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Archive for July, 2009

TD Ameritrade Agrees To Repurchase ARS From Customers

TD Ameritrade Inc. agreed to buy back $456 million of auction-rate securities from about 4,000 clients as part of a settlement with New York Attorney General Andrew Cuomo, the Securities and Exchange Commission and Pennsylvania securities regulators.

The online brokerage firm intends to return the money to customers, including individuals, charities, nonprofit entities and businesses, by March 2010 but could need until June 30 to complete the buybacks. TD Ameritrade said it will buy back the debt from clients with accounts of under $250,000 within 75 days.

Auction-rate securities, short-term debt instruments whose prices reset in periodic auctions, caused billions of dollars in losses for investors after the $330 billion market collapsed in early 2008.

SEC Charges Morgan Keegan With Making Misrepresentations

The SEC alleges that Morgan Keegan misrepresented to customers that ARS were safe, highly liquid investments that were comparable to money market funds. Morgan Keegan sold approximately $925 million of ARS to its customers between Nov. 1, 2007, and March 20, 2008, but failed to inform its customers about increased liquidity risks for ARS even after the firm decided to stop supporting the ARS market in February 2008.

“Morgan Keegan was clearly aware that the ARS market was deteriorating, but it went so far as to actually accelerate its ARS sales even after other firms’ ARS auctions began to fail,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “As we’ve done in our enforcement actions against other firms, the SEC is firmly committed to restoring liquidity to Morgan Keegan customers who purchased ARS.”

The SEC’s complaint, filed in U.S. District Court for the Northern District of Georgia, alleges that Morgan Keegan ignored indications that the risk of auction failures had materially increased amid investor concerns about the creditworthiness of ARS insurers, auction failures in certain segments of the ARS market, increased clearing rates for auctions managed by Morgan Keegan and other broker-dealers, and higher than normal ARS inventories at Morgan Keegan.

The SEC is seeking an injunction against Morgan Keegan for violations of the antifraud provisions of the federal securities laws, as well as disgorgement, financial penalties, and other equitable relief for investors.

The SEC appreciates the assistance and cooperation of the Alabama Securities Commission and the New York Attorney General’s Office.

Aravali Fund Losses

The Aravali Fund was recommended by Deutsche Bank and other brokerage firms to income oriented investors who also sought to preserve their capital.

Deutsche Bank told it’s clients that the Aravali Fund was a safe investment that purchased investment grade or highly rated municipal bonds and acted as a municipal bond replacement fund. The Aravali fund was in fact a highly speculative fund engaged in a complex arbitrage strategy which involved a significant short position in treasury bonds, interest rate swaps and a leveraged pool of municipal bonds.

According to news sources, cases alleging losses of more than $10 million have already been filed.

One such investor alleged that their longtime investment adviser, Russell Smith, sent them a letter just before he killed himself, suggesting they contact his attorney, “for possible redress.”

The defendants are Deutsche Bank Alex Brown, Deutsche Bank Securities Inc., Arthur Kreidel, Mark Young, Aravali Fund LP, and Aravali Partners LLC. Mark Young is or was the president of Aravali Partners.

The investor families claim that Deutsche Bank and its defendant employees persuaded them through misrepresentations to invest $13 million in the “virtually ‘risk free'” Aravali Fund, then lost the money. Both families claim that Deutsche’s Bank misrepresentations of Aravali were so blatant it caused Smith, both families’ longtime financial counselor, to commit suicide in October.

The suicide letter, which was appended to the lawsuit, begins:

“Since you are reading this, I have just taken my life. It was necessary because the alternatives were totally unpalatable. I consider you a friend first and a client second. That said, I had a fiduciary relationship with you that charged me with putting your interest first. I can say that I always tried to do that. However, some of the investment recommendations that I chose did not work out the way I had anticipated. I regret that very much.

The Aravali Fund declined more than 90% and investors in the Fund have sustained significant damages.

UBS Sues Highland Capital Over CDO Losses

UBS AG, Switzerland’s biggest bank, sued Highland Capital Management LP in New York, claiming losses of at least $745 million in a failed collateralized debt obligation transaction.

Highland Capital, the investment firm founded by James Dondero and Mark Okada, failed to fulfill terms of the deal reached in April 2007, UBS said in a breach-of-contract lawsuit filed today in state court in Manhattan. UBS Securities LLC, a UBS unit, agreed to arrange the transaction and serve as placement agent, according to the complaint.

After the original transaction expired in early 2008, the parties restructured the agreement in March 2008, UBS said. UBS and Dallas-based Highland Capital agreed that the fund and a special holding company would bear 100 percent of the risk of losses, according to the lawsuit.

“UBS has suffered losses of no less than $745 million as a result of the depreciation in value of the warehoused collateral obligations and credit default swap obligations that it assumed in connection with the failed CDO transaction,” Zurich-based UBS said in the complaint.

Because of declining market values for the portfolios and collateral in September and October 2008, UBS said it required Highland to produce additional collateral. Highland offered “certain securities” that UBS rejected, according to the complaint.

SEC Charges NY Broker-Dealer In Boiler Room Scheme

The Securities and Exchange Commission today charged New York-based broker-dealer Sky Capital LLC and six individuals involved in a fraudulent boiler room scheme that raised millions of dollars from U.S. and UK investors who were then restricted from selling their stock, and their investments later became worthless.

The SEC alleges that the firm’s founder, president and CEO Ross Mandell directed Sky Capital brokers to make material misrepresentations, omit material information, and use high-pressure sales tactics to induce customers to purchase stock in two related companies — Sky Capital Holdings Ltd. and Sky Capital Enterprises, Inc. (Sky Entities). Sky Capital brokers used scripts to solicit investors for the private placements, and based their sales pitches on what Mandell told them. The brokers enjoyed hefty undisclosed commissions and other perks, and Mandell used investor funds to subsidize his own lifestyle including expensive travel and hotels, adult entertainment, and child care expenses.

“Boiler room tactics like those used by Sky Capital and its brokers undercut the level of honesty and fair play we seek to maintain in the securities markets,” said James Clarkson, Acting Director of the SEC’s New York Regional Office. “This firm and these brokers went to great lengths to repeatedly lie to investors, pressuring them into buying stock without telling them it would be nearly impossible to sell those shares.”

In addition to Sky Capital and Mandell, who resides in Boca Raton, Fla., the SEC’s complaint charges the firm’s former chief operating officer Stephen Shea of Brooklyn and four former registered representatives at the firm: Robert Grabowski of Staten Island, Adam Harrington (a/k/a Adam Rukdeschel) of Miami, Fla., Michael Passaro of Delray Beach, Fla., and Arn Wilson of Concord, N.C. Sky Capital is also known as Granta Capital LLC.

Twin Cities advisers accused of mismangement

Two Ohio families and their pastor filed a federal lawsuit in Minneapolis this week accusing some “confusingly intertwined” Twin Cities investment advisers and a dozen business entities of fraud, misrepresentation and other breaches in the handling of their life savings.

The eight plaintiffs claimed Trevor Cook, 37, of Burnsville and Gerald Durand, 58, of Lakeville persuaded them to invest nearly $5 million in a currency arbitrage program that guaranteed instant liquidity and promised annual returns of 10.5 to 12 percent. But the plaintiffs say they ran into resistance this spring when they tried to withdraw some of their money.

Chief U.S. District Judge Michael Davis took the unusual step Tuesday of issuing a temporary restraining order that freezes as much as $5 million in several of the defendants’ bank and investment accounts. He scheduled a hearing for Friday on a motion for a preliminary injunction in the case.

According to the lawsuit, Durand notified the plaintiffs last month that he had split away from Cook, and that he had heard “that a large sum of money invested with Cook was missing” and that an investigation was pending. Durand advised one of the investors to get all of his money out quickly or he would be unable to do so, the suit says.

Cook’s business cards and other documents indicate he’s an investment director and managing partner at Oxford Global Partners and is the chief investment director at Oxford Global Advisors. Both companies are listed at the VanDusen mansion on LaSalle Street in Minneapolis, which Cook bought for $2.6 million in June 2007. (He sold it to Oxford Global Advisors in April 2008 for the same amount.)

The lawsuit also names Oxford Private Client Group as a defendant, describing the firm as an affiliate of Oxford Global.


California IOUs May Be Treated As Municipal Securities

The recipients of billions of dollars in IOUs being issued by California soon may have a regulated market where they could sell them.

Some of the nation’s largest banks say that, starting Friday, they will no longer accept the IOUs. The banks want to pressure the state to end its budget impasse, but their action could leave many businesses and families with fewer options for getting their money.

The Securities and Exchange Commission is going to recommend that the IOUs, which carry an annual interest rate of 3.75 percent, be regulated by the Municipal Securities Rulemaking Board as a form of municipal debt. The guidance could come as soon as Thursday, according to two people familiar with the matter who spoke on condition of anonymity because the SEC hasn’t yet acted.

A regulated market for the IOUs would make it easier for individuals holding them to sell them at a fair price, analysts said.

The SEC oversees rules set by the nongovernment MSRB. SEC spokesman John Nester declined to comment Thursday.

With JPMorgan Chase & Co., Bank of America Corp., Wells Fargo and Citigroup Inc. and some regional banks in the state saying they won’t accept the IOUs for payment after Friday, attention has turned to the possibility of a secondary market to buy up the notes.

A regulated market for the IOUs “makes it even more advantageous” for individuals holding them, who could sell them at a fair price, Maco said. The price they receive may be discounted in accordance with the market’s perception of the risk of the state repaying the notes, but it would be an orderly market price, he said.

SecondMarket, which creates marketplaces for the trading of illiquid assets, has received “decent interest” from hedge funds, municipal bond and distressed asset investors as potential buyers of the IOUs, Jeremy Smith, the New York-based company’s chief strategy officer, said this week.

Bank Sued Over Madoff Losses

The holders of more than two dozen retirement accounts have sued the Westport National Bank in Connecticut over its role in handling their investments in Bernard L. Madoff’s long-running Ponzi scheme.

The lawsuit, filed on Wednesday in Connecticut Superior Court in Stamford, seeks to recover $60 million that the retirement plans lost when the Madoff fraud collapsed in December, as well as millions of dollars in fees that the bank charged customers who maintained the accounts.

The focus of the lawsuit is the custodian agreement that the bank required each account holder to sign before it accepted any money to be invested with Mr. Madoff.

The agreement, a copy of which was filed as an exhibit in the case, states that the customer “has not relied on the bank in choosing” the Madoff firm.

But it also indicates that the bank would take custody of whatever investments Mr. Madoff made on the customers’ behalf. For example, the agreement specifically requires the bank to adequately document the customers’ ownership of investments made with the Madoff firm “and held by the bank as custodian.”

In fact, there was nothing for the bank to hold since Mr. Madoff never purchased any securities for his investors, according to the bankruptcy trustee liquidating the Madoff estate. Instead, he used most of the cash he received from investors to cover dividends and redemptions paid to other investors.


On July 2, 2009, the Securities and Exchange Commission obtained a temporary restraining order and emergency asset freeze in a $485 million offering fraud and Ponzi scheme orchestrated by Paul R. Melbye, Brendan W. Coughlin and Henry D. Harrison through a company they owned and controlled, Provident Royalties LLC. In addition to the asset freeze, the court has appointed a receiver to preserve and marshal assets for the benefit of investors.

The Commission alleges that from at least June 2006 through January 2009, Provident made a series of fraudulent offerings of preferred stock and limited partnership interests for the purpose of generating promised returns through investments in oil and gas assets. The complaint alleges the sales were made through 21 affiliated entities to more than 7,700 investors throughout the United States. It is also alleged that Provident Asset Management, LLC, an affiliated broker-dealer, made some direct retail sales of securities, but primarily solicited unaffiliated retail broker-dealers to enter into placement agreements for each offering, and those retail broker-dealers sold the stock to retail investors nationwide.

According to the Commission’s complaint filed in U.S. District Court for the Northern District of Texas, Provident falsely promised yearly returns of up to 18 percent and misrepresented to investors that 85 percent of the funds raised through the offerings would be used to purchase interests in oil and gas real estate, leases, mineral rights, and interests, exploration and development. The Commission alleges that, in fact, less than 50 percent of investor funds were used for their stated purpose, and the proceeds from later offerings were used to pay expenses related to earlier offerings and returns to investors in those offerings.

The Commission’s complaint charges the defendants with violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks a temporary restraining order and preliminary and permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest and financial penalties. Officer and director bars are sought against Melbye, Harrison and Coughlin. Five affiliated entities that did not sell securities are named as relief defendants for purposes of disgorgement.

The SEC acknowledges the assistance and cooperation of the Financial Industry Regulatory Authority (FINRA) in this matter.

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