Securities Law Blog
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The SEC approved a new FINRA rule that will make it hard for brokers to delete customer complaints from their records in arbitration cases. Rule 2081 will prevent brokers from making settlements with customers requiring the claimant to accept expungement of the case from the broker’s public record. The goal of the new rule is to ensure that brokers cannot conceal customer complaints in run-of-the-mill cases but only more extreme cases.

According to the Public Investors Arbitration Bar Association, expungement requests were granted in 89% of cases resolved by stipulated awards or settlement between 2007 and 2009. That number has since moved up to 96.9% from May 2009 to the end of 2011.

The SEC has stated that arbitrators have granted expungement too often and that it wants accurate and complete information to be available to the public.

Many people, however, believe that the rule is not strong enough, pointing out that brokers would still be able to expunge legitimate complaints once the rule was in place as clients typically do not return to oppose expungement because it’s an ordeal not worth their hassle.

If you or someone you know has lost money as a result of an investment, please contact Richard Frankowski at 888-390-0036 to discuss your potential legal remedies.

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A federal judge in New York ruled this week that Citigroup would not have to face FINRA arbitration regarding claims that its stock dropped precipitously after it hid securitized-loan losses because an arbitration would violate an already existing $590 million dollar settlement over the same claims. An arbitration had been begun by Gary Burgess and Joseph Icon, two former Citigroup employees who claimed not to be included in the 670,000-person settlement class. Burgess argued that he should not have been included because he failed to opt out of the class, and Icon argued that he did not understand the release. U.S. District Judge Sidney Stein, however, was not swayed and held that Burgess and Icon were in fact included in the settlement class, thus blocking the FINRA arbitration. Stein wrote that the claims the two men were trying to bring were the exact same claims previously settled.

In August 2012, Citigroup agreed to pay $590 million to settle consolidated class claims asserting that Citigroup intentionally failed to warn investors of risky exposure to collateralized debt obligations. The settlement was one of the biggest that resulted from the banking industry’s subprime securities fiasco. The consolidated plaintiffs in the case accused the bank of committing securities fraud by making misrepresentations and omitting material facts from February 2007 to April 2008 pertaining to Citigroup’s debt obligation holdings.

If you or someone you know has lost money as a result of an investment, please contact Richard Frankowski at 888-390-0036 to discuss your potential legal remedies.

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Natural Blue Resources Inc., a company cofounded by Nancy Pelosi’s son, Paul Pelosi Jr., was charged with securities fraud last week after the SEC discovered that two convicted criminals were at the company’s helm. Pelosi Jr. was the company’s president and chief operating officer of the company, which is aimed at selling “environmentally-friendly” investments. Four individuals, including Ex-New Mexico governor Toney Anaya, were charged by the SEC and were suspended from trading in the company’s stock.

According to the SEC, James E. Cohen and Joseph Corazzi, both of whom had previous fraud convictions, were secretly running the company. They claimed to be outside consultants, but the SEC’s evidence shows that they actually controlled the company’s business decisions and failed to disclose their previous convictions with investors.

The SEC has suspended trading in Natural Blue stock and discovered that the company has failed to file periodic reports, as required by law, with the SEC for the past four years.

Anaya, Corazzi, Cohen, and former executive Erick Perry were each charged with federal fraud violations. According to the SEC, Natural Blue made “various material misrepresentations about the company, its contracts, and its anticipated revenue in a February 2011 press release as well as on a website and verbally to investors.”

Having cofounded the company in 2009, Pelosi Jr.’s involvement in this case is currently unknown. He served as the company’s president and chief operating officer until January 11, 2010. However, other sources cite Pelosi as the company’s president just last year with Anaya listed as a chairman and the CEO.

Anaya will be barred from participating in any penny stock company for at least five years and fined an undetermined amount. Perry also settled with the SEC, agreeing to pay a $150,000 fine, and permanently banned from serving as an officer or director of a public company and from participating in any offerings of penny stock.

If you or someone you know has lost money as a result of an investment, please contact Richard Frankowski at 888-390-0036 to discuss your potential legal remedies.

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Earlier this month, the SEC charged a group of golfing buddies with trading on inside information about American Superconductor Corporation, an energy technology company out of Massachusetts. The group allegedly received more than $554,000 in illicit profits.

The SEC alleges in its complaint that Eric McPhail on numerous occasions gave his golfing friends non-public information regarding American Superconductor. McPhail received the information himself from a close friend at the country club who was an executive at American Superconductor. McPhail’s source informed him of American Superconductor’s expected earnings, contracts, and other major tentative corporate developments from July 2009 to April 2011.

Instead of keeping the information to himself, as McPhail’s source expected, McPhail often emailed the information to his friends. This group included five golfing buddies and one lifelong friend. All six allegedly traded on the inside information and received illegal profits.

The SEC specifically alleges that McPhail tipped two members of the group just a couple of days prior to American Superconductor’s announcement that it expected its fourth-quarter and fiscal year-end results to be down because of its fractured relationship with Sinovel Wind Group Co., Ltd., American Superconductor’s primary customer. The two members of the group took the information, placed bets through option contracts predicting that American Superconductor’s stock would fall, which it did by 42% after the announcement. From this one tip, one member received $278,289 and the other $191,521.

On other occasions, McPhail told his friends about American Superconductor’s quarterly earnings, contracts, and potential drops in stock prices.

The SEC’s complaint charges the group with violating federal antifraud laws and the SEC’s antifraud rule, seeking to have them be enjoined, return their allegedly ill-gotten gains with interest, and pay financial penalties of up to three times their gains. Three members of the group have agreed to settle the SEC’s charges by consenting to the entry of judgments without admitting or denying the allegations.

If you or someone you know has lost money as a result of an investment, please contact Richard Frankowski at 888-390-0036 to discuss your potential legal remedies.

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Seven people, including the ex-husband of a star from the Sopranos, were arrested Thursday on securities fraud charges stemming from market manipulation of penny stocks. Two of the seven, Craig L. Josephberg and Matthew A. Bell, were registered representatives with independent broker-dealers. Another charged was the CEO of OmniView Capital Advisors LLC, who was married to Sopranos star Jamie-Lynn Sigler in 2003.

From October 2012 to July 2014, the seven and others allegedly decided to scam investors and potential investors in CodeSmart Holdings Inc., Cubed Inc., StarStream Entertainment Inc. and The Staffing Group Ltd. The group engaged in a “pump-and-dump” scheme, using untrue press releases and filing with the SEC to control the price and volume of shares in those companies. Additionally, they fraudulently hid their ownership interest, created price movements and trading volume in the stocks and made unauthorized purchases of stock in accounts of unwitting clients.

The 10-count indictment includes charges of securities fraud, wire fraud, conspiracy to commit securities fraud, mail fraud and wire fraud in connection with the manipulation of the companies.

If you or someone you know has lost money as a result of an investment, please contact Richard Frankowski at 888-390-0036 to discuss your potential legal remedies.

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The U.S. Court of Appeals for the Second Circuit has dismissed an appeal involving the settlement of class action securities claims pertaining to the Bernie Madoff Ponzi scheme. The claims, having been settled, were brought by 118 plaintiffs, who were individual and institutional investors in Madoff feeder funds managed by Fairfield Greenwich Group.

The appeal was brought by non-settling defendants, challenging a portion of the settlement agreement that provides that investors who file claims under the settlement submit to the district court’s jurisdiction for the sole purpose of participating in the settlement and not for any other purpose. The challenging defendants asserted that the district court erred in approving this provision because district courts cannot permit litigants to agree to insulate themselves from personal jurisdiction if it would otherwise be created as a result of the settlement, according to the opinion.

The plaintiffs argued that the non-settling defendants lacked standing to object, in response to which the defendants contended that they have standing because the provision in question prejudices their rights to assert that participation in the settlement should bar or limit investor claims against them in other litigation.

The Second Circuit, however, agreed with the plaintiffs, concluding that the non-settling defendants did have standing, and thus the court dismissed the appeal. The court’s opinion states, “In reaching this result, we join our sister courts in holding that a settlement which does not prevent the later assertion of a non-settling party’s claims…does not cause the non‐settling party ‘formal’ legal prejudice. For these reasons, we conclude that the non‐settling defendants do not have standing to object to the settlement. In view of this conclusion, we decline to address the remaining issues argued on appeal.”

If you or someone you know has lost money as a result of an investment, please contact Richard Frankowski at 888-390-0036 to discuss your potential legal remedies.

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Bill Turner, a New Mexico insurance broker, pleaded guilty last week to thirteen counts of securities fraud and one count of conspiracy to commit securities fraud in a plea bargain. He had originally been charged with 211 counts related to a scam to defraud an investor.

Turner defrauded Johnny Cleveland, his financier, out of hundreds of thousands of dollars in 2011 by selling false insurance policies through the Turner Insurance Agency. Turner solicited investments from Cleveland asking him to finance the policies instead of Turner getting financing from the bank. Cleveland purchased 69 contracts from Turner, and Turner repaid the first eleven in full. However, the scheme was uncovered when Turner could not manage to pay his monthly obligation to Cleveland. According to Cleveland, Turner then had employees falsify documents as Cleveland began to catch on to the scheme.

Under the plea bargain, Turner will pay full restitution to Cleveland, which will be about $215,000. Additionally, Turner is looking at potentially twenty years in prison if he makes full restitution. If he does not, he is facing no less than five and no more than thirty years.

Turner’s scheme is closely related to a Ponzi scheme, in which an operator uses money from new investors to pay back original investors. Here though, Turner kept preying on the same person.

If you or someone you know has lost money as a result of an investment, please contact Richard Frankowski at 888-390-0036 to discuss your potential legal remedies.

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James R. Holdman of Zachary, Louisiana pleaded guilty to two counts of mail fraud this week. According to U.S. Attorney Walt Green and former U.S. Attorney Donald J. Cazayoux Jr., Holdman defrauded retirees, military veterans, and survivors of Hurricane Katrina in Louisiana, Mississippi, Texas, and Florida out of $13 million. Holdman used his Baton Rouge, Louisiana office, called Greenwing Capital Management LLC, to promote his Greenwing, Bluewing, and Silverwing funds.

From February to October 2008, Holdman admittedly gave his investors fake statements on a regular basis that showed profits. The investments, however, were not profitable. Either the investments failed or Holdman used the investors’ money for his personal affairs. According to his confession, Holdman was able to continue to operate the fund by concealing its actual performance, and over the course of a whole year he continued to lose almost all of the investors’ money.

In October 2008, Holdman mailed a letter to each of his investors, telling them that 98.67% of their investments had been lost in the past month and that he had to close his investment funds. In actuality, most of the losses had happened previously while he was still acquiring money from his customers.

Holdman pleaded guilty on two counts of mail fraud involving a total loss of at least $400,000. In exchange for these guilty pleas, prosecutors agreed to dismiss sixteen more counts of mail fraud against Holdman. He is facing a potential 20-year prison term and fine of $250,000 for each mail fraud charge he was convicted on.

If you or someone you know has lost money as a result of an investment, please contact Richard Frankowski at 888-390-0036 to discuss your potential legal remedies.

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Dean Mustaphalli, a former broker at Sterne Agee Financial Services Inc., is looking at a potential expulsion. According to FINRA, Mustaphalli ran a $6 million hedge fund, Mustaphalli Capital Partners, that he failed to disclose. FINRA charged Mustaphalli for creating the fund and receiving commissions without notifying the broker-dealer. He sought cash for the fund from more than 25 investors for more than half of 2011. Between April and August of 2011, Mustaphalli received about $41,800 in management fees.

The fund’s value has allegedly dropped by about 90% since then. To date, FINRA is unsure if any of Mustaphalli’s clients were customers of Sterne Agee, but a lawyer filing two arbitration claims against Mustaphalli claims that one of his clients was in fact a customer of Sterne Agee. FINRA states that Mustaphalli was not providing account statements for the hedge fund as requested.

Under FINRA’s rules, brokers are allowed to operate hedge funds as long as they are fully disclosed, approved by the FINRA member firm, and supervised by the firm. Mustaphalli managed the fund through Mustaphalli Advisory Group, and although he did disclose the existence of the RIA to Sterne Agee, he did not disclose that he was managing the hedge fund through the firm. He received performance fees, and his RIA received management fees through the hedge fund.

According to another attorney representing investors in the Mustaphalli hedge fund, Mustaphalli continued to seek clients for the fund through the investment adviser even after Sterne Agee fired him. Previously, Mustaphalli had been in the industry for fourteen years before being fired in 2011.

If you or someone you know has lost money as a result of an investment, please contact Richard Frankowski at 888-390-0036 to discuss your potential legal remedies.

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In July 2010, President Barack Obama signed into federal law the Dodd–Frank Wall Street Reform and Consumer Protection Act, which provided the SEC with the power to create a rule that would mandate all financial advisers act in the best interest of their clients. This rule is called the fiduciary-duty standard of care, which as of now solely applies to investment advisers. In the wake of that legislation, the Department of Labor proposed regulation that would broaden the meaning of “fiduciary” to financial advisers assisting clients with retirement plans, which would include brokers selling IRAs.

The future for investor protection seemed so bright, but any progress started in 2010 has slowed down considerably. In May 2014, the Department of Labor stated that a re-proposal of its rule will be delayed from August to January of next year. The original proposal was withdrawn after numerous fiery attacks from the financial industry, which contended that the proposal would increase liability and regulatory costs for brokers. Subsequently, these brokers would cease to serve the retirement plan market, and investors with small accounts would be hurt.

Despite these setbacks from the Department of Labor’s proposal, it is in a much better position than the SEC’s proposal. In fact, the SEC has yet to reach a decision as to whether to push for a fiduciary proposal at all. While support for an SEC fiduciary-duty rule applying to retail investment advice exists in the financial industry, there also exists apprehension regarding how the regulation would work for brokers.

An SEC rule is supported by the Securities Industry and Financial Markets Association provided that it complies with Dodd-Frank. Response to the Department of Labor proposal depends on prohibited-transaction exemptions, according to Fred Reish of Drinker Biddle & Reath.

If you or someone you know has lost money as a result of an investment, please contact Richard Frankowski at 888-390-0036 to discuss your potential legal remedies.