Monthly Archives: April 2010

French trader Fabrice Tourre and his employer, Goldman Sachs, are being sued by the Securities and Exchange Commission (SEC) for allegedly devising a package of highly risky credit default swaps (CDS) and then betting against the investments – and their clients – to fail. The deals produced massive losses for investors but big profits for Tourre and, ultimately, for Goldman Sachs.

The SEC filed its civil lawsuit on April 16, and the move seems to confirm what many people have long believed: The world of Wall Street is indeed rigged, and investors are the ones who wind up on the losing end.

“The SEC suit against Goldman, if proven true, will confirm to people their suspicions about the total selfishness of these financial institutions,” said Steve Fraser, a Wall Street historian, in an April 18 article in the New York Times. “There’s nothing more damaging than that. This is way beyond recklessness. This is way beyond incompetence. This is cynical, selfish exploiting.”

Tourre is the only Goldman Sachs employee named in the SEC’s complaint. As for the deals Tourre created, they consisted of collateralized debt obligations (CDOs), which were contingent on the performance of risky mortgage-related securities. Those details, however, were never disclosed to investors, according to the SEC.

In the SEC’s complaint, Tourre is accused of structuring the CDO, called ABACUS 2007-AC1, with input from the hedge fund Paulson & Co. The CDO itself held some of the riskiest assets around, a key fact that allegedly was never stated in any marketing materials related to ABACUS or by Tourre when he sold the investments to investors. Regulators say Paulson then bet against the CDO. Again, investors in the CDO were never told about Paulson’s role or intentions.

When the housing market began to spiral out of control in 2007 and 2008, ABACUS felt the pain. In an e-mail that Tourre sent to a friend on Jan. 23, 2007, he states the following:

“More and more leverage in the system, The whole building is about to collapse anytime now…Only potential survivor, the fabulous Fab[rice Tourre]…standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!”

Another e-mail from Tourre – this one dated Feb. 11, 2007 – reads as follows:

“The CDO biz is dead we don’t have a lot of time left.”

And neither did investors as it turns out. When the housing market collapsed, investors in ABACUS 2007 AC1 suffered losses of more than $1 billion, according to the SEC. Paulson, meanwhile, made a profit of about $1 billion. And Goldman Sachs? It was paid about $15 million for structuring the bonds and selling them to investors.

News involving Medical Capital fraud recovery has been on the minds of thousands of investors following a July 2009 lawsuit filed by the Securities and Exchange Commission (SEC) that accuses the Tustin-based company of securities fraud. In the lawsuit, the SEC alleges that Medical Capital misappropriated about $18.5 million of investor funds and misrepresented certain financial facts about the investments, otherwise known as Medical Capital Notes.

In March 2010, federal prosecutors launched a criminal investigation into two executives with ties to Medical Capital Holdings: Medical Capital CEO Sidney M. Field and President Joseph J. “Joey” Lampariello. Both Field and Lampariello were sued by the SEC in August 2009 for securities fraud.

A number of broker/dealers that sold Medical Capital investments also are facing regulatory scrutiny and lawsuits. At the top of the list is Securities America, which was sued in January 2010 by the Commonwealth of Massachusetts. According to the complaint, a number of Securities America reps allegedly misled investors about investments in Medical Capital and failed to disclose the risks associated with the investments.

The Massachusetts lawsuit further alleges that between 2003 and 2008, a group of Securities America executives repeatedly failed to heed the warning of an outside due-diligence analyst regarding the risks of the Medical Capital investments.

One Securities America rep facing legal troubles is William Glubiak, who’s been named in a $7.7 million complaint from about 24 households of investors who purchased investments in Medical Capital Holdings.

Another leading Securities America adviser involved in litigation connected to Medical Capital is Paula Dorion-Gray. In November 2009, Dorion-Gray was cited in a $254,000 complaint.

As for Securities America, it vigorously disputes the allegations of the Massachusetts Securities Division and contends that Massachusetts regulators don’t understand the workings of private placements and Regulation D offerings.

Maddox Hargett & Caruso P.C. continues to file arbitration claims with the Financial Industry Regulatory Authority (FINRA) on behalf of investors who suffered investment losses in Medical Capital. If you purchased Medical Capital Notes from a broker/dealer and wish to discuss your potential rights for recovery, contact us today.

The Securities and Exchange Commission (SEC) has charged investment firm Goldman Sachs with fraud in connection to sales of synthetic collateralized debt obligations (CDOs).

According to the SEC’s complaint, Goldman Sachs failed to disclose critical information about the CDOs to investors, including their ties to a major hedge fund whose investments Goldman allegedly was betting against. Meanwhile, as investors suffered huge financial losses totaling billions of dollars, Goldman itself profited.

The hedge fund, Abacus 2007-AC1, contained mortgage investments that were most likely to lose value, says the SEC. Abacus was then marketed and sold to investors such as pension funds, insurance companies and other hedge funds.

As reported April 16 by the New York Times, the SEC’s lawsuit against Goldman marks the first time that regulators have taken action against a Wall Street deal that helped investors capitalize on the collapse of the housing market.

“The product was new and complex, but the deception and conflicts are old and simple,” Robert Khuzami, director of the SEC’s division of enforcement, said in a statement.

“Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party,” Khuzami said.

Medical Capital Holdings broker John B. Guyette has surrendered his securities license to practice business in Colorado over what regulators say was a violation of state and federal securities laws regarding sales of private placements in Medical Capital Holdings. Guyette also is no longer registered with the Financial Industry Regulatory Authority (FINRA).

Colorado regulators allege that Guyette sold the private placements to a number of investors with whom he did not have a prior relationship, which is a violation of Regulation D. Regulation D is the federal securities law under which private placements are offered.

“I surrendered my license; I did not lose it,” said Guyette, who contends that he personally invested more than $200,000 in Medical Capital notes. “I voluntarily resigned rather than take this to the next level [court]. I decided not to fight this, and retired,” he said in an April 13 story in Investment News.

Guyette neither admitted nor denied the allegation by Colorado regulators, but nonetheless agreed to the order.

Private placements have come under fire by state and federal regulators following a 2009 announcement by the Securities and Exchange Commission (SEC) to file fraud charges against Medical Capital Holdings. According to the SEC’s complaint, Medical Capital allegedly operated much like a Ponzi scheme.

Since 2003, Medical Capital raised $2.2 billion from six private placement offerings to 20,000 investors nationwide. Things started to go haywire in the summer of 2008, when many Medical Capital borrowers began defaulting, which resulted in late interest payments to investors throughout 2009. Since then, investors have filed several complaints against Guyette alleging losses of $600,000.

Guyette and his business partner, Tom Miller, sold Medical Capital securities through Elite Investments; other broker/dealers marketed and sold the placements through CapWest Securities in Greeley.

Guyette remains licensed to sell securities in California, Illinois and Wyoming. According to an April 13 article by American Chronicle, Guyette sayshe has no plans to fight the state of Colorado for the return of his license or move to states where he is licensed.

Private placement offerings and leveraged ETFs (exchange-traded funds) are among the investments that con artists turn to as a way to scam innocent victims. Private placements in particular have been in the news lately, with their issuers – i.e. Medical Capital Holdings and Provident Royalties – accused of committing fraud.

As reported April 9 by CNBC, it’s become increasingly commonplace for investors to find themselves a victim of an investment scam or con. According to the North American Securities Administrator Association (NASAA), senior citizens are the No. 1 target for fraud, with baby boomers ranking a close second. In 2008, the FBI estimated that some $40 billion was lost to securities and commodities fraud.

In addition to private placement offerings, leveraged ETFs rank high in terms of potential abuse for fraud. While legitimate financial products, ETFs are complicated investments that trade on a daily basis. ETFs use exotic financial instruments, including derivatives, to generate better returns than the market return. This potential volatility, along with the increased exposure to risk, may make ETFs an unsuitable investment for most retail investors.

The best way to prevent fraud is to do your homework. If you suspect a deal is too good to be true, contact your state securities regulator. You also can find out if the person selling the offering or investment is registered with the Financial Industry Regulatory Authority (FINRA) on FINRA’s BrokerCheck Web site.

Another red flag to be aware of: Guarantees of a high rate of return on unregistered securities.

An obscure hedge fund called Magnetar offers new details into the world of collateralized debt obligations (CDOs) and how the instruments cost investors billions while yielding a payday bonanza for Magnetar. And that’s the irony. What Magnetar did appears to be legal.

Magnetar and the toxic deals it created and then bet against are the subject of an investigative story by ProPublica and co-produced with Chicago Public Radio’s This American Life and NPR’s Planet Money.

The short version of Magnetar – which was started up by former Citadel trader Alec Litowitz – begins with the Chicago hedge fund buying up the riskiest portion of CDOs. At the same time, Magnetar placed bets that portions of its own deals would fail. Meanwhile, Magnetar ended up reaping a massive fortune.

Magnetar worked with most of Wall Street’s top banks in its deals – deals that ultimately produced $40 billion worth of extremely toxic, high-risk CDOs. Among the banks that helped sell those toxic assets to investors: Merrill Lynch, Lehman Brothers, Citigroup, UBS and JPMorgan Chase.

“Along the way, it did something to enhance the chances of that happening, according to several people with direct knowledge of the deals. They say Magnetar pressed to include riskier assets in their CDOs that would make the investments more vulnerable to failure. The hedge fund acknowledges it bet against its own deals but says the majority of its short positions, as they are known on Wall Street, involved similar CDOs that it did not own. Magnetar says it never selected the assets that went into its CDOs.”

ProPublica offers an excellent slideshow of how Magnetar orchestrated its CDO deals. Entitled The Anatomy of the Magnetar Trade, the slides provide a straightforward and simple account of the players involved in the CDO market and how when the instruments ultimately collapsed, Magnetar profited.

The complete (5,900 words) story on Magnetar is well worth the read. You can view the story in its entirety here.

Morgan Keegan’s legal problems show no signs of letting up. The latest troubles facing the Memphis-based investment firm include federal and state charges alleging Morgan Keegan and two employees – James Kelsoe and Thomas Weller – committed fraud when pricing several proprietary bond funds.

As reported April 12 by the Wall Street Journal, the federal and state charges are in addition to a slew of arbitration claims filed by investors who allegedly lost approximately $2 billion through fraudulent and reckless business practices on the part of Morgan Keegan. Class-action lawsuits also have been leveled against the company.

Mississippi, Alabama, Kentucky and South Carolina regulators joined the Financial Industry Regulatory Authority (FINRA) in filing fraud charges on April 7. The Securities and Exchange Commission (SEC) filed similar charges that same day.

The fraud charges are “a serious event,” said Chris Marinac, managing principal at FIG Partners, in the Wall Street Journal story. “The exposure” to eventual costs “could be all over the map,” he said. “There’s no telling what a judge and jury will do.”

Morgan Keegan may also have another legal problem on its plate. The SEC reportedly could force the company to buy back nearly $200 million in auction-rate securities – investments that became frozen when the credit markets seized up in February 2008.

Several Regions Morgan Keegan bond funds that lost more than $1 billion of investor assets have resulted in enforcement actions against Morgan Keegan & Co. and its asset management unit, Morgan Asset Management Inc., by the Securities and Exchange Commission (SEC), four states and the Financial Industry Regulatory Authority (FINRA).

Among the allegations, federal and state regulators say that Morgan Keegan mismanaged and misrepresented the funds to both investors and brokers, as well as manipulated the net asset value of the funds.

As reported April 7 by Investment News, regulators say they have evidence showing that James Kelsoe, the former portfolio manager of the Morgan Keegan funds, was allowed to work with little or no supervision.

“The actions taken by regulators today are long overdue,” said Scott Shewan, president of the Public Investors Arbitration Bar Association, in the Investment News story.

The Morgan Keegan funds in question invested in risky mortgage-backed securities. As a result, the value of the funds plummeted in 2007 and 2008 following the collapse of the housing market.

The states that joined the SEC to bring actions against Morgan Keegan include Alabama, Kentucky, Mississippi and South Carolina.

In addition to Morgan Keegan and Morgan Asset Management, regulators also are targeting Joseph Weller, head of the Morgan Keegan fund accounting department; Brian Sullivan, president and chief investment officer of Morgan Asset Management; Gary Stringer, director of investments for Morgan Keegan’s Wealth Management Services division; and Michele Wood, chief compliance officer of the Morgan Keegan funds.

The latest charges by the SEC and state regulators could serve as further evidence to help thousands of investors who have filed lawsuits and arbitration claims against Morgan Keegan with FINRA. For instance, regulators claim that the president of Morgan Asset Management, Carter Anthony, was told by Morgan Keegan president Doug Edwards and former president Allen Morgan not to supervise Kelsoe. The time period involved was from 2001 through 2006,

In an October 2009 deposition, attached to the states’ complaint, Anthony stated the following:

“Time and time again I was told by [Mr.] Morgan and [Mr.] Edwards [to] leave [Mr.] Kelsoe alone, he’s doing what we want him to do, he’s also a little bit strange, he gets mad easy, leave him alone; and I left him alone. I did what I was told to do.”

Another potentially damning piece of evidence is a May 2007 email sent by Gary Stringer, who headed Morgan Keegan’s Wealth Management Services division. That e-mail reads:

“What worries me about this [Regions Morgan Keegan Select Intermediate] bond fund is the tracking error and the potential risks associated with all that asset-backed exposure. Mr. & Mrs. Jones don’t expect that kind of risk from their bond funds. The bond exposure is not supposed to be where you take risks. I’d bet that most of the people who hold that fund have no idea what’s [sic] it’s actually invested in. I’m just as sure that most of our FAs have no idea what’s in that fund either.”

Memphis broker Morgan Keegan & Co. faces fraud charges by the Securities and Exchange Commission (SEC). The SEC announced the charges on April 7, accusing Morgan Keegan and two employees of defrauding investors by deliberately inflating the value of risky mortgage securities that cost investors more than $2 billion.

According to the SEC’s complaint, Morgan Keegan allegedly failed to employ reasonable procedures to “internally price the portfolio securities in five funds managed by Morgan Asset and, consequently, did not calculate accurate net asset values (NAVs) for the funds.” Morgan Keegan recklessly published these inaccurate daily NAVs and sold shares to investors based on the inflated prices, the SEC said.

“This scheme had two architects – a portfolio manager responsible for lies to investors about the true value of the assets in his funds, and a head of fund accounting who turned a blind eye to the fund’s bogus valuation process,” said Robert Khuzami, Director of the SEC’s Division of Enforcement, in a statement.

The portfolio manager cited by the SEC is James C. Kelsoe Jr., who the SEC says manipulated prices of low-quality investments to make his funds appear more appealing to investors. The complaint further alleges that Kelsoe convinced staff members in Morgan Keegan’s fund accounting department to accept 262 “price adjustments” during the first seven months of 2007 that hid the deteriorating value of Morgan Keegan’s ill-fated bets on mortgage-backed securities and other toxic structured products.

Joseph Thompson also was named in the SEC’s complaint. The SEC accuses Thompson, who was in charge of reviewing prices within the Morgan Keegan funds, of failing to ensure that the securities in the funds were properly priced.

The Financial Industry Regulatory Authority (FINRA) also filed a complaint against Morgan Keegan on April 7, alleging that the firm misled customers about the risks of the bond funds and used false and misleading sales materials to market the funds. FINRA is seeking an unspecified fine and restitution for affected investors.

“This was a slick operation, it was devastating,” said the Rev. Richard Bland in an April 7 story by the Dow Jones Newswires. According to the story, Bland’s Alabama-based United Prison Ministries International lost more than $200,000 in the Morgan Keegan bond funds. “They took all that money from us,” Bland said.

LPL Financial, the nation’s largest independent-contractor broker/dealer, is once again in the news over technology mistakes that could put private client information at risk. The story was first reported April 6 by Investment News.

According to the article, an “unencrypted portable hard drive” was stolen from an LPL representative sometime in late February. The representative, Christian D’Urso, was based in Beaverton, Oregon. It’s unclear exactly how many LPL clients could be affected by the theft.

This isn’t LPL’s first run-in with potential breach of customer information. In 2008, the Securities and Exchange Commission (SEC) issued a cease and desist order against LPL for its failure to implement adequate controls to protect access to customer accounts.

According to the SEC, between mid-July 2007 and February 2008, LPL was subject to hacking incidents in which customer accounts were accessed and the perpetrator placed or attempted to place 209 unauthorized trades in 68 accounts for more than $700,000. Without admitting or denying the SEC’s charges, LPL paid a fine of $275,000 to settle the matter.

LPL Financial has 12,000 representatives and advisers.