May 22, 2015

FINRA’s Regulatory Arm Announces Strengthening of Sanction Guidelines for Fraudulent Conduct by Brokers

In a move intended to emphasize that FINRA’s ultimate mandate is to protect investors, the SRO’s National Adjudicatory Council last week issued newly-revised Sanction Guidelines including tougher ranges of recommended punishments to be meted out against member firms or brokers who commit fraud or make unsuitable recommendations to customers.

Since 1993, FINRA has maintained and published “Sanction Guidelines” setting forth common securities rule violations and the range of disciplinary actions FINRA can issue for such violations, including monetary fines as well as suspensions, bars from the industry and other sanctions.

Specifically, the revised Guidelines, announced in Regulatory Notice 15-15 available on FINRA’s website at, contain revisions to the Sanctions relating to two specific areas: (i) fraud, misrepresentations or material omissions of fact; and (ii) suitability and the making of unsuitable recommendations to investing customers. According to the Notice, the ramped-up sanctions are meant to reinforce that fraudulent conduct is unacceptable, and that FINRA adjudicators on the Regulatory side should consider strong sanctions for such conduct, including barring or expelling repeat offenders, particularly where aggravating factors outweigh mitigating ones. With regard to unsuitability, the heightened punishments include an increase in the high-end range of suspensions from one year to two, as well as recommending bars, suspensions or expulsions for the most egregious recidivists.

Although the Sanction Guidelines aren’t directly applicable to claims made by investors in FINRA arbitration proceedings, it’s reassuring to see that the Regulatory side at FINRA is taking these steps to increase sanctions specifically for bad acts directed at the investing public.

March 5, 2015

Morgan Stanley Likely Will Face Lawsuit by New York Attorney General Related to its Mortgage Bonds; Reaches Agreement to Settle Federal Mortgage Claims

Reuters reports that Morgan Stanley’s annual 10-K, filed March 2, 2015, indicates that the New York Attorney General intends to file a lawsuit related to 30 subprime securitizations sponsored by the company. This follows lawsuits and similar allegations by attorneys general in California, Virginia and Illinois. The New York Attorney General indicated that the lawsuit would allege that Morgan Stanley misrepresented or omitted material information related to the due diligence, underwriting and valuation of loans and properties. In the 10-K, Morgan Stanley stated that it does not agree with the allegations.

Morgan Stanley also reached a $2.6 billion agreement in principle last month with the U.S. Department of Justice and the U.S. Attorney’s Office for the Northern District of California to resolve claims related to what it called “residential mortgage matters.”

It remains to be seen whether investors will reap any of the benefits of these government actions seeking to mend the damage done by the subprime mortgage crisis and the proliferation of mortgage-backed securities (MBS), residential mortgage backed securities (RMBS), and collateralized debt obligations (CDOs).

Rich Intelisano & Katz LLP represents investors with claims related to the purchase of mortgage bonds, MBS, RMBS, and CDOs.

February 19, 2015

Securities Arbitration Award Against Merrill Lynch Upheld

This week, the New Jersey Supreme Court denied the appeal of an arbitration award against Merrill Lynch by the Associated Humane Societies Inc. of Tinton Falls, N.J. In the original FINRA arbitration, the society alleged that certain of its investments were improper, it improperly sustained penalties and other charges when the investments were liquidated, its accounts were improperly managed and churned, and it was overcharged for management of its accounts. The society sought $10 million in punitive damages, $872,171 in compensatory damages and $544,299 in attorneys’ fees. After an 18-day hearing, the FINRA panel found in favor of the society, but awarded it only $168,103 in compensatory damages and $126,077 in punitives.

The society appealed. A 3-judge appellate division panel upheld the award in October, finding that the FINRA panel did not abuse its discretion. Associated Humane Societies, Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., No. L-4376-13 (Oct. 29, 2014). The New Jersey Supreme Court denied any further appeal on Feb. 17, 2015.

Though the society was ultimately disappointed with the size of the award, the decision shows the reluctance of courts to disturb FINRA arbitration awards.

Rich Intelisano & Katz LLP represents non-profit entities as well as other investors in securities arbitrations.

February 19, 2015

Brokers Must Consider New Market Realities When Determining the Suitability of Asset Allocation for Young Investors

Does the conventional wisdom regarding asset allocation hold up in today’s economy? The New York Times recently featured an article suggesting that a portfolio teeming with risky stocks, derivatives, and other exotic investments may, in fact, not be suitable for even young investors. The Times points out that these young investors experience higher rates of unemployment and are more likely to cash out their 401(k)’s and other investments when they switch jobs. An appropriate suitability analysis under FINRA Rule 2111 would take these factors into account. It is highly likely that many brokers are still using a one-size-fits-all asset allocation formula for their young customers.

Investors may have a variety of claims against such brokers who fail to take into account current market conditions, including unsuitable investment advice, fraudulent misrepresentations and omissions, and failure to supervise.

February 6, 2015

Rich, Intelisano & Katz Opens LA Office

Rich, Intelisano and Katz is proud to announce the opening of our new office in Los Angeles. The California practice will be headed by our new partner Scott Rahn, a former partner at Greenberg Traurig in LA. Scott's bio is here:

We look forward to working with Scott in California and to continue representing investors and employees from around the world in disputes with the financial industry.

July 13, 2011

Securities Fraud Tweets

Recent Securities Fraud tweets by Ross Intelisano:

FT: Investigators listened in on almost 100 clients of Primary Global. Buyer (and Seller) Beware. · reply · retweet · favorite

MBIA Drops Merrill Fraud Case.Hard to tell if ML settled with dollars or MBIA forced to just withdraw.Bad news if latter 2 hours ago · reply · retweet · favorite

Lattman on SEC Examining Fletcher Fund. Bayou started same way. Huge red flags of potential fraud. Freeze those assets. 2 hours ago · reply · retweet · favorite

Schneiderman questioning BofA settlement. Begs question why GS and others would settle at 5 cents. Seems odd. 2 hours ago · reply · retweet · favorite

Feds charge 3 CEOs with penny-stock fraud. What is this 1998? Can't believe still happens. via @forbes

Deutsche fires big trader after "substantial trading anomalies" in huge CDS portfolio. Expect more of these via @reuters

May 16, 2011

Reuters Quote by Ross Intelisano on Securities Fraud

Below is an interesting Reuters piece by Matt Goldstein which quotes Ross Intelisano regarding securities fraud and Ponzi schemes.

Special Report: A fame-seeking Philly trader's rap falls flat
Thu, May 12 2011

By Matthew Goldstein

NEW YORK (Reuters) - Tyrone L. Gilliams Jr., a commodities trader, part-time online preacher and hip hop event promoter, is not one for understatement.

In a promotional video for a celebrity-studded charity event last December -- among the headliners was rapper Sean "Diddy" Combs -- Gilliams mugs for the camera. Posing with stacks of money on his lap, he bills himself as a mogul, a philanthropist and a self-starter.

But now one of his investors is crying foul, suing the Camden, New Jersey, native and Ivy League graduate for fraud.

David Parlin, a businessman from Cincinnati, Ohio, claims Gilliams misappropriated much of his private foundation's $4 million investment and used the money to pay for trips to the Bahamas, outings at Miami nightclubs and shopping sprees at Saks Fifth Avenue and a Cherry Hill, New Jersey Mercedes Benz dealership.

On its face, the investment venture that Parlin sunk some of his foundation's money into seems dubious. He was promised, according to court papers, a five percent a week return -- the kind of performance that would make even Ponzi king Bernard Madoff blush. And it was an investment strategy using U.S. Treasuries, where the current yield on a 10-year T-bill is 3.2 percent.

Worse, Parlin says he didn't even know the money had been passed on to Gilliams to manage until shortly before he filed the lawsuit. He's also suing New York financier Vassilis Morfopoulos, who transferred the foundation's money to Gilliams.


It appears Parlin's due diligence was not complete.

But some securities experts are not surprised. Nearly two-and-a-half years after Madoff's decades long investment fraud came to light and prosecutors charged Allen Stanford with running a $7 billion Ponzi scheme, there has hardly been a pause in the number of new dubious investment schemes. Unfortunately, yield-hungry investors have been slow to grasp that if an investment opportunity sounds too good to be true -- it probably is.

Last year, for instance, the Securities and Exchange Commission brought 47 enforcement actions against the architects of apparent Ponzi schemes. That's just seven fewer than securities regulators filed in 2009. And tips about new investment schemes keep coming to the SEC on a regular basis.

"Every day we see tips alleging Ponzi schemes," says Thomas Sporkin, who oversees the SEC's new market intelligence unit, which is responsible for vetting and filtering the more than 30,000 tips securities regulators get each year from the public. "Unfortunately, investment schemes appear just as prevalent as ever."

Tuesday, SEC Chairman Mary Schapiro, in testimony on Capitol Hill, told the House Oversight and Government Reform Committee that "fraudulent investment schemes disguised as investment opportunities" accounted for 22 percent of the agency's enforcement actions in 2010.

Indeed, securities experts say each year individual investors -- even sophisticated ones who should seemingly know better -- lose hundreds of millions of dollars to financial charlatans. But many under-the-radar scams tend to get overlooked by regulators and short-shrift from the financial media because the dollars involved are relatively small and the alleged scamsters don't work for big Wall Street banks like Goldman Sachs Group or JP Morgan Chase.

"You hear more about the bank cases because there is often a big pot of money at the end of the day," said Ross Intelisano, a New York securities attorney with Rich & Intelisano. "But I get called on these small scams all the time. But sometimes they are even too small for us to get involved."

It's too soon to say how the Parlin case will play out. Parlin, who made his fortune from founding a Midwestern-based company that refurbished automated teller machines company called The ATM Exchange, has had at least one discussion about his 2010 investment with agents in the Cincinnati office of the Federal Bureau of Investigation, according to a court filing.


For his part, Gilliams, who did not respond to repeated requests by Reuters for comment and does not appear to have retained a lawyer, is keeping an uncharacteristic low profile. Earlier this year, he suddenly abandoned a small office he had in downtown Philadelphia, skipping out on the rent, according to court records.

The official headquarters for his TL Gilliams LLC trading firm, which claims to have offices in two dozen locations around the globe, is a so-called virtual office located in a building in a Philadelphia suburb. Mail is collected for Gilliams at the location and a receptionist takes phone messages. But a person familiar with the facility says the trader rarely shows up in person.

Beyond Gilliams, the litigation and interviews by Reuters also reveals an array of middleman and unregistered investment advisers, each of whom may have played a part in the investment venture. For instance, Morfopoulos, the New York financier who invested Parlin's money with Gilliams, has his own questionable track record. In 2005, he was sued by the federal government for failing to pay nearly a quarter of a million dollars in back taxes.

Christopher Chang, the lawyer for Morfopoulos, says his client was duped just like Parlin and "denies any participation in the fraud perpetrated by Tyrone Gilliams." Chang adds that his client intends to fully cooperate with Parlin in helping him get his money back.

Laura Keller, a San Francisco financial consultant, said she recommended Gilliams to Morfopoulos and another Bay Area investor group based on a recommendation she'd got from Blackhawk Wealth Solutions, a San Diego-based investment advisory firm. Phone calls and emails to Blackhawk executives weren't returned.

Says Keller: "Proper questioning and trust and prior working experience and their vetting made the referral strong."

Other middlemen who may have been involved in the deal, according to court records and interviews, were Brett Smith, also named as a defendant in the lawsuit, and Santiago Delgado of Global Fortress Inc. based in West Palm Beach, Fla.


Some of the allegations of profligate spending outlined in Parlin's lawsuit filed in Manhattan federal court would seem to dovetail with images of Gilliams' over-the-top lifestyle, which were captured last year in a series of videos he had posted online under the banner "TLG TV." (

Gilliams, who graduated from the University of Pennsylvania in 1990 and was a standout basketball player for the Ivy League school's team, hired a team of professional videographers to follow him around. He appears to have been trying to position himself as some sort of high-living Internet reality TV star who made a fortune trading oil, gold, diamonds and sugar.

His TLG TV was something like an online version of "Keeping up with the Kardashians," the reality TV show about a celebrity family that parties hard for the cameras, crossed with "Trading Places," the 1983 hit movie about Philadelphia commodities traders starring Eddie Murphy and Dan Aykroyd. In one online video, Gilliams brags that he will get Kim Kardashian, the reality show's star, to walk the red carpet at the charity gala held at Philadelphia's Ritz-Carlton Hotel. (

Kardashian was a no-show at Gilliams' "Joy to the World Fest" event. Aside from Combs, other celebrities who did turn out included actor Lance Gross and Sheree Whitfield, from "The Real Housewives of Atlanta," another reality TV show. Also attending the gala were local politicians such as Pennsylvania State Senator Anthony Williams and Chaka Fattah, a Democratic congressman from Philadelphia. Tickets for the events sold for between $250 and $1,200.

But in the wake of Parlin's lawsuit a number of people who worked with Gilliams in arranging the event are distancing themselves from the trader. Privately some now say they question just how much money was raised for charity from the gala and how Gilliams got the start-up money to organize the event.

These people say Gilliams often arrived at a nightclub surrounded by a bevy of armed security guards, or showed up at some luxury car dealer and put down a deposit on an Aston Martin.

"I saw a lot of money going out but not much money coming in," said Tim Fontaine, a videographer and producer with The Artist Warehouse in Chester, Pennsylvania, who was hired by Gilliams to produce the "TLG TV" online videos. "I have footage where I see him blow $70,000 on drinks. The idea was to party with the rich and famous ... and to see the world through Gilliams' eyes."

A representative for Combs declined to comment. But the weekend of the event, Combs also was in Philadelphia for the grand opening of a new nightclub called Vault. More than two decades ago, Gilliams and Combs were part of a group of investors in a failed venture to represent professional athletes called Bad Boys Sportz. But the men are not reported to be close friends.

There are just as many unanswered questions surrounding Gilliams' commodities trading business.

The website for his firm, TL Gilliams LLC, ( says the trader works with a "team" to analyze deals but offers few details. Neither Gilliams nor his firm are registered with the Financial Industry Regulatory Authority or the National Futures Association. On the website, Gilliams says he expects to become an owner of a "major refinery in Brazil."


The litigation involving Parlin is not the first time Gilliams' trading business has sparked controversy.

A year ago, Gilliams teamed up with a group of investors that tried to acquire $10 million in assets from a bankrupt coal mining operation in Utah. But the deal was scuttled when "T.L. Gilliams surreptitiously withdrew $10 million that had been deposited in the bank account" of the company the parties formed to buy the mining assets, according to court papers filed by lawyers for Kenneth Rushton, the trustee in the U.S. bankruptcy case for C.W. Mining Company.

In advance of the sale, the $10 million had apparently been deposited in the bank account by Gilliams' firm, though it is not clear exactly whose money it was. The court record is not clear on why the money was withdrawn or what happened to it.

A few weeks before the sale was scheduled to take place, a U.S. bankruptcy judge held a hearing to determine whether Gilliams' group had the financing to complete the transaction. During that proceeding, Joseph Giordano, who at the time was a principal with Fieldstone, a small New York investment firm, testified that he and Gilliams had worked together for "multiple years" on various transactions. Giordano also told the court he and Gilliams "co-manage" a trading account that "has approximately $400 million in it."

It's not clear, however, if such an account even exists.

Giordano, who no longer works for Fieldstone, could not be reached for comment. The only registered fund that Giordano is listed as having managed is the Fieldstone Value Partners Fund, which as of four years ago had raised less than $1 million.

Parlin's lawsuit claims that Gilliams transferred $450,000 of his $4 million to a bank account held in the name of Fieldstone Value Partners Fund. Parlin says the money transfer "appears to have been part of a Ponzi scheme orchestrated by Gilliams."

Officials with Fieldstone did not respond to a request for comment.

Neither Parlin nor his lawyer Louis Craco will comment on the litigation. But court papers reveal that in January, Parlin began demanding that Morfopoulos return his $4 million because the Cincinnati businessman had not received any of the promised returns on his investment. It wasn't until mid-March that Parlin says he ultimately learned that Morfopoulos had inked a deal behind his back with Gilliams to manage the money.

On April 13, Parlin filed suit in Manhattan federal court against Gilliams and Morfopoulos, claiming they had defrauded him and that Gilliams misappropriated his money.

As it happened, just a few weeks before Parlin learned of Gilliams involvement, the Philadelphia trader was planning to raise money for new investment vehicle. On February 28, Gilliams filed a registration statement with the SEC for the "Black Fox Fund" -- a planned $20 million stock-focused fund.

(Reporting by Matthew Goldstein; Editing by Jim Impoco and Claudia Parsons)

April 11, 2011

FINRA Fines UBS for Principal Protected Notes

FINRA fined UBS Financial Services, Inc. $2.5 million, and required it to pay $8.25 million in restitution for omissions and misleading statements made regarding the "principal protection" feature of Lehman Brothers100% Principal-Protection Notes (PPNs).

Our firm is presently representing investors of the Lehman PPNs against UBS in arbitrations at FINRA. It's good to see FINRA stepping up and fining UBS in this matter. It'll be a battle in the many pending arbitrations against UBS for investors to enter the fine into evidence as an indication of wrongdoing by UBS.

According the FINRA press release, UBS had described the structured notes as principal-protected investments and failed to emphasize they were unsecured obligations of Lehman Brothers, which eventually filed for bankruptcy in September 2008.

FINRA found that UBS:

* failed to emphasize adequately to some investors that the principal protection feature of the Lehman-issued PPNs was subject to issuer credit risk;
* did not properly advise UBS financial advisors of the potential effect of the widening of credit default swap spreads on Lehman's financial strength, or provide them with proper guidance on the use of that information with clients;
* failed to establish an adequate supervisory system for the sale of the Lehman-issued PPNs, and failed to provide sufficient training and written supervisory policies and procedures;
* did not adequately analyze the suitability of sales of the Lehman-issued PPNs to certain UBS customers;
* created and used advertising materials that had the effect of misleading some customers about specific characteristics of PPNs

Here is the link to the release.

December 10, 2010

CNBC Guest Blog: Madoff Two Years Later - It'll Never Be the Same

Below is a CNBC guest blog by Ross Intelisano on the two year anniversary of Madoff's arrest.

Madoff Two Years Later - It'll Never Be the Same
by Ross B. Intelisano - Rich & Intelisano, LLP

December 11, 2008 started like a typical year-end work day. Then the phone rang with a hysterical retired widow screaming and crying that she had just lost almost all of her money investing with Bernie Madoff. That might seem strange to many, but we receive calls like this all of the time. Our law firm represents investors who've been defrauded by Wall Street. But the phone kept ringing, all day, every day, from December through February. And the numbers were staggering; tens or even hundreds of millions of dollars lost. Generations of wealth were completely wiped out. We knew immediately. This was going to be the largest fraud ever, and by a long shot. And it was. $18 billion. Almost ten times larger than any other Ponzi scheme.

It became clear very early that the direct Madoff investors were doomed. SIPC would provide it's limited coverage and hopefully litigation would scrape some money back. But that didn't stop direct Madoff investors from calling. For about four hours every day we heard the most awful financial stories: sick seniors with no money for medicine, retirees who were now refugees. Although we knew we couldn't help these people legally, we spent three months providing emotional support to investors, some of whom were friends of friends, parents of colleagues, and even my wife's middle school teacher's family. It was the most torturous time of my professional career.

Prior to Madoff, when I told people what I did for a living, I often heard responses like, "Really? There's fraud on Wall Street." Since Madoff, it's been "You must be really busy." Uh, yes.

Unbeknownst to many people, most Madoff investors were not directly invested with Madoff but were indirect investors; those who got to Madoff through feeder funds often recommended by third party advisors. Many of the indirect Madoff investors had no idea that there money ended up in a Madoff feeder fund. These are the most tragic stories, often including people of modest wealth who lost most of their savings. There has been substantial backlash levied against direct investors alleging greed, ignorance and worse. But the unsuspecting indirect Madoff investors hired investment professionals to look after them. Some of these advisors did whatever they could to direct client money to Madoff feeder funds and represented that it was appropriate for clients' safety needs. There lies the greed. When Madoff blew up, the advisors shrugged their shoulders and cried, "how was I supposed to know?". That is as much a sham as Madoff himself.

Luckily, we've been able to help a bunch of indirect Madoff investors recover money from the few third party advisors who were financially viable even after Madoff exploded. Last week, almost two years to the date of Madoff's arrest, the retired widow called me crying again. We had just resolved her case against a third party advisor and it brought back all of her horrible memories of the winter of Bernie Madoff. She told me she still can't trust anyone. I understood. She said it will never be the same again. She's right. Though securities fraud will survive so long as there are brokers and customers, we will never see an $18 billion Ponzi scheme that destroyed so many families. Ever.

October 4, 2010

Ross Intelisano Named to 2010 New York Super Lawyers List

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.

April 20, 2010

RaceTrac Arbitration May Show ABACAS Investors’ Best Path to Recover Against Goldman

Investors who lost $1 billion in the Goldman Sachs structured ABACAS CDO were handed a strategic road map by the SEC when it filed the civil fraud complaint against Goldman on Friday. The alleged misrepresentation to ACA by Goldman that Paulson was long the equity tranches of ABACUS and the omission to disclose to ABACUS investors in writing and orally that Paulson handpicked securities in ABACUS while it was simultaneously shorting the same securities are the crux of a potential claim by ABACUS’ investors against Goldman. But what path should investors forge to recover their losses? Court or arbitration? The recent RaceTrac v. Bear Stearns arbitration award shows that a large investor can win a private arbitration against a significant brokerage firm related to misrepresentations and omissions of CDO’s regardless of the risk disclosure language contained in the prospectus.

Since the subprime market meltdown, only one multi billion dollar investor has received a legal award or judgment against brokerage firm for misrepresenting and materially omitting to disclose facts related to CDOs. RaceTrac Petroleum, an Atlanta-based chain of more than 525 retail gasoline convenience stores in the southeast U.S., won a $3.4 million award against Bear Stearns in December 2009. The FINRA arbitration panel ruled that Bear Stearns was liable for misrepresentation and material omission, negligence and failure to supervise related to the Bear Stearns High Grade Funds, a CDO packed hedge fund which caused $1.6 billion in losses in 2007.

The issues in the Goldman ABACUS case are very similar to the Bear Stearns High Grade case. Did Goldman misrepresent or omit disclosing a material fact to the ABACUS investors? Instead of filing a lengthy, costly, public civil lawsuit against Bear Stearns, RaceTrac filed an arbitration claim at FINRA in December 2007 seeking $5 million in damages. Federal prosecutors filed criminal charges against the funds’ portfolio managers, Ralph Cioffi and Matthew Tannin. In March 2009, on the eve of the arbitration hearings in Atlanta, the U.S. Attorneys’ Office in New York ran into federal court in Brooklyn to try to stop RaceTrac from going forward with the arbitration until the criminal trials of Cioffi and Tannin were completed. Judge Block shut the government down and allowed RaceTrac to proceed. A jury then acquitted Cioffi and Tannin of all criminal charges November 2009. However, after 16 days of private arbitration hearings, the FINRA arbitration panel ruled that Bear Stearns was liable and awarded damages of almost 70% of RaceTrac’s investment.

The RaceTrac case took only two years and was won irrespective of the criminal acquittals. There are pending SEC actions against Cioffi and Tannin. The award shows that a large investor may want to choose a quiet, less expensive venue in which equity plays a role as opposed to a civil fraud complaint in court which is exposed to motions to dismiss and will be a three ring circus.

April 16, 2010

ABACUS Lawsuits Against Goldman Sachs Coming?

The investment world is buzzing about the SEC’s fraud allegations against Goldman Sachs for misrepresenting and omitting to disclose Paulson’s role in choosing RMBS securities for the ABACUS CDO and then shorting the same individual RMBS through CDS transactions with Goldman. According to the SEC, “investors in the liabilities of ABACUS are alleged to have lost more than $1 billion.” It is hard to tell whether direct investors in ABACUS lost $1 billion or whether that includes companies which had CDS risk exposure to it. Either way, what are the money losers going to do about it?

According to the SEC complaint, IKB, the German commercial bank, bought $150 million of Class A-1 and Class A-2 Notes which seem to look like the AAA-rated upper tranches of ABACUS. But there is no other disclosure of who else bought ABACUS from Goldman. I presume that IKB was very cooperative with the SEC and allowed its name to be used in the complaint as opposed to being dubbed “Investor #1". IKB has likely been negotiating with Goldman behind the scenes. I expect to see a civil complaint filed by IKB against Goldman in federal court in New York shortly. However, they are probably better off arbitrating the dispute for numerous reasons (privacy, low cost, limited dispositive motion practice, etc.).

The SEC complaint also explains how a division of ACA, the monoline insurance company, served as the “Portfolio Selection Agent” for ABACUS, and another division of ACA (ACA Capital) also sold protection on $909 million of the super senior tranche of ABACUS through credit default swaps as well. ABN AMRO, the European bank, then assumed that same exposure through CDS deals with Goldman and ACA. The complaint alleges Goldman defrauded IKB, ACA and ABN AMRO. ABN AMRO was bought by the Royal Bank of Scotland and after ABACUS went to almost zero, RBS paid Goldman $841 million, most of which was then paid by Goldman to Paulson due to Paulson’s short bets on the underlying tranches. Got that?

So, RBS is holding the potential claims against Goldman (and Paulson?) for $841 million. Very interesting to see if RBS sues either of them.

But what about the rest of the ABACUS investors? According to the Flip Book available on Reuters’ website, ABACUS was a $2 billion synthetic CDO. Who else bought it besides IKB? And what are these investors going to do once they’ve read the SEC complaint? I have a guess or two.

By the way, Goldman netted $15-20 million for structuring and marketing ABACUS. Amazingly, Paulson paid Goldman $15 million to allow it to help pick the RMBS for ABACUS. This is a killer fact for the SEC.

April 16, 2010

Goldman Sachs Charged in ABACUS CDO Case By SEC

The SEC charged Goldman Sachs with defrauding investors of ABACUS 2007-AC1, a synthetic CDO created and sold by Goldman in early 2007 when the subprime world was reeling. Investors in ABACUS ultimately lost $1 billion.

The SEC's civil fraud complaint alleges that Goldman allowed the multi billion dollar hedge fund Paulson & Co. to help select RMBS (residential mortgage backed securities) for the Abacus CDO, knew that Paulson was concurrently shorting specific tranches of the CDO but did not disclose anything about Paulson to investors in the CDO offering documents or marketing materials.

This is a huge development in that it shows SEC has the fortitude to file actions against the biggest firm of all related to its failure to disclose material information to investors. Goldman will likely be the brunt of civil lawsuits or arbitrations related to the ABACUS CDO. The next question is whether the SEC will file claims against Paulson as well.

CDOs and synthetic CDOs are extremely complex investments which are at the heart of the Bear Stearns High Grade Funds cases our firm is handling.

May 15, 2009

Securities Arbitration Filings Surge

Securities arbitration cases are being filed at a much greater pace so far in 2009 than they were in 2007 and 2008. FINRA, the Financial Industry Regulatory Authority, which administers most of the securities arbitrations filed in the U.S., released its case filing statistics as of April 2009.

According to FINRA’s website, there were 2,403 securities arbitration cases filed at FINRA so far this year. That’s an 81% increase over the same time period in 2008. This news is not surprising. Since the market decline in October 2008 and the exposure of the Bernie Madoff and Allen Stanford scandals, securities fraud has become a hot topic. Many investors who may not have known they have potential remedies for abuses in the securities, commodities and hedge fund world, have since reached out to securities attorneys to determine whether they have a case.

Based upon our firm’s increased caseload and anecdotal evidence from other practitioners in this niche market, we expect FINRA case filing numbers to continue to grow, possibly to 2001 and 2002 levels. Unfortunately, due to the great media attention given to the Madoff affair, there are many attorneys now promoting themselves as experts in securities fraud. Investors who think they’ve been wronged should make sure they speak to attorneys who specialize in securities arbitration. Luckily, securities arbitration attorneys may handle cases nationally (and internationally) despite not being licensed in every state so there is a strong pool to choose from. PIABA, the Public Investors Arbitration Bar Association, is a great place to find a securities arbitration practitioner. Check out for more information. The FINRA statistics are available at

May 8, 2009

Lehman Structured Notes - A Global Problem with Potential U.S. Remedies

Lehman Brothers structured notes were sold worldwide by firms including UBS and Citigroup as a conservative investment. They turned out to be very risky and worthless. Investors around the globe are investigating what potential legal claims they may have, against whom and where. These issues need to be analyzed in detail.

According to a recent BusinessWeek article, a Lehman Brothers subsidiary in Amsterdam manufactured $30 billion in structured notes from 2003 through 2008. A structured note can be defined as a debt obligation which also contains an embedded derivative component with characteristics that may adjust to the security's risk-return profile. The performance of a structured note tracks that of the underlying debt obligation and the derivative embedded within it. Many of these notes are extremely complex and hard to understand by even institutional investors. The BusinessWeek article reports that “Lehman's Amsterdam notes were bafflingly complex. In all, the unit issued some 4,000 variations, and the documentation for each type often ran to 600 pages.”

International firms including UBS and Citigroup pitched these notes to investors as safe investments. However, they were extremely risky and became worthless when Lehman filed for bankruptcy. Attempting to recover one’s investment through any of the Lehman bankruptcy proceedings may prove difficult. However, investors in the U.S. and worldwide may have potential claims against the entities (such as UBS and Citigroup) which sold the Lehman notes. Our firm and others in the U.S. have already been retained by many investors. Investors outside the U.S. should investigate whether they can bring potential claims against any U.S. based broker-dealer or an affiliate of a U.S. based bank in the U.S. court system or in arbitration. Historically, international investors have been able to commence FINRA arbitrations against U.S. broker-dealers or affiliates of U.S. firms in New York for actions which took place abroad.

Here is the link to the very interesting BusinessWeek article by David Henry and Matthew Goldstein.

May 6, 2009

SEC Files Credit Default Swaps Insider Trading Case

The SEC filed the first case alleging insider trading in credit default swaps (CDS) yesterday. It’s likely the first of many. CDS’s are derivatives which are essentially a form of insurance against a bond default. The $38.6 trillion CDS market is rife with problems and was used to wildly speculate on prospects of companies.

The SEC brought the case in the U.S. District Court in the Southern District of New York. The complaint alleges that Jon-Paul Rorech, a 38-year-old salesman for Deutsche Bank AG, passed confidential information about the 2006 buyout of Dutch media company VNU NV to Renato Negrin, a 45-year-old former trader for the hedge fund Millennium Partners. The complaint also alleges that Mr. Rorech told Mr. Negrin about the new bond offering for VNU and when Mr. Negrin asked to handicap the likelihood of the deal, Mr. Rorech said, "You're listening to my silence, right?" The two men then had a three-minute cell phone call and ten days later after Mr. Negrin had bought €20 million of credit-default swaps on VNU, he had pocketed a cool €950,000, or $1.2 million. Not bad for a weeks work.

However, the interesting aspect of the SEC complaint is not that the alleged fraud took place in the CDS market, it is that there are still allegations of employees of banks providing selective information to hedge funds and other high priority clients prior to disseminating said information to the public. Despite the public outcry over the research analyst scandals in the early 2000's, banks continue to have two sets of playing rules: one for the big hitters and another for the little guys. Hopefully, the SEC’s new found set of sharp teeth will eventually even the playing field.

The case is Securities and Exchange Commission v. Jon-Paul Rorech, et. al., Civil Action No. 09 CV 4329- (JGK)(SDNY). The complaint is available on the SEC’s website.

March 13, 2007

Mortgage Securities Fraud? We Shall See

The stock market has been tumbling since announcements by HSBC and other banks that there is great concern about exposure to subprime mortgage defaults. Could this be the beginning of a potential giant mortgage securities fraud investigation? Maybe.

Subprime mortgages are loans given to potential home buyers who are not creditworthy or have almost no cash to put down as collateral. According to some reports, up to 35 percent of all mortgage securities issued in 2006 were of the subprime variety which to us seems very high.

These subprime mortgages are then packaged with investment grade mortgages and sold as securities by banks to investors. The loan originators, banks, attorneys and everyone else who is involved have been reaping huge returns in recent years on mortgage securities. However, owners of pooled mortgage securities only mark the securities to market when a rating agency changes its rating. There are whispers on the Street that institutional investors may be reporting inflated values for their pooled mortgage securities.

The risky mortgage bond market is in a free fall. New Century, a major subprime mortgage lender that does business with HSBC, Morgan Stanley, CitiGroup and Goldman Sachs is on the brink of bankruptcy, has all but been delisted by the NYSE and is being investigated by the SEC.

But where is the mortgage securities fraud you ask? If the underlying subprime mortgages that make up a tranche of a CDO or other mortgage backed security were issued in a fraudulent manner. And the banks and brokerage firms who sold the security to an institution did not do their due diligence on said loans when they were included in the pooled mortgage security. The banks and brokerage firms may be exposed to potential legal claims. We shall see how it all plays out.

March 9, 2007

Stockbroker Fraud in Trusts Can Be Caught By Trustees By Investigating

Trustees have fiduciary duties to trusts. When stockbroker fraud has potentially been committed in a trust, what should the trustee do? Investigate.

A trustee has the duty to investigate red flags of fraud or wrongdoing by stockbrokers and to pursue any legitimate claims for the trust's benefit. Failure to investigate may make the trustee liable to the trust's beneficiaries.

Trustees should review the brokerage statements and new account documents of the trust's brokerage account immediately. If the trustee does not have the expertise to decipher potential fraud, he should speak to an attorney who represents investors in securities fraud cases. If there's a claim, the trustee should commence an arbitration.

However, note that the brokerage firm may file a counterclaim against the trustee for failing to fulfill his fiduciary duty. We think these are meritless counterclaims because the brokerage firm does not have standing to assert them. Irrespective, the trustee will have to defend it.

Counsel should advise the trustee about the potential conflict of interest which may arise due to the counterclaim and create personal exposure for the trustee if he commences the arbitration on behalf of the trust. But the trustee would likely have greater exposure to liability to the beneficiaries if he doesn't commence a stockbroker fraud claim when a viable one exists.

March 3, 2007

Securities Fraud Charges Lodged By SEC Against UBS, Morgan Stanley and Bear Stearns Employees for Insider Trading

We thought huge, brazen insider trading cases went out with Gordon Gekko and Ivan Boesky in the eighties. Apparently not. The SEC charged 14 defendants with securities fraud in one of the boldest insider trading rings in recent years. A total of $15 million was misappropriated.

UBS, Morgan Stanley and a few hedge funds were front and center. Mitchel Guttenberg, an executive director of research at UBS, allegedly provided inside information about UBS research analysts changing opinions on stocks to a hedge fund manager named Erik Franklin. Not only did Franklin trade on the inside information since 2001, his broker buddies at Bear Stearns did too.

Meanwhile, at Morgan Stanley, a lawyer in the compliance department allegedly tipped off her attorney husband and a high school friend about impending mergers. They traded on the inside information and also tipped the same broker buddies at Bear Stearns. The SEC figured out the overlapping schemes because of unusual trading in Adobe, one of the stocks involved in a merger handled by Morgan.

Here are the relevant questions raised by these bold securities fraud schemes: does the actions of broker-dealer employees tipping hedge funds call for the SEC to regulate hedge funds? Or, is the SEC's regulation of the trading activities of counterparties (ie brokerage firms) which do business with hedge funds enough? We'll see what happens when more insider trading cases come to light.