Securities Fraud Attorney Blog

Morgan Keegan Loses Another Bond Fund Arbitration

October 26, 2009 | By Ross B. Intelisano

Morgan Keegan, a division of Regions Financial Group, lost yet another FINRA arbitration related to its Bond Funds. The case is allegedly the first successful arbitration on behalf of an investor who was not direct customer of Morgan Keegan. According the law firm who won the arbitration, the elderly investor was awarded complete damages, including interest and fees.

Morgan Keegan has now lost many FINRA arbitrations in the last six months related to the Regions Morgan Keegan funds which lost significant value in 2008. Many law firms around the U.S., including our firm, have been retained by investors who lost money in the Regions Morgan Keegan funds.

The funds were run by Jim Kelsoe, the chief-fixed income investment officer of the Memphis-based brokerage’s Morgan Asset Management. The seven mutual funds include four Regions Morgan Keegan closed-end funds: Advantage Income Fund, High Income Fund, Multi-Sector High Income Fund and Strategic Income Fund; and three open-end funds: Regions Morgan Keegan Select Short Term Bond Fund, Intermediate Bond Fund and High Income Fund.

Galleon Wiretaps Rattle Hedge Funds

October 26, 2009 | By Ross B. Intelisano

Katherine Burton and David Glovin wrote a good piece on Galleon on Friday. Here it is.

Galleon Wiretaps Rattle Hedge Funds as Insider Trading Targeted
Oct. 26 (Bloomberg) — First came the biggest bear market since the 1930s, then Bernard Madoff’s $65 billion Ponzi scheme and the threat of increased regulation. Now hedge funds have a new concern: getting caught on tape as the government expands its use of wiretaps to ferret out insider trading.

Prosecutors, using secretly recorded phone conversations for the first time against hedge funds, alleged Oct. 16 that billionaire Raj Rajaratnam and five others made $20 million by swapping material inside information on companies such as Hilton Hotels Corp. and Google Inc. They may charge at least 10 more people soon, people familiar with the matter said last week.

Rajaratnam, founder of New York-based Galleon Group LLC, regularly talked to hundreds of contacts, including other traders, according to people who know him. His arrest rattled hedge-fund managers, who are questioning whether legitimate discussions caught on the tapped lines will draw scrutiny, say lawyers who’ve fielded such queries. A broader worry: whose phones are being monitored as prosecutors and U.S. Securities and Exchange Commission continue their probes?

“The word wiretap strikes fear in the hearts of everyone, even the innocent,” said Brad Balter, who runs Balter Capital Management LLC, a Boston-based firm that allocates clients’ money to hedge funds.

Ross Intelisano, an attorney with Rich & Intelisano LLP in New York, said he received a call from an executive at a $1 billion hedge fund who was considering hiring a company to test his firm’s phones for listening devices. The client asked what to do if the firm found any. “Do we go to the police?” the executive asked, according to Intelisano.

The executive instructed his colleagues to be extra careful about what they say on the phone, not because they are breaking the law, but because they are fearful that any conversation about stocks could be misconstrued, Intelisano said.

Calls Aren’t Safe
“After the Bear Stearns case, e-mails aren’t safe, and now phone calls aren’t safe,” Intelisano said. “From now on, people are going to be meeting for lunch.”

Prosecutors used e-mails to build their case against former Bear Stearns Cos. hedge-fund mangers Ralph Cioffi and Matthew Tannin, who are currently on trial in Brooklyn for misleading investors about the health of two funds that collapsed in 2007. It’s the biggest trial stemming from a U.S. probe of banks and mortgage firms whose losses in subprime loans and related securities total at least $396 billion.

For hedge-fund managers whose knowledge of wiretaps may have been limited to “The Wire,” the HBO drama in which Baltimore police eavesdrop on drug dealers, electronic bugging is a new reality of their industry as U.S. Attorney Preet Bharara’s new Complex Frauds Unit targets white-collar crime.
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Charles Schwab Hit with SEC Wells Notice for YieldPlus Funds

October 16, 2009 | By Ross B. Intelisano

Charles Schwab acknowledged that the SEC served it with a Wells Notice related to its sale of

two funds, the YieldPlus Fund and Total Bond Market Fund. A Wells Notice advises the firm that the SEC staff intends to recommend civil charges for possible securities violations.

The additional heat from the SEC may force Schwab to think about settling the many pending FINRA arbitrations against the firm. There is also a pending class action which was certified by a federal court in California in August. The litigation bills are growing.

Charles Schwab YieldPlus Fund – Decisions To Make

October 14, 2009 | By Ross B. Intelisano

The Charles Schwab YieldPlus Fund class action suit has generated some serious questions for investors to consider. The U.S. District Court in San Francisco issued a Notice of Pendency to class members which includes important information about how to opt out as a class member. Opt out requests must be received by the claims administrator no later than Monday, December 28, 2009. Investors therefore have to decide whether they intend to file individual arbitration claims against Schwab or whether they would like to remain in the class action. As we wrote about last week, investors around the country have recently won a string of FINRA arbitrations against Schwab based upon allegations that the Fund was over concentrated in mortgage backed securities.

Bear Stearns High Grade Fund Criminal Trial – It’s Not Just Emails

October 14, 2009 | By Ross B. Intelisano

Opening statements in the criminal trial of Ralph Cioffi and Matthew Tannin, the former portfolio managers for the Bear Stearns High Grade Funds, start today in federal court in Brooklyn, NY. The High Grade Funds imploded in 2007 causing $1.4 billion in investor losses. Prosecutors have charged Cioffi and Tannin with securities fraud and Cioffi with insider trading. The media coverage so far has focused almost exclusively on emails sent by Cioffi and Tannin regarding their personal thoughts about the Funds. The government alleges that Cioffi and Tannin thought the Funds were in serious trouble but then told investors on conference calls that everything was fine. While emails are often sexy and this is an important part of the case, the defense will likely argue that the email quotes were taken out of context and that the portfolio managers were simply analyzing the prospects of the Funds and were not intentionally lying to investors.

The press has not focused much on two just as important aspects of the prosecution’s case which should be easier to prove. First, according to the prosecutors, on the investor conference calls, the managers told investors that there was a lesser amount of investor redemptions in the High Grade Funds than there actually were. Here, the government can argue that Cioffi and Tannin clearly knew how much in redemptions were put in by investors yet they told investors a different number so investors wouldn’t run for the exits. The redemption amounts are undisputed facts and much less susceptible to defense spinning.

Second, the prosecutors allege that Cioffi and Tannin used their personal investments in the Funds as part of their pitch to investors, to invest in, and stay invested in the Funds. In early 2007, the government alleges Tannin told investors he was adding to his position. Also, Cioffi redeemed $2 million of his own personal monies in 2007 and did not notify investors. The government can argue that Tannin lied to investors about his own personal investments in order to keep them in the Funds. Also, that Cioffi, because he used his own personal investments in the Funds as a marketing tool, wilfully omitted his $2 million personal redemption in order to induce investors to stay in the Funds. The longer the Funds were alive, the better chance Cioffi and Tannin could continue to reap their multi million dollar annual bonuses.

New Tannin E-Mails Could Help Prosecutors

October 9, 2009 | By Ross B. Intelisano

Matthew Tannin, the former Bear Stearns High Grade Fund portfolio manager, kept a personal diary of e-mails to himself in a G-Mail account. The U.S. Attorney’s Office received the e-mails after using a search warrant on Google. According to e-mails released by prosecutors yesterday, Tannin wrote in as early as November 2006 that the funds “could blow up”. U.S. District Judge Frederic Block said at a hearing that he will likely allow prosecutors to introduce the newly obtained e-mails as evidence at Tannin’s trial. The U.S. Attorney’s Office apparently has not finished reviewing all of the e-mails.

These e-mails could be extremely helpful in the government’s case against Tannin. His trial is set for Oct. 13. The prosecutors can use Tannin’s e-mails to show his knowledge and intent that Tannin and a co-defendant Ralph Cioffi misled clients about the funds.

The e-mails may also be helpful for the many investors who have pending securities arbitration cases against Bear Stearns (our firm has multiple, significant arbitrations pending at FINRA). Since the notebook and Tablet PC of Cioffi and Tannin have gone missing, Tannin’s newly discovered personal e-mail diary may be investors only chance to look into Tannin’s thoughts regarding the funds.

Auction Rate Securities Cases Better Off in Arbitration

October 9, 2009 | By Ross B. Intelisano

Floyd Norris of the New York Times has a piece in today’s paper about the legal hurdles facing plaintiffs in court actions related to auction rate securities. He writes about the Private Securities Litigation Reform Act (PSLRA) pleading requirements when filing a fraud claim in a securities litigation. A plaintiff must allege very specific allegations of fraud or risk getting tossed out on a pre-trial motion dismiss. Tough hurdle.

Luckily, most of the auction rate securities cases have been filed as arbitrations at FINRA. The PSLRA pleading requirements do not apply. And there is a very small chance that a claimant in a FINRA arbitration will have his case knocked out by a pre-hearing motion to dismiss because FINRA recently changed its rules severely limiting the grounds to file such a motion.

The upshot is that if you’re an investor, whether retail or institutional, and you’re stuck holding an auction rate security that was misrepresented to you as a cash equivalent, your best bet is to file an arbitration at FINRA. It’s private, less costly than a court litigation, and should resolve between 12 and 18 months. We represent auction rate investors worldwide. Also, PIABA, a bar association of attorneys who specialize in representing investors, is a good place to find counsel. The auction rate securities fiasco has been a huge burden on small and large conservative investors. Securities arbitration seems to be the only intelligent solution.

FSA Censures Dresdner Portfolio Managers for Insider Trading

October 8, 2009 | By Ross B. Intelisano

The UK’s Financial Services Authority (FSA) censured two Dresdner Kleinwort bond traders for market abuse. Darren Morton, a director, and Christopher Parry, a vice-president, were charged with committing market abuse in relation to a new issue of Barclays’ bonds. According to the FSA, Mr. Morton and Mr. Parry were portfolio managers with K2, a Dresdner structured investment vehicle (SIV) that held $65 million worth of Barclays floating rate note bonds in its book. The FSA alleged that the traders received inside information about a potential new issue of Barclays FRNs with better terms than the previous issue, and then sold the SIV’s entire position to two separate counterparties which had no knowledge of the inside information. The counterparties suffered mark to market losses of $66,000 and later complained to K2. It is very encouraging to see the FSA step up its investigative pressure on improper behavior in the UK markets. Sure its only a censure and not a fine or permanent ban but we feel this is the beginning of a very tough regulatory environment in the City and on the Street.

Charles Schwab Loses Another YieldPlus Arbitration

October 6, 2009 | By Ross B. Intelisano

Charles Schwab has been trying most of the many arbitration cases filed against it related to the Charles Schwab HighYield Plus fund. Last month, a Los Angeles based Finra panel awarded what appears to be almost 100% of an investor’s losses (about $75,000) in the fund, plus expert witness fees and all of the arbitrators compensation. The case is Chang v. Charles Schwab (Finra case number 08-02417) and is available on Finra’s website. This is one of a string of recent losses in the HighYield Plus fund cases based upon allegations that the fund was overconcentrated in mortgage backed securities. It will be interesting to see if Schwab starts settling more of these cases.

Cioffi and Tannin Criminal Trial Set for October 13th

October 6, 2009 | By Ross B. Intelisano

The Bear Stearns High Grade Funds blew up in the early summer of 2007, precipitating the the credit crisis around the world. On October 13, 2009, in federal court in Brooklyn, NY, Ralph Cioffi and Matthew Tannin, the portfolio managers of the High Grade Funds, will be facing criminal trial on fraud and conspiracy charges. Cioffi has also been charged with insider trading. This is the first major criminal trial stemming from the subprime mortgage era. It will be closely watched around the world. The U.S. Attorneys’ Office of the Eastern District of New York recently won a huge trial against former Credit Suisse broker Eric Butler who was convicted of fraudulently selling millions of dollars of auction rate securities. The Brooklyn jury convicted Butler of conspiracy to commit securities fraud, securities fraud and conspiracy to commit wire fraud and he faces a maximum sentence of 45 years in prison. A major battle is being fought over whether the prosecutors can introduce evidence that a Tablet PC and a notebook of Cioffi and Tannin disappeared and about Cioffi’s lavish lifestyle.