Monthly Archives: February 2010

Botched financial planning is the accusation facing Northern Trust Company, which has been sued by the Chicago Teachers’ Pension Fund over claims that the investment company breached its fiduciary duty and made unsuitable investments in risky, long-term securities that ultimately plummeted in value. 

The lawsuit – which seeks class-action status – was filed by Public School Teachers’ Pension and Retirement Fund of Chicago and the city of Atlanta Firefighters’ Pension Plan. It also names Northern Trust Investments N.A. 

As reported Feb. 2 by Pensions & Investments, the lawsuit stems from a Northern Trust securities lending program.  Specifically, the 43-page complaint states that instead of investing the Chicago and Atlanta funds in conservative, highly liquid, ultra short-term investment funds, “Northern Trust, in flagrant violation of its duties, locked the funds into risky, long-term investments – including hundreds of millions of dollars of unregistered, illiquid securities that plummeted in value.” 

On July 31, 2007, almost 70% of the securities held in the Short-Term Extendable Portfolio (STEP) were not due to mature for more than a year-and-a-half, and more than 20% of the securities in STEP were not due for at least 10 years,” the suit alleges. 

“The STEP portfolio included hundreds of millions of dollars in exotic, unregistered securities issued by structured investment vehicles, or SIVs – entities that were recently identified in hearings before the congressional Financial Crisis Inquiry Commission as one of the causes of the financial crisis that served no good or productive purpose in the financial system – and millions more in securities backed by risky residential mortgages and other consumer loans.” 

As of July 31, 2007, more than 15% of the securities in STEP were invested in unregistered securities – securities which, by definition, can only be sold under certain narrow circumstances and for which there is no ready market, the suit said. 

Those unregistered securities included two structured investment vehicles, Sigma Finance and Theta Finance Corp. Both were created and managed by the United Kingdom-based investment management company, Gordian Knot.  According to the lawsuit, the notes issued by SIVs are exotic, high-risk investments that were outside the enumerated classes of securities permitted to be held in STEP. 

The lawsuit further contends that because SIVs in general – and Sigma and Theta in particular – lacked an established track record, they were entirely inappropriate investments for a conservative fund such as STEP. 

The complaint also cites what could be some telling information by Northern Trust’s chief economist, Paul Kasriel. In 2006, according to the complaint, Kasriel said the following: “The U.S. housing market was in a ‘recession’ and that the housing market would ‘pull the economy down’ in 2007.” 

Northern Trust, however, ignored the warnings of its own chief economist and kept the collateral pools invested in securities, the lawsuit states. And those securities had significant exposure to mortgage-backed securities, SIVs and financial institutions that (Mr.) Kasriel warned were overly exposed to mortgage-backed investments. 

Northern Trust has denied the allegations.

David McFadden, a former broker for Securities America, has been sentenced to five years in prison for running a securities fraud scheme that cost at least 150 clients – many of whom were retired or living on a fixed income – tens of millions of dollars in losses.

McFadden headed a company called Diversified Financial Services and was a registered representative for Securities America. And while he touted himself as a certified public accountant, he neglected to tell clients that he hadn’t been a licensed CPA for more than two decades.

Most of McFadden’s victims were solicited via seminars that he held for longtime Exxon-Mobil employees. According to court documents, McFadden convinced investors to make early withdrawals from their retirement accounts and then deposit the money into stock accounts and/or risky securities. McFadden, meanwhile, would make commissions on the purchases, even though he knew such investments were unsuitable for those approaching retirement.

McFadden pled guilty on May 27, 2009, admitting that he conspired with others to commit a securities fraud scheme by falsely promoting his qualifications and credentials as a CPA and financial planner to obtain clients.

“He lied to them and told them they were going to have their nest eggs for the rest of their lives,” said Assistant U.S. Attorney Dorothy Manning Taylor.

If you have a story to tell involving Securities America and/or David McFadden, please contact our lawyers. After reviewing your situation, they will advise you of your options.

Tim Durham’s Fair Finance Company has officially withdrawn its request from the Ohio Department of Commerce’s Division of Securities to sell additional investment certificates to Ohio investors. The company has remained on lock down since Nov. 24 after federal prosecutors filed court papers accusing Durham of running a Ponzi scheme. That same day, FBI agents stormed Durham’s Indianapolis office and the Akron, Ohio, offices of Fair Financial where they seized boxes of banking records and computer equipment.

No one has been charged with criminal wrongdoing.

The FBI raids occurred one month after IBJ reporter Greg Andrews published an in-depth investigative story that raised questions about the financial health of Fair Financial and whether the company had enough money to repay the $200 million it owed to Ohio investors.

A number of stories have since come forth citing evidence that Durham and others used Fair Finance as a personal bank for years.

“We concluded some time ago that Ohio would never allow Fair Finance to register any more securities,” said Thomas Hargett of Maddox Hargett & Caruso P.C., in a Jan. 13 article in the Indianapolis Star. Hargett and David P. Meyer & Associates Co. are working to get class-action status on behalf of investors. Their complaint, filed last month in Akron, Ohio, accuses Fair Finance and its officers of violating the Ohio Securities Act and other breaches of legal duty that included duping investors into buying investment certificates from Fair Finance.

Late last month, more than 1,000 Fair Finance investors packed the Fisher Auditorium at the Ohio Agricultural Research and Development Center in hopes of getting some answers about their investments.

The meeting was spearheaded by Ohio Congressman John Boccieri, who invited area attorneys, Ohio securities officials and representatives from the FBI to answer questions and offer guidance to investors.

As reported Jan. 27 by The Daily Record, one investor asked what was being done about potential asset liquidations, noting that Durham’s 98-foot yacht is reportedly up for sale. Other investors wanted to know why the U.S Attorney’s Office decided to drop the civil suit against Durham and unfreeze his assets.

“Reports have said that Mr. Durham doesn’t want to be known as one of the richest men in America, he wants to be the richest man in America,” Boccieri said in the article. “I find that absolutely egregious and that people would do this and perpetuate such acts on people who have put their life savings in these types of investments.”

If you have questions about investments in Fair Finance, contact us.