Securities Fraud Attorney Blog

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 piaba.org for more information. The FINRA statistics are available at FINRA.org.

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. http://www.businessweek.com/magazine/content/09_20/b4131038438462.htm?chan=top+news_top+news+index+-+temp_top+story

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.

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.

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.

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.