Securities Fraud & Unsuitable Investments

Investors Should be Wary of Student Loan Securities Investments

March 4, 2013 | Malecki Law Team

The Wall Street Journal reported on March 4, 2013 that Sallie Mae sold $1.1 billion of securities backed by private student loans, noting that demand for the offering was fifteen times that. Related to this offering, the Wall Street Journal noted that a new platform was being rolled out by SecondMarket Holdings Inc. that would enable lenders to directly issue student-loan securities to investors.

The potential problem with the securitization of student loans is the increase in default by borrowers on the underlying student loans. The Federal Reserve Bank of New York has stated that 31% of people paying back student loans were late on their payments by 90 days or more, an increase from 24% in 2008, as reported by the Wall Street Journal article.

Investors who are offered or are considering investing in student loan backed securities should keep in mind the spike in pre-recession investing in mortgage-backed securities that was then followed by massive defaults on payments of those underlying mortgages, which in some ways deepened the scale and effect of the 2008 recession. While student loan backed securities may lead to greater yields, these investments would most likely also include increased risk of loss. Investors should remain wary of including this investment in their portfolio, especially given the tough employment market and increase in late payments.

Wells Fargo Advisors, LLC is Ordered to Repurchase Fannie Mae Preferred Shares in FINRA Arbitration

February 7, 2013 | Malecki Law Team

On February 6, 2013, the Financial Industry Regulatory Authority (FINRA) announced that a public customer was awarded an award of full rescission against Wachovia Securities, LLC, doing business as Wells Fargo Advisors, LLC (“Wells Fargo”) for the entirety of Fannie Mae Preferred shares recommended by Wells Fargo. By awarding full rescission, the arbitrator required Wells Fargo to repurchase the Fannie Mae Preferred shares at the same price they were sold to the customer. The arbitration award is attached here.

According to the award, the arbitrator found that Wells Fargo was liable for negligence, negligent supervision, fraud and breach of contract as a result of the sale of the Fannie Mae Preferred shares. Billions of dollars of Fannie Mae Preferred shares were sold by broker-dealers like Wells Fargo to investors before the U.S. Government placed Fannie Mae in conservatorship and stopped payments of preferred dividends to investors, but after we believe such broker-dealers were aware that those preferred shares were much riskier than how they were promoted to investors.

In our opinion, Fannie Mae Preferred shares were often endorsed as a safe investment by brokers and broker-dealers, especially given that Fannie Mae was considered a quasi-governmental entity. However, as early as February 2008, we believe many broker-dealers were well aware of Fannie Mae’s exposure to real estate liabilities. On March 10, 2008, Barron’s reported that Fannie Mae’s solvency would be tested by a growing number of mortgage defaults and falling home prices. Despite these in-house understandings of the risky nature of Fannie Mae Preferred shares, many broker-dealers continued to promote the investment as safe, and provided their brokers with research material to further promotion of the shares. Like many other broker-dealers, Wells Fargo, recommended the Fannie Mae Preferred shares to investors who sought safe investments, according to the award.

UBS to Reclassify Bond Investors as “Aggressive”

February 4, 2013 | Malecki Law Team

Fox Business reported recently that UBS is planning to reclassify many of its clients who are invested heavily in bonds as “aggressive” investors.

While the report indicates this is being done as a result of growing bearishness in the bond market, some are speculating that this move is being done in an attempt to reduce the firm’s exposure to future litigation. How an account or an investor is categorized by a broker-dealer’s internal paperwork can have a substantial effect on how that account is treated internally – a fact many investors are unaware of when they open their account. If an injured client later sues the firm in a FINRA arbitration or in court, this classification can also have an impact on the success of their case.

Firms can change the classification of an investor/account with “non consent” or “negative consent” letters, which require no affirmative act or consent on behalf of the investor to change the account. It is reported that UBS will be using just these type of letters to reclassify its clients’ accounts.

Falling Timber: Timberland REIT Reportedly Plunges In Value

December 19, 2012 | Malecki Law Team

As recently reported by InvestmentNews, the estimated value of common stock in real estate investment trust (or REIT) of Wells Timberland REIT, Inc. fell to $6.56 per share. Given the illiquidity of the trust, finding that price in the market may prove difficult. That figure marks a 35% plunge in value since the REIT premiered in 2006 at $10 per share. Unfortunately, such incidents are all too common in a post-bubble real estate industry continuing to face adversity. Many of these incidents have caused substantial losses to investors who invested some or all of their savings in these ventures at the recommendation of their financial advisor.

The trust in question is controlled by Wells Real Estate Funds, an industry giant which has over $11 billion invested in real estate worldwide. Wells management has committed $37 million in preferred equity to this REIT alone, yet the trust currently appears to accrue annual dividends of a mere 1%. In October of 2011, redemption of trust shares was suspended until a new share value could be determined. Beginning next month, shareholders are apparently supposed to have the option of redemption, which will garner 95% of each share’s estimated value, or $6.23.

REITs in many instances can be considered to be high-risk endeavors: appealing for their potential for high gains due to their interest rates, but with equal if not unwarranted potential for resolute failure, and a possible lack of accountability toward investors. Too often, financials advisors describe high-risk investment products like REITs 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.

Drawing Outside the Lines: Contrasts in Evolving Definitions of “Insider Trading”

August 8, 2012 | Nick Curley

Professor of economics Peter J. Henning wrote July 30th for the New York Times of the ever-changing definition of what classifies as “insider trading” in today’s market. Henning’s approach is at once streamlined and nuanced, walking us through a user-friendly tutorial of how and why fiduciary duties are upheld. Because insider trading holds no set definition within federal law, proving it within legal confines can be a hazy process. Henning illustrates this flexibility by profiling two recent cases filed by the U.S. Securities and Exchange Commission (“SEC”). For a detailed definition of fiduciary duty and its effects on one’s securities, visit the Investors page of our firm’s website.

Likely the most common claim cited within insider trading cases is violation of the SEC’s “Rule 10b-5” – subtitled “Employment of Manipulative and Deceptive Devices” – which bans “any device, scheme, or artifice [used] to defraud” investors. Simply put, insider trading violates an investor’s rights when a financial representative takes confidential information and uses it for their own gains. Rule 10b-5 was created in 1942, after the SEC allegedly got word of a company’s president who lied to shareholders, claiming the company was doing poorly and then buying investors’ shares, when in fact their stock was booming. Henning writes that incredibly, until the inception of Rule 10b-5, such fraud was not explicitly prohibited.

Often insider trading violations amount to “jumping the gun” with regard to the exchange of information leading directly to trades of stock or other securities. Earlier this year, trader Larry Schvacho allegedly made over $500,000 from stock in Atlanta tech firm Comsys IT Partners. Last week the SEC set out to prove through civil action that Schvacho had been given non-public information as to the stock’s value by Larry Enterline, a close friend of Schvacho’s and chief executive at Comsys. Proving insider trading in this instance would likely require not only proof of possession of non-public information, but a determination that Schvacho breached the trust of his longtime confidante.

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.

CBS Evening News Will Be Featuring the Lawsuit filed by Malecki Law relating to Alleged Ponzi Schemer Robert Van Zandt

June 5, 2012 | Malecki Law Team

Tonight, June 5, 2012, on the 6 O’Clock Evening News on CBS 2 New York, the lawsuit filed by Malecki Law on behalf of forty-three investors in the alleged Ponzi scheme run by Robert Van Zandt will be featured.

This past December, Malecki Law announced the filing of a civil arbitration complaint with the Financial Industry Regulatory Authority against MetLife Securities for more than $4 million on behalf of twenty-four investors. In March, Malecki Law announced that the complaint had been amended to include additional nineteen investors totaling roughly $9.2 million in claims.

The attorneys at Malecki Law continue to take calls and anticipate either adding future victims to the existing claim or commencing a second action, if necessary. We urge anyone with knowledge about the Van Zandt Agency or MetLife Securities supervision (or lack thereof) over the office to contact us. Investors or employees with knowledge of the events at the Van Zandt Agency who seek further information or want to explore their rights should contact Malecki Law by e-mail or phone. Malecki Law has a uniquely diverse background with significant experience representing clients in securities and investment fraud issues and is “AV Rated” by Martindale-Hubbell. Malecki Law hosts a website providing information and resources dedicated to the securities industry: www.AboutSecuritiesLaw.com. Please contact Jenice L. Malecki, Esq., MALECKI LAW, 11 Broadway, Suite 715, New York, NY 10004, Telephone: (212) 943-1233, Facsimile: (212) 943-1238, E-Mail: Jenice@MaleckiLaw.com.

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.

New York Attorney General Announces Civil Suit Against Van Zandt to Recover Funds for Investors

May 21, 2012 | Malecki Law Team

On Thursday May 17, 2012, the New York Attorney General Eric Schneiderman issued a press release announcing the filing of a summons and complaint to recover funds for investors. The filing coincided with an earlier press release disclosing that Mr. Robert (Bob) H. Van Zandt had been indicted and arrested for criminal charges stemming from some of the same activity that formed the factual basis for the civil filing.

The New York Attorney General’s civil filing noted that Mr. Van Zandt issued promissory notes totaling over $35 million to over 250 investors, most of whom were unsophisticated and invested the bulk of their life savings in the scheme. The filing alleged that these promissory notes were securities sales that were not properly registered with the requisite governmental offices in New York State and, while stated to be suitable for self-directed IRAs, were at best “highly speculative.”

The civil filing also alleged that while the Van Zandt Agency, by Mr. Van Zandt, sold the promissory notes with the understanding that the money collected would be used to fund real estate purchases and real estate development, in reality bank loans were used to fund certain purchases and construction, while other projects were never even commenced. The civil filing further alleged that no investors received security in the form of mortgages or otherwise, and that the money was converted for personal use or used to pay interest claims of other investors, essentially a Ponzi scheme.

New York Attorney General Announces the Arrest of Robert Van Zandt

May 14, 2012 | Malecki Law Team

The New York Attorney General Eric T. Schneiderman announced today the unsealing of a 35-count indictment of and the arrest of Robert H. Van Zandt, a Bronx tax preparer who for years sold promissory notes in alleged real estate investments “guaranteeing” high rates of interest return. He sold these promissory notes out of his tax preparation business, the Van Zandt Agency, while he was licensed by various broker-dealers to sell securities.

Malecki Law currently represents a large group of investors who purchased promissory notes totaling almost $10 million in aggregate from Mr. Van Zandt in an arbitration before the Financial Industry Regulatory Authority (“FINRA“), the independent regulator of securities companies. The arbitration is pending against MetLife Securities, Inc., a broker-dealer who employed Mr. Van Zandt during a period in his career. While investors purchased the promissory notes directly from Robert Van Zandt and through the Van Zandt Agency, he was then licensed by MetLife Securities, Inc. to sell securities, and MetLife was required to perform certain supervisory and audit duties as a result of that employment relationship.

Malecki Law is also investigating the potential for other actions against other broker-dealers arising from Mr. Van Zandt’s alleged real estate investments.