Securities Law Blog
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Last week, the Alabama Supreme Court upheld a Jefferson County judge’s ruling that a lawsuit against CVS Caremark Corp. can proceed as a class-action to represent roughly 70,000 investors who assert that they lost $3.2 billion in a securities fraud during the 1990s. The case arises from twenty-one lawsuits filed by investors in 1998 against MedPartners, which was founded by former HealthSouth CEO Richard Scrushy. In those suits, MedPartners was accused of making misrepresentations to the public regarding its financial well-being. The suits were consolidated and settled for $56 million after MedPartners was about to go bankrupt, and $50 million was the most that its insurance would pay. The company changed its name to Caremark in 2000 and merged with CVS seven years later.

One original plaintiff, John Lauriello, filed a fraud claim in 2003 asserting that MedPartners was dishonest about how much its insurance would pay during settlement negotiations. He alleged that in October 1999, before the settlement was completed, MedPartners paid for unlimited insurance coverage. Lauriello claimed that if the plaintiffs had know that at the time, they could have negotiated a more favorable settlement for them.

CVS Caremark has countered that the additional insurance coverage was known or should have been known by the plaintiffs before the settlement was finalized, as it was discussed in press releases, communications with plaintiffs’ attorneys, and within a filing with the SEC. Additionally, the company contends that the statute of limitations bars the plaintiffs claims and has fought against the claims being treated as a class actions. The Alabama Supreme Court disagreed on the last contention, upholding Judge Tom King’s certification of the class with an opt-out provision.

Opt-out notices will have to be sent to the 70,000 investors in the class. Because many of the addresses of investors from 16 years ago may no longer be valid, attorneys will also have to advertise the opt-out provision. Once the opt-out process is complete, the case can then proceed on the merits. Plaintiffs will have to prove there was fraud during the settlement and will have to get experts to say what the case could have been settled for if they had known about the unlimited insurance coverage.

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

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The Frankowski Firm is investigating a Ponzi scheme involving the owners of Fair Finance, which was once a legitimate company that had provided financial services since the Great Depression. The United States Court of Appeals for the Seventh Circuit last week upheld the convictions of the three owners–Timothy Durham, James Cochran, and Rick Snow–who turned the financial firm into a Ponzi scheme, taking $200 million of investors’ money to fund their own extravagant lifestyles.

While upholding ten convictions, the court did, however, overturn two wire fraud counts, stating that the government did not enter critical documentary evidence into the record. The Court of Appeals stated the government’s failure to enter the documentary evidence “was clearly an oversight, but the mistake leaves a crucial gap in the evidence in those counts.” It said the government used single-page printouts to establish the wire transfers were made to further the fraudulent scheme. This evidence showed that the wires were made but did not establish that they were made in furtherance of the Ponzi scheme.

According to the court’s ruling, the three defendants took control of Fair Finance in 2001 and essentially turned the company into “their personal piggy bank,” using “money invested in Fair to support their lavish lifestyles and to fund loans to related parties that would never be repaid. When the company’s auditors raised red flags about its financial status, the auditors were fired.”

The scheme crumbled when the 2008 financial crisis struck, and Fair Finance could not meet its interest payments. The company declared bankruptcy after an FBI raid on its offices. The company had more than 5,200 investors who were owed almost $209 million when federal authorities closed it in November 2009. Almost all of the investors were from Northeast Ohio.

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

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FINRA issued a new investors alert, this time warning investors considering funds that invest in frontier markets to take note of the large risk associated with these markets. Although no set definition of frontier markets exists, such frontier funds typically invest in companies in countries with developing securities markets, including Argentina, Lebanon, Nigeria, Slovenia, and Vietnam.

Gerri Walsh, FINRA’s Senior Vice President for Investor Education cautions that “[i]nvestors seeking potentially higher returns in frontier funds should understand that the promise of higher returns always carries more risk—and the past performance of any fund is never a guarantee of future results.”

FINRA’s alert warns that any investment has its pros and cons and provides investors with tips to avoid problems:

  • Know which frontier markets the fund invests in. Risk factors vary by country—and no two countries share identical risk elements.
  • Monitor changes in index components. If you are investing in a frontier ETF or index mutual fund, make sure you know and understand the index that the fund tracks and also the components of that index. The countries included in a frontier index can change over time.
  • Geopolitical and currency risks are real. Be aware that some frontier markets are located in parts of the world with unstable political or market environments.
  • Factor in costs and fees. Frontier fund costs and fees can be higher than their emerging market peers, and significantly higher than broadly diversified domestic and international managed funds.
  • Consider Performance History. Frontier funds are relatively new, and most have limited performance histories.

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

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U.S. District Judge John A. Jarvey, an Iowa federal judge, decided not to dismiss a case alleging investment managers Principal Management Corp. and Principal Global Investors, LLC took too much on fees they charged a retirement plan investing in particular mutual funds. Judge Jarvey ruled that American Chemical & Equipment Inc 401(K) Retirement Plan (ACE) had standing under the Investment Company Act (ICA) to initiate a case alleging the investment management groups kept an acquired fund fee that was in breach of their fiduciary duties to investors in a collection of mutual funds, which held $18 billion in assets combined.

According to Judge Jarvey, a shareholder in those principal funds, ACE is a security holder of the principal funds within the meaning of ICA and therefore established standing to file the case. In addition, ACE rightfully limited it breach of fiduciary duty claim against the Principal defendants to only those fees collected from principal interest holders and retained by principal fund advisers.

ACE alleged the defendants, as advisers to the principal funds, first “pocket[ed] the entire acquired fund fee from the principal funds as investment money” before distributing a part of the fee to sub-advisers for managing the underlying funds. ACE is only looking to recover the fees it was charged as a principal funds shareholder and which were kept by defendants as advisers to that fund.

Judge Harvey, however, did dismiss a claim for excess profits from economies of scale, taking the defendants’ position that breach of fiduciary duty based only on economies of scale is not an independent cause of actions under the ICA.

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

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New York federal prosecutors have asked the U.S. Court of Appeals for the Second Circuit to dismiss an appeal by a federal prisoner who asserts that Ponzi schemer Bernie Madoff was convicted because the government used mind-control techniques to influence the court.

In July, a handwritten motion seeking to dismiss the case was filed under Madoff’s name by Frederick Banks, who is currently serving a sentence in a Youngstown, Ohio federal prison. Banks claimed that the government utilized “bio-electric sensors and sub-aural communicators voice-to-skull technology.” Judge Denny Chin, believing the motion to be filed by Madoff himself, denied the motion in late July. Banks, however, was not deterred, subsequently filing two handwritten notices of appeal in which he made relate claims regarding “bio-electric sensors” and “voice to skull influence.”

In response, Southern District of New York prosecutor Michael Levy filed a motion to dismiss the appeal on August 27, stating that “Banks is a stranger to this case. He has no apparent authority to act on Madoff’s behalf and, even if he did, he is not an attorney and may not do so.” He also noted that the appeal was filed more than fourteen days after Judge Chin’s ruling and as a result untimely.

Madoff, himself, is currently serving a 150-year prison sentence after confessing to running the biggest Ponzi scheme in U.S. history. Fifteen other individuals have pled guilty or been convicted in connection to the fraud.

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

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Eliyahu Weinstein, a New Jersey Ponzi schemer already serving 22 years in prison for a $200 million real estate scam, confessed in federal court last week that he additionally defrauded potential investors in Facebook’s initial public stock offering and other real estate transactions. He then admitted to laundering the illicit proceeds.

Weinstein pleaded guilty to conspiracy to commit wire fraud, committing wire fraud while on pretrial release, and money laundering. According to U.S. Attorney Paul J. Fishman, the crimes occurred while he was awaiting trial for his previous crimes. Fishman stated, “Even while facing federal charges that eventually netted him decades in prison, Weinstein couldn’t resist the buzz around the Facebook [initial public offering] and the opportunity to fleece unsuspecting investors. Shamelessly, he even used the money he stole to pay the legal fees he accumulated from the previous scam.”

Weinstein and his conspirators offered a pair of investors the opportunity to purchase blocks of Facebook shares prior to the social media company’s initial public offering in May 2012, even though they had no access to the shares. The offer appeared especially attractive because large blocks of the shares were extremely hard to come by and were expected to increase in value at the time of the initial public offering.

Weinstein and his conspirators falsely claimed they had buyers lined up to whom they would sell the Facebook shares at a substantial profit and that they had collateral to secure the investments, even though that collateral was worthless, according to a federal indictment issued on April 17. The victims wired a total of $4,675,000 to accounts controlled by Weinstein and his conspirators in February and March 2012 for the blocks of Facebook shares, but the money was never used to purchase the stock.

Weinstein also was charged in the indictment with persuading the Facebook investors to invest in an apartment complex in Florida at a discounted price by telling them the property would be flipped immediately at a substantial profit. The victims wired a total of $2,830,000 in two payments in February and April 2012 to an attorney trust account that was supposed to be held in escrow to purchase the property, but Weinstein and a conspirator wired out most of the money soon afterward. They gave about $1.8 million of it back to the Facebook investors, falsely claiming it represented the return of their principal and a profit on the Facebook transaction.

A third component of the fraud involved misrepresentations to induce investment of about $1.5 million in notes on seven South Florida condominiums that Weinstein claimed were in foreclosure, although he had lost the units in a foreclosure years earlier and the money was never invested in the notes. To further the scheme, he provided the investment group with phony documents that falsely claimed the condominiums earned about $780,000 a year in rental income.

Weinstein will be sentenced on December 15th. He faces up to 20 years in federal prison for the new conspiracy, up to 30 years for committing wire fraud while on pretrial release, and up to 10 years for the money laundering.

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

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The United States Court of Appeals for the second circuit ruled this week that a forum-selection clause in Goldman Sachs and Citigroup contracts preempts their responsibility under FINRA rules to arbitrate disputes with a customer. The Appellate Court had consolidated two separate cases brought by Golden Empire Schools Financing Authority and North Carolina Eastern Municipal Power Agency against Goldman Sachs and Citigroup respectively.

The plaintiffs in both cases assert that the firms fraudulently induced them to issue millions of auction rate securities in the years prior to the 2008 financial crisis, during which the auction rate securities market imploded. But as the Second Circuit ruled, the plaintiffs cannot compel arbitration against the financial firms because their broker-dealer contracts included forum selection clauses requiring all disputes to be brought in federal court.

The ruling brings to light a circuit split on the issue. The 4th Circuit reached the opposite conclusion last year in UBS Financial Services v. Carilion Clinic, but a 9th Circuit April precedent conforms to this ruling.

FINRA, of which Goldman Sachs and Citigroup are both members, requires members to arbitrate a dispute if requested to do so by the customer and “the dispute arises in connection with the business activities of the member.” But “[b]ased on this Circuit’s precedent, we hold that a forum selection clause requiring ‘all actions and proceedings’ to be brought in federal court supersedes an earlier agreement to arbitrate,” U.S. Circuit Judge John Walker wrote on behalf of the three-judge panel.

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

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Earlier this week, the SEC charged a Houston financial adviser with fraud for failing to disclose to clients that it was profiting from a broker investing their money in mutual funds recommended by that broker. According to the SEC, Robare Group Ltd., a registered investment adviser that provides services for 350 separately managed accounts and currently managing about $150 million in assets, contracted in 2004 with an anonymous broker that the broker would pay Robare between two and twelve basis points on the client assets that the adviser invested in no-transaction-fee mutual funds on the broker’s platform.

From September 2005 to September 2013, Robare allegedly aquired about $441,000 in fess from that broker, using the broker for execution, custody, and clearing services for its clients. The agreement provided Mark L. Robare and Jack L. Jones, Jr., the co-owners of Robare, an incentive to recommend the broker’s mutual funds rather than other investments that might have been more suitable for the clients.

Robare also failed to disclose the revenue agreement from 2005 until December 2011 on its form ADV. At that time, Robare started disclosing the agreement, but the SEC alleges it was not sufficient. For example, it did not state that the agreement created a conflict of interest, and it stated that Robare “may receive compensation” from the broker when it was receiving the payments.

Alan Wolper, the attorney representing Robare, denied the SEC’s charges and is confident that the SEC will not be able to meet its burden of proof.

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

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Attorneys for Samuel Wyly and the estate of Charles Wyly, who were found liable for using a network of offshore trusts to conceal stock holdings in illegal trading, claim that they cannot pay the $728 million demanded by the SEC, stating that it would bankrupt them. Last week featured closing arguments from both sides in a non-jury trial regarding the amount the brothers should pay following their May 2014 jury verdict. Their attorneys claim that they have a combined net worth of about $119 million.

The Wylys asserted that the SEC did not show a nexus between the amount they demanded and the transactions for which the jury found them liable, arguing that $1.38 million should be the maximum amount they should pay. They claim that the SEC failed to present any evidence that any of their investors were harmed by the securities law violations. The jury found, however, that the Michaels Stores Inc. co-founders operated a fraud that earned them over $550 million in illicit gains over thirteen years.

The SEC reduced its demand from $1.41 billion after the judge rejected one of the theories underlying its calculations. The judge also threw out the SEC’s insider-trading claim against the brothers. The SEC, however, believes the numbers are “fair and equitable,” according to Bridget Fitzpatrick, an attorney for the SEC.

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

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Administrative Law Judge Cameron Elliot found that Timbervest LLC and its four principals committed fraud and ordered the group to disgorge nearly $2 million in illegal gains. Timbervest is an Atlanta company that manages over $1.2 billion in investments pertaining to timber. The SEC alleged that in 2006 and 2007, Timbervest’s CEO, CIO, COO, and President received over $1 million in unauthorized, undisclosed real estate commissions paid out of the pension plan assets of Timbervest’s biggest client.

The SEC alleges that the payments were arranged to hide that the group benefited financially from the unauthorized transactions. Finally, the SEC alleges that Timbervest and its principals operated the undisclosed and unauthorized sale of a timberland property from a fund holding that same client’s pension assets to another investment fund that the firm managed. The company’s representatives stated that Timbervest’s client’s representative ordered it to destroy almost half of its portfolio, and the sale was a direct consequence of that order. The client knew of the sale, and it was authorized.

Timbervest has denied the SEC’s allegations and claims that there were no unauthorized transactions.

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