Securities Fraud Attorney Blog

Employment Arbitration Award Confirmed – $4.1 billion

June 4, 2009 | By Ross B. Intelisano

An employment arbitration award worth $4.1 billion was confirmed this week by the Los Angeles County Superior Court. The arbitration was heard before JAMS and the defendants included iFreedom Communications International Holdings, Limited, and its founder, Timothy Ringgenberg.

This is one of the most significant employment awards ever rendered in arbitration. We have no information regarding the potential collection of said award.

For FINRA registered representatives in the securities industry, employment arbitration is mandatory. Many other industries are including pre-dispute arbitration clauses in their employment agreements as well. We expect to see a surge in employment arbitrations filed in the U.S. due to the declining economy.

Securities Arbitration – FINRA Withdraws Discovery Proposal

May 30, 2009 | By Ross B. Intelisano

Investors who file securities arbitrations received a quiet victory at the end of May. FINRA, the Financial Industry Regulatory Authority, quietly withdrew a proposal to the discovery rules in securities arbitrations that would have obliged investors to disclose even more of their financial histories than the present rules provide.

FINRA’s proposal was filed with the SEC in March and intended to increase the responsibilities of investors who file customer arbitrations to produce, among other things, complete tax returns (instead of certain pages and schedules) for five years prior to the first transaction identified in the statement of claim (instead of three years).

The SEC received more than 50 comment letters about the proposal, mostly from attorneys who represent investors who objected. FINRA filed a two-page notice with the SEC, withdrawing the rule proposal, on May 21.

OTC Derivatives Fraud – Happens More Often Than You Think

May 19, 2009 | By Ross B. Intelisano

Over-the-counter (OTC) derivatives are very complicated investments. OTC derivatives are sometimes defined as contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. They include swaps (such as credit default swaps (CDS)) and interest rate, currency and commodities contracts. The OTC market is supposedly made up of banks and other highly sophisticated parties such as hedge funds. Then why have OTC derivatives been sold to less sophisticated investors? Good question.

The U.S. Secretary of the Treasury, Tim Geithner, announced last week the Obama Administration’s broad plan on regulatory reform of OTC derivatives. Much of the news coverage focused on the systemic risk portions of Mr. Geithner’s memo. However, the last section of the memo stated that Treasury’s objective is also “ensuring that OTC derivatives are not marketed inappropriately to unsophisticated parties.” This is a very important mandate.

Our firm represents investors who were improperly sold various over-the-counter derivatives without the requisite risk disclosure made by the parties selling them. OTC derivatives fraud cases have become more and more prevalent as the OTC market mushroomed to greater than $600 trillion in notional amount in 2008. There is no room for fraudulent misrepresentations in this extremely complex market. Investors should be wary. Let’s hope the government follows through on its objectives and protects investors from the risks posed by OTC derivatives.

Securities Arbitration Filings Surge

May 15, 2009 | By Ross B. Intelisano

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.

Morgan Keegan Hit with Multiple Arbitration Awards

May 12, 2009 | By Ross B. Intelisano

Morgan Keegan has lost six FINRA arbitrations in the last two months related to the Regions Morgan Keegan funds which lost significant value in 2008. One of the recent awards included punitive damages. 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.

Morgan Keegan represented the Regions Morgan Keegan funds as low-risk bond funds. They turned out to be highly concentrated in subprime mortgage-backed securities and collateralized debt obligations (CDO’s). The losses are astounding. For example, The Select High Income lost 75% through February 28, 2008 and the Select Intermediate Bond lost 84%.

Lehman Structured Notes – A Global Problem with Potential U.S. Remedies

May 8, 2009 | By Ross B. Intelisano

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.

The Madoff Affair – PBS Frontline

May 7, 2009 | By Ross B. Intelisano

The Madoff Affair is a one hour special airing on Frontline on PBS on Tuesday, May 12th at 9pm. Correspondent Martin Smith and award winning producer Marcella Gaviria produced the program. Through exclusive television interviews with those closest to Madoff’s operation, they unearth the details of the world’s first global Ponzi scheme, the longest running, widest reaching business scandal in history.

Mr. Smith and Ms. Gaviria were very impressive during their interview of me. I expect the show to be the best of its kind on Madoff. It’ll be available online as well.

SEC Files Credit Default Swaps Insider Trading Case

May 6, 2009 | By Ross B. Intelisano

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.

Madoff Accountant Arrested

March 18, 2009 | By Ross B. Intelisano

The accountant for Bernard Madoff was arrested and is out of jail on a $2.5 million bond. David Friehling faces up to 105 years behind bars on charges he “rubber stamped” Madoff’s books. The U.S. Attorney’s Office charged Friehling with securities fraud, aiding and abetting investment adviser fraud and four counts of filing false audit reports to the SEC.

The SEC Complaint recites some juicy facts: the Friehling family invested for many years with Madoff, up to $14 million. David Friehling tried to hide his investment by replacing his name with his wife’s name and later with “Friehling Investment Fund.” The family withdrew $5.5 million since 2000. And the Friehling firm made $186,000 per year from1991 to 2008 – that’s over $3 million in fees over 17 years. Also, the SEC Complaint alleges that Friehling lied to the AICPA that didn’t do audit work he claimed to do and lied to the SEC about Madoff’s Form X-17-A-5.

What does this mean? Criminally, it looks like the government started by arresting Friehling: the low hanging fruit. Friehling is an easy one. The big question is who’s next? Likely DiPasquale and the other Madoff Securities employees. What about family? Who knows.

Reviewing Arbitrators’ Prior Awards in Securities Arbitration

April 2, 2007 | By Rich, Intelisano & Katz

One of the most important aspects of securities arbitration proceedings is choosing your arbitrators. It is more art than science. Securities arbitration attorneys ought to spend a ton of time researching and vetting potential panel members. This includes not only reviewing prior awards but assessing value to said awards.

It is essential that attorneys review all of the arbitrators’ prior awards, not just the ones from the NASD. NYSE and AAA awards are available from the Securities Arbitration Commentator. NYSE awards are available on the NYSE website and on Westlaw.

Attorneys should not just review the awards from securities cases. Employment awards may be important too. For example, whether an arbitrator has awarded punitive damages in an employment case would be important to know.