Securities Law Blog

According to the New York Times, an inquiry into corruption at the New York State pension fund continued to broaden nationwide when a top consultant to pension funds around the country was charged with a fraud-related felony late last week by the office of the New York Attorney General.Skip to next paragraph

The consultant, Saul Meyer of Aldus Equity, a Dallas-based firm, was also charged with violations of securities laws by the Securities and Exchange Commission as part of what the agency called “a multimillion-dollar kickback scheme involving New York’s largest pension fund.” The commission also charged Aldus Equity with multiple securities violations.

Mr. Meyer, 38, is a founder of Aldus, which has advised several of the nation’s largest pension funds, including those overseen by New York State and the city of Los Angeles. Mr. Meyer surrendered to the authorities in New York and pleaded not guilty to the fraud-related felony, a violation of the Martin Act, a sweeping state securities statute, on Thursday in Manhattan Criminal Court. A judge ordered him released on $200,000 bail.

In a teleconference on Thursday, Mr. Cuomo said his investigation, which is continuing, had uncovered what amounts to a conspiracy involving politicians, professional investors and consultants to defraud public pension funds in New York and other states by paying millions of dollars in kickbacks in exchange for access to the funds. Investment firms reap lucrative fees by managing portions of the funds.

“I learned years ago that it’s far easier for a prosecutor to file a complaint than to prevail at a trial,” said Paul L. Shechtman, Mr. Meyer’s lawyer. “Time and the evidence will show that Saul Meyer did nothing wrong.”

In a statement, a lawyer for Aldus, Matthew D. Orwig, accused the S.E.C. of conducting a “trial by news release” and called its action “appalling and careless.”

Aldus is accused of helping Daniel Hevesi, former New York Comptroller Alan Hevesi’s son, profit from a deal in New Mexico at the same time that the New York comptroller’s office, then run by his father, agreed to increase by $200 million the amount of pension money overseen by Aldus.

Laura A. Brevetti, a lawyer for Daniel Hevesi, said on Thursday that her client did not have “any knowledge of a so-called quid pro quo arrangement for his benefit.” Bradley D. Simon, a lawyer for Alan Hevesi, said his client did not engage “in a quid pro quo to benefit his son.”

Hank Morris, a former political consultant to Alan Hevesi, also received money as part of deals in New Mexico and California. Mr. Morris was accused last month in an indictment of demanding millions of dollars from investment firms in exchange for access to the New York State pension fund. He has pleaded not guilty.

“We are purposefully and aggressively looking to cooperate with other enforcement agencies across the country,” Attorney General Cuomo said. “This is sort of like when you pull a thread on the sweater and that one thread starts to unravel the entire fabric.”

“We’re pulling threads and it turns out the other end of the thread is in New Mexico or Connecticut or Illinois or in California,” he said.

In court filings, the S.E.C. has described a range of improper transactions undertaken in connection with an investment pool run by Aldus for the New York State pension fund. Among other things, Aldus agreed to split fees with Mr. Morris as part of its advisory deal with the pension fund, the filings said.

Mr. Hevesi, who resigned as comptroller in late 2006 after pleading guilty to an unrelated felony, has not been charged in the case.

The maker of Valvoline motor oil has filed a lawsuit against Oppenheimer & Co., a subsidiary of Oppenheimer Holdings, over the sale of $194 million of auction-rate securities. According to the complaint by Ashland Inc., Oppenheimer misrepresented the liquidity and risks of the instruments at the time it sold them to the chemical company in 2007 and early 2008.

When the market for auction-rate securities collapsed in February 2008, Ashland, like thousands of institutional and retail investors, found itself stranded with an illiquid investment that no one wanted to buy. Several months later, in an effort to settle investigations by state and federal regulators, many Wall Street firms, including Citigroup, UBS and Merrill Lynch, agreed to buy back billions of dollars of auction-rate securities from investors. Oppenheimer, however, opted not to participate in the ARS buy-back programs, contending it didn’t issue or underwrite the securities but only sold them.

In November 2008, Massachusetts’ Secretary of State William Galvin sued Oppenheimer, charging the firm with fraud and dishonest and unethical conduct in connection to its auction-rate securities business. Galvin not only wanted Oppenheimer to rescind all sales of auction-rate securities at par and make full restitution to investors who already had sold their securities but also sought to revoke Oppenheimer Chairman and CEO Albert Lowenthal’s Massachusetts registration as a broker-dealer agent of Oppenheimer, as well as fine the company and several senior-level executives.

Ashland filed its lawsuit against Oppenheimer on April 17,2009 in the U.S. District Court for the Eastern District of Kentucky.

Massachusetts Secretary of the Commonwealth William Galvin confirmed last week that the Securities Division has opened a probe of State Street its funds. In a story appearing April 30, 2009 in Investment News, it was reported that the fund is among several fixed-income strategies managed by State Street’s investment unit, State Street Global Advisors, to lose substantial amounts of money because of exposure to the subprime mortgage market. In an interview, Secretary Galvin is looking at whether State Street made “ representations that were either flat-out untrue or potentially deceptive” to conservative investors.

According to published reports, pension funds and other institutional investors initially invested in the State Street Limited Duration Bond Fund as an “enhanced cash fund,” with the idea to generate better returns than ultra-safe, conservative money market funds with just slightly more risk. Investors now say the Limited Duration Bond Fund took on large positions of high-risk mortgage-related assets, a move that ultimately proved devastating for investors.

More than a year ago, several lawsuits were filed against State Street over charges the firm misrepresented the risks of various bond funds, including the Limited Duration Fund. A State Street spokeswoman declined to comment to the Wall Street Journal regarding the investigation.

According to published reports on Bloomberg, FINRA, supervising 344 investor arbitration cases over auction-rate bonds, skirted losses from auction rate securities by selling its holdings months before the market collapsed.

FINRA, responsible for educating and protecting investors, owned as much as $862.2 million of the debt before exiting the market in the spring of 2007, less than six months before auctions began to fail. Investors who were sold the auction rate securities as money-market alternatives say FINRA, a non-profit corporation owned by banks that oversees 5,000 brokerage firms and 659,000 brokers, failed to protect them. The market froze in February 2008 when banks, which had supported the debt for two decades through periodic dealer-run auctions, stopped buying bonds that investors didn’t want as losses from subprime mortgages spread.

Auction-rate securities (ARS) are long-term notes and preferred stock with interest rates reset through sales every seven, 28 or 35 days. Auctions failed when banks, beset by mounting losses on bonds tied to subprime mortgages, stopped buying bonds that went unsold. Borrowers were forced to pay rates of more than 20 percent and investors got stuck with unwanted securities.

Dozens of auctions continue to fail daily, according to data compiled by Bloomberg.

FINRA issued its first guidance for investors caught in the debt on March 31, 2008, more than a month after the failure rate rose to about 80 percent.

FINRA, known as the National Association of Securities Dealers until its 2007 merger with the regulatory unit of the New York Stock Exchange, invested in auction-rate securities with funds from the $1.6 billion sale of the NASDAQ electronic trading system starting in 2000.

In the first wave of so-called Madoff “clawback” lawsuits, the trustee liquidating Bernard L. Madoff Investment Securities LLC sued Stanley Chais and other defendants over claims they received more than $1 billion as “insiders” in the Ponzi scheme.

Similar lawsuits will be filed in coming weeks and months, said the trustee, Irving Picard, in an e-mailed statement. Chais is a philanthropist and investment adviser based in Los Angeles. The suit named Chais, his companies including Brighton Co., and trusts in family members’ names.

“Stanley Chais was a beneficiary of this Ponzi scheme for at least thirty years,” Picard said in the Complaint. Since December 1995, Chais and the other defendants “collectively profited from this scheme through the withdrawal of more than one billion dollars, and knew or should have known that they were reaping the benefits of manipulated purported returns, false documents and fictitious profits.”

Picard, a lawyer with Baker & Hostetler LLP in New York, has recovered about $1 billion for investors in Madoff’s money- management business, known by its initials as BLMIS.

“This is the first of several actions that will be brought against entities that either acted as insiders with Bernard Madoff and BLMIS or that benefited from Madoff’s scheme to the severe detriment of other customers of BLMIS,” an attorney for Picard, said in the statement.

The case is Picard v. Chais, 09-01172, and the bankruptcy case is Bernard L. Madoff, 09-11893, U.S. Bankruptcy Court, Southern District of New York (Manhattan).