Goldman Told to Pay Bayou Fund Creditors

Goldman Sachs Group Inc. was ordered to pay $20.6 million, the largest arbitration award levied against the securities firm, to unsecured creditors of Bayou Group LLC who accused Goldman of ignoring signs of fraud at the hedge-fund firm.

Bayou collapsed in 2005, and the firm’s former chief executive, Samuel Israel III, is serving a 20-year prison term for fraud. He pleaded guilty to misrepresenting the value of Bayou’s funds and defrauding clients out of more than $400 million.

Goldman cleared trades for the Connecticut hedge-fund firm before it collapsed. In 2008, Bayou’s unsecured creditors’ committee filed an arbitration claim against two Goldman units.

“Through either gross negligence or a willful choice to ignore the signs of fraud, [Goldman] failed to diligently investigate the red flags it was made aware of, to contact Bayou’s auditors to request additional information, or to alert the appropriate authorities of what it had learned,” lawyers for the committee alleged in the claim.

A three-person Financial Industry Regulatory Authority arbitration panel didn’t provide an explanation for its ruling, issued Thursday. A Goldman spokesman said the panel didn’t conclude that the firm committed any wrongdoing or violated any rules.
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Judge Dismisses Charges in Major ‘Swaps’ Case

A federal judge dismissed a high-profile insider-trading case against a Deutsche Bank salesman and hedge-fund trader, finding the Securities and Exchange Commission offered “no evidence” to support its allegations.

In a 122-page opinion, U.S. District Judge John Koeltl rejected key components of the SEC’s case against Deutsche salesman Jon-Paul Rorech and Renato Negrin, a manager of the Millennium hedge fund.

The SEC sued both men, alleging they shared confidential information about a debt restructuring and then traded swaps, a type of derivative, based on that information. The defense maintained no inside information was exchanged.

Richard Strassberg, a lawyer for Mr. Rorech, called the decision a “complete vindication” for his client. Mr. Negrin said in a statement, “I’m grateful the court was able to reach the right decision based on all of the evidence. I look forward very much to putting all of this behind me.”

An SEC spokesman said the agency is reviewing the decision.

The case represented the SEC’s first attempt to extend its reach beyond stock and other securities and into the murky field of swaps and other derivatives contracts. The judge found the SEC did have jurisdiction over swaps in this context but didn’t agree with the allegations that the contracts were bought based on inside information.

The decision doesn’t appear to impair the SEC’s jurisdiction over swaps. The financial regulation bill heading toward passage in Congress also makes clear the SEC’s authority.
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Merrill Lynch’s CDOs: The Thundering Herd Tramples Its Wealthiest Clients Yet Again

Individual investors who choose to do business with Merrill Lynch would be wise to take the time to read the complaint filed two years ago by Massachusetts regulators. They outlined, in impressive layman’s language, how the firm deceived its clients into believing that auction rate securities were safe, liquid, cash equivalent investments when in fact they were risky and illiquid.

“Time after time, when confronted with conflicts of interest, Merrill Lynch was consistent in that it placed its own interests ahead of its investor clients,” the complaint alleged.

An excellent compendium to that complaint was an article recently published by the Wall Street Journal about how Merrill brokers duped a bevy of the firm’s high net worth investors into buying high risk collateralized-debt obligations with assurances that they were also risk free.

“This was a great chance to participate with the big boys,” one client whose family lost millions because of Merrill’s CDOs recalls a broker as saying.

CDOs are indeed for the big boys and Merrill was the leading issuer of these toxic products.  But what Merrill clients clearly didn’t understand  — perhaps because they were never told — was that the CDOs they were buying were the lowest-rated slices; the higher rated slices were sold to more sophisticated institutional investors, the Journal says.

The Journal says that Merrill targeted investors with a net worth in excess of $5 million, and, therefore met the SEC standard of what constitutes a “sophisticated investor.”   That standard should have been altered long ago. For example, one of Merrill Lynch’s victims was a hair-salon entrepreneur - should someone who can leverage an expertise in shearing and coloring hair into a multi-million dollar business, automatically be qualified to evaluate highly sophisticated financial products?

Merrill’s defense is that the offering documents disclosed that the CDOs carried considerable risk, but that warning statement is contained in virtually every financial product the firm sells.  That’s why investors rely heavily on the representations made by their brokers.  And those representations will figure heavily into arbitration claims; if clients can prove that their brokers misled them, Merrill will likely need more of a defense than hiding behind it’s standard legal boilerplate.

Merrill ultimately was forced by the SEC to make whole the clients it fleeced with auction rate securities.  Buyers of CDOs likely have similarly strong claims and should aggressively pursue arbitration or court cases.  And investors who choose to continue doing business with Merrill should be wary of any product their brokers pitch that can’t be readily understood.  If a financial product sounds too good to be true, it probably is.

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FINRA and Australian Regulator Enter Cooperation Agreement

The Australian Securities and Investments Commission (ASIC) and FINRA entered into a Memorandum of Understanding (MOU) today to promote and support greater cooperation between the two regulators.  The MOU establishes a framework for mutual assistance and the exchange of information between ASIC and FINRA, to help ensure that high standards of market integrity and consumer protection are maintained in both jurisdictions. Among other things, the agreement will help the regulators to investigate possible instances of cross-border market abuse in a timely manner, exchange information on firms under common supervision of both regulators, and allow more robust collaboration on approaches to risk-based supervision of firms.

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Two Americas and the Prosecution of Securities Fraud

Post From Securities Fraud/Arbitration Lawyer Jacob Zamansky.

Former presidential candidate  Senator John Edwards is hardly someone to be cited in a blog post about morality and fairness, but he was spot on in his rallying cry about there being two Americas.  This painful reality was driven home to me in recent weeks while pursuing a case in New Jersey’s Gloucester County, a predominantly working class area in the backyard of my hometown, Philadelphia.

The case involves a purported “financial advisor” named John R. Montague, who was a registered representative with Questar Capital Corporation. The FBI has been investigating Montague since at least last August and possibly longer, but there appears to be no movement in the case.  I represent some elderly investors who Montague defrauded for over $1 million. Given that there are likely many other victims of  Montague’s alleged wrongdoing, it’s quite possible that Montague’s misappropriation of funds is well in excess of what  has already been documented.

My firm has long been a source of leads and other information for prosecutors and law enforcement agents, however, the Montague case doesn’t appear to be a priority for the FBI. For example, the US Attorney’s office is handling the investigation of Kenneth Starr, a money manager whose well heeled clients reportedly included a litany of bold-faced names such as Al Pacino, Uma Thurman, and Neil Simon.  With miraculous speed, prosecutors managed to nearly double the $30 million originally thought to be allegedly swindled by Starr. “In the less than two weeks since Kenneth Starr’s arrest, this investigation has maintained its velocity,” Manhattan US Attorney Preet Bharara told reporters last week.

Furthermore, Bernie Madoff, who orchestrated the biggest Ponzi scheme of all time, was convicted and sentenced in less time that it has taken the FBI to complete its investigation of Montague. The receiver overseeing the liquidation of the fraudster’s enterprise is reportedly expected to recover more monies than originally anticipated — so much so that some vulture funds are already buying up the claims.

The Montague case isn’t the only example of the wheels of justice grinding to a near halt when working class investors are defrauded of their monies.  I represent some working class investors in Long Island who were defrauded by a convicted felon named Peter Dawson more than three years ago.  Although Dawson sits in prison, Bank of America, Washington Mutual and other financial institutions who enabled Dawson’s fraud have yet to be held accountable.

There is a disturbing lesson here: When it comes to prosecuting securities fraud and garnering restitution for investors, working-class people shouldn’t expect the same level of prosecution and recovery as their wealthy brethren.

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UPDATE: Investor Awarded $400,000 in Private Placement Case

An investor has won a $400,000 securities arbitration case against a former broker dealer involving notes that are the subject of a Securities and Exchange Commission civil fraud action.

The award, against Peak Securities Corp., a former independent broker dealer in Largo, Fla. that sold the investments, may be the first related to notes offered by Medical Provider Funding Corp. VI, say lawyers. The notes were the subject of a civil fraud complaint filed by the SEC in August, 2009 against Medical Capital Holdings Inc., the parent company of the issuer, and two other entities.

A California federal court issued an emergency order in the case at the time, halting an alleged $77 million offering fraud. The SEC had alleged that Medical Capital defrauded investors by misappropriating about $18.5 million of investor funds and by misrepresenting that no prior offerings had defaulted, among other issues.

Numerous independent broker dealers sold the notes, which are now the subject of a flood of securities arbitration claims filed by investors.

The award, entered by a Finra arbitrator on May 10, was reported by Investment News late Tuesday.

Marilyn Hazell, the investor, filed the case in April, accusing Peak Financial of negligence, fraud, as well as breaching its fiduciary duty and contract, according to the award. She sought $400,000 as compensation for her losses, plus $100,000 in punitive damages, according to the award. Peak Securities didn’t respond in the case, according to the award. Arbitrators may enter awards on a “default” basis in cases where parties don’t respond to claims, which can mean awarding the full amount sought by an investor.

Peak Securities Corp. stopped doing business as a broker dealer in November, 2009, and is no longer Finra-registered according to regulatory filings. Medical Capital Holdings is currently being liquidated.

“It’s a hollow victory,” said Andrew Stoltmann, a Chicago-based lawyer who represents investors in other cases involving Medical Capital notes. Chances of collecting on the award are highly unlikely, he said, since the broker dealer is no longer doing business.

Nicholas Thomas, a lawyer in Vero Beach, Fla., who represented the investor, said he intends to pursue “a measured amount” of collection activity. No other investors have presently obtained awards against the broker dealer, he said, which he describes as a “reason to be encouraged.”

Thomas said he’s representing the same investor in a separate arbitration case against the broker who sold the notes. He is in the process, he said, of amending that case to add a claim against David W. Dube, who is listed in regulatory filings as the president and chief compliance officer of Peak Securities.

Dube didn’t immediately return a call requesting comment.

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