Industry Topics

Unfriended: Grasping the Class Action Lawsuit of NY Investors Against Facebook and Its Underwriters

July 2, 2012 | Nick Curley

Three New York investors have filed a class action complaint – dated May 23rd – against Facebook and chief executive Mark Zuckerberg, in addition to lead underwriter Morgan Stanley and an array of secondary underwriters (including JPMorgan Chase, Barclays Capital, Goldman Sachs, and Merrill Lynch) claiming that negative information about the social network’s initial public offering was withheld. Monetary damages are to date unspecified. The suit was filed by Robbins Geller, a firm that years ago earned plaintiffs $7 billion in a suit against Enron.

A failure to disclose information unilaterally among all investors could potentially be considered a form of misrepresentation and fraud, as well as a breach of fiduciary duty. For further explanation of these possible charges and more, visit our Investors page.

Particularly interesting and possibly advantageous for the plaintiffs is that Morgan Stanley’s chief analyst Scott Devitt – famed for his accurate, bearish predictions in recent years that Google and Amazon stock would drop – is alleged to have cautioned preferred customers against zealous purchase of Facebook stock. Morgan Stanley controlled both the process of Facebook’s trading and over 38 percent of Facebook shares sold. Devitt’s and other analysts’ revised revenue forecasts were shared via phone calls with institutional investors – but not with retail investors – before public trading of the stock began. These forecasts outlined expectations for how Facebook would fare into the second quarter and throughout 2012. Robbins Geller’s statement against the underwriters thus argues that the prospectus “contained untrue statements of material facts.”

Hedging Their Bets: Understanding Corporate Loopholes in the Dodd-Frank Act

June 29, 2012 | Nick Curley

Since the financial crisis of 2008 collapse of Lehman Brothers and beyond, the need for regulators to create new means of quelling excessive risk has been met with questions remain as to how effective these rules have been. Many of the new post-crisis rules have not yet gone into effect, and even once executed, a broker’s capability for evasion remains. To learn more about regulation on a national scale, visit the Governmental, Regulatory, and Self-Regulatory Proceedings page of our firm’s website.

A section of the Dodd-Frank Act legislation, the Volcker Rule, is to be implemented over the next two years with an aim at averting certain types of trading. While this regulation prevents banks from doing speculative trades with their own money, it will not stop hedging activities. The Volcker Rule contains guidelines that are meant to help regulators decide whether a hedge masks proprietary trading.

Other parts of Dodd-Frank resist undue risk more covertly. The Act looks to shift many derivatives to central clearing houses, the groups who collect the payments on a trade. This is said to theoretically strengthen the market, because companies are required to back their trades with margin payments of cash or safe securities. In theory, the financial burden of supplying margin to clearinghouses could make excessively risky trades restrictively expensive, and therefore less attractive for banks.

FINRA Fines Brookstone Securities $1 Million Dollars and Permanently Bars Two Individuals for Fraudulent Sales of CMOs

June 6, 2012 | Malecki Law Team

The Financial Industry Regulatory Authority (“FINRA”), issued a news release on June 4, 2012 announcing that a FINRA hearing panel fined Brookstone Securities $1 million for the fraudulent sales of Collateralized Mortgage Obligations to elderly investors. In addition, FINRA ordered restitution from the firm and the individuals involved and permanently barred the firm’s Owner/CEO and one of the firm’s brokers from the securities industry. The firm’s Chief Compliance Officer was suspended by FINRA for two years.

FINRA found that from 2005-2007, Brookstone, through its employees, “made fraudulent misrepresentations and omissions to elderly and unsophisticated customers regarding the risks associated with investing in CMOs.” Many of the alleged defrauded customers were senior citizens, including two women who were recently widowed. The customers allegedly feared losing their assets and relied on Brookville to keep their retirement funds safe. However, CMOs were apparently actually high-risk investments that were unsuitable for senior investors seeking income and principal protection.

Unfortunately, all too often brokers sell high-risk investment products like CMOs to elderly investors as safe, secured or guaranteed, typically to get the higher commission that these riskier investments pay. Misrepresenting the risk of an investment to a customer like that is against the law and rules under which these professionals work.

FINRA Fines Citigroup Global Markets $3.5 Million for Providing Inaccurate Performance Data Related to Subprime Securitizations

June 1, 2012 | Nick Curley

Investors rely upon their brokers for accurate statements on the market: without knowledge and researched facts, there is no trust that our investments have been wisely managed. In understanding this need, regulatory bodies intervene in situations when brokerage firms have failed to live up to their end of the informational bargain struck with their customers. To learn more about failure to disclose, misrepresentation, and omission within the securities game – as well as Malecki Law’s extensive experience in aiding investors harmed by misinformation – visit the Investors page of our firm’s site.

A new instance of high-profile misinformation is alleged in a May 22nd press release which confirms that the Financial Industry Regulatory Authority (FINRA) has fined Citigroup Global Markets, Inc. the sum of $3.5 million. The release cites numerous causes for the admonishment, including several alleged violations pertaining to subprime residential mortgage-backed securitizations (RMBS), including the supplying of erroneous information on mortgage performance and failure to supervise. An RMBS can be defined as a type of security in which investor profit stems from home-equity loans and mortgages (subprime and otherwise).

FINRA cites inaccurate RMBS information on Citigroup’s website as the fine’s direct cause. Citigroup and other RMBS distributors are required to disclose accurate and up-to-date historical data on mortgage performances, so as to grant investors a fair assessment of the RMBS value, as well as the true likelihood of a mortgage-owner’s failure to make payments. According to FINRA Executive Vice President and Chief of Enforcement Brad Bennett, “Citigroup posted data for its RMBS deals that it should have known was inaccurate; for over six years, investors potentially used faulty data to assess the value of the RMBS.”

Fixed Leaks: Insider Trading and How It Affects Your Investment Strategies

May 31, 2012 | Nick Curley

A headline of the New York Times’ Sunday Business section published May 19th, Gretchen Morgenson asks “Is Insider Trading Part of the Fabric?“, raising a potentially distressing question for regulators and market analysts alike. Morgenson profiles the woes of one Ted Parmigiani, a Lehman Brothers investment analyst whose career was apparently placed in peril in 2004, when his research was allegedly leaked by a colleague in his research department. Parmigiani was then planning to raise his assessment of computer chip producers Amkor Technology. The leak was apparently discovered by Parmigiani on the planned date of his announcement, when Amkor’s price quickly shot up that morning, an hour before his new assessment was to be broadcast. Such are the dangers those working in investment too often face, and therein lies the potential for such figures to become brave whistleblowers. Visit the Practice Areas section of Malecki Law’s website to learn more about the firm’s work in aiding whistleblowers of fraud and further financial corruption.

Parmigiani responded by spending years providing information to the Securities and Exchange Commission (SEC) about the trading and research climate at Lehman, where suspicious trades were all too common, and sales reps and analysts illegally shared both office space and data. As part of 1.4 billion collective settlement paid by Lehman and nine other firms following an Eliot Spitzer-induced inquiry into insider trading, Lehman agreed to separate analysts from sales teams. Parmigiani says he was asked to ignore this supposed divide, write praise for investment banks whether it was merited or not, and explicitly told not to make negative comments about Lehman-favored companies and executives.

Parmigiani alleged that Lehman traders were often advised of changes to analysts’ company ratings before the revisions were publicly announced, and that traders were tipped off by analysts so that they would make hedge bets with Lehman’s own money. According to reports, announcement of Parmigiani’s recommendations were delayed by sales management for days at a time for no justified reason. In the Times article Parmigiani compares his actions to his time in the U.S. military, where the duty to disobey unlawful orders was instilled. Following his outrage over the Amkor incident, Parmigiani was fired from Lehman and found himself unable to find work at comparable Wall Street firms.

In Light of MF Global: Knowing the Risks of European Investment

December 20, 2011 | Malecki Law Team

It has been difficult to not hear about the recent events surrounding MF Global Holdings Ltd and former Senator and New Jersey Governor, John Corzine. However, many investors do not really understand what happened or why. A recent article in Forbes Online titled “MF Global: Were the Risks Clear?” helps to break down just how these events transpired. The article details how overexposure to European sovereign debt (government bonds) leveraged by using borrowed money (called “margin”) coupled with declines in the value of those bonds caused the downfall of the fund.

The almost overnight collapse of such a prominent and public investment fund as MF Global has brought many issues to light, and the Forbes article characterizes this “as the latest reminder to investors that it’s important – and sometimes very difficult – to understand the entire spectrum of risk they’re exposed to.” These events also raise many questions that should be asked by investors, such as “Do I really understand how my advisor is managing my savings?” and “Have the risks in my portfolio been adequately explained to me?”.

Many investors in MF Global have said that they did not understand what their money was being invested into, but rather trusted that the firm would do the right thing by them. One investor cited by the article said on his blog that “I am supposed to know the difference between an ethical operator and one that is not. The truth is that it often is very difficult to tell them apart.” This has unfortunately come to be a fairly common sentiment by many individual investors, in reference to their personal broker and the funds they invested in.

Watching the Watchers: Charting the SEC’s Increased Pursuit of Negligent Execs

November 4, 2011 | Nick Curley

The Securities and Exchange Commission (SEC) has in recent weeks seemingly broadened its pursuit of wrongdoers by filing cases against defendants on the charge of negligence alone. Negligence can be defined as a situation in which one should have known that information given to investors was inadequate. In recent years, negligence fines have been what accused bigwigs would accept and pay to avoid more severe charges of fraud, which carry heavy costs and the potential to be banned from the finance industry. Such admissions were usually made out of court and out the public eye. Readers looking to learn more about the role of negligence in securities law proceedings can visit our firm’s informational Practice Areas and Investors sections.

As of today, these ramped-up regulations have been sparsely utilized, though the Wall Street Journal speculates that more actions against negligence are forthcoming. It’s the SEC’s recently united “Structured and New-Products Enforcement” unit that’s claiming to be newly insistent about information being more fairly provided to investors.

Criticism of the SEC’s post-2008 methods has come in part because they have seemingly failed to catch many financial criminals in the act. Detractors believe that in many cases, outright fraud or recklessness is the issue: branding such failures as negligence would then only diminish or downplay their severity. The penalties for fraud are far more severe, but are in turn more challenging to obtain, as they require proof of intentional malfeasance. The charge of “Recklessness” falls between fraud and negligence in severity, and can be defined as one turning a blind eye to potentially harmful activity.

All in the Timing: What Judge Rakoff’s Decision Against Madoff’s Trustee Teaches Us About Managing Our Securities

October 14, 2011 | Nick Curley

In a follow up to our recent critique of dividing defrauded consumers into “net winners” and “net losers” comes a decision from U.S. District Judge Jed Rakoff, who has dismissed Bernie Madoff trustee Irving Picard’s claims filed to regain nearly $1 billion from Fred Wilpon and Saul Katz, the owners of baseball’s New York Mets. The decision may potentially limit Picard’s future chances of recouping investors’ initial investments with Madoff, in what analysts have dubbed “clawback suits” filed by the trustee against the defrauded.

The judge’s decision illustrates a difference between U.S. bankruptcy law and securities law regarding when investors should return money previously received from their broker. A thorough, easy-to-read explanation of fraud can be found on our home site. For New York law, that period spans up to six years prior to a broker’s bankruptcy, while Federal law caps that limit at only two years. What Picard will be able to recoup depends greatly upon whether he will continue to be held to Federal standards. Several district court judges have in recent months sided with Madoff investors’ requests to move cases out of bankruptcy court, a setting that typically favors the trustee.

What we can all learn from these rulings is that where and when an investment is made – as well as where and when any necessary litigation takes place – can be just as important as the venture you’ve chosen to pursue. For one, it’s notable that our national standard for “clawback” measures is more favorable than that of New York, a state housing Wall Street and an immense amount of high stakes real estate, as well as many entertainment and banking endeavors. Clearly, it pays for investors to be informed about their state’s “clawback” legislature: for those of us engaging the market longterm, timing is everything, and how recently you’ve been the victim of fraud sets crucial perimeters.

FINRA Fines Three New York Based Broker-Dealers For Mischaracterizing Customer Fees

September 8, 2011 | Malecki Law Team

New York securities law saw quite the news day, as the Financial Industry Regulatory Authority (FINRA) issued a news release on September 7, 2011 announcing fines against five Broker-Dealers, three of them based in New York, for mischaracterizing fees charged to customers. The three New York based firms were John Thomas Financial of New York, NY, A&F Financial Securities, Inc. of Syosset, NY and Salomon Whitney, LLC of Babylon Village, NY. FINRA alleged that the firms understated commissions but charged additional handling fees to make up transaction based income for the firm. FINRA found that by structuring their fees this way, the firms ended up charging fees significantly higher than the actual cost of the services the firms provided.

In making their findings, FINRA reiterated that broker-dealers must accurately disclose commissions earned. By settling these charges with FINRA, the firms did not admit or deny wrongdoing, but they did consent to the entry of FINRA’s findings and also agreed to implement actions sufficient to remedy the handling-fees violations.

Such mischaracterization of handling-fees is one example of how broker-dealers can put their own interests ahead of the interests of their clients, and represent what is essentially securities fraud. If you held an account with one of these firms or you think your broker-dealer may have charged fees in excess of what they disclosed to you, your entire portfolio may need a thorough review for suitability.

Malecki Law Announces Investigation of IRA Services Trust Company and Fiserv, Inc. Arising Out of Investments with the Van Zandt Agency

August 25, 2011 | Malecki Law Team

Malecki Law, a New York securities law firm based in Manhattan, is currently investigating claims against IRA Services Trust Company and Fiserv, Inc. arising out of investments solicited and promissory notes issued through the Van Zandt Agency in relation to real estate investments in the Bronx, New York and elsewhere.

The Attorney General of the State of New York is currently investigating the practices of the Van Zandts and on April 6, 2011, filed an application in the Supreme Court of the State of New York for an order of discovery and preliminary injunction against the Van Zandts and other related agencies.

Based on the initial inquiry of the securities fraud lawyers of Malecki Law and the Attorney General’s investigation, there are questions about whether or not the Van Zandt Agency broke the law by engaging in the fraudulent issuance, promotion offer and sale of securities to the public in the State of New York. It is believed that hundreds and possibly thousands of investors may have lost money invested with the Van Zandts.