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7th Circuit Court Of Appeals Cautions Institutional Funds To Retain Securities Lawyers To Monitor And To Collect From Class Action Lawsuits Involving Securities That They Have Owned

A U.S. Court of Appeals sent a strong message earlier this year to institutional investors that they are expected to have procedures and policies in place to monitor securities class actions in which they have a financial interest and viable claims.  In Larson vs. J.P. Morgan Chase & Co., the $40 billion Colorado Public Employees' Retirement Association, Denver, sought to intervene in a securities class action after being notified of a proposed settlement that failed to include a recovery for certain claims worth several million dollars to the pension fund, according to the case in the 7th Circuit U.S. Court of Appeals, Chicago, in June.  The disputed claims were initially part of the class action, but were dismissed during an earlier stage of the litigation.

The court, in an opinion written by Judge Richard Posner, denied the Colorado pension system's motion to intervene as untimely because it found that the pension fund is a "sophisticated litigant with a large stake who had no good excuse for failing to seek intervention (or bring its own suit) years ago."  In reaching its decision, the ruling stated that "large pension funds have securities lawyers on retainer, and their lawyers would have known about and monitored the progress of the class action whether or not the fund trustees did."

Although not all institutional investors have securities lawyers on retainer to monitor their viable claims, the court's assumption was not surprising, as most recommended best practices and model shareholder's litigation policies make clear that institutional investors and fiduciaries should, at the very least, actively monitor ongoing litigation to ensure that they are fulfilling their duty to preserve viable claims, protect assets and recover funds lost as a result of securities fraud.

It is now well established that institutions, at a minimum, have a duty to recoup losses resulting from securities fraud, regardless of the origin or jurisdiction of the suit.

Since securities litigation reform was enacted by the federal government in 1995, $58.9 billion has been recovered through 2007 for injured shareholders, and an additional $9 billion is now in the "settlement pipeline," which includes settlements that have been agreed upon but funds not yet distributed.  Nevertheless, more than $12 billion went unclaimed.  That number is staggering, considering that most of the money is being left on the table by institutions, run by fiduciaries with a duty to collect it.  In fact, a recent study found that less than 30% of institutions with recoverable losses file the proof of claim forms necessary to collect their settlement proceeds.

As presupposed by the court in the Larson decision, many institutions have indeed turned to securities lawyers to help develop securities litigation policies and to facilitate class-action recoveries.  Typically, portfolio monitoring allows law firms to work in conjunction with custodians and investment advisers to ensure that institutions and fiduciaries are alerted to pending class actions and are kept informed of important events throughout the litigation.

Source: Pensions & Investments

SNSFE Investigating Oppenheimer Champion Income Fund And Oppenheimer Conservative Investor Fund After Steep Losses

SNSFE is investigating two Oppenheimer funds that have suffered steep losses this year.  The Oppenheimer Champion Income Fund is down 82% this year, and the Oppenheimer Conservative Investor Fund, which had 4% of its assets in the Champion Income fund, is down almost 40% this year, making it one of the worst-performing conservative allocation funds followed by fund tracker Morningstar.

Oppenheimer Champion Income changed the way it was investing in late 2006.  Since then, the fund gambled more with derivatives and they haven't paid off.  One problem bet involved total-return swaps, which are basically agreements between parties to exchange cash flows in the future based on how a set of securities performs.  In this case, the fund was betting the top-rated commercial mortgage-backed securities would rally this year.  Well, they didn't.

Credit-default swaps, or CDSs, have hurt the fund, too, declining $238 million through September.  CDSs are basically insurance contracts that protect investors against bond and loan defaults.  In exchange for being on the hook to pay out for such issues, CDS sellers receive a stream of interest payments.

Selling CDSs can be a particularly risky proposition when insuring companies that are already struggling with credit problems.  Indeed, through September the fund was selling CDSs on troubled companies including Lehman Brothers Holdings, American International Group, General Motors Corp. and newspaper company Tribune.  Many of those firms have collapsed, filed for bankruptcy or otherwise have problems.

On top of that, the Champion Income Fund increased its stake in many mortgage bonds that have fallen this year.

Mortgage securities tied to Washington Mutual with a $9 million principal value were valued at only $3 million at the end of September, the last fund reporting date.  A set of five Freddie Mac mortgage-backed securities with a combined principal amount of $20 million were valued at just $2.5 million.  Prospects for the mortgage market have dimmed since September, as defaults have been rising. 

Further, the fund erred with corporate bonds for struggling Wall Street houses.  The fund bought Lehman bonds between June and September with $29 million in principal value.  Lehman filed for Chapter 11 bankruptcy-court protection in mid-September, and those bonds fell to just $144,000.  It also added Morgan Stanley bonds with $13 million in principal during that same period.  They were valued at $8.3 million by the end of September.

Source:  The Wall Street Journal

Delray Beach Police & Firefighters Pension System Sues Citigroup And Smith Barney Asset Management For Improper Monitoring, Evaluation And Management

'Delray Beach Police & Firefighters Pension System estimated that it sustained at least $9 million in investment damages over alleged fiduciary breaches in the consulting work done by a Citigroup Global Markets unit, according to the lawsuit filed by the $120 million fund.

Smith Barney Asset Management, which was acquired by Citgroup in 1998 and also called Salomon Smith Barney, was the investment consultant to the Delray Beach, FL system from 1995 until it resigned in 2006.  The system's board of trustees has been investigating Smith Barney's consulting work since 2005.

The complaint, filed November 12 states that the "board is entitled to recover from SSB the value of the additional return on investment that the fund's investment portfolio would have achieved had the performance of that portfolio been properly monitored, evaluated and managed - an amount that the plaintiff estimates to exceed $9 million."  Plus the board is seeking recovery of fees paid to Smith Barney "and profits that SSB received from activities that placed it in an undisclosed conflict of interest with the fund." 

An estimate of the fees was not in the suit.  The suit also alleges SSB recommended managers that would use SSB as a broker to enable SSB to earn commissions on trades, a conflict of interest never disclosed to or authorized by fund trustees.  Among other claims, the suit alleges "SSB painted a rosier picture of the fund's performance than was actually true,"encouraging "the board to keep SSB in its position as the fund's pension consultant, which, in turn, enabled SSB to continue to engage in self-dealing...at the fund's expense."'

Source:  Pensions & Investments

SNSFE Investigates Entities That Sold Investors Bernard Madoff's Investment Funds, Including Tremont Capital Management and Greenwich Advisors, In View of Epic Ponzi Scheme Alleged By SEC

A top broker has been accused of a $50 billion fraud. 

Bernard Madoff, a former chairman of the Nasdaq Stock Market and a force in Wall Street trading for nearly 50 years, was arrested by federal agents Thursday, a day after his sons turned him in for running what they said their father called "a giant Ponzi scheme."

The Securities and Exchange Commission, in a civil complaint, said it was an ongoing $50 billion swindle, and asked a judge to seize the firm and its assets.  "Our complaint alleges a stunning fraud that appears to be of epic proportions," said Andrew Calamari, associate director of enforcement in the SEC's New York office.

The 70-year old Mr. Madoff is the founder and primary owner of Bernard L. Madoff Investment Securities LLC.  The firm is primarily known for its business in market-making, or serving as the middleman between buyers and sellers of shares.  But Mr. Madoff also oversaw an investment-advisory business that managed money for high-net-worth individuals, hedge funds and other institutions.

Mr. Madoff didn't enter a plea during a court hearing Thursday evening.  He was released after agreeing to post a $10 million bond secured by his Manhattan apartment. 

Earlier this month, the criminal complaint says, Mr. Madoff told one of his sons that "clients had requested approximately $7 billion in redemptions, that he was struggling to obtain the liquidity necessary to meet those obligations."  On Tuesday, the complaint alleges, Mr. Madoff added that he wanted to pay bonuses to employees this month, which was earlier than usual.

The next day, the sons met with Mr. Madoff at his office to ask about the bonus situation because he had appeared to be under "great stress" in prior weeks, they told the FBI.  Mr. Madoff refused to answer their questions and arranged to meet them at his Manhattan apartment, the complaint says.

Mr. Madoff "wasn't sure he would be able to hold it together" if they continued to discuss the issue at the office, the complaint quotes one of the sons as saying.  At the apartment, Mr. Madoff confessed that his business was a fraud that that he was "finished."  He said he had "absolutely nothing," that "it's all just one big lie," and that it was "basically, a giant Ponzi scheme."  He told them the firm was insolvent.

Mr. Madoff told them he planned to surrender to authorities, but before he did so, he wanted to pay certain employees portions of the $200 million to $300 million that was left. 

Mr. Madoff's Fairfield Sentry Ltd., a hedge fund run by Madoff Investment Services to invest in shares in the S&P 100, claimed to be up 5.6% through the end of November, a period when the Standard & Poor's 500-stock index was down 37.65%.  In October, Fairfield Sentry was said to be down 0.06%, a month when the S&P 500 lost 16.8%.  Since its inception in December 1990, the fund averaged 10.5% annual return, according to fund documents.

Such returns sparked wide-spread skepticism for years on Wall Street.  News stories raised questions about his approach.  A number of traders suggested his firm could be buying shares for its own account just before it filed orders for customers, an illegal act called front-running.  In 2001, Mr. Madoff told Barron's that charges of front-running were "ridiculous."

An executive in the securities industry, Harry Markopolos, contacted the SEC's Boston office in May, 1999 urging regulators to investigate Mr. Madoff.  Mr. Markopolos continued to pursue his accusations over the past nine years, he said in an interview and according to documents he sent to the SEC, which were reviewed by The Wall Street Journal.

"Bernie Madoff's returns aren't real and if they are real, then they would almost certainly have been generated by front-running customer order flow from the broker-dealer arm of Madoff Investment Securities LLC," Mr. Markopolos wrote to the SEC in November 2005.

SNSFE attorneys are investigating.  Specifically, many investors gained exposure to Mr. Madoff through hedge fund of funds, including Tremont Capital Management, a major distributor of Mr. Madoff's fund, according to people familiar with the situation.  New York-based fund of funds Fairfield Greenwich Advisors, L.L.C., with $14 billion in assets under management according to its Web site, also had substantial funds with him and were big promoters of the fund.  A spokesman at Fairfield Greenwich declined to comment.  Likewise, a Tremont spokesman declined to comment.

None-the-less, SNSFE will be quite interested to investigate the roles and responsibilities and failure to monitor that might have occurred at both Tremont and Fairfield Greenwich. 

Source:  The Wall Street Journal

Changes To Expungement Rule Seek To Better Protect Customers' And Regulators' Right To Access Complaint Information

Recently, the Securities and Exchange Commission (SEC) approved rule changes that the Financial Industry Regulatory Authority (FINRA) had proposed to better protect customers' and regulators' ability to access complaint records of financial advisers.  Let's examine these important rule changes.

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FINRA Investor Arbitration Statistics Reveal 49% Increase In Claims Filed

FINRA, the Financial Industry Regulatory Authority, has revealed its Dispute Resolution Statistics through October 2008.  As expected, the statistics show a surge in arbitration claims filed through October compared to October 2007. 

Notably, FINRA has experienced a 49% increase in claims in 2008 compared to 2007.  As one would expect, the leading charge is Breach of Fiduciary Duty followed by Misrepresentation, as well as Breach of Contract and Negligence.  Moreover, Mutual Funds are the #1 subject of disputes, however followed closely by Derivative Securities and Common Stock.  Auction-Rate Securities, a debacle that investors recently have witnessed, comes in at #4. 

For information regarding statistics, please contact FINRA at its website, www.finra.org. 

Source: www.finra.org