Archive for the ‘Securities Regulation’ Category:

Leveraged and Inverse ETFs May Not Be Suitable For All Investors

Written on October 4th, 2009 by Jason M. Kueserno shouts

ProFunds Group, one of the largest issuers of leveraged and inverse ETFs recently issued a warning that some of its leveraged and inverse ETFs may not be suitable for all investors. In the prospectus dated October 1, 2009, the company repeatedly states:

The Fund is different from most exchangetraded funds in that it seeks leveraged returns and only on a daily basis. The Fund also is riskier than similarly benchmarked exchange-traded funds that do not use leverage. Accordingly, the Fund may not be suitable for all investors and should be used only by knowledgeable investors who understand the potential consequences of seeking daily leveraged investment results. Shareholders should actively monitor their investments.

(See, e.g., prospectus at pp. 49, 54, 59, 64, 69, 74, 79.)

While additional disclosures are an improvement, this disclosure is still somewhat vague. It is similar to telling someone that an investment is suitable for them if they are seeking growth of their investment. Who isn’t seeking growth of their investments? I have never heard anyone say “I am looking for an investment that will cause me to lose money.”

In addition, many investors who are sold leveraged ETFs such as these never receive a copy of the prospectus. If an investor does not receive the prospectus, the disclosure does not protect them (however, it could protect the fund company from liability).

Leveraged ETFs invest their shareholders’ money in futures and/or derivatives in order to multiply the daily return of an index. Some leveraged ETFs seek a return that is 200% or even 300% of the daily performance of the index. Inverse ETFs work in much the same way, except that these funds seek a return that is equal to 100%, 200%, or even 300% of the opposite of the daily performance of the index. With these funds, an investor actually profits when the index declines in value. Typical leveraged ETFs and inverse ETFs reset each day and therefore, over periods longer than one day, their performance can vary considerably from the index. In addition to ProFunds, the most popular leveraged ETFs and inverse ETFs are managed by Rydex and Direxion.

FINRA has already declared that leveraged ETFs are typically unsuitable for retail investors. Therefore, the announcement by ProFunds is not a revelation. If your stockbroker or financial advisor has sold you any leveraged ETFs or inverse ETFs, or purchased any leveraged ETFs or inverse ETFs in your accounts, you may be entitled to recover any losses on these investments. The Kueser Law Firm represents investors who were sold leveraged ETFs and inverse ETFs. If you are concerned that your investments have been mismanaged, contact us to learn more about your rights.

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Colorado Division of Securities Charges Stifel Nicolaus with Fraudulent Sales of Auction Rate Securities

Written on October 3rd, 2009 by Jason M. Kueserno shouts

On October 1, 2009, Colorado Securities Commissioner Fred Joseph announced that the Securities Division had filed a complaint against Stifel, Nicolaus & Company. According to the Division’s news release, the complaint alleges:

Stifel Nicolaus falsely represented auction rate securities as liquid, short-term investments to Colorado investors without discussing the risks. These representations gave investors a false sense of security that the investments would always be liquid when auction rate securities, in fact, faced significant, inherent liquidity risks.

A copy of the Notice of Charges is available in pdf format here.

Auction rate securities, which are also referred to as auction rate preferred shares, ARS, ARPS, and MARS, to name a few, have been at the epicenter of regulatory investigations across the country. Auction rate securities are long-term (or perpetual) investments that traded in periodic “auctions.” They are designed to allow companies, mutual funds, municipalities, and other organizations to borrow money for a long-term period while paying short-term rates of interest, which were reset during the periodic auctions. It was in these auctions that investors who held the securities could also sell their holdings if they needed to have access to cash. Because these auctions occurred on a relatively frequent basis (i.e., weekly, bi-weekly, or monthly), investors had the ability to sell their positions and obtain cash in a relatively short period of time.

For years, Wall Street firms sold auction rate securities as short-term, cash equivalent investments that paid marginally higher rates of interest as compared to other short-term investments. What these firms did not tell their customers was that the liquidity of the auction rate securities markets was entirely dependent on the ability and willingness of these same firms to participate in the auctions — in other words, these firms had to be willing and able to purchase the securities that were not purchased by the other auction market participants. In most cases, these firms were purchasing more securities than the other market participants. The firms (and their representatives) did not disclose these critical facts, but rather, only disclosed that the interest rates paid on the securities was reset at the auctions. In addition, these firms generally failed to inform investors that they would not be able to access their invested capital if the auctions froze.

In 2007, these Wall Street firms came under massive liquidity problems. As a result, these firms made a decision to cease participation in the auction rate markets, leaving investors across the country with illiquid investments that typically paid short-term rates of interest. In some cases, the auction rate securities paid no interest for months at a time. Therefore, investors were left holding a bag of illiquid long-term securities that paid little, if any interest.

Several class actions have been filed across the country on behalf of auction rate securities investors. In addition, numerous securities arbitration claims have been filed by investors. Some of these cases, as well as action by state regulators, has resulted in redemption of some investors’ auction rate securities. However, many investors remain stuck with these illiquid investments.

If you own auction rate securities that have not been redeemed, you may want to contact an attorney to discuss your rights. The Kueser Law Firm is a boutique legal practice that focuses its practice on protecting the rights of investors and recovering investment losses for companies and individuals. You may contact us by completing the form to the right, or by visiting our website.

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Obama Administration Continues Push for Regulatory Reform

Written on September 24th, 2009 by Jason M. Kueserno shouts

“A nation that forgets its past is doomed to repeat it.” — Winston Churchill

On Wednesday, September 23, 2009, several major media outlets published articles discussing the Obama administration’s continued efforts to enact enhanced regulatory reform over the financial markets.

Given what has occurred over the past two years, enhanced regulation is absolutely necessary. As Paul Krugman noted in a New York Times Op-Ed article: “In the grim period that followed Lehman [Brothers’] failure, it seemed inconceivable that bankers would, just a few months later, be going right back to the practices that brought the world’s financial system to the edge of collapse.” However, that is exactly what is happening. While the rest of America continues to struggle with job losses, foreclosures, and the effect that the downturn had on their investment portfolios, Wall Street is again promoting the very investments that caused the problem — and business appears to be good.

For example, in a recent article on Bloomberg.com, Abigail Moses and Shannon D. Harrington stated that “A year after the bankruptcy of Lehman Brothers Holdings Inc., credit-default swaps have lost their stigma for disaster and are contributing to the growing confidence in the credit markets.” Have we already forgotten Lehman Brothers and AIG and the problems that CDS created? It appears that we have. In a recent article, Greg Burns of the Chicago Tribune noted that credit default swap reform has “fizzled.”

The only reason that all this appears to have been forgotten is due to the recent “recovery” in the stock market. As Treasury Secretary Timothy Geithner stated yesterday in his remarks before Congress:

Make no mistake, the flaws in our financial system and regulatory framework that allowed this crisis to occur, and in many ways helped cause it, are still in place . . . . We may disagree over details over how to best fix those flaws, but that cannot mean we do not act.

It seems to me that the Treasury Secretary is someone we should be listening to, and not Wall Street or others with a similar agenda. Let us not forget our past.

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JP Morgan Returns More Than $28 Million to Missouri Auction Rate Securities Investors

Written on September 23rd, 2009 by Jason M. Kueserno shouts

On September 21, 2009, Missouri Secretary of State Robin Carnahan announced that her office had finalized a consent order with JP Morgan Chase & Co. related to the firm’s marketing and sale of auction rate securities (ARS) to Missouri investors.

According to the press release, Missouri investors will receive more than $28 million. In addition, JP Morgan will pay $86,000 to the Missouri Investor Education and Protection Fund, which is used to educate Missourians about potential investment fraud and other fraudulent schemes.

JP Morgan, like many of the other investment firms across the country marketed auction rate securities as “safe,” “liquid,” and “same as cash,” when, in fact, the investments were subject to the willingness of many of the same firms to provide the necessary liquidity to sustain the auction rate securities market. As these firms’ liquidity began to diminish in late 2007 and early 2008, they became unable to support the market with the necessary liquidity. As a result, in mid-February 2008, the auctions failed and investors were stuck holding long-term and perpetual investments that paid short-term interest rates.

The Kueser Law Firm represents investors in securities arbitration and litigation. If you were sold Auction Rate Securities and your positions have not been redeemed or repurchased, you should contact an attorney to discuss your rights. Feel free to contact us if you have any questions or would like additional information.

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SEC joins FINRA In Cautioning Investors About Risks of Leveraged ETFs

Written on August 21st, 2009 by Jason M. Kueserno shouts

Earlier this week, the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) issued a joint warning cautioning investors on the dangers in investing in leveraged ETFs and inverse ETFs. The two regulators issued the warning because they “believe individual investors may be confused about the performance objectives of leveraged and inverse exchange-traded funds (ETFs).”

The warning also notes that leveraged ETFs are designed to achieve their investment performance objectives on a daily basis, rather than a long-term basis as with typical exchange-traded and mutual funds. In fact, the performance of these funds can vary significantly from their stated objectives over long-term periods. The joint warning contains a detailed description of leveraged and ETFs, as well as examples of how the funds generally operate. The SEC also included a link to a NYSE “Informed Investor” Bulletin entitled “What You Should Know About Exchanged Traded Funds.”

While this warning is welcome, it unfortunately has come after many investors have sustained significant losses in these risky and unsuitable investments. As previously discussed in this blawg, FINRA has already declared that leveraged ETFs are typically unsuitable for retail investors. The most popular of these investments are managed by Rydex, Direxion, and ProShares. If your stockbroker or financial advisor has sold you any leveraged ETFs, or purchased any leveraged ETFs in your accounts, and you have lost money on these investments, you may be entitled to recover these losses. The Kueser Law Firm represents investors who were sold leveraged and inverse ETFs. If you are concerned that your investments have been mismanaged, contact us to learn more about your rights.

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New York Attorney General Sues Charles Schwab Over Auction Rate Securities (ARS) Sales

Written on August 18th, 2009 by Jason M. Kueserno shouts

Yesterday, August 17, 2009, the Attorney General of the state of New York announced that it had filed a lawsuit against Charles Schwab & Co. for its sales of auction rate securities. According to the press release, the Complaint charges Schwab with violations of the Martin Act for:

falsely representing auction rate securities as liquid, short-term investments without discussing the risks. These representations gave investors a false sense of security that their investments would always be liquid when auction rate securities, in fact, faced significant, inherent liquidity risks.

This is another action by Mr. Cuomo’s office to remedy the massive fraud perpetrated by Wall Street firms relating to auction rate securities. In fact, late last month, the Attorney General announced a $456 million settlement with TD Ameritrade related to its sales of auction rate securities.

Auction rate securities, which are also referred to as auction rate preferred shares, ARS, ARPS, and MARS, to name a few, have been at the epicenter of regulatory investigations across the country. Auction rate securities are long-term (or perpetual) investments that traded in periodic “auctions.” They are designed to allow companies, mutual funds, municipalities, and other organizations to borrow money for a long-term period while paying short-term rates of interest, which were reset during the periodic auctions. It was in these auctions that investors who held the securities could also sell their holdings if they needed to have access to cash. Because these auctions occurred on a relatively frequent basis (i.e., weekly, bi-weekly, or monthly), investors had the ability to sell their positions and obtain cash in a relatively short period of time.

For years, Wall Street firms sold auction rate securities as short-term, cash equivalent investments that paid marginally higher rates of interest as compared to other short-term investments. What these firms did not tell their customers was that the liquidity of the auction rate securities markets was entirely dependent on the ability and willingness of these same firms to participate in the auctions — in other words, these firms had to be willing and able to purchase the securities that were not purchased by the other auction market participants. In most cases, these firms were purchasing more securities than the other market participants. The firms (and their representatives) did not disclose these critical facts, but rather, only disclosed that the interest rates paid on the securities was reset at the auctions. In addition, these firms generally failed to inform investors that they would not be able to access their invested capital if the auctions froze.

In 2007, these Wall Street firms came under massive liquidity problems. As a result, these firms made a decision to cease participation in the auction rate markets, leaving investors across the country with illiquid investments that typically paid short-term rates of interest. In some cases, the auction rate securities paid no interest for months at a time. Therefore, investors were left holding a bag of illiquid long-term securities that paid little, if any interest.

Several class actions have been filed across the country on behalf of auction rate securities investors. In addition, numerous securities arbitration claims have been filed by investors. Some of these cases, as well as action by state regulators, has resulted in redemption of some investors’ auction rate securities. However, many investors remain stuck with these illiquid investments.

If you own auction rate securities that have not been redeemed, you may want to contact an attorney to discuss your rights. The Kueser Law Firm is a boutique legal practice that focuses its practice on protecting the rights of investors and recovering investment losses for companies and individuals. You may contact us by completing the form to the right, or by visiting our website.

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Brokerage Firms Pay Billions in Bonuses in 2008 While Taking Taxpayer Money

Written on July 31st, 2009 by Jason M. Kueserno shouts

On July 30, 2009, New York Attorney General Andrew Cuomo issued a report entitled “No Rhyme or Reason: The ‘Heads I Win, Tails You Lose’ Bank Bonus Culture.”

In the report, Mr. Cuomo discusses the compensation programs instituted by banks and brokerage firms while the economy was heading for, and in the midst of, crisis. The findings are truly astonishing are summed up well as “When the banks did well, their employees were paid well. When the banks did poorly, their employees were paid well. And when the banks did very poorly, they were bailed out by taxpayers and their employees were still paid well. Bonuses and overall compensation did not vary significantly as profits diminished.”

The report illustrates that while Citigroup and Merrill Lynch suffered losses of $54 billion in 2008, they “paid out nearly $9 billion in bonuses and then received TARP bailouts totaling $55 billion.” Furthermore, the bonuses paid in 2008 by Goldman Sachs, Morgan Stanley, and J.P. Morgan Chase exceeded their net income. Specifically, the report notes that “these three firms earned $9.6 billion, paid bonuses of nearly $18 billion, and received TARP taxpayer funds worth $45 billion.” The report also noted that State Street paid approximately $470 million in bonuses while receiving $2 billion in TARP funding.

Appendix A to the Report is a must read for anyone concerned about the problems in the financial system. A table contained in the Appendix shows that J.P. Morgan Chase & Co. paid each of more than 1,600 employees bonuses that were equal to or greater than $1 million (while the firm accepted $25 billion in TARP). Goldman Sachs and Citigroup paid similar bonuses to more than 950 and 730 employees, respectively (while accepting $10 billion and $45 billion, respectively from TARP). In 2008, Merrill Lynch suffered losses of more than $465,000 per employee. Nevertheless, the firm paid total bonuses that averaged more than $61,000 per employee.

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SEC Charges Morgan Keegan for Fraudulent Marketing and Sales of Auction Rate Securities

Written on July 27th, 2009 by Jason M. Kueserno shouts

On July 21, 2009, the Securities and Exchange Commission (SEC) charged Morgan Keegan & Company. In its Complaint, the SEC seeks an injunction for violation of the federal securities laws, as well as equitable relief for Morgan Keegan investors. Included in this equitable relief is a request for a court order requiring Morgan Keegan to repurchase illiquid ARS from its customers. More about the SEC’s case, including a link to the Commission’s Litigation Release and Complaint can be found here.

The SEC’s Complaint alleges that Morgan Keegan misled thousands of investors about the liquidity risks related to auction rate securities (ARS). This is another example of the massive fraud related to Auction Rate Securities that was perpetrated by financial services firms across the country. To date, several firms, including UBS, Wachovia, TD Ameritrade, Fidelity, and Stifel Nicolaus have entered into settlements with federal and/or state securities regulators. Some of these settlements have broader relief for investors, while others have left many investors still holding onto these illiquid investments.

If you were sold Auction Rate Securities and your positions have not been redeemed or repurchased, you should contact an attorney to discuss your rights. The Kueser Law Firm represents investors in securities arbitration and litigation. Feel free to contact us if you have any questions or would like additional information.

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SEC permanently changes rules related to “naked” short selling

Written on July 27th, 2009 by Jason M. Kueserno shouts

In a much anticipated move, the Securities and Exchange Commission (SEC) made permanent a rule that it hopes will curb abusive “naked” short selling practices in the securities markets.

Short selling is the practice of selling a security that a person does not own. In essence, the person (the “short seller”) “borrows” the security from their broker (or another third party) and sells it to a buyer. This strategy is implemented where the short seller anticipates that the value of the security will drop. As the value of the security goes down, the short seller makes money. Conversely, if the value of the security increases, the short seller loses money. At some point in the future, the short seller will purchase an amount of shares equal to the amount borrowed. This is referred to as “covering” the short position. Often the short seller has to pay a fee to borrow the securities and has to pay interest on the value of the securities until the short position is covered.

The new rule (Rule 204T) requires broker-dealers to promptly purchase or borrow securities to deliver on a short sale. In addition, the SEC is working with self-regulatory organizations to make public information related to short sale volume. Lastly, the SEC is planning to hold a public roundtable on September 30 to discuss securities lending, pre-borrowing, and possible additional short sale disclosures. According to the SEC’s press release, “the roundtable will consider, among other topics, the potential impact of a program requiring short sellers to pre-borrow their securities, possibly on a pilot basis, and adding a short sale indicator to the tapes to which transactions are reported for exchange-listed securities.”

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Madoff Sentenced to 150 Years

Written on June 29th, 2009 by Jason M. Kueserno shouts

This morning, U.S. District Court Judge Denny Chin sentenced Bernard Madoff to the maximum sentence of 150 years of prison for his role in a “historic” multi-billion dollar fraud.

Judge Chin stated “Here the message must be sent that Mr. Madoff’s crimes were extraordinarily evil and that this kind of manipulation of the system is not just a bloodless crime that takes place on paper, but one instead that takes a staggering toll.”

Mr. Madoff’s “error of judgment” or “tragic mistake” (as he referred to his fraud) devastated the lives of thousands of people. While it is unlikely that Mr. Madoff’s former clients will receive any significant restitution, it is comforting to see that he was not able to buy leniency and that the maximum sentence was ordered.

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