New York Securities Fraud Lawyers Blog

Jenice Malecki of Malecki Law To Appear On On The American Radio News Afternoon Drive Show With Ernie & Rachel to Discuss The SEC’s Current Investigation of Chesapeake Energy’s Aubrey McClendon

March 1, 2013 | Malecki Law Team

Jenice Malecki of Malecki Law will be appearing on the American Radio News Afternoon Drive Show with Ernie & Rachel tonight at 5:15pm est to discuss the current SEC investigation of Aubrey McClendon, Cheseapeake Energy‘s CEO.

Central to the investigation is a controversial program within the company that grants McClendon a share in every well drilled by Chesapeake, so long as he pays his share of the cost. Since the program began, Mr. McClendon has taken out hundreds of millions of dollars in personal loans from companies that invest in Chesapeake. This move did not sit well with shareholders.

Ms. Malecki will discuss how given McClendon’s position at the publicly-traded company, the question of what was disclosed to investors, when it was disclosed, and whether there were actual conflicts of interest that disadvantaged investors, especially, whether these deals were priced to the company’s advantage or disadvantage is at the heart of the current situation. If the allegations are correct, and all required information was not disclosed to investors and conflicts of interest were present, this is a fraud, plain and simple.

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.

Apple Reverse Convertible Notes Mean Potentially Huge Losses for Investors Who Bought Them From UBS and Other Banks

January 28, 2013 | Malecki Law Team

Those who invested in many of the commonly called “Apple reverse convertibles,” now find themselves facing huge potential losses. But all hope is not lost, as investors may be able to recoup their losses.

The plight of these investors has been well documented recently.

What would you do if your broker tells you that you just bought Apple stock at a price of over $700 a share, even though after this past week’s collapse left the price hovering below $440? Now what would you do if you found out that you wound up with this “bum deal” by buying a product that was issued by your broker’s firm?

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.

Give My Receipts to Broadway: NY Musical Producer Accused of Fraud and Breach and Contract

November 12, 2012 | Nick Curley

Despite theater’s common expression that “the show must go on”, a large-scale musical planned to hit Broadway this month has been postponed following accusations of fraud and breach of contract levied against its stockbroker. For further definitions of fraud and “BoC”, visit the Investors page of our firm’s website.

Long Island-based broker Mark Hotton, 46, of West Islip, NY, is alleged to have deceived producers of Rebecca: The Musical via two counts of wire fraud – for which he faces up to 20 years in prison on each count – and the supposed fabrication of four fake investors in the show, who Hotton claimed were prepared to invest $4.5 million. The show’s producers have since filed suit for a sum exceeding $100 million against Hotton and his wife and business partner, Sherri Hotton.

Hotton’s story itself is said to be one of grandstanding theatrics in its own right. When producers attempted to secure funds from allegedly falsified investor “Paul Abrams”, Hotton is said to have told them that the man had recently died on an African safari after contracting malaria. Hotton also created false e-mail accounts and United Kingdom based mailing addresses for his invented investors, even corresponding with Rebecca‘s producers under these false identities.

Closing Bells and Whistles: Accusations of Churning Emerge Within Morgan Stanley Smith Barney

September 14, 2012 | Nick Curley

An intriguing new instance of whistleblowing has emerged from Clifford Jagodzinski, an ex-employee of Morgan Stanley Smith Barney LLC who claims that at least one highly successful broker for the firm was churning preferred securities in 2011. Churning in this case would violate not only state law, but also rules in place under the Dodd-Frank Act. For a further definition of churning, visit the Investors section of our company website. The Whistleblowers section of the site additionally identifies the nature of such cases and the firm’s unique interest in them.

The accused broker, wealth manager Harvey Kadden, was allegedly making tens of thousands of dollars in commissions despite supposedly taking actions which created minimal advances or even losses for his clients. Mr. Jagodzinski claims these moves “were obviously designed to bilk customers”. Mr. Kadden is said to have been recruited from Bank of America/Merrill Lynch, where he had worked for 30 years to great success, often appearing in Barron’s list of the Top 100 Financial Advisors.

Jagodzinski claims he was told to stop investigating Kadden by higher-ups within Morgan Stanley. Kadden is reported to have run a team of four brokers who had brought $14 million in profits to the company within the last 12 months, while managing a total of over $1 billion in customer portfolios.

A Raft of Risks: Assessing FINRA’s New Alert on Exchange Traded Notes

August 20, 2012 | Nick Curley

Headline news charting the dramatic peaks and valleys of select Credit Suisse and Barclays properties prompted the Financial Industry Regulatory Authority Inc. (FINRA) to issue a July warning to investors detailing the potential risks inherent to exchange-traded notes (or ETNs). The investor alert, entitled “Exchange Traded Notes – Avoid Unpleasant Surprises“, details vital notices to consumers on the nature of such properties.

“ETNs are complex products and can carry a raft of risks,” said Gerri Walsh, FINRA’s Vice President of Investor Education in a July 15th statement to Investment News. “Investors considering ETNs should only invest if they are confident the ETN can help them meet their investment objectives, and they fully understand and are comfortable with the risks.” Unfortunately, all too often these risks can be hidden from investors by their financial advisor.

Many investors may believe that ETNs are just like exchange-traded funds (or ETFs). However, despite their similar naming and being commonly categorized together, ETNs are quite different than ETFs. ETFs can be essentially characterized as a grouping of bonds or stocks that trade within the same day on an exchange. ETNs meanwhile, do not in fact hold anything, but rather are bank-drafted promissory notes intended to deliver the returns of an index. Unlike an ETF, an ETN in many respects is an uncollateralized loan to a bank, albeit one that offers theoretically great rewards to an index’s return. The value of an ETN is largely dependent on the given day’s market value of the index it tracks.

Peregrine Captured Mid-Flight: PFGBest Brings New Focus to Futures Industry Regulation

August 17, 2012 | Nick Curley

After years of concerns raised but never fully investigated by futures industry regulation, the Commodity Futures Trading Commission (CFTC) and National Futures Association (NFA) took enforcement action July 9th against brokerage firm Peregrine Financial Group, also known as PFGBest. Peregrine founder Russell Wasendorf subsequently confessed to committing acts of embezzlement and fraud over the course of two decades, illegally acquiring over $100 million. Wasendorf was then arrested on charges of having lied to government regulators.

$215 million is believed to be missing from Peregrine’s pool of customer funds, with a recently forged bank statement claiming $221 million in company accounts with U.S. Bank, while the bank has Peregrine on file for only $6.3 million. Four regulatory actions have been against Peregrine since 1996 – with allegations including inaccurate accounting, insufficient capital, and problems with segregating customer money.

Wasendorf in writing confessed to having spent most of the funds embezzled over the course of his career, using the money to secure firm capital, purchase PFG’s corporate headquarters, and even pay regulatory fines and fees. In July, a half dozen customer claims on PFG were met with quotes of twenty-two to twenty-five cents on the dollar by CRT Capital Group, a limited liability company which deals in distressed debt.

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.