FinancialCounsel

Following SEC's Halting Of $77 Million Offering Fraud By Medical Capital, SNSFE Launches Investigation Of Brokerage Firms That Introduced Investors To Medical Capital

SNSFE lawyers are investigating whether brokers inappropriately referred investors to Medical Capital Corporation following what it calls a $77 million offering fraud.  On August 3, the Securities and Exchange Commission obtained an emergency court order halting the $77 million offering fraud perpetrated by defendants Medical Capital Holdings, Medical Capital Corporation, Medical Provider Funding Corporation VI, Sidney Field, and Joseph Lampariello.  The SEC's complaint, filed in federal court in Orange County, alleges that the defendants defrauded investors by misappropriating about $18.5 million of investor funds and by misrepresenting to investors that no prior offerings had defaulted on or been late in making payments to investors on principal and/or interest.

The SEC's complaint alleges that since 2003, these defendants have raised over $2.2 billion through offerings of notes in various offerings. As alleged in the SEC's complaint, the defendants defrauded investors by misappropriating approximately $18.5 million of the $76.9 million raised through the sale of MP VI notes to pay administrative fees to another entity.  The complaint alleges that these fee payments were contrary to representations made in the original offering documents which stated that administrative fees would not be paid out of proceeds from the sale of notes. 

In addition, the SEC's complaint alleges that defendants defrauded investors by misrepresenting in the offering documents that none of the affiliated entities had defaulted on or been late in making payments of principal and/or interest to their respective investors.  In fact, two of the entities did begin defaulting on interest and/or principal payments in the same month that the offering began to be sold to investors.  And recently, two other entities have defaulted or been late in making interest payments.

Brokerage firms have a duty to investigate investments before they recommend them to investors.  We are investigating whether brokerage firms breached this duty. 

Source:  SEC Litigation Release 21165

SNSFE Seeks Information As It Brings Claims Against Morgan Keegan For Fraud In The Marketing And Sale Of Auction Rate Securities As Alleged By The SEC

SNSFE attorneys are investigating Morgan Keegan & Company following SEC charges that the firm committed fraud in the marketing and sale of auction rate securities to customers.  The SEC indeed has filed a complaint in the U.S. District Court for the Northern District of Georgia against Morgan Keegan & Company, a Tennessee-based broker-dealer, for misleading investors regarding the liquidity risks associated with auction rate securities, known as ARS, that the firm underwrote, marketed, or sold.

The SEC's complaint alleges that Morgan Keegan misrepresented to customers that ARS were safe, highly liquid investments that were comparable to money-market funds.  According to the complaint, in 2007 and early 2008, Morgan Keegan was aware that the ARS market was deteriorating.  Specifically, the complaint alleges that investor concerns about the creditworthiness of ARS insurers, auction failures in certain segments of the ARS market, increased clearing rates for auctions managed by Morgan Keegan and other broker-dealers, and higher than normal ARS inventories at Morgan Keegan collectively indicated that the risk of auction failures had materially increased.  The SEC alleges that Morgan Keegan sold approximately $925 million of ARS to its customers between November 1, 2007, and March 20, 2008, but failed to inform its customers about liquidity risks for ARS, even after the firm decided to stop supporting the ARS market in February 2008.

While the SEC's complaint seeks certain relief, SNSFE attorneys are investigating in order to bring claims to redress the wrongs that Morgan Keegan has committed upon investors. 

Source:  SEC Litigation Release No. 21143

Beware Of CDOs Of Loans, The First Of Which Is Coming To Market By Morgan Stanley

Morgan Stanley plans to repackage a downgraded collateralized debt obligation backed by leveraged loans into new securities with AAA ratings in the first transaction of its kind.

Morgan Stanley is selling $87 million of securities that it expects to receive top AAA ratings and $42.9 million of notes graded Baa2, the second-lowest investment grade by Moody's Investors Service, according to marketing documents obtained by Bloomberg News.  The bonds were created from Greywolf CLO I Ltd., a CDO arranged in January 2007 by Goldman Sachs Group and managed by Greywolf Capital Management, an investment firm based in Purchase, NY.

Two years after the credit markets began to seize up, costing the world's biggest financial institutions $1.47 trillion in writedowns and losses, banks are again taking so-called structured finance securities and turning them into new debt investments with top credit ratings.  While the Morgan Stanley deal is the first to involve CDOs of loans, banks have been doing the same with commercial mortgage-backed securities in recent weeks. 

A lot of banks and insurers "cannot buy anything but AAA," said a principal at R&R Consulting.  "You're manufacturing AAA out of non AAA, therefore allowing those people who have AAA written on their forehead to buy."

Investors beware.

Source:  Bloomberg.com

Securities Regulator Takes Sweeping Action To Protect Municipal Bond Investors

FINRA (the Financial Industry Regulatory Authority) has launched a "comprehensive initiative" to protect municipal bond investors.  Among other things, FINRA is conducting "sweeps" of financial services firms and has published investor alerts and on-line tools in an effort to inform investors and better protect their interests.  Let's examine FINRA's efforts.

Continue...