Investment Fraud Lawyer Blog

A FINRA arbitration panel awarded damages in excess of $5,052,500 against Neuberger Berman and it's broker Brian Hahn in connection with the sale of Lehman Brothers Structured Notes to three customers. The investors were represented by Block & Landsman and The Law Firm of Nicholas P. Iavarone.

In the summer of 2008, Neuberger Berman wealth manager Brian Hahn solicited the customers to invest in the comBATS and XLF Lehman Brothers Structured Notes. The customers were all told that the principle of the structured notes were either fully protected (the comBATS note) or partially protected (the XLF note). The Claimants alleged that neither Neuberger Berman or Brian Hahn adequately disclosed the fact that the investments were actually Lehman Brothers debt instruments and not investments the underlying combats and XLF products. When Lehman Brothers declared bankruptcy, the value of the structured notes became virtually worthless. One of the customers had also invested $1 million in Libertyview Credit Select, a Neuberger Berman fund that hypothecated its assets to Lehman Brothers.


The award represents 100% of the money our clients invested in the Lehman Brothers Structured Notes and in Libertyview Credit Select.

Contact Block & Landsman with any questions about the award or any questions about investments in Lehman Structured Notes.

Nearly 40,000 investors who lost $1.5 billion in fraudulent subprime mortgage-backed mutual funds were given a small boost in their claims for recovery as the parent company of investment banking firm Morgan Keegan & Co., Regions Financial Corp., agreed to pay $210 million to settle regulatory charges targeting its subprime mortgage mutual funds.

The Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA) and several state securities agencies brought charges against Morgan Keegan relating to its management of five fixed-income mutual funds that were loaded with subprime mortgages. The agencies accused the firm of manipulating the price of the funds as the underlying mortgages dropped in value, and then misrepresenting the true values of the securities. According to the director of the SEC's Division of Enforcement, "the falsification of fund values misrepresented critical information exactly when invsetors needed it most -- when the subprime mortgage meltdown was impacting the funds."

The investors who purchased these mutual funds will receive $200 million of the Morgan Keegan settlement. Investors who lost money in these investments, however, still have claims for more than $1 billion in losses, and continue to have the right to seek their own damages in individual arbitration claims they can file with FINRA. By consulting with an experienced investment fraud lawyer, investors can determine whether they have a claim for damages as a result of their investments with Morgan Keegan.

The law firm of Block & Landsman represents investors in arbitration and in lawsuits for fraud and breach of fiduciary duty arising out of investment losses. Contact one of the attorneys at Block & Landsman for a free consultation.

Block & Landsman joined other firms in filing a class action lawsuit against the Financial Industry Regulatory Authority (FINRA) seeking injunctive relief to stop the regulatory authority from violating the constitutional due process rights of registered representatives. Specifically, FINRA Rule 3010(b)(2), known as the Taping Rule, requires brokerage firms to establish special supervisory procedures, including the tape recording of broker conversations, when they employ more than a specified percentage of representatives who were previously employed by firms that have been expelled or had their registrations revoked for sales practice rule violations (referred to as "disciplined firms").

FINRA's Rule imposes a "guilt-by-association" standard by tainting brokers who worked for a disciplined firm even though the representatives had no involvement in any activity that led to the firm's expulsion or revocation. Even if the registered representatives worked left the firm before the misconduct occurred, they are nonetheless deemed to be "tainted." The special supervisory procedures required of firms that hire enough of these brokers are burdensome and expensive, and can be avoided only by reducing the number of so-called "tainted" brokers. Subsequent employers can avoid having to implement the procedures by reducing the number of affected brokers below a qualifying number.

As a result, brokers who are "tainted" face termination, or the inability to be hired, on the basis of nothing more than their past association with a prior disciplined firm. And FINRA provides no mechanism for a former broker of a disciplined firm to remove the "taint" arbitrarily imposed by FINRA's rule, thereby violating their due process rights and subjecting them to arbitrary termination.

Is punishment an acceptable replacement for reparation? Is it sufficient fidelity to the securities laws for participants in a fraud to be prosecuted but not held accountable to the victims of their criminal behavior? According to the U.S. Supreme Court, the unfortunate answer is yes.

In a 5-4 decision handed down on June 14, 2011, the Court held that mutual fund investors do not have a right of action under Rule 10b-5 to parties other than the issuer for fraudulent disclosures of risk. The decision does mean that the other participants have not committed securities law violations. Rather, it merely shields them from liability for their conduct. As a result, the victims of the misbehavior by non-issuing parties are foreclosed from seeking compensation for their losses even if the perpetrators admit that they engaged in misconduct.

In Janus Capital Group, Inc. v. First Derivative Traders, the Court narrowed the application of Rule 10b-5, which makes it illegal for "any person, directly or indirectly. . .[t]o make any untrue statement of material fact" in connection with the purchase or sale of a security. In that case, shareholders in a Janus mutual fund sued Janus Capital Management LLC, the management company for the fund, in connection with alleged fraudulent disclosures in the fund's prospectus. The plaintiffs alleged that the management company participated in the preparation of the misleading prospectus, and was liable for their losses resulting from the fraudulent disclosures. In an impressive display of linguistic gymnastics, the Court focused on the meaning of the phrase "make any untrue statement" in Rule 10b-5. Rejecting the arguments of the investors as well as the arguments of the SEC itself, the majority adopted a restrictive definition of the phrase, limiting its reach only to those who had ultimate legal control over the content of the prospectus. Because the management company did not "issue" the prospectus, it cannot be held liable for the investors' resulting damages, even if the management company drafted the misleading disclosure that appeared in the prospectus. While they may be guilty, they are not responsible.

The Court's decision does not exonerate the non-issuing participants, and it does not inhibit the SEC's ability to bring regulatory enforcement actions against them for their misconduct. Instead, the Janus ruling is just the latest in a string of opinions by the Court that impede the securities laws from protecting the very investors for whose benefit the laws were enacted.

Brokers at UBS Securities and Morgan Stanley are alleged to have overcharged Harris County more than $1 million in the sale of new bond issues between March and September 2010. According to an investigation by the Houston Chronicle, the brokers charged the County a premium above par value for newly issued bonds of federal agencies.

The size of the Harris County, Texas investment fund, reported to exceed $4 billion, allowed for large bond purchases that generated enormous commissions for the brokers. The typical commissions for such trades range between $250 to $350 per $1 million in bonds, earning a broker a $6,250 commission on a $25 million purchase. In contrast, by charging a premium above par for new bond issues, the UBS and Morgan Stanley brokers would generate a ten-fold commission of $62,500. In and of themselves, premiums above par for bonds are not unusual, for instance when purchasing a bond paying a higher interest rate than new bonds being issued. But paying such premiums on new bond issues is extremely rare.

Public investment funds, whether belonging to municipalities or public pension funds, are responsible for hundreds of billions of dollars of taxpayer money, and can be a prime target for a wide variety of investment fraud opportunities. The attorneys at Block & Landsman are experienced investment fraud lawyers who can investigate misconduct regarding the purchase and sale of securities.

A type of high risk investment product that imploded with the economic meltdown in the Fall of 2008, leading to investors' losses of hundreds of millions of dollars, continues to concern securities regulators. The Securities and Exchange Commission (SEC) has joined with the Financial Industry Regulatory Authority (FINRA) to issue a joint Investor Alert to warn investors about complex financial products known as "structured notes with principal protection." While the name of this security suggests safety, the structured notes present a variety of extreme risks to uninformed investors.

The notes combine a zero-coupon bond, which pays no interest until the bond matures, with an option or other derivative product whose payoff is linked to an underlying index, benchmark or other asset. These notes are designed to return some of all of an investor's money at a set maturity date (which can be as long as ten years) and offer a potential interest payment linked to a predetermined change in the value of the underlying asset.

There are many risky variations of both components that make up the structured note product. For example, although some notes return the entire amount of an investor's principal at maturity, many return less than 100 percent. Moreover, the principal guarantee -- that investors will receive all or some of their principal at maturity -- is entirely dependent on the creditworthiness of the securities firm that structures and issues the note. If the issuer goes bankrupt -- as was the case with Lehman Brothers, which issued large volumes of these type of notes -- investors have no protection and become unsecured creditors of the defunct firm.

The potential upside benefit of being able to participate in an increase in the underlying assets is similarly subject to signficant risks depending upon how the note is structured. As a result, the issuer can limit the amount of interest it owes investors even if the note reaches maturity. The upside potential is linked to the performance of the underlying assets, which are not limited to common benchmarks such as the S&P 500 or the price of a single commodity. Rather, exotic cominbations of assets such as spreads between interest rates or baskets combining unrelated asset types such as an index, a commodity and a currency, are often chosen as the meaure of interest the bond will ultimately pay above the return of principal. The issuer can select unfavorable formulas to calculate the gains or losses linked the the performance of the underlying asset, so-called "market-linked" returns, which can limit the extent to which investors are allowed to participate in the underlying asset's gains. Additionally, the issuer can determine that only a portion of the underlying asset's gain is credited to the note, which has the effect of restricting the interest paid to the investor at maturity.

The unlimited variations to the structure of these complex financial products makes it difficult for typical investors to assess the true risks and benefits of the notes. For this reason, the SEC and FINRA issued their Investor Alert and provided a series of questions that investors should ask their advisers who recommend structured notes with principal protection, such as: (a) what is the level of principal protection offered, (b) describe any conditions to the principal protection, (c) what are the fees and costs, (d) are there limits to potential gains in the underlying asset, (e) what is the credit risk of the issuer, (f) what other risks are associated with the product, and (g) what alternative investments are available.

Complex risks often hide behind the safe-sounding structured notes, and investors should be wary of recommendations to invest without obtaining direct and clear explanations. Any investor who has lost significant monies in these type of structured notes should consider consulting with an investment fraud lawyer to determine any liability on the part of the financial advisor recommending the security.

Public pension funds are under intense financial pressure because of concerns, real and imagined, about their potential inability to meet benefit payment obligations within a few years. Critics fling accusations that often appear more directed at assigning blame than in finding a remedy to relieve the concerns of the funds and, most importantly, the firefighters who benefit from the funds. Now, more than ever before, boards of trustees must evaluate all available options to discharge their fiduciary responsibility to protect public pension fund assets.

The good news, however, is that boards have concrete steps they can take to strengthen their funds' financial position by recovering investment losses caused by inappropriate investment strategies employed by outside investment advisers. Investment fraud by advisers is a scenario that has been all too common in recent years, and public pension funds are not immune from this danger. Between 2001 and 2009, aggrieved investors have filed, on average, nearly 6,500 securities arbitration claims per year against their brokers, a figure that increases by including investors who were able to pursue their claims in court rather than in arbitration. At any given time, pending arbitration disputes between investors and their advisers involve collective losses of more than one billion dollars. Public pension funds in Illinois, and across the country, have begun pursuing their own claims of investment fraud.

The Illinois Pension Code (the "Code") empowers trustees to invest fund assets in specific securities, and in allowable percentages, as defined by statute according to the size of the fund's net assets. Because investment decisions concerning these assets can be complex, the Code permits the board of any Article 3 or 4 pension fund to appoint an investment adviser for professional guidance. For funds seeking to invest in common or preferred stocks (available only to funds with net assets of at least $5 million), retention of an investment adviser is mandatory.

Pursuant to the Code, any investment adviser hired by a public pension fund is considered a fiduciary, imposing a heightened standard of care that requires the adviser to act in the best interests of the fund. The adviser must act only pursuant to a written contract with the board, and the contract must contain, among other things, an acknowledgement that the adviser is a fiduciary to the fund and will follow the board's investment policy which is based on the allowable investments identified in the Code.

Despite these statutory requirements, trustees, like any investor, can find themselves relying on the guidance of an investment adviser who provides inappropriate investment advice, and which results in significant investment losses. Where an investment adviser engages in wrongdoing that causes a fund to lose money, the trustees (who are themselves fiduciaries to their funds) may have a reason, and indeed an obligation, to investigate and pursue claims against the fund's adviser to recover those losses. Fortunately, the Code specifically provides the funds with a remedy for an adviser's misconduct. Section 114 provides that any fiduciary of a fund who breaches a fiduciary duty imposed by the Code "shall be" liable to a pension fund for any losses resulting from such breach. The Code also allows for additional remedies, including recapture of the adviser's profits and all other equitable or remedial relief that may be appropriate given the circumstances. Section 115 of the Code authorizes a board of trustees to bring an action against the investment adviser for such losses. Moreover, other statutory and common law causes of action exist to use for recover of these losses.

Understanding a fund's right to recover wrongfully caused investment losses, and deciding to act to protect those rights where appropriate, is becoming an urgent matter for public pension fund boards. Recent volatility in the securities markets has exposed the unsuitable nature of many investment strategies, but there are various time limitations that may be running which may restrict or eliminate a fund's ability to recover these losses if too much time passes before a claim is filed. Because the limitations periods which apply to any given investor depend on several factors, they should be discussed with an experienced attorney as soon as the board becomes concerned that investment losses may have resulted from inappropriate investments or strategies. Because trustees are themselves fiduciaries, and are required to act in the funds' best interests, they should not unduly delay their investigations into the causes of their investment losses.

Recovery of improperly caused investment losses can help strengthen the financial position of a public pension fund, and would allow the trustees to ultimately concentrate on the important tasks of caring for the health and well-being of the firefighters they serve.

Later this year, the Financial Industry Regulatory Authority ("FINRA") will put in effect new rules of conduct that narrow the gap between brokers' duties and investors' expectations of their brokers' responsibility.

Many investors would be surprised to learn that licensed brokers generally do not owe a duty to act in the best interests of their customers. Instead, the duty of a broker to a customer with a non-discretionary account has been much more limited: only to recommend investments that are suitable in light of their client's objectives, financial needs and circumstances. This is true even where customers place exclusive reliance on their brokers and always follow their recommendations.

The Securities and Exchange Commission has approved new FINRA Rule 2111, an updated version of the old NASD Rule 2310 (Suitability) requires brokers and their firms to "have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based o n the information obtained through the reasonable diligence of the member or associated person to ascertain the customer's investment profile."

FINRA's new Rule 2111 expands a broker's responsibility toward the customer. While not reaching the level of requiring brokers to act in their customers' best interests, the new standard is an improvement in the protection of investors because it will explicitly cover situations that industry members have historically opposed. Specifically, the new suitability standard will no longer apply only to recommendations concerning the purchase or sale of a security. Rather, it now applies also to the recommendation of investment strategies. Additionally, the new rule directly applies the suitability standard to a broker's recommendation to hold a security, rather than just to purchase or sell a security. This expansion nullifies years of denials by brokers and their firms that a recommendation to "hold" a security constitutes actionable behavior. It recognizes the reality that investors sometimes refrain from executing a transaction on the advice and recommendation of their adviser.

The rule further explains the three primary suitability obligations of a broker. First, a broker must make a reasonable-basis suitability determination, based on reasonable diligence, that the recommendation is suitable for at least some investors. What constitutes "reasonable diligence," however, is undefined, and depends on a variety of factors such as the complexity, the risks and the rewards associated with the security or the investment strategy. Second, assuming the recommendation is suitable for at least some investors, a broker must then make a customer-specific suitability determination to ensure that the recommendation is suitable for a particular customer based on his or her investment profile. Finally, where brokers exercise actual or de factor control over a customer's account, they must have a reasonable basis for believing that a series of recommended transactions, even if individually suitable, are not collectively unsuitable for the customer. Factors relevant to this determination are turnover ratio, cost-equity ratio and the existence of short-term trading.

The new rule is undoubtedly an improvement over the former suitability rule, and will benefit investors in their interactions with their brokers, and in customer arbitration claims where their brokers have violated the rules. The benefits of the revisions, however, are mitigated by the new rule's limitations. For example, the rule leaves much ambiguity regarding the precise contours of a broker's obligations. Additioally, the duty is only triggered by a "recommendation" of the broker, as opposed to an adviser acting under a fiduciary duty, who in required in all respects to provide guidance in the client's best interests. While the regulatory trends appear to favor protecting investors, much work still needs to be done, and investors must remain vigilant to ensure their advisers are recommending securities and investment strategies that are appropriate for their purposes.

Competing claims by customers of Securities America who lost $400 million in allegedly fraudulent securities in Medical Capital and Provident Royalties have finally been resolved. As followed in this blog, the proponents of a class action lawsuit against Securities America and its parent, Ameriprise Financial, sought to force investors who filed their own arbitration proceedings to abandon their own claims and compel them to participate in the class action settlement. The investors in arbitration successful argued for their right to pursue their own claims, and the judge overseeing the class action rejected the onerous settlement agreement.

This week, Securities America agreed to settle the class action claim and the individual arbitration proceedings for a total of $150 million. While that is certainly a significant settlement amount, it nonetheless still means that investors, who will recover slightly more than 30% of their losses, will have to bear the brunt of the MedCap and Provident losses. Given the fact that an investor won an award of $1.2 million against Securities America earlier this year -- an award that included punitive damages to punish the firm for its conduct -- it seems that Securities America secured a global settlement on favorable terms.

Investors who believe they have been defrauded by an investment advisor, or who believes they have suffered investment losses due to broker misconduct, should contact an investment fraud lawyer to investigate their right to recover damages.

Hardly a week goes by without a report that yet another financial institution has settled claims of selling improper investments to groups of investors, often including senior citizens. This week, the largest bank in Spain, Banco Santadar, is reported to have paid $7 million directly to investors and $2 million to the Financial Industry Regulatory Authority ("FINRA") to settle claims that it improper sold high-risk reverse convertibles to elderly, retired investors.

Reverse convertibles are risky, high yield, short-term bonds that automatically convert to the stock of an underlying company's shares if the company's share price rapidly declines. In 2010, banks sold nearly $7 billion worth of these securities to U.S. investors.

According to the allegations, Banco Santander brokers not only sold reverse convertibles to conservative investors, they sometimes recommended that customers use margin to purchase the securities, which had the effect of increasing the risk of significant losses.

Banco Santander is the most recent in a string of fines against banks for improperly selling reverse convertibles. Last year, a subsidiary of Royal Bank of Canada and a subsidiary of Ameriprise Financial were fined a total of $890,000 for similar practices.

Investors who have reverse convertible securities in their portfolios may want to consult with investment fraud lawyers to investigate whether they have a claim to recoup losses incurred by these investments.

Last week, a federal court rejected Securities America's attempt to force arbitration claimants to abandon their cases and require them to participate in a class action settlement that would allow defrauded investors to recover only one-eighth (1/8) of their $400 miilion in losses due to investments in Medical Capital Holdings, Inc. and Provident Royalties. Securities America's effort to extinguish investors' arbitration rights came on the heels of a customer's $1.2 million arbitration award, which included punitive damages, against the firm for allegedly fraudulent sales of Med Cap securities. Faced with the prospect of

Yesterday, Investment News reported that Securities America has now proposed a settlement of all of the individual investor arbitration claims by offering the claimants nearly 50% of their losses. This offer represents a significant increase from the last offer Securities America made before the federal court ruled last week.

While Securities America's proposal represents its attempt to manage its exposure by settling for a sum certain, the offer was reportedly extended only to investors with existing arbitration claims, and does not provide for claims that may yet be filed in the future.

Investors who have lost money in Med Cap and Provident investments and who believe they have claims agaisnt Securities America and its parent, Ameriprise Financial, should contact an investment fraud lawyer to investigate their claims.

Earlier this month, LPL Financial, LLC was fined $100,000 by the Financial Industry Regulatory Authority ("FINRA") for failing to maintain supervisory procedures to catch a representative who was transferring assets from a customer account to the broker's personal account with the firm.

In the face of charges by the regulatory agency, LPL Financial submitted a Letter of Acceptance, Waiver and Consent by which the firm consented to a censure and the fine, while at the same time neither admitting or denying the facts.

According to the FINRA enforcement action, LPL Financial did have a supervisory system that was intended to monitor the transfer of funds or securities from a customer account to third parties. However, the firm's system simply failed to address movement of assets from a customer account to a broker's LPL account. This failure allowed a broker to convert for his own benefit more than $1 million in cash and securities belonging to LPL customers.

This is one of three fines, totaling $220,000, that FINRA assessed against LPL Financial this month for various disciplinary violations in March, 2011.

Any investors who suspect that money or securities have been moved from their accounts without proper authority should immediately investigate the circumstances of the transfers. Investment fraud lawyers can assist with that investigation and seek to recoup embezzled funds.

Earlier this year the regulatory agency that oversees brokerage firms ordered Charles Schwab to reimburse investors in its YieldPlus ultra short-term bond fund a total of $18 million through a fund to be set up by the Securities and Exchange Commission ("SEC").

The Financial Industry Regulatory Authority ("FINRA") determined that Schwab misrepresented the YieldPlus fund as a low risk alternative to money market funds despite the disproportionate impact the upheaval in the mortgage-backed securities market had on the YieldPlus portfolio.

Between September 2006 and February 2008, Schwab sold more than $3.3 billion of YieldPlus shares to its customers, including a significant percentage who were over 65 yeasrs of age. At the beginning of this period, Schwab changed the classification of non-agency mortgage-backed securities to allow the fund manager to increase the percentage of these volatile securities to over 50 percent of the fund's assets. According to FINRA, while YieldPlus' NAV declined through 2007, Schwab internal records admitted that YieldPlus was a higher-risk investment than it had been before this change. Despite this understanding, Schwab continued to market the fund to customers "as a cash alterantive with minimal risk and price fluctuation."

While neither admitting or denying any wrongdoing, Schwab has now settled FINRA's charges by agreeing to pay $18 million into the SEC's "Fair Fund" to compensate investors with the fees Schwab earned in selling the fund.

Investors who believe they have lost money because of Schwab's improper sale of YieldPlus funds, or any other actions, should contact an investment fraud lawyer to investigate their claims.

The parade of investment advisors who target professional athletes for fraud has claimed another victim. Carlos Boozer, a starting forward for the Chicago Bulls NBA franchise, has filed a lawsuit alleging that he and his wife were "maliciously" induced to invest $1 million in a Florida company that was marketed as being in the business of constructing affordable housing for disaster victims.

According to Boozer's lawsuit, the owners of the company, InnoVida, represented that investors would receive returns of 1,000% while helping peopel in need who lost their homes. This combination of benefits proved too attractive fro Boozer and others to pass up. Rather than use the investment funds as intended, the lawsuit alleges that the owners of the company used the money to fund a lavish lifestyle.

Professional athletes are often targeted for investment fraud because they are young, inexperienced in investment matters, and place a premium on trust. Often, the schemes used to defraud them involve private placement investments that are illiquid and are represented to offer large returns. Whether or not you are a professional athlete, the effects of investment fraud can be devasting. Victims of fraud should consult with experienced investment fraud lawyers to learn their rights and pursue claims to recoup their losses.

Investors who accused Securities America and its parent, Ameriprise Financial, of selling fraudulent interests in Medical Capital ("MedCap") and Provident Royalities found themselves odds in a federal court in Dallas, with some investors realigning their interests with the firms they sued.

Attorneys for investors who filed a class action lawsuit against the firms had secured a settlement agreement that would pay nearly $50 million to the thousands of investors victimzed by these deals. The catch, however, was that individuals who wanted to pursue their own claims in arbitration against their advisors had to be forced to participate in the class settlement and abandon their individual cases against Securities America and Ameriprise.

This condition was significant to the firms because the individual arbitration claims exposed the broker-dealer to the potental for huge liabilities. In a class action, any settlement would be equitably distributed among all class members who had similar cases but who did not want to pursue claims on their own. Typically, class members have the right to opt-out of any class settlement and file their own lawsuits without regard to any other payments the defendant made. The benefits of class action settlements are greater to a defendant when larger numbers of class members participate in a class settlement.

With the MedCap litgiation, the class action settlement was less attractive to many victims because of the possiblity of larger awards in favor of investors who decided to forego the class action and instead file their own arbitration claims. In January, 2011, one couple who sued the firm won an arbitration award of $1.2 million. Given the large number of investors who lost an estimated $400 million in MedCap, the likelihood of indivudial arbitration awards threatened Securities America's very existence.

Accordingly, Securities America and Ameriprise sought to eliminate the greater threat posed by individual cases by insisting that all MedCap and Provident investors be forced to participate in the class settlement. The settlement was submitted to the court, which had to decide on the viability of that structure. As a result, investors who opted out of the class action battled investors who wanted the class action settlement to be approved.

On March 18, 2011, the federal court judge overseeing the class action rejected the settlement, allowing aggrieved investors to continue their individual arbitration cases. The status of the agreement to settle the class action lawsuit remains up in the air.

Investors who have lost money from investments in Medical Capital or Provident Royalties should make sure they consult with experienced investment fraud lawyers to investigate their right to recover their losses.