Articles Posted in Hedge, Bond & Mutual Funds

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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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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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Earlier this month, the SEC secured a huge win in SEC v. Wily, but on the same day the SEC was handed a crushing defeat in a bigger case, SEC v. Graham. Furthermore, a jury in Manhattan on Friday returned a verdict against the SEC and in favor of the three defendants in SEC v. Obus, a lengthy high profile insider trading case.

The SEC had brought an insider trading action against Nelson Obus, Peter Black, and Thomas Strickland following the acquisition of SunSource, Inc. by Allied Capital Corporation in June 2001. In May of that year, Allied approached GE Capital about financing its acquisition of SunSource. While performing due diligence on SunSource, Strickland learned of the proposed deal. Strickland then discussed SunSource with Peter Black. Both claim that there was no tip, just a routine due diligence conversation. Black did, however, suspect that SunSource was considering a transaction that would dilute existing shareholders and relayed that information to his boss, Obus. Obus later called the President of SunSource, who would later claim that he learned during this conversation that Obus had been tipped. Obus would later deny that claim.

Two weeks after the Strickland-Black conversation, Wynnefield Capital, Inc., where Black and Obus worked, purchased 287,200 shares of SunSource at $4.50 per share. Nine days later the deal was announced, the share price doubled, and the hedge fund gained a profit of about $1.3 million.

The SEC claimed that Strickland illegally tipped Black who in turn tipped Obus. The District Court granted summary judgment in favor of the defendants, but the Court of Appeals for the Second Circuit reversed and remanded the case for trial. Despite receiving favorable rulings regarding the duty and knowledge of tippees from the Second Circuit, the SEC was unable to prevail at trial as the jury rejected its claims, finding in favor of the defendants.

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 Commodity Futures Trading Commission (CFTC) is investigating the sky high fees that are charged to investors in managed futures funds. This comes after a December 19, 2013 letter that the Senate’s Special Committee on Aging sent to the CFTC asking them to work with the Securities and Exchange Commission (SEC) on investigating the fees and the means for their disclosure when associated with retirement accounts .

A managed future fund is a variety of alternative investment that is overseen by the CFTC. These funds are normally sold to consumers via brokers. Fund managers then invest in futures, which are financial contracts in which the buyer promises to buy an asset at a predetermined date in the future. Such futures obligations typically obligate the buyer to purchase assets like global commodities (goods and services), and foreign currencies, among other speculative financial instruments .

A review of these funds has shown that over 89% of the gains of $11.51 billion these funds posted were eaten up by fees, commissions, and expenses of the fund managers. As The Economist describes hedge fund fees, it is “easy to think of people who have become billionaires by managing hedge funds; it is far harder to think of any of their clients who have got as rich.”

What is worse is many of these fees are not adequately disclosed to investors. The National Futures Association (NFA), a self-regulating watchdog organization that oversees the trading of commodities and futures, does not require managers of managed futures funds to disclose how their fees impact investor profits over time. And given that these funds are sold to investors by brokers, it is not likely a broker would disclose that all of the gains from the fund are likely to be eaten up by these fees .

In the December 19 Senate Committee letter that has prompted the CFTC probe, Senators Bill Nelson and Elizabeth Warren wrote: “Clearly, individual investors, especially senior investors looking to find a suitable place to place their retirement savings, should be made aware of these managed-future funds’ fees and commissions and the draining effect upon their investments. Although these funds are purported to be for sophisticated investors, some of these firms have a very low minimum investment that can be made from an Individual Retirement Account (IRA). We are very concerned about the potential impact these fees could have on the retirement security of the Americans who invest in these funds.”

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The jury has been selected for the trial of Anthony Chiasson and Todd Newman according to an article in the Dealbook section of the New York Times. Chiasson co-founded Level Global Investors and Newman was a portfolio manager at Diamondback Capital Management. Their charge- being part of a $68 million conspiracy that traded massive amounts of Dell and computer chip maker Nvidia shares based off an insider tip, right before an announcement of the negative value of the shares was released.

The article discusses a greater conspiracy than just Chiasson and Newman. Six other traders have already pleaded guilty.One of the other traders worked for SAC Capital Advisors; Level Global and Diamondback were both started by former employees of SAC Capital Advisors. Prosecutors and investors alike are interested to see what information this trial will bring regarding the trading strategies and practices of SAC Capital Advisors.

So far, the investigation into the Wall Street insider trading has lead to sixty-nine convictions. The majority of the defendants have pleaded guilty; of the eight defendants that have gone to trial, all were found guilty. The conspiracy spanned throughout SAC Capital, Level Global and Diamondback; however, the investigation is not limited to those three companies. Rajat Gupta of Golman Sachs and Sandeep Goyal of Dell have been sentenced to jail time due to their active roles in this conspiracy.

An earlier article in the Dealbook explains more about the actual conspiracy. The men charged passed insider information through a “circle of friends” that were mainly hedge fund managers, the article explained. These men then shorted shares of Dell and Nvidia before a negative earnings announcement was due to be released. The hedge fund and portfolio managers involved in this conspiracy had a duty to their investors as well as to their employers to not use insider information. The negative value of the shares of Dell and Nvidia had not yet been made to the public when they acted upon the tip, thus making their trades illegal insider trading. The many of the ties between the insider trading and the participants of the conspiracy, which produced great gains for the managers and great losses for the individual investors, have been traced to SAC Capital Advisors.

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The Los Angeles Times reported that Philip Falcone and his firm, Harbinger Capital Partners, are facing charges of civil fraud and bond price manipulation. The article stated that Falcone and his firm allegedly manipulated the market for high yield and high risk bonds. Falcone used Maxx Holdings to buy up a great portion of Harbinger Funds to shrink the availability in the market and drive up prices.

Falcone and his firm were also accused of letting only certain investors know when they should cash out their holdings, without giving any warning to their other investors. Three other firms were linked to the fraud and bond manipulation and paid $1 million dollar fines.

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Travis Pantin of the New York Sun reports that the number of class action lawsuits filed against Wall Street firms surged in the last year, fueled by the meltdown in the subprime mortgage market, according to new research published yesterday.

There was a 43% jump in the number of securities fraud class action lawsuits last year to 166 suits — 100 of which were filed after the mortgage crisis hit, the study by Stanford Law School and Cornerstone Research.

To read full article click here.

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Andrew Leckly of Tribune Media Services reports that stock of MBIA Inc. declined sharply in 2007. Although the giant bond guarantor has international growth prospects, don’t count on them if it drops the ball in its own country.

Moody’s, Standard & Poor’s and Fitch rating services have affirmed their AAA financial strength rating of MBIA, but also added an ominous “negative outlook.” They’d previously assumed MBIA had been conservative in all business dealings.

To read the full article click here.

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Shefali Anand of the WSJ reports that as the credit crunch is starting to hit some bond mutual-fund investors in unexpected ways, some are now taking legal recourse for losses in their investments.

In the most recent instance, an Indiana charity filed an arbitration complaint against Memphis, Tenn., broker-dealer Morgan Keegan & Co. unit of Regions Financial Corp., for an alleged misrepresentation in selling a bond mutual fund. The fund has lost nearly half of its value this year.

The complaint comes on the heels of a lawsuit filed in a federal court in Manhattan in October over an institutional bond fund of State Street Corp., which alleged that the fund invested in “high risk” investments. A State Street spokeswoman has denied that the firm incorrectly communicated the investment objective of the fund.

In its arbitration complaint, the Indiana Children’s Wish Fund says that it invested around $220,000 in the Regions Morgan Keegan Select Intermediate Bond Fund, on the understanding that it was a relatively safe investment. The complaint was filed with the Financial Industry Regulatory Authority last month.

To read full article click here.

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Serena Ng of the WSJ has reported that the corporate-debt market unwittingly became a victim of contagion from the subprime-mortgage turmoil in 2007, as prices of many bonds and loans plunged even while corporate defaults remained very low.

Investors are hoping for a reprieve this year, but they expect more volatility in the coming months.

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