A.G. Edwards & Sons.  He was found to have put more than a dozen clients' money into volatile technology securities and then piled on margin debt.  When the technology bubble burst, the investors -- many of them elderly and inexperienced investors -- were wiped out. 

NYSE officials couldn't immediately recall the last time a 10-year ban was issued. 

A.G. Edwards asked Cespedes, who currently lives in Capistrano Beach, California, to resign in October 2001.  The firm, now owned by Wachovia Corp., has since settled with 15 of the clients for a total of about $1 million. 

Cespedes primarily invested the clients in technology-heavy "Unit Investment Trusts" which are unmanaged funds tied to a set basket of securities. 

SNSFE attorneys welcome comments from those with information.

SNSFE Investigating Broker Miah And Square Mile Securities For High Pressure Sales Tactics

The Financial Services Authority of Britain has banned a stockbroker for life after he abused the trust of some of his clients.  The stockbroker sold high-risk stocks to unwitting customers, including two retirees over the age of 80.  He's been fined £21,000 and has received a life ban from FSA. 

Mohammed Suba Miah, formerly employed by Square Mile Securities, is the first broker to be both fined and banned after the FSA found that he had sold stocks to customers without their consent and misled them by not explaining the risks involved.  Square Mile was fined £250,000 by the FSA less than a month ago for persistently using high-pressure sales tactics and misleading information to sell customers stocks that they did not want or could not afford. 

According to the FSA, "Customers have a right to expect their brokers to give clear and fair advice, recommend suitable stocks and to treat them fairly.  Stockbrokers are on notice that the FSA will not tolerate abuse of this trust."

Securities Regulator Provides Guidance Regarding The Review And Supervision Of Electronic Communications

FINRA (the Financial Industry Regulatory Authority) has issued Regulatory Notice 07-59 relating to electronic communications, such as email, instant messaging, text messaging, weblogs and podcasting, which financial services firms and their employees may use to conduct business.  Let’s examine the key points of the notice.

Preliminarily, firms must establish, maintain and enforce electronic communication supervisory systems and procedures reasonably designed to achieve compliance with securities laws and rules.  FINRA recognizes that technological innovations have brought and will continue to bring new challenges in supervising electronic communications.  FINRA also recognizes that supervisory systems and procedures may differ among financial services firms depending upon their size and the type of business that they conduct.  And, with some exceptions for mandatory reviews, firms “generally may decide by employing risk-based principles the extent to which the review of incoming, outgoing and internal electronic communications is necessary in accordance with the supervision of their business.”

In Notice 07-59, FINRA divides its guidance into six categories.  These are: (1) written policies and procedures; (2) types of communications requiring review; (3) identification of the person(s) responsible for the review; (4) method of review; (5) frequency of the review; and (6) documentation of the review.

First, regarding written policies and procedures, FINRA recommends that firms allow employees quick and easy access to their policies and procedures.  Firms should state what forms of electronic communication are permissible, and which are not permissible.  Firms should specify the consequences for non-compliance with those policies and procedures, and should conduct training on a regular and as-needed basis.

Second, regarding the types of electronic communications requiring review, FINRA notes that, regardless of what technology is used, if a firm permits its use, then it must have systems and procedures in place reasonably designed to supervise those communications.  As technologies now extend beyond office network servers and firm email addresses to other email platforms (such as AOL or Yahoo mail), message boards and E-faxes, FINRA notes that some firms choose simply to block access, prohibit use and require compliance certifications by employees.  FINRA also states that it expects firms “to prohibit, through policies and procedures, communications with the public for business purposes from employees’ own electronic devices unless the member is capable of supervising, receiving and retaining such communications."

Third, a firm’s procedures must clearly identify the person(s) responsible for performing the reviews.  While the reviewer may delegate certain functions, ultimately the reviewer remains responsible and must ensure that all reviewers have “sufficient knowledge, experience and training to adequately perform the reviews.”  Finally, an individual must not conduct supervisory reviews of his/her own electronic communications (unless there is no reasonable alternative, as with a sole proprietor-type firm).

Fourth, regarding the method of review, FINRA discusses lexicon-based reviews, random reviews and a combination of both methods.  Lexicon-based reviews should contain a meaningful list of phrases, words and industry jargon based on the type of business that the firm conducts and its customer base.  The list should be able to yield a meaningful sample of “flagged” communications.  The system should be able to read attachments.  When firms select the random review method, they may choose a reasonable percentage sampling technique.  Firms can choose to review either a certain percentage of electronic communications based on a branch, department or business unit, or, in the alternative, can choose to review a certain percentage for each individual in the branch, department or business unit.

Given the strengths and weaknesses of each method, however, FINRA recommends that firms use a combination of both methods – lexicon-based reviews and random reviews.  Additionally, no matter what method firms choose, they must “alert their reviewers as to the issues to be raised and the material to be examined, including acceptable content.”  Likewise, firms must “incorporate ongoing evaluation procedures to identify and address any ‘loopholes’ or other issues that may arise as the means of transmitting sensitive information ‘under the regulatory radar’ become more sophisticated and difficult to capture.”

Fifth, FINRA states that the frequency of the review will vary depending upon the type of business conducted, the type of customers involved, and the scope of the activities, the geographical location of the activities, the disciplinary record of those involved, and the volume of communications subject to review.  FINRA also recommends that firms prescribe reasonable timeframes within which supervisors are expected to complete their reviews, considering factors such as those set forth above.

Finally, firms must document their reviews.  FINRA recommends that, at a minimum, firms must evidence the date of the review and any steps taken as a result of the review.  FINRA cautions that reviewers do not satisfy this requirement merely by opening the electronic communication.

In conclusion, FINRA’s guidance should assist firms navigate through the difficult and ever-changing waters of supervising electronic communications.

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SNSFE, As Well As A Host Of State And Federal Authorities, Probe Subprime Mortgage-Related Investments And Related Conduct

Attorneys at SNSFE continue to investigate investment losses related to subprime mortgage investments.  But the probe is widening in a criminal and civil sense.  In today's news, there is a listing of a sampling of investigations of financial firms over the subprime downturn: 

• The Brooklyn U.S. Attorney's office has launched criminal investigations of Bear Stearns and UBS. 
• The Manhattan U.S. Attorney's office has requested information on Merrill. 
• The SEC has three dozen probes, including formal ones of Merrill, UBS, and others of Bear, Morgan Stanley, and a review of Citigroup. 
• The FBI is investigating 14 companies, from mortgage originators to Wall Street, for accounting fraud and insider trading. 
• The New York Attorney General has subpoenaed Bear, Deutsche Bank, Morgan Stanley, Merrill and Lehman Brothers. 
• The Massachusetts Secretary of State's office now has formally sued Merrill Lynch over mortgage-backed securities sold to Springfield, Mass., and it's probing Bear Stearns. 

In addition, Maine securities officials are examining the circumstances surrounding Merrill's role in the sale of commercial paper issued by a SIV known as "Mainsail II," an affiliate of London hedge fund Solent Capital Management LLP, to the state treasury department in August for $20 million.  Shortly after that sale, Standard & Poor's Corp. downgraded Mainsail from the highest rating to "junk" status, and the issuer defaulted on an interest payment that same month. 

All of this spells long, engaging investigations of this activity.  We welcome any comments and insights that our listeners may provide.

SNSFE Investigating Relationship Between Wood River Endwave Stock And Various Brokerage Firms Including UBS Dain Rauscher, Fidelity, And Stifel, Nicolaus

It appears that numerous brokerage firms across the country held Endwave Corporation stock through the Wood River Limited Partnership offerings.  Wood River and John Whittier are the subject of a pending Southern District of New York bankruptcy action.  SNSFE is investigating the relationship between Endwave Corporation Stock, the brokerage firms and the Wood River entities.  Brokerage firms include Stifel, Nicolaus & Company, Silver Leaf Partners, UBS Investment Bank, Wunderlich Securities, RBC Dain Rauscher, Piper Jaffray, Paulson Investment Company, and Fidelity Capital Markets.  Those with information are encouraged to contact SNSFE Securities lawyers.