Securities Law Blog

Two lawsuits have been filed in Palm Beach County Circuit Court against HighTower Advisors, LLC and broker Curtis Lyman. According to court documents, two clients of Mr. Lyman filed the suits over the sale of promissory notes with Banyon 1030-32 LLC. The sale of the notes turned out to be a feeder fund for the $1.4 billion Ponzi scheme controlled by disbarred Florida attorney Scott Rothstein.

Collectively, the two investors invested and lost more than $4.6 million. The lawsuit against HighTower and Mr. Lyman alleges investment fraud, the sale of unregistered securities, breach of fiduciary duty and negligence.

The notes with Banyon went into default in November 2009 when Rothstein’s Ponzi scheme was exposed. According to court documents, Mr. Lyman’s clients were investing in Banyon notes up until October 2009.

In a June 2009 email to a client, Mr. Lyman wrote “I remain comfortable on the Banyon program. Business has remained strong and they have not ‘oversubscribed’ their demand, which is the biggest business risk I think they have. We are monitoring that closely, but, at the moment, they are working to raise over 300 million dollars in order to retire more expensive hedge funds lines. My recommendation is to renew the notes.”

The Banyon fund was controlled by George G. Levin. According to the lawsuits, Mr. Lyman told his clients that “he normally did not do ‘private deals’ as he was very leery and cautious of them” but that he had known Mr. Levin for a long time and that he personally guaranteed the notes. Mr. Lyman allegedly told investors that their investments with Mr. Levin would serve as capital for structured legal settlements, and would produce a guaranteed rate of return through the notes.

Spokeswoman for HighTower, Jennifer Connelly, indicated that the Banyon fund predated Mr. Lyman joining HighTower, and that these “legacy investments” were at no time on the HighTower platform.

HighTower CEO Elliot Weissbluth said that Mr. Lyman has his “unreserved” support.
“We are aggressively pursuing all available remedies because Curt Lyman is as much a victim as the other Ponzi scheme victims. We are defending any allegations of HighTower wrongdoing,” Weissbluth said.

According to HighTower, the significant amount of personal capital invested in the Ponzi scheme by Mr. Lyman shows that he had no intent to harm his clients.

In its first action as part of its initiative of active examinations and investigations, the Financial Industry Regulation Authority (FINRA) expelled Provident Asset Management, LLC from the securities industry on March 18, 2010. The regulator said it expelled the Dallas-based broker/dealer for selling allegedly fraudulent private placements offered by its affiliate, Provident Royalties, LLC in a “massive Ponzi scheme.”

FINRA claims that Provident Asset Management misrepresented the sale of private placement offerings. The broker/dealer allegedly told investors that funds raised through the offerings would be used to purchase interests in the oil and gas business. They would include funding exploration activity and the acquisition of real estate, oil and gas leases and mineral rights. In memoranda issued by Provident Royalties, investors were promised returns of up to 18 percent per year produced by revenues generated primarily from the sale of oil and gas assets. Instead investor funds were allegedly pooled together in order to make dividend and principal payments to earlier investors, in classic Ponzi style.

From September 2006 to January 2009, Provident Royalties raised more than $480 million from thousands of investors, by allegedly marketing and selling preferred stock and limited partnership interests in a series of 23 private placements.

Provident neither admitted nor denied FINRA’s allegations, but consented to their findings and are no longer allowed to sell securities. The lawyer representing two Provident executives, Brendan Coughlin and Henry Harrison, said they “vigorously deny any claim of wrongdoing.”

FINRA began its initiative in response to an increase in investor complaints regarding private placements and following the Securities and Exchange Commission’s (SEC) actions surrounding the sale of certain private placement offerings.

According to FINRA, they will continue to dig deeper in their investigation into the broker-dealers that sold Provident and other questionable private placements. Their attentions will be focused on firms’ compliance with suitability, supervision and advertising rules, as well as the possibility of fraud.

In Manhattan, an investor lawsuit was dismissed against Canadian Imperial Bank of Commerce (CIBC) and four of its executives on March 17, 2010. Filed by Plumbers & Steamfitters Local 773 Pension Fund, the lawsuit was seeking class actions status on behalf of all the investors who bought CIBC shares in the U.S. between May 31, 2007 and May 29, 2008. The claimants alleged that CIBC committed securities fraud and misled investors about its mortgage-backed holdings.

U.S. District Judge William H. Pauley III threw out the case stating that the investors failed to adequately allege that the bank intended to defraud them. According to Judge Pauley, at no point did the plaintiff’s complaint make any reference to specific CIBC documents to discredit CIBC, nor did they demonstrate that CIBC possessed information that was contrary to their public statements. The Judge further asserted that given that the executives suffered large losses in their common stock holdings and compensation, it would be “nonsensical to impute dishonest motives” to them.

In his ruling, Judge Pauley wrote, “Knowledge of a general economic trend does not equate to harboring a mental state to deceive, manipulate, or defraud. CIBC, like so many other institutions, could not have been expected to anticipate the crisis with the accuracy the plaintiff enjoys in hindsight.”

The former Chairman and CEO of infoUSA Inc. and infoGROUP Inc. (Info), has been charged by the Securities and Exchange Commission (SEC) regarding his alleged fraudulent use of corporate funds. The SEC complaint alleges that from 2003 to 2007, Vinod Gupta improperly used corporate funds to pay almost $9.5 million in personal expenses, and caused the company to enter into $9.3 million of undisclosed business transactions with other companies in which he had personal stake.

In an all too familiar scenario, the head of a company allegedly misuses funds to support a lavish lifestyle. In this case Gupta allegedly splurged on jet travel around the globe for friends and family, yacht expenses, credit cards, roughly 28 club memberships, numerous automobiles, at least nine homes in the U.S., and three personal life insurance policies, according to the SEC complaint.

The SEC also charged three former executives of the Omaha-based data compilation company for their roles in allegedly enabling Gupta to funnel illegal compensation to himself.

Vasant H. Raval, former chairman of Info’s audit committee, was charged for allegedly failing to respond appropriately to various red flags concerning Gupta’s expenses and Info’s transactions with Gupta’s other entities. According to the SEC, Raval failed to investigate concerns raised by two Info internal auditors that Gupta was submitting requests for reimbursement of personal expenses. The complaint further states that Raval omitted facts in a report to the board concerning Gupta’s expenses.

“Officers and directors must ensure that shareholders receive accurate and complete disclosure of all compensation paid to executives. Raval, as chairman of the audit committee, neglected these duties and allowed money to flow to Gupta unbeknownst to investors,” said Donald Hoerl, Director of the SEC’s Denver Regional Office.

The SEC alleges that Gupta’s expense reimbursement requests were “rubber-stamped” by two former chief financial officers, Rajnish K. Das and Stormy L. Dean. Das and Dean allegedly ignored concerns raised by other Info employees, and approved the reimbursement requests without sufficient explanation of business purpose and supporting documentation. The pair is also accused of falsely representing that all related party transactions with Gupta’s entities had been properly recorded and disclosed in the company’s financial statements to Info’s outside auditor.

Without admitting or denying guilt, Gupta, Raval and Info agreed to settle the SEC’s charges against them. Gupta will pay a total of $7,431,000, which includes disgorgement of $4,045,000, prejudgment interest of $1,145,400, and a penalty of $2,240,700. He has also agreed to an order prohibiting him from serving as an officer or director of a public company and placing restrictions on the voting of his Info common stock. Raval agreed to pay a $50,000 penalty and to an order barring him from serving as an officer or director of a public company for five years. Info consented to an Order to cease and desist from committing any further violations of the Securities Exchange Act.

The SEC’s case against Das and Dean is ongoing.

The appellate body of the Financial Industry Regulation Authority (FINRA) issued a ruling dismissing the charges against two senior personnel of Knight Securities, Kenneth Pasternak and John Leighton. The National Adjudicatory Council (NAC) reversed an earlier FINRA Hearing Panel decision that found the former CEO and the head of the firm’s Institutional Sales Desk, responsible for supervisory failures.

The original charges filed against Mr. Pasternak and Mr. Leighton stemmed from a March 2005 charging memorandum which alleged that “Pasternak and Leighton did not take reasonable steps to ensure that Knight Securities’ leading institutional sales trader adhered to ‘industry standards’ when executing orders for institutional customers.”

The NAC determined that FINRA failed to satisfy its burden of proof in relation to the 2005 allegations. According to the NAC, the evidence presented by FINRA did not support the claim that Mr. Pasternak and Mr. Leighton failed provide reasonable supervision, nor did it support allegations that Mr. Pasternak did not respond appropriately to “red flags” in relation to the sales trader’s execution of institutional customer orders.

The $100,000 fines, and other sanctions imposed on the two men were vacated by the NAC’s ruling.