SEC SUES PSYCHIC FOR SECURITIES FRAUD
On March 4, 2010, the Securities and Exchange Commission filed a complaint against a purported psychic who fraudulently raised $6 million after telling investors he could predict stock market highs and lows.
According to the complaint, the purported psychic began soliciting investors around the summer of 2006 by telling them that he would use his “psychic expertise to provide investment guidance to his investing team.” In one newsletter , the SEC alleges that the defendant falsely stated, “I have called ALL the highs and lows of the market giving EXACT DATES for rises and crashes over the last 14 years.” The defendant allegedly used his newsletter, website, appearances on a national radio show, and appearances at public events to promote his psychic abilities, and he made numerous materially false representations relating to his psychic abilities in order to solicit investors.
S.E.C. v. Morton, No. 10 Civ. 1720 (S.D.N.Y. Mar. 4, 2010).
JUDGE RAKOFF DISMISSES CASE AGAINST FINRA OVER MERGER OF NASD AND NYSE
On March 1, 2010, District Judge Rakoff issued an opinion in two federal cases concerning alleged misrepresentations in the solicitation of NASD shareholder votes necessary for the consolidation of the NASD and NYSE and formation of FINRA. In both cases, the defendants filed motions to dismiss arguing, among other things, that they were entitled to absolute immunity. In his opinion, Judge Rakoff agreed with the defendants stating:
Pursuant to the Securities Exchange Act of 1934 , 15 U. S .C. §§ 78a-7800 , the United States Securities and Exchange Commission is authorized to delegate certain regulatory functions to SROs, which are therefore considered ‘quasi-governmental’ bodies…. As a result , SROs and their offi cers are absolutely immune from private damages suits challenging official conduct performed within the scope of their regulatory functions.
Judge Rakoff concluded that “[i]t is patent that the consolidation that transferred NASD’s and NYSE’s regulatory powers to the resulting FINRA is, on its face, an exercise of the SROs’ delegated regulatory functions and thus entitled to absolute immunity.”
Standard Investment Chartered v. NASD, No. 07 Civ. 2014 (JSR) and Benchmark Financial Services, No. 08 Civ. 11193 (JSR) (S.D.N.Y. Mar. 1, 2010).
JUDGE RAKOFF APPROVES SEC SETTLEMENT WITH BOA OVER MERRILL MERGER
On February 22, 2010, Judge Rakoff entered an Order approving the Bank of America’s settlement with the Securities and Exchange Commission over the Meriil merger. This litigation began with a proposed settlement in August 2009 which was rejected by Judge Rakoff.
In its Order, the Court commented:
Given the somewhat tortured background of these cases and the difficulties the motion presents, the Court is tempted to quote the great American philosopher Yogi Berra: “I wish I had an answer to that because I’m getting tired of answering that question.” However, after full consideration, the Court reluctantly grants the motion, on the terms specified below.
(Emphasis added).
SEC FILES ENFORCEMENT ACTION IN SOUTHERN DISTRICT OF FLORIDA
On February 9, 2010, the Securities and Exchange Commission filed a complaint against two individuals for violations of the Securties Exchange Act of 1934 alleging that:
From approximately January 2005 until March 2007, the Defendants spearheaded a sophisticated scheme to defraud the banks and their depositors by secretly using relatives as nominees to acquire stock in those conversions in contravention of the offering terms and applicable banking regulations. Over the course of the fraudulent scheme, the Defendants reaped ill-gotten profits from secondary market sales of the illegally obtained stock. The Defendants used four relatives and several business entities they controlled as nominees to fraudulently acquire the bank shares prior to the public offerings.
SEC v. Vitales, No. 10-cv-20408-JAL (S.D.Fla. Feb. 9, 2010).
STATE STREET BANK AND TRUST SETTLES WITH SEC OVER MORTGAGE-BACKED SECURITIES
On February 4, 2010, State Street Bank and Trust Company entered into a settlement with the Securities and Exchange Commission without admitting or denying the findings of the SEC in the settlement Order. During the subprime mortgage crisis the SEC found that State Street engaged in a course of business that misled investors about the extent of subprime mortgage-backed securities held in certain unregistered funds under its management.
As a result of State Street’s conduct, investors in State Street’s funds lost hundreds of millions of dollars during the subprime market meltdown in mid-2007.
State Street offered investments in certain collective trust funds to institutional investors, including pension funds, employee retirement plans, and charities. These funds included two substantially identical funds – referred to together as the Limited Duration Bond Fund (the “Fund”) – made available to different categories of investors. Other actively-managed bond funds and a commodity futures index fund managed by State Street (“the related funds”) also invested in the Fund. State Street established the Fund in 2002 and marketed the Fund by saying it utilized an “enhanced cash” investment strategy that was an alternative to a money market fund for certain types of investors. By 2007, however, the Fund was almost entirely invested in or exposed to subprime residential mortgage-backed securities (“subprime investments”). Nonetheless, State Street continued to describe the Fund to prospective and current investors as having better sector diversification than a typical money market fund, while failing to disclose the extent of its exposure to subprime investments.
When the subprime market collapsed in mid-2007, many investors in the Fund and the related funds were unaware that the Fund had such significant exposure to subprime investments. In fact, the Fund’s offering materials, such as quarterly fact sheets, presentations to current and prospective investors, and responses to investors’ requests for proposal, contained misleading statements and/or omitted material information about the Fund’s exposure to subprime investments and use of leverage. As a result, many investors either had no idea that the Fund held subprime investments and used leverage, or believed that the Fund had very modest exposure to subprime investments and used little or no leverage.
See the SEC Press Release here.
NEW YORK ATTORNEY GENERAL SUES BANK OF AMERICA OVER MERRILL LYNCH MERGER
On February 4, 2010, the New York Attorney General filed a complaint in New York State Suprme Court. The lawsuit alleges that Bank of America (“BOA”) and certain executives violated New York’s Martin Act, the state’s Blue Sky law. The complaint alleges that BOA “intentionally failed to disclose massive losses at Merrill so that shareholders would vote to approve the merger.” The Securities and Exchange Commission has filed a similar action alleging the violation of federal securities laws.
FINRA INVESTOR EDUCATION FOUNDATION ANNOUNCES GRANTS FOR LAW SCHOOL CLINICS
On January 28, 2010, FINRA Education Foundation announced grants to create law school clinics at Florida International University, Howard University, Pepperdine University, and Suffolk University to provide legal assistance to “underserved investors involved in securities disputes.” These grants are intended to “help fill the gap in legal representation for investors with small claims who do not have the financial resources to obtain legal counsel.”
SEC FILES NEW COMPLAINT AGAINST BANK OF AMERICA OVER MERRILL LYNCH MERGER
On January 11, 2010, District Judge Jed Rakoff rejected the Securities and Exchange Commission’s request to file a amended complaint. The SEC stated that the proposed amended complaint alleged that “that Bank of America learned prior to the Dec. 5, 2008, shareholder meeting vote that Merrill Lynch experienced a net loss of $4.5 billion in October and estimated that it had experienced billions of dollars of additional losses in November. The actual and estimated losses together represented approximately one-third of the value of the merger at the time of the shareholder meeting and more than 60 percent of the aggregate losses Merrill Lynch sustained in the preceding three quarters combined.”
On January 12, 2010, the SEC filed a separate lawsuit concernig these new allegations made in connection with its merger with Merrill Lynch. The new complaint was filed in the Southern District of New York, Case No. 10 Civ 0215.
On September 14, 2009, the District Court rejected a proposed settlement between Bank of America and the SEC. SEC v. Bank of America, Case No. 09 Civ. 6829 (S.D.N.Y.)
NINTH CIRCUIT SAYS LEAD PLAINTIFF SELECTS LEAD COUNSEL, NOT TRIAL JUDGE
On November 5, 2009, the Ninth Circuit issued an Opinion regarding the PSLRA’s provision for selection of lead counsel after the trial court did not appoint as lead counsel, the law firm selected by the court-appointed lead plaintiff. The Court noted:
The statute expressly provides that lead plaintiff has the power to select lead counsel, suggesting that the identity of the party selecting lead counsel was of substantial importance to Congress. Nor does the statute, framed in mandatory language, designate any other actor as authorized to select lead counsel or suggest that the district court may appropriate this authority. It would be difficult for the statute to be more clear that it is the lead plaintiff who selects lead counsel, not the district court.
The clause subjecting the lead plaintiff’s selection of counsel “to the approval of the district court” in no way suggests that a district court shares in the lead plaintiff’s authority to select lead counsel or that isapproval of a lead plaintiff’s choice divests the lead plaintiff of this authority. The ordinary reading of this clause merely gives the district court the limited power to accept or reject the lead plaintiff’s selection. Given that the PSLRA indisputably assigns to the lead plaintiff the power to select lead counsel, it would be incongruous to conclude that this power shifts to the district court following disapproval of a lead plaintiff’s selection of lead counsel. Instead, the opposite conclusion is compelled. The logical interpretation of the statute’s failure to provide an intricate procedure for the district court to follow after rejecting the lead laintiff’s selection is that the power to select lead counsel remains in the hands of the lead plaintiff. Any other result would allow the district court in all cases to reject lead counsel and then proceed to appoint its own choice.
(Citations omitted).
About Jay Eng
Jay Eng is an attorney at the law firm of Schwed McGinley & Kahle in Palm Beach Gardens, Florida. He is a member of the Florida Bar, the United States Supreme Court, the United States Court of Appeals for the Eighth Circuit and Eleventh Circuit, and the United States District Courts for the Southern District of Florida, Middle District of Florida Northern District of Florida and Eastern District of Wisconsin. He is also member of the Federal Bar Association and Palm Beach County Bar Association. He is a graduate of Tulane Law School and Florida State University. He is author of the Florida Securities Litigation & Arbitration law blog.
Schwed McGinley & Kahle
11376 North Jog Road, Suite 101
Palm Beach Gardens, FL 33418
Telephone: (561) 694-0070
Facsimile: (561) 694-0057
E-Mail: jeng@schwedmcginley.com
RSS FEED to Florida Securities LitigationON-
United States Securities & Exchange Commission- SEC Warns Firms on Muni Pay-to-Play Rules March 18, 2010
- SEC Charges S.C.-Based Lawyer in Scheme Promising Investors Returns as High as 4,900 Percent March 18, 2010
- SEC Charges Innospec for Illegal Bribes to Iraqi and Indonesian Officials March 18, 2010
- SEC Charges Former Executives in Illegal Scheme to Enrich CEO With Perks March 15, 2010
- FINRA
- FINRA_News: FINRA Enforcement Chief Susan Merrill Stepping Down - http://bit.ly/bsQaeS March 18, 2010
- FINRA_News: FINRA - Dallas Firm Expelled for Making Fraudulent Private Placements in Massive Ponzi Scheme - http://bit.ly/aovp8f March 18, 2010
- FINRA_News: FINRA - Applications Now Available for Military Spouses to Become Accredited Financial Counselors - http://bit.ly/bf86bn March 8, 2010
- Florida Securities Filings
- Wiand v. Gilbert et al March 17, 2010
- Solymar Investments, Ltd. et al v. Banco Santander, S.A. et al March 8, 2010
- Securities and Exchange Commission v. Cantens et al March 3, 2010
- v. Scoppetuolo et al February 16, 2010
- Securities and Exchange Commission v. Scoppetuolo et al February 16, 2010
- Wiand v. ABN AMRO Bank, N.V. February 11, 2010
- Demaria et al v. Gisbex Clearing Corporation, S.A. et al February 10, 2010
- Securities and Exchange Commission v. Vitale et al February 9, 2010
- The Law and Equity Report by Timothy Powers O’Neill
- Out of Limbo? Monies in excess of 15% Ordered Released in Terra-Adi Intern. Bayshore, LLC v. Georgarious December 9, 2009
- Irreconcilable Differences: The Stein v. Paradigm Court Divorces Itself From Precedent on the Interstate Land Sales Full Disclosure Act October 22, 2009
- “Mirror, Mirror” Securities Law Principles in a Parallel Universe. September 14, 2009
