Monthly Archives: July 2010

Martin Wegener, a former financial representative for New England Securities, is accused of fleecing investors out of millions of dollars through an elaborate investment scam. The Securities and Exchange Commission (SEC) filed fraud charges against Wegener on June 14, 2010, accusing the one-time broker of scamming investors out of at least $6.5 million.

From December 1998 to May 2010, Wegener worked as a registered representative for New England Securities. According to the SEC, it’s during his employment at New England Securities that the investment scam allegedly occurred undetected.

In the SEC’s complaint, Wegener is accused of encouraging investors to withdraw funds from their New England Securities brokerage accounts so that he could, in turn, invest their money in certain publicly traded securities, publicly traded mutual funds, and other investment vehicles such as certificates of deposit or private businesses. In reality, however, Wegener deposited the money into bank accounts in the name of Wealth Resources.

As it turns out, the sole owner of Wealth Resources was Wegener.

In order to maintain the appearance of legitimate investing, Wegener provided customers with purported “brokerage account” statements from Wealth Resources, which falsely showed that Wegener had placed their money in a variety of investments.

The SEC says that never happened. Instead, Wegener used investors’ money for his personal gain.

Wegener reportedly operated his scam from at least 2007 through March 2010.

New England Securities is the licensed broker/dealer of New England Financial. Whether New England Securities could face regulatory sanctions in the future for failing to properly supervise Wegener remains to be seen. If that happens, however, it would not be the first time that New England Securities has been called on the carpet for supervisory violations.

According to the Financial Industry Regulatory Authority’s BrokerCheck, New England Securities paid a $500,000 fine in connection to that very issue in March 2009. Earlier that same year, the company was fined $1.2 million by FINRA for, among other things, failing to “establish, implement and enforce a supervisory system designed to monitor compliance with regard to participation of associated persons in outside business activities and private securities transactions.”

On March 24, 2010, New England Securities submitted an offer of settlement with the Massachusetts Securities Division over alleged supervisory violations of former representatives and sales of promissory notes.

Investors who purchased preferred shares of Fannie Mae and Freddie Mac stock continue to lament their decision. In 2007 and 2008, investment firms like UBS, Morgan Stanley, Citigroup, Merrill Lynch and others sold billions of dollars in various series of preferred stock issued by the two mortgage giants. According to investors, however, the brokerages never revealed key information about the preferred shares and the ticking time bomb they represented.

Specifically, investors allege they never knew about the rapidly deteriorating financial health of Freddie Mac and Fannie Mae – a decline that was largely fueled by the two companies’ voracious appetite for risky lending, excessive leverage and investments in toxic derivative products.

By the time Fannie Mae and Freddie Mac issued select series of preferred stock in 2007 and 2008, the damage had been done. Both companies were fading fast financially and desperately needed an immediate infusion of capital. Enter the idea to issue noncumulative preferred stock to investors. Investors were eager to jump on board. After all, the stock came with attractive dividends of about 8%. As for the toxic nature of Fannie and Freddie’s mortgage portfolio, that was something investors now say they were never told.

The brokerage firms that continued to sell preferred securities in Fannie Mae and Freddie Mac even in the face of the companies’ plummeting financial condition may have had good reason to keep such information under wraps. Why? Because of the profits they made in underwriting fees. As reported in a July 7 article in Forbes titled How Fannie and Freddie Unloaded Their Trash, brokerages took in more than one-third of a billion dollars total in fees between November 2007 and June 2008.

As for investors holding preferred shares in Fannie Mae and Freddie Mac, they saw their investments become essentially worthless with the deepening of the U.S. housing crisis. Finally, in 2008, the federal government took over Fannie Mae and Freddie after the two companies suffered huge loan losses.

A number of investors have since filed arbitration claims against the brokerages that allegedly misrepresented the various series of preferred stock in Fannie Mae and Freddie Mac. If you are an institutional investor or retail investor and were misled about your investments in Fannie Mae or Freddie Mac preferred shares, we want to hear your story. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA). Leave a message in the Comment Box below or via the Contact Us form.

The admission of guilt came on July 15 as Goldman Sachs settled civil fraud charges with the Securities and Exchange Commission (SEC) over its marketing of a collateralized debt obligations (CDO) package known as Abacus 2007-ACI.

In settling the matter, Goldman agreed to pay a $550 million fine. It is biggest fine ever levied by the SEC on a U.S. financial institution. Goldman also acknowledged that its marketing materials for Abacus contained incomplete information.

“This settlement is a stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing,” says Robert Khuzami, Director of SEC Enforcement.

Goldman’s troubles began back in April, when the SEC accused the investment bank of failing to disclose that one of its clients, Paulson & Co, had helped select the securities contained in the Abacus mortgage portfolio and which was later sold to investors.

According to the SEC, Goldman did not reveal that Paulson, one of the world’s largest hedge funds, had, in fact, bet that the value of the securities would fall.

Following the collapse of the housing market, the securities in that mortgage portfolio – i.e. Abacus – lost more than $1 billion.

Despite the settlement with the SEC, Goldman is far from being out of legal hot water. One of the investors in Abacus was the Royal Bank of Scotland PLC (RBS), which lost $841 million as a result of the deal. Of Goldman’s $550 million settlement with the SEC, approximately $100 million will be paid to RBS. However, the RBS may be considering a civil suit against Goldman Sachs Group to recoup additional financial losses it sustained in Abacus, according to a July 16 article in the Wall Street Journal.

Meanwhile, Fabrice Tourre, who is the only Goldman Sachs executive named as a defendant in the SEC’s fraud lawsuit, has yet to settle with the regulator.

Tourre, the creator of Abacus, has repeatedly denied the SEC’s charges that he misled investors. A number of potentially damaging emails seem to refute Tourre’s claims, however. In one email, Tourre comments on the state of the housing market and the inevitable demise of Abacus:

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

The alleged stock broker fraud case involving Martin Wegener offers insight into what investors can do to avoid becoming victims of investment scams. On June 14, the Securities and Exchange Commission (SEC) charged Wegener and his companies – Wealth Resources, Inc. and Wealth Resources, LLC – with defrauding investors out of at least $6.5 million.

According to the SEC, Wegener was not a registered broker or investment adviser yet told his clients he would invest their money through Wealth Resources. He would then provide investors with purported “brokerage account” statements from Wealth Resources – statements that falsely represented a variety of investments courtesy of Wegener’s “financial acumen.”

Wegener never used his customers’ money for those investments, however. Instead, the SEC says he took clients’ money for his personal use, paid business expenses and made investments on his own behalf in entities where he had an ownership interest. Those companies included WU Ventures, LLC, Secura Technology, LLC, and Trailblazer Learning, Inc., as well as Wealth Resources. Investors’ funds also were transferred to Wegener’s former wife, Kristin Wegener.

The SEC further says that during the course of the alleged scam, Wegener used money from investors to make Ponzi-like payments to clients who wanted a portion or all of their investment returned.

The Wegener case offers several lessons for investors. First, before investing money with any financial professional, take time to verify that the person is a registered stock broker or financial advisor. Is the individual a member of the Financial Industry Regulatory Authority (FINRA)? Does the person have any customer complaints, disciplinary actions, fines, suspensions or other sanctions by FINRA, the SEC or other federal or state regulatory agencies listed on FINRA’s BrokerCheck Web site?

In addition, be leery of sales pitches that make exaggerated claims about the expected profitability of an investment, such as it will double in value in six months. The bottom line, if it sounds too good to be true, it usually is.

The admission of guilt came on July 15 as Goldman Sachs settled civil fraud charges with the Securities and Exchange Commission (SEC) over its marketing of a collateralized debt obligations (CDO) package known as Abacus 2007-ACI.

In settling the matter, Goldman agreed to pay a $550 million fine. It is biggest fine ever levied by the SEC on a U.S. financial institution. Goldman also acknowledged that its marketing materials for Abacus contained incomplete information.

“This settlement is a stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing,” says Robert Khuzami, Director of SEC Enforcement.

Goldman’s troubles began back in April, when the SEC accused the investment bank of failing to disclose that one of its clients, Paulson & Co, had helped select the securities contained in the Abacus mortgage portfolio and which was later sold to investors.

According to the SEC, Goldman did not reveal that Paulson, one of the world’s largest hedge funds, had, in fact, bet that the value of the securities would fall.

Following the collapse of the housing market, the securities in that mortgage portfolio – i.e. Abacus – lost more than $1 billion.

Despite the settlement with the SEC, Goldman is far from being out of legal hot water. One of the investors in Abacus was the Royal Bank of Scotland PLC (RBS), which lost $841 million as a result of the deal. Of Goldman’s $550 million settlement with the SEC, approximately $100 million will be paid to RBS. However, the RBS may be considering a civil suit against Goldman Sachs Group to recoup additional financial losses it sustained in Abacus, according to a July 16 article in the Wall Street Journal.

Meanwhile, Fabrice Tourre, who is the only Goldman Sachs executive named as a defendant in the SEC’s fraud lawsuit, has yet to settle with the regulator.

Tourre, the creator of Abacus, has repeatedly denied the SEC’s charges that he misled investors. A number of potentially damaging emails seem to refute Tourre’s claims, however. In one email, Tourre comments on the state of the housing market and the inevitable demise of Abacus:

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

In May and June, investors prevailed in five out of six arbitration claims against Memphis brokerage firm Morgan Keegan. Meanwhile, hundreds of additional individual arbitration claims await decisions from the Financial Industry Regulatory Authority (FINRA).

Since 2008, thousands of investors have suffered more than $1 billion in losses from a group of mortgage-related Morgan Keegan bond funds. The funds, whose investments were tied to the real estate market, plummeted by as much as 80% following the burst of the housing bubble.

In the lawsuits and arbitration claims that have followed, investors accuse Morgan Keegan of misrepresenting or failing to disclose certain facts about their investments.

In April 2010, regulators charged Morgan Keegan and two employees with fraud for inflating the value of mortgage securities and other risky debt held in the bond funds at the center of the ongoing litigation. The complaint – which was filed by the Securities and Exchange Commission (SEC), FINRA and various state securities regulators – also charged Morgan Keegan portfolio manager James Kelsoe of improperly directing his accounting department to make repeated, arbitrary “price adjustments” that boosted the fair values of securities.

Morgan Keegan’s Joseph Thompson Weller, who led the accounting department, is named in the complaint, as well.

An influx of stockbroker fraud lawsuits and regulatory investigations has prompted the Financial Industry Regulatory Authority (FINRA) to significantly expand the information it provides through its BrokerCheck Web site.

Specifically, FINRA plans to increase the number of customer complaints reported publicly, make certain information about brokers available on a permanent basis, and extend the public disclosure period from two years to 10 years for any broker who leaves the industry.

“The greater amount of information that is available to the investing public will only provide the opportunity for investors to be better informed as to the investment professionals they are entrusting their assets to,” said Steven Caruso of Maddox Hargett & Caruso, P.C., in a July 14 phone interview with On Wall Street.

The BrokerCheck expansion will be implemented in two phases, according to FINRA. In late August, historic complaints will be added to the public records of all current and former brokers. By the end of 2010, full records will be publicly available for brokers whose registrations were terminated within the past 10 years.

The Martin Wegener fraud investigation is now the subject of a civil injunction action by the Securities and Exchange Commission (SEC). According to the June 14 complaint, the Grand Rapids stock broker defrauded investors of at least $6.4 million from March 2007 to March 2010.

Wegener’s office in Walker, Michigan, has been closed since April following a raid by law enforcement officials. So far, at least two of Wegener’s former clients are suing New England Securities, the company Wegener represented.

In its 13-page civil complaint, the SEC contends Wegener ran his alleged scheme by investing clients’ money in a variety of bogus securities, as well as in two companies of which he had ownership, Wealth Resources, Inc. and Wealth Resources, LLC.

In reality, however, Wegener was keeping investors’ money for himself, while sending out fake brokerage statements to clients.

The SEC also accuses Wegener of using investors’ money to make Ponzi-like payments to other customers who requested a return of all or a portion of their investment.

Maddox Hargett & Caruso P.C. currently is investigating both Martin Wegener and New England Securities on behalf of investors who sustained investment losses. If you have a story to tell related to this matter, contact our securities fraud team. We can evaluate your situation to determine if you have a claim.

Private-placement sales in Provident Royalties LLC have come back to haunt many once-successful broker/dealers. The Securities and Exchange Commission (SEC) charged Provident with civil fraud last summer, accusing the company and various top executives of operating a $485 million Ponzi scheme allegedly involving phony oil and gas securities.

Fifty broker/dealers that sold private placements in Provident are now being sued by Provident’s trustee, Milo H. Segner Jr. At the same time, hundreds of investors have filed arbitration claims with the Financial Industry Regulatory Authority (FINRA).

As reported July 11 by Investment News, many broker/dealers facing Provident-related lawsuits appear to have dangerously low net-capital positions – a fact that could put them in peril if they eventually pay out large legal claims over soured Provident deals.

“Broker-dealers facing millions of dollars in lawsuits could be in a world of hurt,” said Carrie Wisniewski, president of B/D Compliance Associates, in the Investment News article. “It’s a big problem,” she said.

One of the broker/dealers named in the trustee’s June 21 lawsuit is Capital Financial Services. It had only $390,000 in excess net capital at the end of 2009. The firm also has at least nine pending arbitration claims against its president, Brian Boppre, totaling $10.8 million in damages.

Next Financial Group also is a big seller of Provident private placements. It had $3.1 million in excess net capital at the end of last year, including $1.1 million reserved to pay contingent legal liabilities, according to Investment News.

Violation of the SEC’s net-capital requirement can signal the end of a broker/dealer. The Provident case – and the resulting legal claims it produced – has pushed many broker/dealers to the breaking point. Okoboji Financial Services, the fifth-largest seller of the Provident private placements, said in May it was closing up shop. Okoboji reportedly had excess net capital of $32,048 at the end of 2009, but made no provisions for legal liabilities.

GunnAllen Financial got caught up in a similar situation. A leading seller of investment deals in Provident Royalties, the broker/dealer closed in March when its available capital fell below the amount needed to adhere to industry rules. At least 10 other firms that sold private placements in Provident Royalties, as well as in Medical Capital Holdings, have shuttered recently because of net-capital issues.

If you are a retail or institutional investor and sustained investment losses related to Provident Royalties, contact our securities fraud team. We can evaluate your situation to determine if you have a claim.

Suitability, misrepresentation and issues involving variable annuities and mutual funds topped the list of enforcement actions levied by the Financial Industry Regulatory Authority (FINRA) in 2009. In total, the regulator imposed $50 million in fines and resolved 1,090 disciplinary actions. By comparison, FINRA saw $28 million in fines from 1,007 actions in 2008.

As reported July 9 by Investment News, about two-thirds of the 2009 fines for advertising violations came from auction-rate securities cases. Actions against FINRA members for sales of convertible notes and private placements also were more prevalent in 2009 and into 2010.

Moving forward, analysts predict the industry to see a growing number of fines from cases connected to sales seniors, alternative investments and private placements. Already, two significant cases involving private placements – Medical Capital Holdings and Provident Royalties – are the subject of multiple lawsuits and arbitration claims.