New York Securities Lawyer BlogIn September 2008, the United States government took over Fannie Mae and Freddie Mac as rising losses on loans guaranteed by both threatened to decimate capital reserves. Last year, the Securities and Exchange Commission (“SEC”) filed civil fraud cases against three former senior executives of Fannie Mae, including but not limited to, Fannie Mae’s former chief executive Daniel Mudd. The SEC alleged that the former executives mislead investors about the quality of the mortgage loans Fannie Mae guaranteed. Specifically, the SEC alleged that the former officers provided definitions and disclosures regarding what constituted a subprime mortgage that misled investors about their exposure to the loans. In response to the SEC’s allegations, the former executives filed a motion to dismiss and argued that the SEC complaint should be dismissed because they provided detailed disclosures about the loan characteristics to investors. On Friday, August 10, 2012, the Honorable Paul Crotty of the District Court for the Southern District of New York denied the motion to dismiss and held that the SEC had “plausibly argued,” that the former Fannie Mae executives, “consciously assisted the venture to misstate [Fannie’s] subprime and Alt-A exposure in an active way.” Lax & Neville LLP is experienced in representing investors who are the victims of sales practice abuses, including misrepresentations made about the credit rating and/or risks of various investments. If you are an investor who has suffered losses as a result of misrepresentations regarding your investments, feel free to contact Lax & Neville LLP for a free consultation.
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Lax & Neville LLP Investigates Possible Claims Regarding The Sale Of Main Street Natural Gas Bond
In the months before the collapse of Lehman Brothers many brokerage firms were recommending the purchase of Main Street Natural Gas Bonds. It appears that many investors were sold these Bonds as equivalents to or replacements for Municipal Bonds. We believe that at least some brokerage firms were misrepresenting the Main Street Natural Gas Bond as being as safe and conservative as a Municipal Bond, when in reality they were linked to the credit of Lehman Brothers, a financial institution which by that time was in a precarious position, certainly worse off than almost all municipal bond issuers. In fact by 2008 the risk of investing in a Lehman backed investment had been steadily increasing and this risk should have specifically been disclosed. Main Street Natural Gas and various investment banks, including Lehman Brothers, entered into arrangements whereby Main Street Natural Gas would borrow money at low, tax-exempt interest rates and then give the money to the investment banks(Lehman) to invest for profit, and in return, supply natural gas at a below-market price. In November 2006, the Municipal Gas Authority of Georgia set up Main Street Natural Gas as a non-profit corporation, which borrowed money to buy natural-gas derivatives all guaranteed by Lehman Brothers. Natural gas derivatives are complex financial instruments which can be extremely risky and often times are completely unsuitable for a portfolio that is predominantly invested in municipal bonds. In April 2008, Main Street Natural Gas borrowed $700 billion and essentially gave it to Lehman Brothers. In return, Lehman Brothers arranged for the delivery of 160 billion cubic feet of natural gas over 30 years at a below market price. The $700 billion Main Street Gas gave to Lehman came from the Main Street Gas Inv. Gas Project Bonds, Series 2008A. This esoteric investment was completely subject to the rising risk of Lehman Brothers’ default – a risk its seems was either never mentioned or explained to the broker-dealers’ customers. Our firm is currently investigating potential claims against brokerage firms that sold the Main Street Natural Gas Bonds. If you invested in Main Street Natural Gas Bonds, please contact Lax & Neville LLP for a free consultation.
Lax & Neville Investigates Newbridge Securities and Philip Crispino
Lax & Neville is currently investigating potential sales practice abuses by Newbridge Securities Corporation (“Newbridge”), a broker-dealer, and Philip Crispino, one of its financial advisors. Specifically, we are investigating whether Crispino churned and charged excessive commissions in his customers’ brokerage accounts, and whether he sold unsuitable positions in exchange traded funds (“ETFs”), United Development Fund and Virnetx Holding Corp. to customers. It should be noted that according to Crispino’s FINRA BrokerCheck Report, one of his former customers filed an arbitration claim against him and Newbridge in January 2011 alleging compensatory damages of $247,435 as a result of alleged churning and excessive commissions. According to Crispino’s BrokerCheck Report, Newbridge and Crispino settled that matter for $300,000 in July 2012. If you are a customer of Newbridge or Crispino and believe sales practice abuses occurred relating to your account, contact Lax & Neville LLP at (212) 696-1999 for a free consultation.
District Court Sanctions Morgan Keegan For Misrepresentations
Recently, on August 3, 2012, a Judge in the United States District Court for the Middle District of Florida granted a former Morgan Keegan customer’s motion to confirm and arbitration award and denied Morgan Keegan’s cross-motion to vacate the arbitration award. In the underlying arbitration, a FINRA Arbitration Panel awarded the claimant $194,976 in compensatory damages based upon Morgan Keegan’s alleged misrepresentations regarding the nature and riskiness of the investments and found Morgan Keegan liable for violations of ERISA, breach of fiduciary duty, negligence and negligent supervision. When granting the motion to confirm, the Florida District Court also issued sanctions against Morgan Keegan by ordering it to pay the former Morgan Keegan customer’s attorneys’ fees. The Court noted, “Although Morgan Keegan argues that concerns over the neutrality of arbitrators must be taken seriously, an award of sanctions in this case would not thwart the ability of arbitration participants to challenge neutrality. To do so in good faith, however, they must have an objective reasonable basis for such a challenge – something that is woefully lacking here.”
FINRA Renders Another Award Against Morgan Keegan
Numerous FINRA arbitration awards have been rendered against Morgan Keegan & Company Inc. (“Morgan Keegan”) based upon Morgan Keegan’s alleged misrepresentations regarding mutual funds sold as stable high yield bond mutual funds, which were actually highly speculative and risky investments in low grade asset backed securities, commonly referred to as “toxic waste.” There are also numerous pending FINRA arbitrations against Morgan Keegan regarding various Morgan Keegan funds including, but not limited to, the Regions Morgan Keegan Select High Income-A, Regions Morgan Keegan Select High Income-C, Regions Morgan Keegan Select High Income-I, RMK High Income Fund, RMK Strategic Income Fund, Regions Morgan Keegan Select Intermediate Bond Fund-A, Regions Morgan Keegan Select Intermediate Bond Fund-C, Regions Morgan Keegan Select Intermediate Bond Fund-I, RMK Multi-Sector High Income, RMK Advantage Income, RMK Strategic Income Fund, RMK High Income Fund. Just recently, on August 2, 2012, FINRA issued an award against Morgan Keegan relating to the sale of Regions Morgan Keegan (“RMK”) mutual funds. Specifically, this arbitration related to the RMK High Income Fund, the RMK Strategic Income Fund, the RMK Advantage Income Fund and the RMK Multi-Sector High Income Fund. In the claimants’ amended statement of claim, claimants requested $100,000 in compensatory damages, punitive damages, interest, costs and attorneys’ fees based upon Morgan Keegan’s alleged breach of fiduciary duty, negligence, negligent supervision, fraud and breach of contract. The Arbitration Panel held that “[Morgan Keegan] is liable for breach of fiduciary duty, negligence, negligent supervision, fraud and breach of contract and shall pay claimants compensatory damages in the sum of $100,000 plus interest at the Florida legal rate.” The Arbitration Panel also awarded claimants $100,000 in punitive damages, costs in the amount of $32,735, and attorneys’ fees in an amount to be determined by a court of competent jurisdiction. When awarding punitive damages, the Arbitration Panel held, “Claimants established by clear and convincing evidence that [Morgan Keegan] was guilty of intentional misconduct or gross negligence in its communication to its broker and the Claimants of the true nature of the RMK investments, the risks associated therewith and its failure to supervise the Claimants’ accounts.” If you have suffered losses from an investment in any Morgan Keegan funds, or other investment products that were represented as low risk, such as Citigroup Global Market Inc.’s MAT Five LLC and MAT Three LLC, and/or the Aravali Fund LP, which was sold and marketed by Deutsche Bank Securities, please contact Lax & Neville LLP for a free consultation.
Brokers Seeking Expungement of Numerous Customer Complaints Related to Product Problems
In the securities industry, it is essential for a broker to keep their record with Central Registration Depositary as clean as possible from customer complaints and other negative disclosures. Given the vast arrays of product problems that have arisen in recent years, may brokers have seen their records tarnished with numerous customer complaint disclosures arising out of product problems. Examples of product problem cases in the last few decades, include, limited partnerships in the early 1990s, and more recently, Auction Rate Securities and Lehman Principal Protected Notes.
Madoff Trustee Files A Complaint Against The New York Attorney General
On August 1, 2012, the Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC (“BLMIS”) filed a complaint (“Complaint”) in the United States Bankruptcy Court for the Southern District of New York against Eric T. Schneiderman, as successor to Andrew M. Cuomo, Attorney General of the State of New York (“New York Attorney General”), Bart M. Schwartz as Receiver for Ariel Fund Ltd. and Gabriel Capital, L.P., David Pitofsky, as Receiver for Ascot Partners, L.P. and Ascot Fund, Ltd., J. Ezra Merkin, and Gabriel Capital Corporation (collectively referred to as Defendants) regarding a $410 million settlement between the New York Attorney General and J. Ezra Merkin. The Trustee requests that the Bankruptcy Court enforce an automatic stay to enjoin the Defendants from diminishing the assets which the Trustee seeks to recover. Ezra Merkin and Gabriel Capital Corporation (the “Merkin Defendants”) managed the Merkin Fund, which invested in BLMIS. According to the New York Attorney General’s 2009 Complaint against Merkin, investors in the Merkin Fund lost more than $1.2 billion as a result of the Merkin Fund’s involvement with BLMIS, while the Merkin Defendants collected hundreds of millions of dollars in management and incentive fees. Through the $410 million settlement, the New York Attorney General will recover substantial assets from Merkin and will distribute the settlement funds to eligible investors in the Merkin Fund so they can recover 40% of their losses. The Trustee’s Complaint asserts that the settlement “threatens the orderly administration of the BLMIS estate and seek[s] to diminish the pool of assets from which the Trustee can make equitable and pro rata distributions to victims of Madoff’s fraud.” See Complaint, page 2. Indeed, the Trustee’s Complaint alleges that the New York Attorney General had no authority to enter into such a settlement as the settlement gives “a select group [of Madoff customers] a jump-start over all of the victims of this heinous fraud . . . Every victim should be treated equally.”
Madoff Trustee Seeks Approval For Allowance of Interim Compensation
On August 1, 2012, the Irving H. Picard (“Trustee”), Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC (“BLMIS”), filed a Motion for Allowance of Interim Compensation for Services Rendered between October 1, 2011 and January 31, 2012 with Judge Burton R. Lifland in the United States Bankruptcy Court for the Southern District of New York. The Trustee seeks to recover $48,107,863.80 for legal services rendered, and $866,625.44 in expenses incurred, by Baker & Hostetler LLP for a 4 month period. In addition, various other firms acting as special counsel to the Trustee filed similar motions seeking to recover $1,788,698.96 for the legal services rendered, and $562,814.67 for expenses incurred, during the 4 month period. This was the ninth application for interim compensation made by Baker & Hostetler LLP. All of the previous applications made by the Trustee, and his counsel, have received blanket approvals from Judge Lifland. Astoundingly, pursuant to Judge Lifland’s Order Approving the Eighth Application For Allowance of Compensation For Services Rendered And Reimbursement For Expenses, entered on March 19, 2012, the Trustee and Baker & Hostetler LLP were cumulatively compensated in the amount of $273,066,911.54 from December 2008 through September 30, 2011. Assuming this Ninth Application for Interim Compensation is approved by Judge Lifland, the Trustee and Baker & Hostetler LLP will be cumulatively compensated for legal services in the amount of $321,174,775.34 from December 2008 through January 31, 2012. Many victims and others believe that the immensely high legal fees incurred by the Trustee’s counsel present a blatant conflict of interest, and should raise the question of whether the Trustee’s efforts are truly in the best interest of the BLMIS estate, or whether his efforts are meant to prolong the process in an attempt to line his own pockets while potentially violating the due process rights of the Madoff victims. Objections to the Trustee’s Motion are due on August 22, 2012 by 4 p.m., and oral argument on the matter will take place on August 29, 2012 at 10:00 a.m.
FINRA Implements New Suitability Rule
On July 9, 2011, FINRA implemented a new Suitability Rule codified in the FINRA Manual as Rule 2111. See 75 Fed. Reg. 71479 (Nov. 23, 2010) (Order Approving Proposed Rule Change; Fine No. SR-FINRA-2010-039). Previously, the FINRA Suitability Rule was codified under Rule 2310. According to FINRA Regulatory Notice 12-25, the new rule, in part, requires broker-dealers and/or associated persons 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 on the information obtained through the reasonable diligence of the [firm] or associated person to ascertain the customer’s investment profile.” The phrase “investment strategy involving a security” used in this Rule is to be interpreted broadly and would include an explicit recommendation to hold a security. Thus, the new rule imposes a suitability obligation on brokers when making a recommendation to hold a security. Moreover, the new rules imposes three suitability obligations on FINRA member firms and/or associated persons. The first suitability obligation is reasonable-basis suability which requires that a broker perform reasonable diligence to understand the nature of the recommended security, or investment strategy involving a security, as well as potential risks and rewards, and determine whether the recommendation is suitable for at least some investors based upon that understanding. The second suitability obligation is customer specific suitability requirement which requires that a broker must have a reasonable basis to believe that a recommendation of a security, or investment strategy involving a security, is suitable for the particular customer based on the customer’s investment profile. This addition to the rule adds several customer-specific factors to the predecessor rule including a customer’s age, investment experience, time horizon, liquidity needs and risk tolerance. The third suitability obligation is a quantitative suitability requirement which requires a broker who has control over a customer account to have a reasonable basis to believe that a series of recommended securities transaction are not excessive. If you believe your firm and/or broker invested in securities, or implemented an investment strategy involving a security, that violated this suitability rule, please contact Lax & Neville LLP for a free consultation.
Madoff Trustee Seeks Approval From The U.S. Bankruptcy Court To Make A Second Interim Distribution To BLMIS Customers With Allowed SIPC Claims
On July 26, 2012, Irving H. Picard, the Trustee (“Trustee”) for the liquidation of Bernard L. Madoff Investment Securities LLC (“BLMIS”) filed a motion before the Honorable Burton R. Lifland in the United States Bankruptcy Court for the Southern District of New York seeking entry of an order approving the second interim pro-rata distribution to customers with allowed Securities Investor Protection Corporation (“SIPC”) claims. Specifically, the Trustee’s motion seeks Judge Lifland to enter an order (1) approving the second allocation of property to the fund of customer property (the “Customer Fund”); and (2) authorizing a second pro rata interim distribution to customers whose claims for customer protection under the Securities Investor Protection Act (“SIPA”) have been allowed for amounts exceeding the SIPC statutory advance limits and not already satisfied by the initial pro rata interim distribution. According to the Trustee’s motion, as of June 30, 2012, the Trustee received 16,519 customer claims. Of the 16,280 customer claims which the Trustee determined, 2,436 were allowed, 13,679 were denied, 12 were determined as asserting no claim, and 153 were withdraw. In the Trustee’s initial motion for the initial allocation and pro rata interim distribution, the Trustee allocated $2,617,974,430.26 to the fund of customer property. Now, the Trustee seeks the Bankruptcy Court’s approval to allocate an additional $5,501,375,994.66 to the Customer Fund. This approximately $5 billion to be allocated to the Customer Fund was derived from: (1) the transfer of BLMIS bank accounts to the BLMIS estate; (2) pre-litigation and litigation settlements; (3) customer preference recoveries; (4) the sale of assets; (5) refunds; and (6) earnings on the Trustee’s investment and money market accounts. With the addition of $5,501,375,994.66 to the Customer Fund, the total amount allocated to the customer fund will be $8,119,350,424.92. Of the $8,119,350,424.92 allocated to the Customer Fund, $3355,499,915.98 was distributed to customers with allowed claims as part of the Trustee’s First Interim Distribution. In connection with the First Interim Distribution, $417,364,436.12 was reserved for accounts in litigation and $8,499,781.66 of SIPC subrogation was deferred. Therefore, the total amount available for the Second Interim Distribution will be $7,357,986,291.16. Of the $7,357,986,291.16, $220,000,000 will be held in reserve pending the outcome of certain appeals, $103 million will be held in reserve relating to the IRS settlement, and $115,190,556.49 will be held in reserve pending the outcome of the motion before the court regarding the time-value of monetary damages. Thus, after reserves, the amount available for the Second Interim Distribution is $6,919,795,734.67. Any objections to the Trustee’s motion will be filed on August 8, 2012. The Trustee will appear before Judge Lifland to argue his motion on August 22, 2012 at 10:00 a.m. We anticipate a final resolution of this motion to be rendered in late August 2012. The final determination will set the exact amount available to distribute to customers, as well as the amount the Court will require the Trustee to keep on reserve.