Securities Law Blog

Securities regulators on Friday announced charges brought against a broker-dealer in Colorado for misappropriating funds from investors. The Securities and Exchange Commission announced that it has charged David William Thomas and his company, Global Marketing Consultants LLC, with bilking investors through two investment schemes. The SEC claimed that the company raised approximately $6.3 million from more than 140 investors nationwide, by misrepresenting the nature of how the funds were invested. About one-third of the investors were senior citizens according to the SEC.

According to the SEC, Thomas and GMC told clients that investor funds would be pooled into "non-depleting custodial" bank accounts and would be used only as collateral to fund a high-speed internet business and a global positioning system business. He also told investors that the investments were fully insured and would lead to a high rate of return. The complaint filed by the SEC alleges that all of these claims were false, and that Thomas used the money for prime bank trading programs. Thomas has been ordered to pay $4.4 million in restitution and sentenced to 42 months in prison in a related criminal action brought by the U.S. Attorney's Office for the District of Colorado, the SEC said.

For more information on this subject contact securities attorneys, Michaels, Ward & Rabinovitz, LLP.

Good morning. I am Linda Thomsen, the Director of the Division of Enforcement of the Securities and Exchange Commission. With me today are some of the members of a terrific team of talented and dedicated staff members. We are here to announce an agreement in principle with Citigroup Global Markets, Inc. in connection with its sales of auction rate securities. Citi was a significant marketer of action rate securities; its sales accounted for over one-fifth of the auction rate securities market. This agreement, which is subject to finalization of terms and review and approval by the Commission, will provide real liquidity relief to tens of thousands of investors. This agreement in principle is compatible with similar agreements Citi has reached with the North American Securities Administrators Association (NASAA) and the Office of the Attorney General of New York, which are being announced as we speak in New York. Some of the members of the SEC team are there with representatives of the New York Attorney General’s Office and NASAA. These several agreements are the result of a coordinated effort by the states, the Financial Industry Regulatory Association (FINRA), and the enforcement staff of the Securities and Exchange Commission to bring their various tools and talents to investigate the facts of Citi’s conduct and to bring meaningful relief to investors.

Under the terms of the agreement in principle, Citi will agree, without admitting or denying the allegations, to be enjoined from violations of Section 15C of the Securities Exchange Act. The conduct underlying the proposed charges stems from Citi’s marketing of auction rate securities as highly liquid investments. In reality, there were serious liquidity risks associated with auction rate securities. When those risks became a reality in February 2008, and the markets seized up, thousands of Citi’s customers were left holding illiquid securities. As a result, for many investors, their ability to provide for themselves and their families has been undermined.

I’d like to highlight some of the key aspects of the relief this agreement provides to investors:

First, beginning immediately, Citi will offer to purchase at par – 100 percent of the purchase price – the nearly $7.5 billion dollars worth of auction rate securities it sold to 38,000 individual, retail, charity and small business customers. As I said, the offers will begin to go out immediately and the purchases from customers who accept the offer will begin in a matter of weeks. The process is to be completed within 90 days.

Second, other relief will be available to retail customers. For example, if any individual customer has sold securities in the secondary market after the crash of the ARS market in February of this year below par, Citi will make up the difference. Citi will also offer loans at what amounts to zero interest in the event a customer needs liquidity faster than the 90-day redemption period.

Third, for customers who seek consequential damages arising out of the lack of liquidity of their ARS investments, loss of earnest money for example, FINRA’s Office of Dispute Resolution will provide an optional special arbitration process. In this streamlined process, the costs of the process will be born by Citi, and Citi will not be able to contest liability but may contest the existence and amount of consequential damages. Susan Merrill, the Enforcement Director at FINRA will be addressing this in just a moment.

Fourth, for Citi’s institutional customers who are not covered in the 90-day redemption offer, and who hold an additional nearly $12 billion worth of securities, Citi will use its best efforts to provide liquidity and other relief to these customers by the end of 2009. Citi will regularly report on its progress and will not be able to sell any particular auction rate security it holds in its own inventory until it has worked out a liquidity solution for its customers holding those same securities.

For more information on this subject contact securities attorneys, Michaels, Ward & Rabinovitz, LLP.

I am consistently struck by the stupidity of the criminal—in this instance, like so many others-I have to ask “did they really think they wouldn’t get caught”?....The SEC charged two Wall Street brokers on September 3, 2008 with defrauding their customers when making more than $1 billion in purchases of subprime-related auction rate securities. The SEC alleges that Julian Tzolov and Eric Butler misled customers into believing that auction rate securities being purchased in their accounts were backed by federally guaranteed student loans and were a safe and liquid alternative to bank deposits or money market funds. Instead, the securities that Tzolov and Butler purchased for their customers were backed by subprime mortgages, collateralized debt obligations (CDOs), and other non-student loan collateral.

The SEC's Complaint, filed in federal court in Manhattan, alleges that Tzolov and Butler, while employed at Credit Suisse Securities (USA) LLC in New York, deceived foreign corporate customers in short-term cash management accounts by sending or directing their sales assistants to send e-mail confirmations in which the terms "St. Loan" or "Education" were added to the names of non-student loan securities purchased for the customers. Tzolov and Butler also routinely deleted references to "CDO" or "Mortgage" from the names of the securities in these e-mails. As a result, the complaint alleges that customers were stuck holding more than $800 million in illiquid securities after auctions for auction rate securities began to fail in August 2007.

For more information on this subject contact securities attorneys, Michaels, Ward & Rabinovitz, LLP.

On the day of the historic (or at least pretty darn huge) Fannie/ Freddie government bailout—the finger pointing has begun about the other big debacle confronting the economy—the Auction Rate Securities mess. In a far-reaching article on Bloomberg.com today, authors Michael McDonald and David Scheer try to ask SEC Chairman Christopher Cox what went wrong. He declined to be interviewed. Ditto for Mary Schapiro the CEO of FINRA. Massachusetts Secretary of State Bill Galvin did speak to Bloomberg—and it was a doozy. He said “It’s obvious they missed an opportunity..they could have raised a red flag”. His words are in the article echoed by the “usual suspects” of Plaintiff’s lawyers, but the point is well-taken. As McDonald and Scheer pointedly note:”[f]ederal regulators didn’t stop brokers from selling the long-term securities to individuals as alternatives to cash late last year when credit markets seized up, though they knew dealers routinely propped up the bonds”.

The full article can be found at http://www.bloomberg.com/apps/news?pid=20601109&sid=aNpaeNekCTe4&refer=home#

For more information on this subject contact securities attorneys, Michaels, Ward & Rabinovitz, LLP.

It’s about time, don’t you think? On August 28th, the Justice Department released new corporate prosecution guidelines that, among other things, instruct prosecutors not to consider a corporation's advancement of attorneys' fees to employees when evaluating cooperativeness. The guidelines also make clear that the mere participation in a joint defense agreement will not render a corporation ineligible for cooperation credit. In addition, the new guidance provides that prosecutors may not consider whether a corporation has sanctioned or retained culpable employees in evaluating whether to assign cooperation credit to the corporation. The revised guidelines further state that credit for cooperation will not depend on the corporation's waiver of attorney-client privilege or work product protection, but rather on the disclosure of relevant facts. Corporations that disclose relevant facts may receive due credit for cooperation, regardless of whether they waive attorney-client privilege or work product protection in the process.I have been railing about this unfair practice and even did it in print in the ABA’s Securities Litigation Journal, Volume 17, No. 1-Fall 2006. For more on this welcome and long overdue change in the government’s stance, see Department of Justice Press Release and Remarks of Deputy Attorney General. In a related development, the Second Circuit affirmed the dismissal of the government's indictment against 13 former partners and employees of KPMG, LLP. The Court found that the government deprived the defendants of their Sixth Amendment right to counsel by causing KPMG to place conditions on the advancement of legal fees to defendants and to cap the fees and ultimately end them. Sanity has returned. Okay, at least a little leveling of the playing field...

For more information on this subject contact securities attorneys, Michaels, Ward & Rabinovitz, LLP.