Securities Fraud Attorney Blog

There’s a very good piece in the Financial Times today about Goldman Sachs by Francesco Guerrera and Tom Braithwaite. It’s available online at http://www.ft.com/cms/s/0/1eb0ea18-d497-11de-a935-00144feabdc0.html?nclick_check=1

The authors explain how competitive Goldman is and how profits and risk management drive the firm. They go on to explain how difficult it will be for Goldman to handle the backlash of paying out huge bonuses in an environment of double digit unemployment rates.

For a long time, Goldman was by far the gold standard of investment firms. Much of the financial crisis stems from every other firm trying to be like Goldman and making huge, leveraged bets with proprietary capital. The difference has been that Goldman has always one stop ahead of the rest of the Street. Partly due to the “market color” it receives as an investment bank, prime broker, clearing firm, counter party, and trader, Goldman somehow is nimble enough to know when to stop on a dime and bet the other way. Merrill, Citi, Morgan and the rest could never do that. Merrill, especially, was three steps behind and was late to the CDO game just like it was late to the prop trading game and the internet craze.

Goldman is now in a bind. It’s entire business model is based upon paying employees who generate profits for the firm. It has generated huge profits using cheap money. Did the world really expect Goldman not to take advantage of the low cost of borrowing and two less competitors in the market place (Lehman and Bear)? Now, the press will hammer Goldman if the firm follows its normal course of business. But if the Goldman trader who’s P&L is up $20 million for the year gets stiffed on his bonus, he’s leaving for a hedge fund. It’s that simple.

Have no fear though, Goldman is smart enough to figure a way out that no other firm has thought of. And haters can continue to hate Goldman just like baseball fans outside of New York hate the Yankees.

On July 16, 2009, SEC charged Medical Capital Holdings Inc. of Tustin, Calif., with fraud in the sale of $77 million of private notes. According to sources, many independent broker-dealers such as American Portfolios Financial Services, National Securities Corp., Securities America, and Signature Financial Group, sold the notes. Rich & Intelisano is presently investigating Medical Capital and speaking with investors who purchased Medical Capital Holdings through registered broker dealers or investment advisors.

A receiver was appointed for Medical Capital. Most recently, the SEC filed its First Amended Complaint on November 9, 2009 and the Receiver filed his Fourth Status Report. Both documents are available on the Receiver’s website at http://www.medicalcapitalreceivership.com/

FINRA announced yesterday that it won approval from the SEC to expand its BrokerCheck service to make records of final regulatory actions against brokers permanently available to the public, regardless of whether the broker continues to be employed in the securities industry.

The FINRA press release states disclosure records for former brokers will be available on BrokerCheck beginning November 30. It goes on to state, “This is an important step for investors and for investor protection," said FINRA Chairman and CEO Richard Ketchum. "Individuals previously barred by FINRA and other regulators have surfaced in a number of recent frauds in other parts of the financial industry that cost unsuspecting investors millions of dollars. It has never been more critical for investors to research the backgrounds of the financial professionals they deal with than it is today."

This is an important addition to the publicly available regulatory records of former brokers. Often times, permanently barred brokers, traders and salesmen will attempt to work at unregistered entities such as hedge funds. It is difficult for potential investors to do due diligence on a hedge fund manager without the historical BrokerCheck information. In the past, if a registered representative was out of the business for more than two years, a public investor had no access to the broker’s disciplinary record.

BrokerCheck is available at www.finra.org/brokercheck

I’m often asked what I read on a regular basis regarding securities and investment fraud. Back in the day (say, pre-Enron), there was limited print and online coverage of investment misconduct. In fact, when I told people what I did for a living, some would actually question whether our niche practice was even viable, “you mean there’s fraud going on on Wall Street?” Ah, how the world has changed. First Sam Israel, then the Bear Stearns High Grade Funds, and finally, the big whale of the Bernie Madoff affair.

Now, financial fraud news is general business news. Just look how Vanity Fair has scored huge every month with one strong financial story after another (Madoff, Fairfield Greenwich, Marc Dreier, Goldman Sachs and Morgan Stanley survival, etc.). Here is a little a look at what I’m presently reading, for better or worse. Today, I’ll focus on newspapers.

I start with the Financial Times. Worldly, smart, a cut above the rest for global coverage of finance. I particularly like Gillian Tett’s column and Greg Farrell’s Street coverage. I read the NY Times business section (mostly because it’s attached to the Sports section, but that’s a whole other issue). Gretchen Morgenson, Jenny Anderson, and newly appointed wonder kid Andrew Ross Sorkin, are all strong. No one covers investor protection better than Gretchen. And I love Ben Stein. However, it’s too bad the Times won’t throw more resources at its Street coverage. I also read the Wall Street Journal daily, especially on breaking finance news issues. Kate Kelley’s coverage of Bear Stearns collapse was award winning stuff. When the Journal sends its entire squadron on a topic, no one can top its finance coverage. I used to read the Post’s coverage but since Roddy Boyd left, it’s not as interesting.

Since The Economist calls itself a newspaper, I’ll include it in this section. The most intelligent weekly by far. Their in depth, forward looking analysis is unparalleled. It’s a bit daunting however on a weekly basis (like The New Yorker).

Lehman Brothers Holdings Inc. filed a lawsuit against Barclays Capital in New York federal court alleging the British bank took control of excess assets in collusion with Lehman executives when it bought its U.S. brokerage business in 2008. The Lehman bankruptcy is the largest U.S. bankruptcy in history. The claim alleges that Barclays Capital received a $8.2 billion "windfall profit" due to an undisclosed $5 billion discount on the sale of certain securities. The complaint alleges, "The windfall to Barclays was not disclosed to the Court, the Lehman Boards or Lehman's lawyers so as to allow the transfer to Barclays of billions of dollars in excess assets, without consideration, in a manner designed to avoid judicial, corporate and creditor oversight."

Bankruptcy litigation is booming amidst the flood of major bankruptcies filed in the U.S. We have seen more and more battles between bankruptcy trustees and receivers against the major worldwide banks. Since many of these cases are filed by and defended by law firms which often represent bulge bracket investment banks and broker dealers, it will be interesting to see how many international law firms will be conflicted out of handling such cases.

In the Lehman v. Barclays case, Jones Day represents the Debtor, Lehman in the Barclays matter. Weil, Gotshal & Manges, is Lehman's lead bankruptcy counsel, but is not handling the Barclays litigation. Boies, Schiller & Flexner is representing Barclays. David Boies’ firm’s website states, “We have been described by The Wall Street Journal as a "national litigation power--house" and by the National Law Journal as "unafraid to venture into controversial" and "high risk" matters.” This certainly qualifies.

The SEC announced that it will continue to pursue its civil enforcement case against former Bear Stearns High Grade Fund portfolio managers Ralph Cioffi and Matthew Tannin, after the recent acquittal of criminal charges against Messrs. Cioffi and Tannin. According to recent news reports, Robert Khuzami, head of enforcement at the SEC, told Reuters TV, “We filed a case based on the evidence from our investigation.” Mr. Khuzami added, “we have a different standard of proof.”

The SEC’s complaint (available on its website) is indeed far more broad than the charges lodged by the U.S. Attorneys’ Office in Brooklyn. It also reaches all of the way back to the beginning of the High Grade Fund’s existence as opposed to just the late 2006, early 2007 time period the prosecutors focused on. The prosecutors’ standard of proof of “beyond a reasonable doubt” is much stiffer than the SEC’s and civil litigants’ standard of “by a preponderance of evidence.” In order for Messrs. Cioffi and Tannin to re-enter the securities industry, they will have to defend the SEC action as well.