Wall Street Investment Fraud Lawyer Blog

According to the Wall Street Journal today, Massachusetts securities regulators have begun an investigation into whether State Street Corp. misled pension funds investors by falsely repesenting that some its bonds funds were low risk vehicles even though they were actually invested in volatile mortgage-backed securities.

State Street is one of the largest managers of index funds. It is currently facing several lawsuits about its "enhanced index" bond funds.  Lawsuits filed by customers invested in those funds have alleged that State Street mispresented the risks associated with those funds. The products falsely marketed as low risk investments even though the underlying investments were in mortgage related securities.

Credit-rating firms, such as Moody's Corp., McGraw-Hill Cos.' Standard and Poor's and Fimalac SA's Fitch Ratings, are facing a multitude of lawsuits regarding their ratings of mortgage-backed securities, according to the Wall Street Journal. These lawsuits stem from investors' losses in the securities due to homeowner defaults.

In response to the litigation, these credit-rating firms hope to be protected by the Constitution, specifically the First Amendment right to free speech. However, according to the Wall Street Journal, this protection is being questioned as a result of allegations that the credit-rating firms had conflicts of interest which prompted them to give "unduly rosy" opinions with regard to the credit-worthiness of mortgage-backed securities. A survey conducted by the Securities and Exchange Commission revealed that rating firms have put profits ahead of providing a quality rating for mortgage-backed securities.

Unfortunately, investors may have a tough time dealing with the credit-rating firms' assertion of the free-speech right. Traditionally, the ratings that are provided by the firms, which designate a security on a scale from triple-A to junk, have been considered "opinion."  Courts have held that rating firms are protected against claims that the firms issued ratings that were too high or low and have held that in order to usurp the Constitutional protection a litigant would have to show that the firm made false statements with "actual malice." Showing that a firm acted with "actual malice" is a high burden.  

However, no court has specifically addressed the extent to which a rating firm of mortgage-backed securities, is protected by the First Amendment. Larry Ellsworth, a former litigator at the SEC, believes that "the more it looks like [ratings] firms were hired specifically to do this one rating for this one company... the less likely it is that the First Amendment will be applied."

Oddo Asset Management has filed suit against McGraw-Hill, in New York and intends on pushing this issue. Oddo claims that S&P gave "puffed-up" ratings to  notes that were issued by investment entities, which invested in "impaired securities back by toxic, U.S. Subprime mortgages." Oddo seeks recovery of millions that Oddo alleges were lost in the notes issued by the investment entities. It is alleged by Oddo that S&P privately contracted to provide the ratings and that these ratings were given to a select group of individual investors, which Oddo contends prevents S&P from being afforded the protection of the First Amendment. However, McGraw-Hill contends that since the ratings were publically distributed and were of public concern, McGraw-Hill is entitled to the First Amendment protections.

Credit-rating firms should not be able to hide behind the First Amendment if they put profits over providing reliable quality ratings. Many investors rely on ratings to make investment decisions and if the ratings are flawed or skewed then the investor may suffer a loss. Credit-rating firms obviously know that the ratings they issue are relied upon and should be responsible in issuing a rating. Finally, these firms should absolutely be held liable when they issue a rating that is inappropriate solely for financial gain of the firm.

According to the Atlanta Journal Constitution (AJC), Robert Price Copeland, a Marietta, Georgia lawyer, pleaded guilty on April 20, 2009 to wire fraud relating to a ponzi scheme he had been running for five years. U.S. Attorney David E. Nahmias said that in total Copeland owes more than $28 million to 125 investors.  The investors included senior citizens who trusted Copeland and invested their entire life savings.

The U.S. Attorney's office says that Copeland, a lawyer who specialized in elder law, solicited his victims through seminars and financial planners. Copeland would promise the investors that he would invest their money in real estate and promised returns as high as 15 percent every six to 12 months. In addition to the promises made by Copeland, he would show the investors false security deeds to document their promised profits. Unfortunately, this was merely a scam, which netted Copeland more than $40 million.

It is believed by the U.S. Attorney's office that Copeland conducted little, if any, real estate financing or development.

Copeland does face up to 20 years in prison and a $25,000 fine. Additionally, Copeland will likely have to pay restitution to his victims and forfeit all of the proceeds from the fraud.  The Government has seized several bank accounts, jewelry and cars, 12 properties, and other valuable items from Copeland.

It is hoped that Copeland's investors are able to recoup at least some of their losses.  

If you would like to learn more about investment fraud, please visit our website www.dossfirm.com.  

According to the Securities and Exchange Commission (SEC), the SEC has charged seven church leaders, in Queens, New York, for orchestrating an investment fraud scheme that took advantage of elderly church members.  It is alleged that the elderly investors were defrauded of more than $12 million.  The SEC says that the seven church leaders would make false promises of returns as high as 75% in an effort to get the investors to invest in two hedge funds, the Logos Fund and the Donum Fund.  Once the investors invested, the money would be misappropriated rather than invested.  The church leaders would allegedly use the investor's funds to sustain lavish lifestyles, which included purchasing jewelry, clothing, luxury cars, and funding expensive foreign travel.

The SEC's complaint states that the fraudsters took advantage of more than 80 investors, claiming incredible returns.  The SEC says that the fraudsters "misrepresented the performance of the Logos Fund, the amount of assets under management,  the identity and skill of the portfolio managers, and the level of supervision of the portfolio managers. Further, the SEC states that the defendants also "misrepresented the registration status of the Donum Fund by falsely claiming to investors that the fund was registered with the SEC."  In addition, it is alleged that instead of investing the money as promised to the investors the fraudsters immediately misappropriated the investor's money as soon as they invested with the funds. Along with lavish purchases, the fraudsters used the money to pay for unauthorized operating expenses of Jadis Capital and Jadis Investments. 

Affinity fraud occurs when a fraudster exploits investors in close knit communities like church groups.  Unfortunately, this type of fraud is common. The SEC has had to bring similar affinity fraud enforcement actions against fraudsters who have exploited members of a deaf community, various minority groups, and other religious groups similar to this matter. Fraudsters prey on individuals within such groups by exploiting the trust relationship that they share with the individuals within the same small group. 

It seems outrageous that a person would take advantage of someone who they go to church with or someone who they share membership with in a community group.  But, we must remember that greed can penetrate any group.  Although it may be easy to trust a church member or a parent of a child in your child's boy scout troup, we must always be conscientious when investing.  Remember if the person who wants your business, to invest YOUR money, gets defensive when you ask questions about the investment, about their qualifications, or about the returns and does not want to provide an adequate prospectus or other necessary information to make your investment decisions, you may want to chose another person to trust with your investments.

If you believe you are a victim of affinity fraud or any other type of investment fraud, you may have a legal claim against an individual broker or brokerage firm.  The Doss Firm, LLC represents investors nationwide who have lost money as a result of investment fraud or due to faulty investment advice. We invite you to visit our website www.dossfirm.com for further information.   

It is no secret that the stock market has most of us shaking our heads these days.   Millions of Americans are watching their nest eggs dwindle.  Baby boomers have been hit the hardest because there may not be enough time to make up the losses.

Amazingly, most Americans do not know that their financial advisors have a duty to ensure that their clients' assets are invested appropriately and in accordance with their investment objectives and risk tolerance.

In today's Wall Street Journal an article entitled, Investors Face Tough Duel When Fighting Brokers, stated that investors have filed 1,264 arbitration claims with FINRA through March 31st this year.  That number is up 114% from the same period last year.  FINRA, also known as the Financial Industry Regulatory Authority, provides the arbitration forum for resolving disputes with brokerage firms. 

The article provided some good tips to help improve your odds of successfully recovering your losses from your financial advisor and his or her brokerage firm.

Tip 1-  Keep Good Records- This is very good advice because most the time securities arbitration disputes come down to a he said / she said dispute between the customer and the financial advisor.  The customer testifies that the broker recommended an investment that was too risky and the broker testifies that the customer picked the investment.  Having documentation helps the arbitrators to find out who is telling the truth.

Tip 2- Ask what happened-  The article suggests that you write to your broker and explain why you feel your account was mismanaged.  I think this is a terrible idea for investors particularly if you are clueless about investing and if you trusted your broker to act in your best interest.  Too often customers who write to the brokerage firm complaining try to sound more knowledgeable than they are in the complaint letter.  The brokerage firm can then use the letter against the customer in the arbitration.  If you are intent on writing a letter, keep it simple and only ask, "Can you please explain how the investments you recommended to me are appropriate for my investment objectives and risk tolerance?"  Odds are the brokerage firm will not write back because they do not want to commit to anything in writing.  You can use the brokerage firms non-response against them in the arbitration proceeding.

Tip 3- Lock in the loss- The article suggests that you seek a second opinion from another broker and your accountant, then dump whatever investments you should have never owned in the first place.  I generally agree with this idea.  Your complaint is more compelling when you actually realize the loss.  I would, however, be skeptical of another broker's second opinion because that person has an incentive to bad mouth the former broker in order to gain your trust and your money.  Therefore, it is definitely a good idea to educate yourself about why the investments were bad for you.

Tip 4- Get help -  The article suggests that the investor find a lawyer who specializes in securities arbitration. I totally agree. Because the area of law is so unique, it is a good idea to find a lawyer who specializes in the field.  PIABA is an organization consisting of plaintiff's attorneys who practice in this area. You can find a securities attorney on PIABA's website, https://secure.piaba.org/piabaweb/html/index.php.

Tip 5-  Don't "go on the papers." If your losses are less than $25,000, FINRA provides for a simplified arbitration process.  This means that the customer will not have a hearing and the arbitrator will decide the case on the papers only. I agree with the article that customers do not generally fair well in simplified arbitrations.

Tip 6-  Pick Your Panel-  It is true that the customer gets a say in who decides the case. It is important to find a lawyer who practices in this area because they may have experience in front of many of the arbitrators in the pool.  Picking a panel is just as important as picking a jury.  Do not leave it to inexperienced attorneys.

Recently, there have been numerous Georgia articles discussing the ponzi scheme committed by Marietta attorney, Robert P. Copeland. Mr. Copeland, a real estate attorney, was charged by federal prosecutors with operating a ponzi scheme from 2004-2009.  In total, Mr. Copeland duped 125 investors out of $28 million. In a recent article in the Dalton Daily Citizen, U.S. Attorney David Nahmias stated, "But we hope this case sends a second message as well. This defendant came forward, reported his crimes, and pledged his full cooperation, which has already resulted in numerous seizures of assets that will be restored to the victims."

What Mr. Nahmias did not say, however, how the assets will be distributed to investors. You need to pay attention to this because you may be entitled to more than a pro rata share of the seized assets if you can trace your money.  Typically, when the U.S. Government seizes the assets of a fraudster, the Government distributes the money seized back to investors on a pro rata basis.  This means that if the government seizes $10 million from a fraudster and there are 125 victims, each victim receives from the restitution fund a percentage of the $10 million based on how much each victim invested. For example, if the total amount of the fraud totals $28 million and Investor A invested $2.8 million, Investor A would receive 10% of the $10 million or $1 million.

This may seem fair on the surface.  What if Investor A invested the $2.8 million a week before the Government seized the assets and the money can be traced to the fraudster's bank account? Is is fair for Investor A only to receive $1 million out of $2.8? Maybe not.

Does the U.S. Government have unfettered discretion to distribute the funds anyway it sees fit? The answer is no.  Victims of Ponzi schemes have the right to petition the Court and challenge the Government's discretion.  If you can trace your funds, you may be able to establish a constructive trust on the money.  In simple terms, this means that title to the money never transferred to the fraudster. Therefore, the Government did not have the right to seize the funds in the first place. If Investor A, for example, can establish a constructive trust on the $2.8 million, he or she is entitled to receive $2.8 million, not $1 million.

If you are a victim in this situation, our firm has handled these types of cases.

According to Forbes.com, a new lawsuit has been filed claiming that Bank of America aided and abetted a fraudulent investment scheme.  Specifically, the lawsuit alleges that Bank of America was so involved with the fraudster that they should be held liable for the $400 million losses sustained by investors. The suit was filed in the U.S. District Court for the Eastern District of New York on behalf of a possible class of mostly blue-collar workers from Long Island, New York.

This case names Nicholas Cosmo, former owner of Agape World, Inc. as the individual who perpetrated the fraud. Federal authorities charged Cosmo with investment fraud for allegedly promising investors that they were investing in high-interest loans and then using investor funds to trade in commodities futures instead.

Interestingly, Cosmo served two years in prison after admitting in 1997 that, while a licensed stockbroker, he mislead investors and forged documents. Cosmo's broker's license was revoked and he was barred from associating with any members of the National Association of Securities Dealers. Despite his prior troubles, in 2004, Cosmo was owner of Agape which promoted its business as a provider of bridge loans to commercial borrowers.

The Plaintiffs' attorney in this lawsuit contends that Bank of America ignored banking compliance standards and should have filed suspicious activity reports in light of the fact that $400 million was being run through numerous Bank of America accounts held by a convicted felon. It is further suggested by Plaintiffs' attorney that this case will serve to highlight the role of financial institutions in assisting Ponzi schemes.

The lawsuit also alleges that Bank of America did not intervene when investor money was commingled or wired to commodities futures brokerages. Further, it is alleged that Bank of America failed to intervene when some of the investors' funds was used to pay off Cosmo's personal expenses.

In total, the complaint states that Bank of America housed 13 accounts used by Cosmo and his brokers in the Ponzi scheme.  The complaint also alleges that some of the brokers employed by Cosmo had criminal records as well.

It is hoped that this suit does serve to highlight the fact that fraudsters are generally not acting alone when perpetuating a fraudulent investment scheme. They often use financial institutions in various ways to further the fraud.  These financial institutions should have better internal monitoring systems which would expose individuals engaged in fraudulent schemes. They are often in the best position to discover the fraud, or even better to prevent the fraud from occurring.