Former Bank of America CEO Ken Lewis is in a category all by himself. Following the Feb. 4 filing of civil fraud lawsuit by New York Attorney General Andrew Cuomo filed, Lewis became the highest ranking banking official to face charges of wrongdoing as part of the financial industry’s meltdown.

Cuomo’s lawsuit accuses Lewis, former Bank of America CFO Joe Price (who now runs the bank’s consumer banking division) and Bank of America itself of manipulating both investors and the government by not disclosing the full extent of massive financial losses occurring at Merrill Lynch before shareholders voted on the firm’s pending acquisition. The suit says Bank of America then used Merrill’s financial predicament to get additional bailout funds from the government.

“Ken Lewis is the poster child – or scapegoat – for the excesses of the past,” said Mark Williams, executive-in-residence at Boston University and a former bank examiner in a Feb. 5 article in Bloomberg. While Lewis didn’t push as deeply as some rivals into mortgage-backed securities, “he made bad strategic decisions” by overpaying for Merrill Lynch and subprime home lender Countrywide Financial Corp., Williams said.

According to Cuomo’s complaint, Bank of America was given advice by its own legal counsel, Timothy Mayopoulos – as well as outside counsel – as early as November to tell investors about the current and predicted financial losses of Merrill Lynch. Deloitte and Touche, Merrill’s auditing firm, also suggested disclosure, the complaint says.

“ . . . Bank management failed to disclose that by December 5, 2008, the day Bank of America shareholders voted to approve the merger with Merrill Lynch, Merrill had incurred actual pretax losses of more than $16 billion. Bank management also knew at this time that additional losses were forthcoming and that Merrill had become a shadow of the company Bank of America had described in its Proxy Statement and other public statements advocating the merger,” the complaint reads.

Corporate Treasurer Jeffrey Brown also “urged Price to make a disclosure to no avail,” according to the complaint. “When Price dismissed the Treasurer’s advice, the Treasurer warned, ‘I didn’t want to be talking [about Merrill’s losses] through a glass wall over a telephone.’ ”

“Astonishingly, Price seemed to have forgotten this dramatic exchange,” according to the lawsuit.

Lewis also was aware of the disclosure issues, because Price updated him on disclosure and loss issues.

More of what Lewis did or didn’t know will likely come to light in the coming days and weeks ahead. In the meantime, however, the opening summary of Cuomo’s lawsuit may sum up the situation best: “Throughout this episode, the conduct of Bank of America, through its top management, was motivated by self-interest, greed, hubris, and a palpable sense that the normal rules of fair play did not apply to them. Bank of America’s management thought of itself as too big to play by the rules and, just as disturbingly, too big to tell the truth.”

State Street Corporation gave some “preferred” investors key information about its Limited Duration Bond Fund back in 2007, allowing them to jump ship and subsequently avoid millions of dollars in losses. As it turns out, the Limited Duration Bond Fund was almost entirely invested in mortgage-related securities. Investors who were not privy to State Street’s pre-warnings paid the price.

As reported Feb. 4 by the New York Times, State Street’s selective disclosure became public after agreed to pay more than $310 million in penalties and restitution to settle accusations by the Securities and Exchange Commission (SEC) and Massachusetts officials that it misled investors about the risks associated with the Limited Duration Bond Fund and other funds that invested in it.

According to a complaint filed by the SEC, State Street created the Limited Duration Bond Fund in 2002 and marketed it as an alternative to a money-market fund. Five years later, however, the fund was almost entirely invested in mortgage securities. State Street not only misled many investors about the fund’s exposure, but also provided certain investors with more complete information regarding the fund’s investing strategies, the SEC says.

“State Street gave preferential treatment to some investors over others, leaving many investors, including dozens of Massachusetts charities and retirement funds, completely unaware of key facts about the funds,” said Massachusetts Attorney General Martha Coakley in a statement.

Investors who received more accurate information from State Street included clients of State Street’s internal advisory groups, which advised some investors in the fund. The advisory groups recommended that their clients, including State Street’s own pension plan, redeem their investments. State Street sold the most liquid holdings to meet these redemptions, according to the SEC. As for the remaining investors, they were left with largely illiquid holdings.

The funds, which were managed by State Street Global Advisors, accounted for about $13 billion of State Street’s funds under management in 2007.

State Street’s settlement will be allocated among about 270 investors who lost money. It includes a $50 million fine and $8 million in forfeited advisory fees and interest. The payment is in addition to $350 million that State Street will pay to settle private claims. The bank also will pay an additional $20 million to settle with Massachusetts authorities.

State Street does not admit or deny the allegations.

College investments dropped 23% in 2009, with U.S. colleges and universities losing a total of $93 billion in endowment value in 2009. It was the most disastrous year since 1974, when the average college lost 11.4% of its endowment, according to a recent survey by the National Association of College and University Business Officers (NACUBO). NACUBO’s study, which was jointed conducted with the Commonfund, offers several important insights.

Institutions that focused more intently on using endowment funds as a way to provide long-term economic security – and thus invested in relatively low-risk, conservative investments – fared far better in general. On the other hand, institutions that may have viewed endowment money as a mechanism to generate capital and invested in riskier types of investments paid the price.

Harvard (the richest of the institutions that participated in the NACUBO survey) lost 30% at the end of 2009, followed by Yale University at 29%. Stanford University lost nearly 27% and Texas University nearly 25%.

By comparison, New York University (which also has an endowment greater than $1 billion) suffered a 15% decline in the value of its endowment at the end of FY 2009.

As reported Jan. 28 by Forbes, Martin Dorph, the university’s senior vice president for finance, credits the relatively positive performance to the endowment’s conservative asset allocation. NYU had $780 million – or about 35% of its endowment – invested in fixed income at the beginning of 2009. Another 30% was invested in hedge funds, 25% in equities and 10% in private equity.

“The reality for NYU is that, while our endowment is large on an absolute basis, it is not as large on a per-student basis as our peer institutions,” Dorph said in the article. “Our endowment is seen as more precious because we don’t have as much.”

Harvard Ignored Warnings About Investments?

Harvard’s questionable investing strategies have been well documented in the past weeks. In a Nov. 29 article appearing in the Boston Globe, a story reports that Jack Meyer, who headed Harvard’s endowment, had “repeatedly warned” Harvard officials that the school was being too aggressive with billions of dollars in cash, “investing almost all of it with the endowment’s risky mix of stocks, bonds, hedge funds, and private equity.”

The warnings, however, apparently fell on deaf ears. When the market crashed in 2008, Harvard found that $1.8 billion in cash had vanished. And, today, the university is still paying the price for its investing style via tighter budgets, deferred expansion plans, and big interest payments on bonds issued to cover the losses.

Larry Summers served as president of Harvard from 2002 to 2006. He also is one of the officials who allegedly failed to heed Jack Meyer’s warnings about taking on risky investments.

In 2004, Summers entered into an interest-rate swap agreement to finance a large-scale construction project. The notional value of the swaps involved was $3.7 billion, and the contracts had the university paying a fixed rate to, as well as receiving a variable rate from, a counterparty. At the time Harvard entered into the swaps in 2004, it assumed interest rates would rise. That assumption backfired when the Federal Reserve cut lending rates to zero in the wake of the financial collapse of 2008. In turn, the value of Harvard’s interest-rate swap contracts plunged, forcing the school to come up with almost $1 billion in cash to terminate the contracts.

Harvard needed a loan and it needed it fast. As reported Dec. 18 by Bloomberg, the nation’s most prestigious institution had to ask Massachusetts for fast-track approval to borrow $2.5 billion. Almost $500 million was used within days to exit the interest-rate swaps that Summers had previously approved.

Summers is no longer president of Harvard University. He now serves as an economic advisor to President Obama, heading up the White House’s National Economic Council. Let’s hope Summers has learned a lesson or two from the decisions he made at Harvard.

Bank of America execs, including former CEO Ken Lewis, are gearing up for a heated legal battle with New York Attorney General Andrew Cuomo. On Feb. 4, Cuomo charged Lewis of defrauding investors and the U.S. government when he helped put the wheels into motion for Bank of America to buy financially troubled Merrill Lynch & Co.

Specifically, Cuomo alleges that Lewis, as well as BofA’s former chief financial officer Joe Price, failed to tell shareholders about the $16 billion in losses that Merrill had incurred before it was bought by Bank of America. After shareholders approved the acquisition, Cuomo says Lewis then demanded government bailout funds to keep the deal afloat.

In total, the government injected $45 billion into Bank of America via the purchase of preferred shares, including $20 billion approved after the merger in January 2009.

“We believe the bank management understated the Merrill Lynch losses to shareholders, then they overstated their ability to terminate their agreement to secure $20 billion of TARP money, and that is just a fraud,” Cuomo said today at a press conference. “Bank of America and its officials defrauded the government and the taxpayers at a very difficult time.”

Separately, the Securities and Exchange Commission (SEC) announced that it had reached an agreement with Bank of America over the company’s decision to pay $3.6 billion of bonuses to former Merrill employees for fiscal year 2008. BofA agreed to pay a $150 million fine to settle the matter.

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.

A complaint against Securities America contains a lengthy and potentially damaging list of allegations against the Omaha broker-dealer and its sales of private offerings in Medical Capital Holdings. The complaint, which was filed Jan. 26 by Massachusetts Secretary of State William Galvin, accuses Securities America of not only misleading investors but also intentionally making material misrepresentations and omissions in order to get them to purchase investments in Medical Capital Notes.

Medical Capital was sued by the Securities and Exchange Commission (SEC) in July 2009 and placed into receivership one month later. Since then, its collapse has resulted in about $1 billion in losses for investors throughout the country.

Massachusetts’ securities division launched an investigation into Securities America in December 2009, after receiving complaints from investors who had placed their life savings into Medical Capital based on recommendations by Securities America. According to the complaint, many of these investors were unaware of the risks involved in the offerings. Securities America, on the other hand, was fully aware of these risks, the complaint says.

“Year after year, the due diligence analyst hired retained by Securities America to conduct a review of the various Medical Capital offerings specifically requested – and at many times pleaded – that investors be informed of certain heightened risks,” the complaint reads.

Many investors who purchased Medical Capital Notes had no idea as to how the notes were actually structured. In reality, the offerings were highly complex, speculative securities and considered suitable only for the most sophisticated of investors. In addition, many investors believed they were buying “fully secured” investments when they purchased Medical Capital Notes. As it turns out, that was not the case.

Other information that Securities America allegedly kept from investors included Medical Capital’s lack of audited financials. It was a concern that even Securities America’s own president, Jim Nagengast, felt. In a 2005 email, Nagengast wrote the following:

“My big concern is the audited financials. At this point, there is no excuse for not having audited financials . . . it is a cost they simply have to bear to offer product through our channel. We simply have to tell them if they don’t have financials by XXXX date, we will stop distributing the product on that date. Then they can decide if it’s worth to spend $50,000 to have it done. If they won’t spend the money, that should give us concerns.”

Concerns aside, Securities America ignored its president’s recommendation and continued selling millions of dollars worth of Medical Capital Notes. They did this knowing full well that no audited financials had ever been conducted on any of the Medical Capital entities issuing the notes

If you have a story to tell involving Securities America and/or Medical Capital Notes, please contact a member of our securities fraud team.

Main Street Natural Gas Bonds are an investment that many investors would like to forget. On Sept. 15, a $700 million deal called Main Street Natural Gas Bonds exploded, plummeting in value after Lehman Brothers Holdings – which guaranteed the bonds – filed for bankruptcy protection. Thousands of individual investors were affected, with many literally wiped out financially. 

Main Street Natural Gas Bonds were marketed and sold by some broker/dealers as safe, conservative municipal bonds. The reality is they were not. Instead, the Main Street bonds invested in complex natural gas derivative contracts that bet on the future costs of natural gas. The $700 million that Main Street borrowed to finance the contracts was placed with Lehman Brothers, which in turn, agreed to arrange delivery of some 200 billion cubic feet of natural gas at below-market prices.

Lehman’s promise went up in smoke when its fiscal health deteriorated beyond repair and it filed for bankruptcy protection. The ripple effect – and subsequent financial losses for investors – reverberated back to the value of the Main Street Gas bonds. 

Many investors who put their money in Main Street Natural Gas Bonds say their brokerage failed to disclose the fact that the value of their investment was tied to the financial health of Lehman Brothers. These same investors also contend they never received a prospectus about the bonds, which should have revealed key information and facts that investors are entitled to know.

If you believe you were misled about the safety of Main Street Natural Gas Bonds, contact us. A member of our securities fraud team will review your situation to determine if there is a viable claim to recover some or all of your investment losses. 

Investments in Inland American REITs have backfired for investors throughout the country. In many instances, these products – including the Inland American Real Estate Trust and Inland Western Retail Real Estate Trust – were pitched by broker/dealers as a low-risk, conservative investment. In reality, however, investors were putting their money into non-traded REITs, and the qualities that define these REITs are anything but conservative.

Non-traded REITs (or unlisted REITs) are not listed on a stock exchange. Redemptions in them are limited at best. Perhaps the biggest downside to non-traded REITs is their fees, which in some cases can be upwards of 15%.

Many investors were woefully unaware of the high fees associated with their non-traded REITs – until it was too late. And for some broker/dealers, that’s just what they had in mind when they pitched these products to their conservative clients.

Maddox Hargett & Caruso is investigating a number of non-traded REITs, including the Inland American Real Estate Trust and Inland Western Retail Real Estate Trust. If you suffered investment losses in either of these REITs or another non-traded REIT, contact us to tell your story. A member of our securities fraud team will work with you to determine if some or all of your losses can be recovered.