Securities Law Blog

David Lerner Associates, Inc. (DLA) was fined $2.3 million for marking up municipal bond and collateralized mortgage obligation (CMO) transactions and ordered to pay $1.4 million in restitution plus interest to affected customers. The FINRA Panel also fined head trader William Mason $200,000 and suspended him for six months from the securities industry.

The FINRA Panel found that from January 2005 through January 2007, DLA and Mason charged retail customers excessive markups in more than 1,500 municipal bonds and in more than 1,700 CMO transactions from January 2005 through August 2007. According to the Panel’s decision, the Long Island-based company charged markups on municipal bonds ranging from 3.01 percent to 5.78 percent and charged markups on CMOs ranging from 4.02 percent to 12.29 percent. The price was reportedly marked up without consideration for the amount of money involved in the transaction.

The Panel also found that DLA failed to establish and maintain adequate procedures to monitor the fairness of pricing for municipal bonds and CMOs. DLA also allegedly failed to have adequate procedures in place to ensure that it recorded the time that municipal bond orders were received from customers and failed to records the order receipt time.

In 2004 DLA received a Letter of Caution regarding FINRA’s concerns with its markup practices. DLA reportedly continued its unfair pricing practice after receiving a Wells Notice concerning the matter in July 2009.

New York Mets owners Fred Wilpon and Saul Katz have agreed to settle with Madoff trustee Irving Picard for $162 million. Mr. Picard in turn agreed to drop all claims that the men were “willfully blind” to signs that Mr. Madoff was carrying out a fraud. The agreement includes a provision that neither side can make disparaging remarks about each other.

Mr. Picard originally sought to recover the $300 million that was withdrawn prior to the liquidation of Madoff’s business. The lawsuit centered on a “red flag” raised by the chief investment officer for a hedge fund owned by Messrs. Katz and Wilpon, Noreen Harrington. Ms. Harrington stated in a deposition that in 2003 she told Mr. Katz that Mr. Madoff was either trading illegally or reporting fictitious profits. When her advice was ignored and she didn’t have proof of wrongdoing, Ms. Harrington resigned, according to her deposition. According to court documents, the Mets owners said they were never given any specific evidence that Mr. Madoff was running any kind of fraud.

As part of the settlement, the Mets owners won’t have to make a payment for three years. If they are able to recover on their $178 million claim against the bankruptcy estate, $162 million will go to the trustee and Messrs. Katz and Wilpon are responsible to pay the difference.

Brookstreet Securities Corp. and its former CEO Stanley C. Brooks have been ordered to pay a maximum penalty of $10 million in a securities fraud case. The SEC began its case against Brookstreet and Brooks in December 2009 alleging that the company sold risky mortgage-backed securities to customers with conservative investment goals from 2004 to 2007.

A statement issued by the SEC stated that Brookstreet and Brooks developed a program through which the firm’s registered representatives sold particularly risky and illiquid types of Collateralized Mortgage Obligations (CMOs) to more than one thousand seniors, retirees and others for whom the securities were unsuitable. The firm and Brooks continued to promote and sell the risky CMOs even after receiving numerous warnings that these were dangerous investments that could become worthless overnight, said the SEC.

The fraud caused severe investor losses and caused the firm to eventually collapse in June 2007 after failing to meet margin calls for the notes and then failing to meet net-capital requirements.

In addition to the $10 million penalty, U.S. District Judge for David O. Carter also ordered Brooks to pay $110,700 in disgorgement and prejudgment interest.

In its annual 10K filing with the SEC, State Street Corp. disclosed that New York’s attorney general and the U.S. Attorney’s Office in Manhattan have made inquiries into its foreign exchange business. The Boston-based company reported that its total revenue worldwide from foreign exchange services was approximately $331 million in 2011. That number has dropped significantly from $462 million in 2008.

State Street said in its filing that as a result of the heightened regulatory scrutiny, some clients or their investment managers have changed the way they handle indirect foreign exchange trades.

The nationwide probe into indirect foreign exchange practices focuses on the pricing of small transactions handled automatically by the custody banks on behalf of pension funds. In October 2009 State Street became the first bank to be sued for alleged overcharging in foreign exchange. The attorney general in California sued State Street on behalf of the state’s two largest pension plans for $56 million in alleged overcharges from 2001 to 2009.

Expert consulting firm, Broadband Research Corporation, and its owner, John Kinnucan, have been charged by the SEC for allegedly providing clients with material nonpublic information. Kinnucan and his Portland, Oregon-based consulting firm claimed to be in the business of providing clients with legitimate research about publicly traded technology companies.

According to the SEC’s complaint filed in federal court in Manhattan, Kinnucan and Broadband received significant consulting fees for providing information obtained from prohibited sources inside publicly-traded technology companies to portfolio managers and analysts at prominent hedge funds. Kinnucan reportedly compensated his sources with cash, meals, ski trips and other vacations. The SEC’s complaint alleged that Kinnucan’s misconduct occurred from at least 2009 to 2010, during which he generated hundreds of thousands of dollars in annual revenues for Broadband.

In July 2010, Kinnucan reportedly obtained insider information from a source at F5 Networks Inc. According to the complaint, within hours of learning the confidential details, Kinnucan had phone conversations with several clients to convey that F5’s revenues would exceed market expectations. Subsequently, three clients placed trades at their respective investment advisory firms based on the information they allegedly received from Kinnucan and reaped profits (or avoided losses) of nearly $1.6 million.

The SEC is seeking a final judgment ordering Kinnucan and Broadband to disgorge their ill-gotten gains plus prejudgment interest, requiring them to pay financial penalties, and permanently enjoining them from future violations.

In a parallel criminal case, Kinnucan has been arrested and charged with one count of securities fraud and one count of wire fraud.