Securities Fraud Attorney Blog

Below is a Bloomberg article about our firm's $20.6 million FINRA arbitration award against Goldman Sachs related to Bayou. It's the largest arbitration award ever rendered against Goldman. The award was confirmed by Judge Rakoff and Goldman filed it's brief to the Second Circuit.

Goldman Sachs Asks Court to Throw Out $20.5 Million Bayou Creditors’ Award
By Bob Van Voris - Oct 15, 2011

Goldman Sachs Group Inc. (GS) filed an appeal seeking to dismiss a $20.5 million arbitration award to creditors of the failed hedge fund firm Bayou Group LLC.

Goldman Sachs asked the U.S. Court of Appeals in Manhattan to overrule a decision by the Financial Industry Regulatory Authority, the independent regulatory group for the securities industry. A federal district judge declined in November 2010 to reverse the Finra award.

The creditors sued Goldman Sachs Execution and Clearing LP in 2008 for its role as the prime broker and clearing broker for Bayou’s hedge funds. They said the Goldman Sachs unit aided a $400 million fraud at Stamford, Connecticut-based Bayou, which filed for bankruptcy in May 2006. Bayou co-founder Samuel Israel pleaded guilty to directing the scheme and is serving a 22-year prison term.

In the November ruling, U.S. District Judge Jed Rakoff in Manhattan said Goldman Sachs failed to show that the arbitration panel had “manifestly disregarded the law” in granting the award.

Goldman Sachs, based in New York, argued in its appeal brief that the Finra panel was wrong in determining that deposits into Bayou’s accounts and internal bookkeeping entries qualified as fraudulent transfers.

John Rich, a lawyer for the Bayou creditors, didn’t immediately return a voice-mail message seeking comment yesterday on the Goldman Sachs filing.
Fellow Inmate

Israel is incarcerated at the same federal prison complex in Butner, North Carolina, as Bernard Madoff, who is serving a 150-year sentence for orchestrating the biggest Ponzi scheme in history.

In addition to a 20-year term for the fraud, Israel’s term was extended by two years after he attempted to make it appear that he had committed suicide by jumping off a bridge on the day he was to report to prison.

The case is Goldman Sachs Execution & Clearing LP v. Official Unsecured Creditors’ Committee of Bayou Group LLC, 10- cv-05622, U.S. District Court, Southern District of New York (Manhattan).

Below is a WSJ article about our firm's $20.6 million FINRA arbitration award against Goldman Sachs related to the Bayou hedge fund fraud. It is the largest arbitration award ever rendered against Goldman. The award was confirmed by Judge Rakoff of the SDNY in November 2010 and Goldman filed it's brief to the Second Circuit this week.

Goldman Continues to Fight $20.5 Million Award in Pivotal Case
By LIZ MOYER

NEW YORK—Goldman Sachs Group Inc. is continuing to fight a $20.5 million arbitration award that, while relatively small from the big bank's perspective, has broader implications for Wall Street.

The award stems from Goldman's role as a clearing broker for a failed hedge fund. Goldman filed an appeal Thursday in the U.S. Court of Appeals in the Second Circuit, arguing as it did last fall in district court that the Financial Industry Regulatory Authority arbitration panel that awarded the sum ignored the law.

On the opposite side are the creditors of Bayou Group LLC, which accused Goldman Sachs Execution & Clearing LP of ignoring signs of fraud at the hedge fund run by Samuel Israel III before it imploded in 2005.

A Finra panel awarded the Bayou creditors $20.5 million in June 2010. Goldman sued to vacate the arbitration award in July 2010, but Federal Judge Jed Rakoff confirmed the award in November.

Ross Intelisano, a lawyer for the Bayou creditors at Rich, Intelisano & Katz, said investors are "frustrated" by the delay in receiving their money. "We're looking forward to the Second Circuit reconfirming the arbitration award," he said.

The disputed case comes as regulators are eager to lay blame after the financial crisis exposed rampant cases of Ponzi schemes and other frauds. The $20.5 million award, if it is upheld, could raise the standards of care required by banks that clear trades for hedge funds, lawyers said.

The Securities Industry and Financial Markets Association, an industry group representing Wall Street sided with Goldman in district court last year and plans to file a brief in support of Goldman in the appeal, a spokesman said.

In May, Goldman said the Commodity Futures Trading Commission had "orally advised" it that it faced civil fraud charges over its role clearing trades for an unnamed client. Goldman said it was cooperating.

In that probe, the potential charges concern whether Goldman knew or should have known the client was using customer accounts in transactions with Goldman rather than the client's own accounts.

In the Bayou case, the creditors argued that the hedge fund's depositing of money into its account at Goldman, and then its shuffling around of that money among accounts, constituted transfers to Goldman that could be recovered by investors.

The creditors also accused Goldman of ignoring several warning signs, including suspicious money transfers. About $13.9 million of the award concerns money Bayou moved among its accounts.

Bayou was founded in 1996 and exposed as a $400 million fraud in 2005. Goldman was a prime broker and clearing firm for Bayou from 1999 to 2005. Mr. Israel, who went on the lam briefly, is currently serving a 22-year prison sentence.

Dan Carlson, a San Diego lawyer who represents investors in Finra arbitrations, said the financial crisis has "opened eyes that clearing firms and brokerages need to be doing more due diligence."

Wall Street firms have argued that extra due diligence will slow down business and increase costs. "In imposing liability on Goldman, the arbitrators disregarded the long-recognized principle that a clearing firm cannot be liable for merely processing transactions received from an authorized source," Sifma wrote in its friend of the court brief siding with Goldman in district court last fall.

"If clearing firms were required to analyze trading in introduced accounts," Sifma added, "the speed and efficiency demanded in the contemporary securities markets would not be possible."

A Florida FINRA panel awarded $6.4 million to an investor in Citi's MAT municipal bond arbitrage fund this week. It's the largest award rendered against Citi related to its MAT and Falcon proprietary fund blow-ups. The case is Berghorse v. Smith Barney (FINRA 08-04466). Although damages claimed on the award were $12 million, sources say the net out of pocket losses were under $10 million, making the award amount over 64% of the losses. The 29 hearing sessions also make it the longest MAT arbitration to date. This substantial award follows a string of 100% NOP awards rendered against Smith Barney late last year. Below is an On Wall Street piece about the case.

FINRA: Citi To Pay Investors $6.4M
By Lorie Konish
February 9, 2011

A Financial Industry Regulatory Authority panel has ordered two parts of Citigroup Inc. to pay $6.4 million to make up for investment losses tied to a group of troubled municipal arbitrage trust funds.

The $6.4 million award is about half of the compensatory damages requested by the claimants, led by investment banking executive D. Theodore Berghorst, who sought no less than $12 million for costs, attorneys’ fees, rescission and other expenses.

“It’s the largest award to date,” said Ross B. Intelisano, a partner at Rich & Intelisano LLP, a New York law firm handling other cases involving Citigroup’s proprietary MAT and Falcon hedge funds. “I think it’s because of the size of the claim. It’s also the largest in size that’s been tried all the way to a full award.”

FINRA’s decision caps off a string of awards in the last few months related to those Citigroup funds, Intelisano said, while the 29 hearing sessions for this case was longer than most.

The respondents in the cased include Citigroup Global Markets Inc., operating under the name Smith Barney, and Citigroup Alternative Investments LLC. The claim is related to a group of funds, MAT Finance LLC, short for municipal arbitrage trust.

Those funds, which underwent severe losses during the financial downturn, have also come under investigation by the Securities and Exchange Commission after investors charged that the brokers selling them did not fully disclose their risks, The Wall Street Journal reported in November. The MAT funds were modeled to reap gains by investing in long-term bonds, but reportedly suffered around 80% in losses around 2008.

“We neither confirm nor deny the existence or non-existence of investigations,”

SEC Spokesman Kevin Callahan said regarding the reported investigation of the funds.

The claimants in the case, which was first filed in November 2008, alleged fraud, fraudulent misrepresentations, negligent misrepresentation, breach of fiduciary duty, negligence, breach of contract, and violation of the Florida Securities and Investor Protection Act, among other rules.

The list of claimants include D. Theodore Berghorst, chairman and chief executive of Vector Securities LLC, a health care-focused merchant and investment banking firm; Berghorst Snowbird LLC; Berghorst 1998 Dynamic Trust and Vector Managed Holdings.

With the award decision, Citigroup will pay $6.4 million excluding interest to the claimants. Of that sum, Citigroup Global Markets will pay 75%, while Citigroup Alternative Investments will be responsible for the remaining 25%. The FINRA panel denied the claims related to the Florida statues, citing a lack of proof.

“We disagree with the decision,” Citi Spokesman Alexander Samuelson said.

Berghorst was not available for comment by press time.

Rich & Intelisano recently won a FINRA arbitration award which included $100,000 in punitive damages. The case is Stora, et al. v. Strasbourger, Pearson et al. (FINRA 09-01769). We represented a group of investors who were defrauded by a broker dealer and its registered representatives. Matthew Woodruff of our office tried the matter which included five hearing sessions. The panel awarded the claimants $373,968 in compensatory damages, plus interest. The award is significant because pursuant to the Mastrobuono Supreme Court decision, the panel awarded claimants $100,000 in punitive damages, a rarity in securities arbitrations.

Below is a New York Times piece about the Firm's $20.6 million arbitration award against Goldman Sachs being upheld by Judge Rakoff in a sternly written opinion.

DealBook - A Financial News Service of The New York Times
November 30, 2010, 6:16 pm
Goldman's $20 Million Consequence
By SUSANNE CRAIG

Goldman Sachs made its bed. Now Judge Jed S. Rakoff says the Wall Street firm has got to lie in it.

In 2008, Goldman chose to fight a case in arbitration rather than court. On Tuesday, in a sharply worded attack on the system, Judge Rakoff of the United States District Court in Manhattan said that Goldman would have to live with the findings of the arbitration panel. In this instance, those consequences could amount more than $20 million.

"Although arbitration is touted as a quick and cheap alternative to litigation, experience suggests that it can be slow and expensive. But it does have these `advantages'; unlike courts, arbitrators do not have to give reasons for their decisions, and their decisions are essentially unappealable." Judge Rakoff wrote in his opinion. Goldman "having voluntarily chosen to avail itself of this wondrous alternative to the rule of reason, must suffer the consequences."

The case stems from the collapse of the Bayou Group, whose former chief executive, Samuel Israel III, is now serving 20 years for fraud. Goldman cleared trades for the hedge fund for years. In 2008, unsecured creditors of Connecticut-based Bayou filed a claim against Goldman, arguing the firm ignored signs of wrongdoing at Bayou.

Under the terms of its contract with Bayou, Goldman could have applied to fight the case in bankruptcy court. But instead the firm opted for arbitration.

"Both sides could theoretically have agreed to waive the arbitration clause and litigate in court, but either could have insisted on arbitration," says a Goldman spokesman, who declined to comment on the decision.

That strategy didn't pan out. Earlier this year, a three-person Financial Industry Regulatory Authority panel ordered the firm to pay $20.6 million to the unsecured creditors of the Bayou Group.

But Goldman wasn't happy with the findings, and in July it moved to vacate the arbitration award - the largest ever levied against the firm. In taking the matter to court, the firm argued the panel had "manifestly disregarded the law" and exceeded its authority under the Federal Arbitration Act.

In early November, Judge Rakoff denied the request. On Tuesday, he expounded on the matter in a 13-page opinion, taking jabs at both arbitration and Goldman. Judge Rakoff, known for his sharp wit and blunt talk in big Wall Street cases wrote, "a court, unlike an arbitrator, must state its reasons and subject them to appellate scrutiny."

The firm is not out of options yet. It can appeal Judge Rakoff's decision to the Second Circuit Court of Appeals.

If ultimately upheld, the Bayou award could have ramifications across the financial sector. Wall Street firms, which handle billions of dollars in transactions, say that their job is to clear trades, not police clients. This award could raise the standard for clearing businesses.

John G. Rich, a partner at New York law firm Rich & Intelisano who represented the Bayou creditors, said, "The Bayou investors are gratified that the judge gave proper deference to the arbitrators' findings about Goldman's conduct."

New York Super Lawyers, a publication of The New York Times Magazine, has named Ross B. Intelisano as one of New York’s top Securities Litigation attorneys in their 2010 publication. The list of Super Lawyers recognizes lawyers from more than 70 practice areas who have attained a high degree of peer recognition and professional achievement in their respective fields. Super Lawyers' selection process is a vigorous multi-phase rating process based on peer nominations and evaluations, combined with third-party research. Their selection process has been recognized by bar associations and courts across the country.

Ross Intelisano is the only attorney on the 2010 New York Super Lawyers top Securities Litigation list who primarily represents institutional and individual investors in securities arbitration.

Today, the SEC charged Morgan Keegan & Company, Morgan Asset Management and two employees with fraudulently overstating the value of securities backed by subprime mortgages. These are the first federal government allegations related to the Regions Morgan Keegan bond funds which lost significant value in 2008. The serious charges come on the heels of a string of recent FINRA arbitration multi-million dollar awards against Morgan Keegan related to the funds.

Morgan Keegan is the subject of numerous arbitration cases relating to over $2 billion of losses in RMK proprietary bond mutual funds managed by James Kelsoe and decimated due to allegedly risky investments. Kelsoe was charged by the SEC. Many law firms around the U.S., including our firm, have been retained by investors who lost money in the Regions Morgan Keegan funds.

It will be interesting to see how the SEC allegations effect the firms’ litigation strategy of trying most of the arbitration claims to award. Here is the text of the SEC release.

Continue reading "SEC Charges Morgan Keegan with Fraud Related to Bond Funds" »

4,991securities arbitration cases have been filed at FINRA this year as of the end of August 2009. That is a 65% increase from 2008. Based upon our firm's case log and speaking with other attorneys who represent investors in securities arbitrations, I expect the numbers to increase even more by year end. The dramatic drop in the securities markets in 2008 and 2009 exposed some dubious behavior, including the misrepresentation of bond funds as low risk (ie Morgan Keegan, Citigroup MAT and Falcon, Schwab Yield Plus). Also, structured products, such as the Lehman Brothers Structured Notes sold by UBS, were pitched as safe alternatives to bonds and imploded causing many arbitration claims. The increase in case filings in 2008 and 2009 is the first big spike in filings since the 2001 through 2003 time period after the tech market collapsed. New case filings reached almost 9,000 in 2003. Many inexperienced attorneys jumped into the securities arbitration practice area after the tech bubble and got clobbered by savvy defense counsel. With the Madoff and Stanford scandals generating so much attention to the investment fraud area, we'll see if it happens again in this cycle.

Securities arbitration attorneys seem to be everywhere. Since the market collapse last October and the high profile securities frauds committed by Bernie Madoff and Allen Stanford, the ranks of attorneys who represent investors has grown significantly. As other litigation areas have struggled in this new economic climate, securities fraud is alive and kicking. Many litigators who have little experience in securities fraud arbitration and litigation are now holding themselves as experts in the space. Be wary.

Representing investors who have been defrauded by brokerage firms, investment advisors, banks, hedge funds and trust companies is a very specialized practice area. Investors searching for counsel should ensure that any securities attorney they hire has been through the wars with the investment industry. Significant securities cases are often defended by the large Wall Street law firms. A neophyte will be exposed.

How does one find an experienced securities attorney? A good place to start is PIABA – the Public Investors Arbitration Bar Association (piaba.org). PIABA is a national organization of attorneys who represent investors in arbitration proceedings against Wall Street firms. The PIABA site has a listing of attorneys by state who handle these matters. Speak to multiple attorneys before you hire one. After being taking advantage of once by the investment industry, make sure you’re not making mistake number two. Hire attorneys who practice securities law for a living.

Investors who file securities arbitrations received a quiet victory at the end of May. FINRA, the Financial Industry Regulatory Authority, quietly withdrew a proposal to the discovery rules in securities arbitrations that would have obliged investors to disclose even more of their financial histories than the present rules provide.

FINRA's proposal was filed with the SEC in March and intended to increase the responsibilities of investors who file customer arbitrations to produce, among other things, complete tax returns (instead of certain pages and schedules) for five years prior to the first transaction identified in the statement of claim (instead of three years).

The SEC received more than 50 comment letters about the proposal, mostly from attorneys who represent investors who objected. FINRA filed a two-page notice with the SEC, withdrawing the rule proposal, on May 21.

It’s good to see FINRA admitting it made a mistake and withdrawing the proposal.