UBS Willow Fund's use of Credit Default Swaps Causes Investor Loss

The UBS Willow Fund, ostensibly a distressed debt fund, was a closed-ended fund recommended and sold by UBS to its clients.  This product utilized credit default swaps (“CDS”), which are essentially contracts whereby one party shifts the risk of a default onto the CDS seller in exchange for an agreed upon premium.  These are highly speculative investments.  Unfortunately for the Willow Fund, it invested in CDS involving European sovereign debt.  This gamble by UBS did not pay off, and investors are now paying the price. 

Last October, investors found out the Willow Fund, which was valued in 2006 at $500 million, was being liquidated.  As reported by the New York Times, the Willow Fund suffered losses of almost 80 percent in the first three quarters of 2012, and as a result, drastically switched investment strategy away from distressed debt, and into highly speculative CDS. 

Some UBS investors were unaware they held investments in such a speculative product, and now investors are out millions of dollars.  Investment fraud may be found on a variety of grounds, including that these investments were unsuitable for certain investors.  If you held UBS Willow Fund and believe you may have lost value in your investment due to securities fraud, please contact Block & Landsman to discuss how we may be able to assist you in recovering your assets.

Mamtek CEO Posts Bail in Missouri

Today former Mamtek CEO, Bruce Cole, was released on bail from jail in Randolph County, Missouri pending his trial on theft and securities fraud charges related to a failed artificial sweetener facility in Moberly, Missouri.  Cole was released after a $10,000 bail was paid on a $100,000 bond.

The city of Moberly issued $39 million in industrial development bonds to fund construction of a sucralose plant that was to be operated by Cole’s company, Mamtek.  Cole allegedly misappropriated around $700,000 of that money and used investor funds to avoid foreclosure of his Beverly Hills, California home.  This allegation makes up part of the securities fraud case against him.  The project was derailed when the first principal payment on the bond was missed.  Now the incomplete factory serves as a reminder of the 600 jobs that never materialized, and a loss for investors all of the U.S. 

The failed project made headlines last year when Mamtek CEO Bruce Cole was charged with securities fraud by the Securities and Exchange Commission (“SEC”). These charges are in addition to the criminal charges Cole faces in Missouri.

SEC Charges Houston-Based John Thomas Capital Management Group with Fraud

The Securities and Exchange Commission (“SEC”) instituted a cease-and-desist proceeding against John Thomas Capital Management Group, George Jarkesy Jr., John Thomas Financial (“JTF”), and Anastasios “Tommy” Belesis.  The case centers on Jarkesy, who is accused of fraudulent conduct while managing two hedge funds – John Thomas Bridge and Opportunity Fund LP I, and John Thomas Bridge and Opportunity Fund LP II.  In addition to fraudulent actions in connection with these two funds, Jarkesy is accused of funneling Fund money into JTF and Belesis in the form of bloated funds to the broker-dealer.

The Funds, which had assets over $30 million at their peak, were also known as Patriot Bridge and Opportunity Fund LP I and LP II, and the advisers were known as Patriot28 LLC. 

Belesis is accused of demanding and obtaining de facto control over investment decisions at the Funds, despite representations Jarkesy was responsible for all investment decisions.  It is alleged this sham was perpetrated to insulate Belesis from liability.  Further, it is alleged Jarkesy and John Thomas Capital Management breached their fiduciary duty by diverting a large amount of fees to JTF and Belesis from the Funds via borrowing companies.

In a particularly egregious email sent from Jarkesy to Belesis after Belesis had berated Jarkesy for not delivering enough fees, Jarkesy responded, “We will never retreat we will never surrender and we will always try to get you as much [fees] as possible, Everytime [sic] without exception!” 

The SEC Order, which can be viewed here, alleges Jarkesy incorrectly valued the Funds’ holdings on multiple occasions and in multiple different assets.  Further, it alleges John Thomas Capital Management’s sales material contained multiple misrepresentations designed to make the Funds appear legitimate. 

If you were the victim of this allegedly fraudulent scheme, please contact the securities fraud attorneys at Block & Landsman to discuss your matter.

Ameriprise and Affiliated Clearing Firm Fined for Failing to Supervise Transfer of Customer Funds

The Financial Industry Regulatory Authority (“FINRA”) announced a fine of $750,000 against Ameriprise Financial Services, Inc (“Ameriprise”) and its affiliated clearing firm, Ameriprise Enterprise Investment Services, Inc. (“AEIS”).  The fine was levied against the firms “for failing to have reasonable supervisory systems in place to monitor wire transfer request.”   Though the fine relates to a compliance issue, the circumstances uncovering the supervisory issues involved an investment fraud perpetrated by an Ameriprise representative, Jennifer Guelinas. 

Guelinas, who is now barred from the securities industry (click here for more info), defrauded investors through a series of fraudulent transfers from clients’ accounts to accounts controlled by her.  This scheme took place from December of 2006 until October of 2010, during which time Guelinas converted over $500,000 from clients’ brokerage accounts.  Sadly, the three clients involved in this securities fraud were senior citizens. 

While neither affirming nor denying the charges, Ameriprise and AEIS consented to FINRA’s finding of failure at the firms to detect multiple red flags concerning Guelinas.  As stated by Brad Bennett, Executive Vice President and Chief of Enforcement at FINRA, "Ameriprise and its affiliated clearing firm missed numerous supervisory red flags, including the fact that two of the wire transfers went to accounts in Guelinas' name. Firms must have robust supervisory systems to monitor and protect the movement of customer funds."

This fraudulent arrangement was only possible because of Ameriprise’s failure to detect this long-operating scheme.  Altogether, Guelinas forged the signatures of her clients over 80 times on wire transfer requests.  This is in addition to forging clients’ signatures on three real estate closing agreements and one promissory note.

Adviser Jeffrey Rubin of Pro Sports Financial Banned from Securities Industry

The Financial Industry Regulatory Authority (“FINRA”) announced yesterday it has barred Jeffrey Rubin, a Florida resident, from selling securities for his unsuitable recommendations to customers. 

Rubin, who operated Pro Sports Financial, a concierge services company for professional athletes, has also been affiliated with Lincoln Financial Advisors and Alterna Capital Corporation.  Starting in at least 2006, Rubin used his position of authority to induce a client, a NFL player, to invest $3.5 million in four high-risk securities.  The largest single investment, $2 million, was invested in an Alabama casino project.  However, what started out with one investor quickly grew to over 30 additional clients of Rubin with investments totaling approximately $40 million in the casino project.

The casino project, however, was mired in regulatory issues, and was effectively shut down shortly after it began operations.  Rubin’s clients who invested in this project, all former and current NFL players, lost millions, while Rubin received a 4% ownership stake and approximately $500,000 from the casino project promoter for his referrals.

In settling the matter, Rubin neither admitted nor denied charges, however, he is barred from the securities industry.  If you believe you have lost money because of the actions of Jeffrey Rubin, please contact Block & Landsman to discuss your potential legal options.

Great Lakes Dredge & Dock Corp May Have Violated Federal Securities Laws

Potential federal securities law violations at Great Lakes Dredge & Dock Corp (Symbol: GLDD) have caused upset at the Oak Brook, Illinois company. After close of trading on March 14, 2013, GLDD announced it would restate its 2012 2Q and 3Q revenues. The adjustment resulted in 2012 2Q revenues being reduced by $3.9 million and 2012 3Q revenues being reduced by $4.3 million. In addition, GLDD announced $5.6 million of 4Q revenues failed to meet revenue recognition standards.

This news came along with the announcement of the company’s President and COO, Bruce J. Biemeck, stepping down, effective March 13, 2012. Biemeck was CFO of the company from 1991 to 1999, returning as a director in 2006. He was then promoted to president and CFO in 2010, before taking his final position with the company as COO in August 2012. Along with the restating of revenue and change of leadership, GLDD’s stock plummeted more than 30% following the news. For more information, see this Bloomberg Businessweek article.

Investors have sustained losses as a result of GLDD’s stock devaluation, and it remains to be seen if regulators will investigate. If you purchased GLDD stock and would like to discuss legal options to potentially recoup your investment, please contact Block & Landsman.

SEC Uncovers Deficiencies in how Investment Advisers Handle Custody of Clients' Assets

The Securities and Exchange Commission (“SEC”) recently published a new Risk Alert and Investor Bulletin regarding investment advisers’ handling custody of their clients’ assets.

According to the SEC, there are significant deficiencies in how investments advisers handle the custody of clients’ assets. Recent examinations of investment advisers have uncovered custody related issues in one out of three firms inspected. The SEC highlighted three areas of particular concern:

1) “Failure to recognize that they [investment advisers] have custody, such as situations where the adviser serves as trustee, is authorized to write or sign checks for clients, or is authorized to make withdrawals from a client’s account as part of bill-paying services;”
2) “Failure to meet the custody rule’s surprise examination requirement;” and
3) “Failure to satisfy the custody rule’s qualified custodian requirements, for instance, by commingling client, proprietary, and employee assets in a single account, or by lacking a reasonable basis to believe that a qualified custodian is sending quarterly account statements to the client.”

The investment advisers found to be deficient in the aforementioned areas were required by the SEC to change their compliance policies and modify their business practices. These are serious issues and serve to remind investors to remain vigilant in overseeing their investment accounts. 

Equity Indexed Annuities - Seniors At Risk

If you are an elderly investor looking for a conservative way to invest in the stock market, you should be aware of an Investor Alert recently issued by the Financial Industry Regulatory Authority ("FINRA") regarding the dangers of equity indexed annuities ("EIAs"). In contrast to the way they are often sold, EIAs are in fact complicated with confusing features that make them difficult to understand. As a result, they are often misunderstood to be solidly conservative investments.

An annuity is a contract between a purchaser and an insurance company that promises to make periodic payments. Annuities are either "fixed," meaning the insurance company guarantees the rate of return as well as the ultimate payout, or "variable," meaning that the rate of return varies with the performance of the investments (stocks, bonds) purchased within the annuity. Unlike fixed annuities, variable annuities carry the risk of loss if the underlying investments decrease in value. As a result, variable annuities are considered securities and are registered with the Securities and Exchange Commission ("SEC"). Fixed annuities escaped similar regulatory oversight due to a late amendment to the Dodd-Frank Wall Street Reform and Consumer Protections Act passed in July 2010, even though the stocks purchased within the fixed annuity remain subject to SEC regulation. As a result of this exeption, sellers of fixed annuities do not have to be licensed securities brokers.

EIAs have characteristics of both fixed and variable annuities because their value is dependent on the performance of the stock indices they track except they do not decline in value if held to maturity even if the underlying indices they track do decline. As a consequence, the returns vary more than a fixed annuity but less than a variable annuity with a risk of loss that is less than variable annuities but more than fixed annuities.

In the abstract, EIAs may seem to some investors to be an attractive middle ground between fixed and variable annuities. As FINRA describes them, however, EIAs are complex financial instruments that are not well understood by the general investing public. The gains that are linked to the performance of the underlying index is dependent on various features that an EIA uses. For example, insurance companies often limit the percentage of the stock index increases that is credited to the annuity. Moreover, some insurance companies add a spread/margin/asset fee which is subtrracted from any gain in the index linked to the annuity. Other EIAs place a ceiling on the amount of the annual return the annuity can gain. These an other features reduce the gains which EIAs can achieve. Therefore, conservative investors may not find these investments suitable.

EIAs not only limit the upside potential, they are structured to be long-term investments that carry significant penalties if the investor needs to withdraw his or her funds early. Investors who pull their money out of EIAs early may suffer losses that occurred in the underlying stock index. Such investors typically also face surrender charges that further add to the losses. Additionally, any investor who withdraws from tax-deferred annuities before the age of 59 1/2 are subject to a 10% tax penalty in addition to having any gain taxed as ordinary income.  As a result, elderly investors may question the suitability of EIA investments.

Strengthening Public Pension Funds by Attacking Investment Fraud

Public pension funds are under intense financial pressure because of concerns, real and imagined, about their potential inability to meet benefit payment obligations within a few years. Critics fling accusations that often appear more directed at assigning blame than in finding a remedy to relieve the concerns of the funds and, most importantly, the firefighters who benefit from the funds. Now, more than ever before, boards of trustees must evaluate all available options to discharge their fiduciary responsibility to protect public pension fund assets.

The good news, however, is that boards have concrete steps they can take to strengthen their funds' financial position by recovering investment losses caused by inappropriate investment strategies employed by outside investment advisers. Investment fraud by advisers is a scenario that has been all too common in recent years, and public pension funds are not immune from this danger. Between 2001 and 2009, aggrieved investors have filed, on average, nearly 6,500 securities arbitration claims per year against their brokers, a figure that increases by including investors who were able to pursue their claims in court rather than in arbitration. At any given time, pending arbitration disputes between investors and their advisers involve collective losses of more than one billion dollars. Public pension funds in Illinois, and across the country, have begun pursuing their own claims of investment fraud.

The Illinois Pension Code (the "Code") empowers trustees to invest fund assets in specific securities, and in allowable percentages, as defined by statute according to the size of the fund's net assets. Because investment decisions concerning these assets can be complex, the Code permits the board of any Article 3 or 4 pension fund to appoint an investment adviser for professional guidance. For funds seeking to invest in common or preferred stocks (available only to funds with net assets of at least $5 million), retention of an investment adviser is mandatory.

Pursuant to the Code, any investment adviser hired by a public pension fund is considered a fiduciary, imposing a heightened standard of care that requires the adviser to act in the best interests of the fund. The adviser must act only pursuant to a written contract with the board, and the contract must contain, among other things, an acknowledgement that the adviser is a fiduciary to the fund and will follow the board's investment policy which is based on the allowable investments identified in the Code.

Despite these statutory requirements, trustees, like any investor, can find themselves relying on the guidance of an investment adviser who provides inappropriate investment advice, and which results in significant investment losses. Where an investment adviser engages in wrongdoing that causes a fund to lose money, the trustees (who are themselves fiduciaries to their funds) may have a reason, and indeed an obligation, to investigate and pursue claims against the fund's adviser to recover those losses. Fortunately, the Code specifically provides the funds with a remedy for an adviser's misconduct. Section 114 provides that any fiduciary of a fund who breaches a fiduciary duty imposed by the Code "shall be" liable to a pension fund for any losses resulting from such breach. The Code also allows for additional remedies, including recapture of the adviser's profits and all other equitable or remedial relief that may be appropriate given the circumstances. Section 115 of the Code authorizes a board of trustees to bring an action against the investment adviser for such losses. Moreover, other statutory and common law causes of action exist to use for recover of these losses.

Understanding a fund's right to recover wrongfully caused investment losses, and deciding to act to protect those rights where appropriate, is becoming an urgent matter for public pension fund boards. Recent volatility in the securities markets has exposed the unsuitable nature of many investment strategies, but there are various time limitations that may be running which may restrict or eliminate a fund's ability to recover these losses if too much time passes before a claim is filed. Because the limitations periods which apply to any given investor depend on several factors, they should be discussed with an experienced attorney as soon as the board becomes concerned that investment losses may have resulted from inappropriate investments or strategies. Because trustees are themselves fiduciaries, and are required to act in the funds' best interests, they should not unduly delay their investigations into the causes of their investment losses.

Recovery of improperly caused investment losses can help strengthen the financial position of a public pension fund, and would allow the trustees to ultimately concentrate on the important tasks of caring for the health and well-being of the firefighters they serve. 

The Epidemic of Financial Abuse Against The Elderly in the United States

Senior citizens deserved to be protected against financial scams. And, like anybody who has been victimized by investment fraud, the elderly need the people who care for them to ensure that our nation's elderly do not have to deal with the devastating consequences caused by fraud. A pilot project initiated by Baylor College of Medicine trained physicians to detect elderly patients who were victims fo financial fraud and report their concerns to the state securities department. The project uncovered several instances of fraud, including one Ponzi scheme that raised $10 million from 130 investors and which resulted in a conviction for that fraudster

Mickey Rooney, the 90 year old legend who starred in more than 200 movies, exposed painful and embarrassing details of his personal life when he testified before a Senate panel that he was the victim of financial abuse. Rooney's testimony was offered in support of pending legislation called the Elder Abuse Victims Act, which would establish an Office of Elder Justice within the Department of Justice.

Financial abuse of senior citizens is serious problem. According to a study by Duke University, nearly 9 million Americans over the age of 71 are susceptible to financial exploitation because of cognitive difficulties ranging from mild impairment to Alzheimer's disease. Indeed, according to a wide-ranging study by the Investor Protection Trust ("IPT"), one in five elderly U.S. citizens have been victims of fraud.

The exploitation of seniors who are vulnerable to financial fraud is made more likely because the people closest to these victims -- their adult children -- are unaware of the dangers to their parents. For example, the IPT study found that 37% of elderly Americans are solicited to buy into one of several financial schemes. Yet, only 19% of all adult children believe that their elderly parents are the targets of fraudsters. In addition, only 5% of adult children who speak with their parents' physicians said that the healthcare providers expressed concern regarding their parents' ability to handle their own money. In contrast, nearly 20% of these same physicians reportedly raised concerns with these adult children about their parents' mental comprehension.

The combination of vulnerability and lack of family appreciation of the danger of elder financial abuse fuels the efforts of scam artists to target senior citizens. In response to this looming danger, the North American Securities Administrators Association ("NASAA"), in cooperation with IPT and various medical associations across the country, created the "Elder Investment Fraud and Financial Exploitation" prevention campaign intended to education medical professionals to identify seniors who are vulnerable to financial fraud and to refer suspected victims to the appropriate state securities departments. This program deserves the whole-hearted support of the medical community, securities regulators across the country, and family members of the elderly.