Defrauded Investors Given Hope of Recovery As Morgan Keegan Parent Settles Regulatory Charges for $210 Million

Nearly 40,000 investors who lost $1.5 billion in fraudulent subprime mortgage-backed mutual funds were given a small boost in their claims for recovery as the parent company of investment banking firm Morgan Keegan & Co., Regions Financial Corp., agreed to pay $210 million to settle regulatory charges targeting its subprime mortgage mutual funds.

The Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA) and several state securities agencies brought charges against Morgan Keegan relating to its management of five fixed-income mutual funds that were loaded with subprime mortgages. The agencies accused the firm of manipulating the price of the funds as the underlying mortgages dropped in value, and then misrepresenting the true values of the securities. According to the director of the SEC's Division of Enforcement, "the falsification of fund values misrepresented critical information exactly when invsetors needed it most -- when the subprime mortgage meltdown was impacting the funds."

The investors who purchased these mutual funds will receive $200 million of the Morgan Keegan settlement. Investors who lost money in these investments, however, still have claims for more than $1 billion in losses, and continue to have the right to seek their own damages in individual arbitration claims they can file with FINRA. By consulting with an experienced investment fraud lawyer, investors can determine whether they have a claim for damages as a result of their investments with Morgan Keegan.

The law firm of Block & Landsman represents investors in arbitration and in lawsuits for fraud and breach of fiduciary duty arising out of investment losses. Contact one of the attorneys at Block & Landsman for a free consultation.

Class Action Lawsuit Filed Against FINRA for Violating Brokers' Constitutional Due Process Rights

Block & Landsman joined other firms in filing a class action lawsuit against the Financial Industry Regulatory Authority (FINRA) seeking injunctive relief to stop the regulatory authority from violating the constitutional due process rights of registered representatives. Specifically, FINRA Rule 3010(b)(2), known as the Taping Rule, requires brokerage firms to establish special supervisory procedures, including the tape recording of broker conversations, when they employ more than a specified percentage of representatives who were previously employed by firms that have been expelled or had their registrations revoked for sales practice rule violations (referred to as "disciplined firms").

FINRA's Rule imposes a "guilt-by-association" standard by tainting brokers who worked for a disciplined firm even though the representatives had no involvement in any activity that led to the firm's expulsion or revocation. Even if the registered representatives worked left the firm before the misconduct occurred, they are nonetheless deemed to be "tainted." The special supervisory procedures required of firms that hire enough of these brokers are burdensome and expensive, and can be avoided only by reducing the number of so-called "tainted" brokers. Subsequent employers can avoid having to implement the procedures by reducing the number of affected brokers below a qualifying number.

As a result, brokers who are "tainted" face termination, or the inability to be hired, on the basis of nothing more than their past association with a prior disciplined firm. And FINRA provides no mechanism for a former broker of a disciplined firm to remove the "taint" arbitrarily imposed by FINRA's rule, thereby violating their due process rights and subjecting them to arbitrary termination.

Supreme Court Widens Gap Between Investor Protection and SEC Enforcement

Is punishment an acceptable replacement for reparation? Is it sufficient fidelity to the securities laws for participants in a fraud to be prosecuted but not held accountable to the victims of their criminal behavior? According to the U.S. Supreme Court, the unfortunate answer is yes.

In a 5-4 decision handed down on June 14, 2011, the Court held that mutual fund investors do not have a right of action under Rule 10b-5 to parties other than the issuer for fraudulent disclosures of risk. The decision does mean that the other participants have not committed securities law violations. Rather, it merely shields them from liability for their conduct. As a result, the victims of the misbehavior by non-issuing parties are foreclosed from seeking compensation for their losses even if the perpetrators admit that they engaged in misconduct.

In Janus Capital Group, Inc. v. First Derivative Traders, the Court narrowed the application of Rule 10b-5, which makes it illegal for "any person, directly or indirectly. . .[t]o make any untrue statement of material fact" in connection with the purchase or sale of a security. In that case, shareholders in a Janus mutual fund sued Janus Capital Management LLC, the management company for the fund, in connection with alleged fraudulent disclosures in the fund's prospectus. The plaintiffs alleged that the management company participated in the preparation of the misleading prospectus, and was liable for their losses resulting from the fraudulent disclosures. In an impressive display of linguistic gymnastics, the Court focused on the meaning of the phrase "make any untrue statement" in Rule 10b-5. Rejecting the arguments of the investors as well as the arguments of the SEC itself, the majority adopted a restrictive definition of the phrase, limiting its reach only to those who had ultimate legal control over the content of the prospectus. Because the management company did not "issue" the prospectus, it cannot be held liable for the investors' resulting damages, even if the management company drafted the misleading disclosure that appeared in the prospectus. While they may be guilty, they are not responsible.

The Court's decision does not exonerate the non-issuing participants, and it does not inhibit the SEC's ability to bring regulatory enforcement actions against them for their misconduct. Instead, the Janus ruling is just the latest in a string of opinions by the Court that impede the securities laws from protecting the very investors for whose benefit the laws were enacted. 

Public Investment Fund Overcharged $1 Million on Dozens of Bond Trades

Brokers at UBS Securities and Morgan Stanley are alleged to have overcharged Harris County more than $1 million in the sale of new bond issues between March and September 2010. According to an investigation by the Houston Chronicle, the brokers charged the County a premium above par value for newly issued bonds of federal agencies.

The size of the Harris County, Texas investment fund, reported to exceed $4 billion, allowed for large bond purchases that generated enormous commissions for the brokers. The typical commissions for such trades range between $250 to $350 per $1 million in bonds, earning a broker a $6,250 commission on a $25 million purchase. In contrast, by charging a premium above par for new bond issues, the UBS and Morgan Stanley brokers would generate a ten-fold commission of $62,500. In and of themselves, premiums above par for bonds are not unusual, for instance when purchasing a bond paying a higher interest rate than new bonds being issued. But paying such premiums on new bond issues is extremely rare.

Public investment funds, whether belonging to municipalities or public pension funds, are responsible for hundreds of billions of dollars of taxpayer money, and can be a prime target for a wide variety of investment fraud opportunities. The attorneys at Block & Landsman are experienced investment fraud lawyers who can investigate misconduct regarding the purchase and sale of securities. 

SEC and FINRA Issue New Warning About Investing in Principal Protected Structured Notes

A type of high risk investment product that imploded with the economic meltdown in the Fall of 2008, leading to investors' losses of hundreds of millions of dollars, continues to concern securities regulators. The Securities and Exchange Commission (SEC) has joined with the Financial Industry Regulatory Authority (FINRA) to issue a joint Investor Alert to warn investors about complex financial products known as "structured notes with principal protection." While the name of this security suggests safety, the structured notes present a variety of extreme risks to uninformed investors.

The notes combine a zero-coupon bond, which pays no interest until the bond matures, with an option or other derivative product whose payoff is linked to an underlying index, benchmark or other asset. These notes are designed to return some of all of an investor's money at a set maturity date (which can be as long as ten years) and offer a potential interest payment linked to a predetermined change in the value of the underlying asset.

There are many risky variations of both components that make up the structured note product. For example, although some notes return the entire amount of an investor's principal at maturity, many return less than 100 percent. Moreover, the principal guarantee -- that investors will receive all or some of their principal at maturity -- is entirely dependent on the creditworthiness of the securities firm that structures and issues the note. If the issuer goes bankrupt -- as was the case with Lehman Brothers, which issued large volumes of these type of notes -- investors have no protection and become unsecured creditors of the defunct firm.

The potential upside benefit of being able to participate in an increase in the underlying assets is similarly subject to signficant risks depending upon how the note is structured. As a result, the issuer can limit the amount of interest it owes investors even if the note reaches maturity. The upside potential is linked to the performance of the underlying assets, which are not limited to common benchmarks such as the S&P 500 or the price of a single commodity. Rather, exotic cominbations of assets such as spreads between interest rates or baskets combining unrelated asset types such as an index, a commodity and a currency, are often chosen as the meaure of interest the bond will ultimately pay above the return of principal. The issuer can select unfavorable formulas to calculate the gains or losses linked the the performance of the underlying asset, so-called "market-linked" returns, which can limit the extent to which investors are allowed to participate in the underlying asset's gains. Additionally, the issuer can determine that only a portion of the underlying asset's gain is credited to the note, which has the effect of restricting the interest paid to the investor at maturity.

The unlimited variations to the structure of these complex financial products makes it difficult for typical investors to assess the true risks and benefits of the notes. For this reason, the SEC and FINRA issued their Investor Alert and provided a series of questions that investors should ask their advisers who recommend structured notes with principal protection, such as: (a) what is the level of principal protection offered, (b) describe any conditions to the principal protection, (c) what are the fees and costs, (d) are there limits to potential gains in the underlying asset, (e) what is the credit risk of the issuer, (f) what other risks are associated with the product, and (g) what alternative investments are available.

Complex risks often hide behind the safe-sounding structured notes, and investors should be wary of recommendations to invest without obtaining direct and clear explanations. Any investor who has lost significant monies in these type of structured notes should consider consulting with an investment fraud lawyer to determine any liability on the part of the financial advisor recommending the security.

FINRA Rules Inch Toward Holding Brokers Fully Accountable to their Customers

Later this year, the Financial Industry Regulatory Authority ("FINRA") will put in effect new rules of conduct that narrow the gap between brokers' duties and investors' expectations of their brokers' responsibility.

Many investors would be surprised to learn that licensed brokers generally do not owe a duty to act in the best interests of their customers. Instead, the duty of a broker to a customer with a non-discretionary account has been much more limited: only to recommend investments that are suitable in light of their client's objectives, financial needs and circumstances. This is true even where customers place exclusive reliance on their brokers and always follow their recommendations.

The Securities and Exchange Commission has approved new FINRA Rule 2111, an updated version of the old NASD Rule 2310 (Suitability) requires brokers and their firms to "have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based o n the information obtained through the reasonable diligence of the member or associated person to ascertain the customer's investment profile."

FINRA's new Rule 2111 expands a broker's responsibility toward the customer. While not reaching the level of requiring brokers to act in their customers' best interests, the new standard is an improvement in the protection of investors because it will explicitly cover situations that industry members have historically opposed. Specifically, the new suitability standard will no longer apply only to recommendations concerning the purchase or sale of a security. Rather, it now applies also to the recommendation of investment strategies. Additionally, the new rule directly applies the suitability standard to a broker's recommendation to hold a security, rather than just to purchase or sell a security. This expansion nullifies years of denials by brokers and their firms that a recommendation to "hold" a security constitutes actionable behavior. It recognizes the reality that investors sometimes refrain from executing a transaction on the advice and recommendation of their adviser.

The rule further explains the three primary suitability obligations of a broker. First, a broker must make a reasonable-basis suitability determination, based on reasonable diligence, that the recommendation is suitable for at least some investors. What constitutes "reasonable diligence," however, is undefined, and depends on a variety of factors such as the complexity, the risks and the rewards associated with the security or the investment strategy. Second, assuming the recommendation is suitable for at least some investors, a broker must then make a customer-specific suitability determination to ensure that the recommendation is suitable for a particular customer based on his or her investment profile. Finally, where brokers exercise actual or de factor control over a customer's account, they must have a reasonable basis for believing that a series of recommended transactions, even if individually suitable, are not collectively unsuitable for the customer. Factors relevant to this determination are turnover ratio, cost-equity ratio and the existence of short-term trading.

The new rule is undoubtedly an improvement over the former suitability rule, and will benefit investors in their interactions with their brokers, and in customer arbitration claims where their brokers have violated the rules. The benefits of the revisions, however, are mitigated by the new rule's limitations. For example, the rule leaves much ambiguity regarding the precise contours of a broker's obligations. Additionally  the duty is only triggered by a "recommendation" of the broker, as opposed to an adviser acting under a fiduciary duty, who in required in all respects to provide guidance in the client's best interests. While the regulatory trends appear to favor protecting investors, much work still needs to be done, and investors must remain vigilant to ensure their advisers are recommending securities and investment strategies that are appropriate for their purposes.

Securities America Fraud Victims Settle for Little More Than 30 Cents on the Dollar

Competing claims by customers of Securities America who lost $400 million in allegedly fraudulent securities in Medical Capital and Provident Royalties have finally been resolved. As followed in this blog, the proponents of a class action lawsuit against Securities America and its parent, Ameriprise Financial, sought to force investors who filed their own arbitration proceedings to abandon their own claims and compel them to participate in the class action settlement. The investors in arbitration successful argued for their right to pursue their own claims, and the judge overseeing the class action rejected the onerous settlement agreement.

This week, Securities America agreed to settle the class action claim and the individual arbitration proceedings for a total of $150 million. While that is certainly a significant settlement amount, it nonetheless still means that investors, who will recover slightly more than 30% of their losses, will have to bear the brunt of the MedCap and Provident losses. Given the fact that an investor won an award of $1.2 million against Securities America earlier this year -- an award that included punitive damages to punish the firm for its conduct -- it seems that Securities America secured a global settlement on favorable terms.

Investors who believe they have been defrauded by an investment advisor, or who believes they have suffered investment losses due to broker misconduct, should contact an investment fraud lawyer to investigate their right to recover damages.

Banco Santander Pays $9 Million to Settle Claims It Improper Sold Reverse Convertibles To Elderly Investors

Hardly a week goes by without a report that yet another financial institution has settled claims of selling improper investments to groups of investors, often including senior citizens. This week, the largest bank in Spain, Banco Santander, is reported to have paid $7 million directly to investors and $2 million to the Financial Industry Regulatory Authority ("FINRA") to settle claims that it improper sold high-risk reverse convertibles to elderly, retired investors.

Reverse convertibles are risky, high yield, short-term bonds that automatically convert to the stock of an underlying company's shares if the company's share price rapidly declines. In 2010, banks sold nearly $7 billion worth of these securities to U.S. investors.

According to the allegations, Banco Santander brokers not only sold reverse convertibles to conservative investors, they sometimes recommended that customers use margin to purchase the securities, which had the effect of increasing the risk of significant losses.  Banco Santander is the most recent in a string of fines against banks for improperly selling reverse convertibles. Last year, a subsidiary of Royal Bank of Canada and a subsidiary of Ameriprise Financial were fined a total of $890,000 for similar practices.

Investors who have reverse convertible securities in their portfolios may want to consult with investment fraud lawyers to investigate whether they have a claim to recoup losses incurred by these investments.

Securities America Seeks to Resolve Arbitration Cases Involving Medical Capital and Provident Royalties

Last week, a federal court rejected Securities America's attempt to force arbitration claimants to abandon their cases and require them to participate in a class action settlement that would allow defrauded investors to recover only one-eighth (1/8) of their $400 million in losses due to investments in Medical Capital Holdings, Inc. and Provident Royalties. Securities America's effort to extinguish investors' arbitration rights came on the heels of a customer's $1.2 million arbitration award, which included punitive damages, against the firm for allegedly fraudulent sales of Med Cap securities.

Yesterday, Investment News reported that Securities America has now proposed a settlement of all of the individual investor arbitration claims by offering the claimants nearly 50% of their losses. This offer represents a significant increase from the last offer Securities America made before the federal court ruled last week.

While Securities America's proposal represents its attempt to manage its exposure by settling for a sum certain, the offer was reportedly extended only to investors with existing arbitration claims, and does not provide for claims that may yet be filed in the future.

Investors who have lost money in Med Cap and Provident investments and who believe they have claims against Securities America and its parent, Ameriprise Financial, should contact an investment fraud lawyer to investigate their claims.

LPL Financial Disciplined For Allowing Broker To Improperly Transfer Customer Funds to His Own Account

Earlier this month, LPL Financial, LLC was fined $100,000 by the Financial Industry Regulatory Authority ("FINRA") for failing to maintain supervisory procedures to catch a representative who was transferring assets from a customer account to the broker's personal account with the firm.

In the face of charges by the regulatory agency, LPL Financial submitted a Letter of Acceptance, Waiver and Consent by which the firm consented to a censure and the fine, while at the same time neither admitting or denying the facts.

According to the FINRA enforcement action, LPL Financial did have a supervisory system that was intended to monitor the transfer of funds or securities from a customer account to third parties. However, the firm's system simply failed to address movement of assets from a customer account to a broker's LPL account. This failure allowed a broker to convert for his own benefit more than $1 million in cash and securities belonging to LPL customers.

This is one of three fines, totaling $220,000, that FINRA assessed against LPL Financial this month for various disciplinary violations in March, 2011.

Any investors who suspect that money or securities have been moved from their accounts without proper authority should immediately investigate the circumstances of the transfers.Investment fraud lawyers can assist with that investigation and seek to recoup embezzled funds.