Articles Posted in Securities Fraud

In a very high profile private share litigation, Theranos, a privately held health-technology and medical-laboratory-services company worth $9 billion as of 2014, has been sued this Monday by one of its largest and trusted financial backers, San Francisco hedge fund Partner Fund Management, LP (PFM).  It will be a widely watched, difficult case.

In its lawsuit in the Delaware Court of Chancery, PFM has accused Theranos Inc. and its founder Elizabeth Holmes of deceiving their fund to attract a $100 million in investment. PFM has sent a letter to investors accusing Theranos of “a series of lies, material misstatements, and omissions” and also “engaged in securities fraud and other violations by fraudulently inducing PFM to invest and maintain its investment in the company.” Furthermore, PFM makes the claim that Theranos intentionally lied about having developed “proprietary technologies” that would work and also lied about being in the process of receiving regulatory clearance and approval.

The Theranos case highlights the risks of even institutional investors like hedge funds investing in private companies. It is very difficult for investors to do proper due diligence on private companies. If things go poorly as they have here, a securities fraud case in Delaware court is challenging. There are strenuous pleading requirements and dispositive motion practice. Major investors are actually better off in arbitration where there are no pleading requirements and very limited dispositive motion practice. However, Theranos isn’t looking down a clear path to victory because the Securities and Exchange Commission is investigating the allegations that Theranos misled investors. The SEC has subpoenaed PFM in the case and PFM will likely be more than willing to cooperate with authorities.

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 www.finra.org, 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.

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).

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.

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.

Recent Securities Fraud tweets by Ross Intelisano:

FT: Investigators listened in on almost 100 clients of Primary Global. Buyer (and Seller) Beware. http://t.co/GRNEcNs · 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 http://t.co/kwPT9t8 2 hours ago · reply · retweet · favorite

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.

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.

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.