Articles Posted in Asset Backed Securities

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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 The original proposal was withdrawn after numerous fiery attacks from the financial industry, which contended that the proposal would increase liability and regulatory costs for brokers.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.

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Last week, the SEC issued an order requiring particular national security exchanges and FINRA to jointly develop and file with the SEC a national market system plan to install a 12-month pilot program directed at expanding minimum quoting and trading increments (i.e., tick sizes) for particular small capitalization stocks. The pilot program will target stocks with a market capitalization of $5 billion or less, a mean daily trading volume of one million shares or fewer, and a share price of $2 per share or more.

A control group and three test groups, each consisting of 300 securities, will be included in the program. Control group securities will be tested at the current tick size increment of $0.01 per share, trading exclusively at increments presently allowed. Securities in two of the test groups will be quoted in $0.05 minimum increments, but the increments in which the applicable securities trade will vary. The final test group will be subject to a “trade-at” requirement, designed to stop price matching by a trading center that does not show the best bid or offer. The SEC will use the third group’s trade-at requirement to ascertain if quoting and trading at expanded increments without a trade-at requirement will cause trading volume to move to “dark venues,” which do not provide public pre-trade price transparency.

The SEC’s order will require that all data collected be transferred to the SEC and made publicly available. The SEC will provide a plan with the details of the pilot program by August 25. At that time, the SEC will publish the plan for public comment and determine whether to approve it.

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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Martin Franklin Blane of Ocean Springs, Mississippi and Robert Neil Robinson of Pensacola, Florida were sentenced by Montgomery County Circuit Court Judge Eugene Reese to five years in prison, suspended, with three years supervised probation for violating the Alabama Securities Act. Additionally, the Court ordered Blane to pay $81,000 restitution and Robinson to pay $185,520 restitution to victims.

Both defendants were charged with violations of the Act in a November 2013 Montgomery County Grand Jury indictment. Blane was thereafter arrested by the U.S. Marshal’s Fugitive Task Force in Jackson County, Mississippi; Robinson was similarly arrested in Escambia County, Florida. The Alabama Securities Commission’s Enforcement Division investigation found that Blane and Robinson sold shares of stock in Eyewonder, Inc., a company based out of Atlanta, Georgia, to the victim investors. In the end, a third party involved in the sales failed to transfer the shares to the victims. Accordingly, the victims never received anything in return for their investment. According to the ASC’s investigation, neither Blane nor Robinson were registered with the ASC to legally offer and/or sell securities into, within, or from Alabama, as required by law.

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. Supreme Court gave Halliburton Co. a partial victory recently, putting further restrictions on class-actions lawsuits by shareholders just shy of eradicating such suits altogether. Halliburton tried to overturn twenty-six year old precedent and end class-action fraud suits over securities brought on public exchanges. A divided court declined to do so, and Chief Justice John Roberts stated that Halliburton had not shown “the kind of fundamental shift in economic theory” that would warrant overruling the precedent. The court did, however, make it easier for defendants to prevent approval of a class action. Roberts stated that a defendant can prevent such approval by showing that an alleged misstatement had no effect on a company’s stock price.

The precedent in this case comes from Basic v. Levinson, a 1988 case which stated that judges considering misrepresentation claims should presume that investors will take any public misstatement into account before buying shares.

The shareholders, with the Erica P. John Fund at the lead, allege that between 1999 and 2001 Halliburton falsified earnings reports, played down estimated asbestos liability, and exaggerated the benefits of a merger.

Securities-fraud litigation has boomed as of late despite Congress’ attempt limit it. In fact, more than 4,000 class-action suits have been filed since 1996, producing nearly $80 billion in settlements.

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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Thirty-seven former clients have filed complaints against Kathleen Tarr, a broker who worked for Royal Alliance Associates, after encouraging hundreds of departing AT&T employees to roll over their retirement money into the type of risky high-commission investments that FINRA warns about. These complaints, together with similar complaints against other brokers, underscore a massive rollover boom in the U.S. Former employees shifted $321 billion from 401(k)-style plans to IRAs in 2012, an increase of approximately 60% in one decade.

While generally retirees can leave their savings in 401(k) plans, financial firms lure them in with cold calls, Internet advertisements, storefront signs, and cash incentives to switch to IRAs, lauding the advantage of the IRA’s expansive variety of investment choices over those of 401(k) plans. However, IRAs are associated with expensive and high-risk investments, and they often charge higher fees than those associated with 401(k) plans, providing brokers an incentive to promote rollovers.

Given this incentive for brokers to promote rollovers, federal regulators are combating rollover abuse. The U.S. Labor Department plans to institute a fiduciary standard by proposing in January rules that brokers and other advisers act in clients’ best interests during rollovers. FINRA, too, has stated that it will heighten its scrutiny of IRA rollovers.

Tarr, who stands by her advice, was dismissed from Royal Alliance in 2010 for failing to follow a policy for pre-approval of variable annuities. As her customers’ investments went south, thirty-seven clients complained about her to FINRA. Four of these complaints have been settled, fifteen are pending, and eighteen were closed without action. Tarr is now the president of AeroComputers Inc., an Oxnard, California aviation company that caters to law enforcement. She continues to believe in the products she sold while at Royal Alliance but notes that the firm never objected to her practice, stating that “Royal Alliance could have said to me five years ago, ‘We’ve been looking through your book of business. We think you’re a little heavy on variable annuities. Let me suggest alternatives.’ They never said anything. Nothing.”

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 SEC is currently examining potential changes to its definition of “accredited investor.” Section 413(b)(2)(A) of the Dodd-Frank Act of 2010 states that the SEC must examine the definition of “accredited investors” under the Securities Act of 1933 every four years to determine whether it should be changed “for the protection of investors, in the public interest and in light of the economy.” Currently, an individual qualifies as an “accredited investor” regarding participation in private offerings of securities under Rule 506 of the Securities Act if the investor has at least $200,000 in annual income in each of the two most recent years or $1 million in net worth without taking primary residence into account.

SEC chair Mary Jo White wrote a letter in November of last year detailing the SEC’s plan regarding the definition, indicating that the SEC is examining

  • Whether the existing net worth and income tests are appropriate measures that should continue to be used;
  • Whether individuals with certain professional accreditations, including certified public accountants, chartered financial analysts and experienced financial professionals, including registered investment advisors, consultants, brokers, traders, portfolio managers, analysts, compliance staff, legal counsel and regulators should be considered “accredited investors” regardless of whether they satisfy the income and net worth tests;
  • Whether individuals with certain educational backgrounds focused on business, economics and finance should be considered “accredited investors” based solely on such backgrounds;
  • Whether an expanded pool of “accredited investors” would increase liquidity in private placement investments and thereby reduce the risk profile of those investments;
  • Whether reliance on a qualified broker or registered investment advisor should enable ordinary investors to participate in private placements; and
  • Whether reducing the pool of “accredited investors” would harm the United States Gross Domestic Product.

White’s letter further indicates that the SEC believes that the inclusion of more financially sophisticated investors in private offerings may improve the extent to which private offerings are generally scrutinized by investors. The SEC is also open to the idea of considering whether certain professional certifications and educational backgrounds could be useful in determining financial sophistication, such as CPA or CFA designations. White, however, stated that concern had already been expressed to the SEC regarding whether academic background in and of itself is an appropriate indicator of “accredited investor” status.
The SEC believes that it should complete its review of the “accredited investor” definition by July 2014.
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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Variable annuities may sound like a slam dunk for investors as many brokers pitch them as providing a guaranteed income for life. However, many investors soon find out that their variable annuity contracts contain unclear terms and conditions, high annual fees, massive surrender charges, and illusory tax benefits. Investors are becoming more wary of these annuities, and data from FINRA shows that there has been a massive increase in complaints regarding variable annuities.

There are a number of factors that investors should consider when deciding whether or not to purchase a variable annuity. First of all, variable annuities are extremely complicated. At its foundation, a variable annuity is a contract between an investor and an insurance company in which the company agrees to make periodic payments to the investor. The annuity is called “variable” because its value changes depending on how investments (usually mutual funds tied to stocks, bonds, and cash equivalents or a combination of the three) inside the annuity perform. This may seem simple, but many investors have trouble understanding the inner-workings of various riders that guarantee living benefits with minimum roll ups and periodic step ups. Additionally, many investors fail to read the fine print of their contracts.

Secondly, often variable annuities are expensive, and many times they are not worth their high costs. Expenses relating to these annuities can easily take a 3% chunk out of the account value yearly. Thus, an investor would need to reach an annual return of 3% to break even. Say an investor’s variable annuity grew by 4% annually. The return on that annuity would only be 1% after expenses. Additionally, investors should know about surrender penalties, which apply to withdrawals made within a specified time period, usually six to eight years, after the annuity is purchased. The penalty is a percentage of the amount withdrawn and typically declines over time. Thus, investors who place a large portion of their assets in a variable annuity and find themselves needing cash within a couple of years of the contract can find that these penalties will hit them hard.

Finally, tax deferral is typically a poor reason for purchasing an annuity. Investments inside a variable annuity grow tax free and taxes on gains are paid only as money is withdrawn, but many other investment vehicles, such as IRAs and 401(k) plans, already offer tax-deferred growth. Furthermore, the tax-deferral benefits of a variable annuity may be overblown because investment gains in a variable annuity are taxed at the highest marginal income tax rate whereas investment gains in traditional brokerage accounts are taxed at the lower capital gains tax rate.

Of course, these annuities may be the right option for a number of investors, but it is important that they are fully informed on the risks and rewards of variable annuities before they purchase them.

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 Securities and Exchange Commission has charged global investment bank and brokerage firm Jefferies LLC with failing to supervise its employees who sold mortgage-backed securities desk and were in turn lying to customers about pricing .

An SEC investigation found that Jefferies representatives including Jesse Litvak, who the SEC charged with securities fraud last year, lied to customers about the prices that the firm paid for certain mortgage-backed securities. Lying about those prices mislead customers about the true amount of profits being earned by the firm in its trading. Jefferies’ policy required supervisors to review the electronic communications of traders and salespeople in order to flag any untrue or misleading information provided customers. However, the policy was not implemented in a way to detect misrepresentations about price .

Jefferies agreed to pay $25 million to settle the SEC’s charges as well as a parallel action announced today by the U.S. Attorney’s Office for the District of Connecticut.

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On Feb. 19, RBS officials announced that the company had reached a $275 million settlement with the U.S. government to resolve allegations of misleading investors in mortgage-backed securities. The settlement is the third-largest settlement in the U.S. class action against banks packaged and sold mortgage securities .

This case was originally filed in 2008 by New Jersey Carpenters Health Fund and the Boilermaker Blacksmith Pension Trust. The suit accused RBS and others of violating U.S. securities law by packaging and selling an estimated $25.39 billion of securities in 14 separate offerings to linked to the Harborview Mortgage Loan Trusts. These mortgage loans did not meet underwriting guidelines, a fact the suit says RBS concealed. The loans later sank to junk status .

This settlement is just a drop in the bucket compared to the estimated losses suffered by investors. As more and more of these settlements take place it is important that investors take actions to protect their legal rights in these sorts of cases.

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Countrywide Financial group is urging a California court to dismiss racketeering claims brought against it by Prudential Life Insurance Company. Prudential’s suit alleges that Countrywide used omissions and misrepresentations to sell low-quality mortgage backed securities to unknowing consumers. Countrywide is alleging that the claim is time barred based on an inquiry notice standard that would prevent the suit alleging that more than $500 million of these mortgage backed securities were wrongfully sold by Countrywide .

The inquiry notice standard starts running the statute of limitations at the point when plaintiffs should have been aware of its claimed injury and the source of that injury — in this case, when “reasonable investor” would have been aware of problems with underwriting at Countrywide — according to Countrywide’s memorandum in support of its motion to dismiss the claims. Opposing council claimed that this notice standard had not been met by the date in question .