SEC FILES COMPLAINT AGAINST FOREIGN CURRENCY TRADING FIRM FOR ENGAGING IN ALLEGED “PONZI SCHEME”

July 19, 2011 By Jay Eng

On July 15, 2011, the Securities and Exchange Commission (“SEC”) announced that it had filed a complaint against First Capital Savings & Loan, Ltd. (“First Capital”) alleging that the firm defrauded investors by promising high fixed rates of return from foreign currency trading. The SEC alleges that

First Capital conducted little foreign currency trading, lost money on the little trading that it conducted, and never engaged in any profitable business operations. Instead, after transferring investors’ money to an off-shore account, Lowrance and First Capital secretly diverted investor funds to pay fake returns to other, earlier investors in the classic modus operandus of a “Ponzi scheme.”

SEC v. First Capital Savings & Loan, Ltd., No. 11-CV-3451 (N.D. Cal.)

DISTRICT JUDGE ENTERS JUDGMENT FOR BANKATLANTIC IN CLASS ACTION LAWSUIT

May 12, 2011 By Jay Eng

In 112 page Order entered on April 25, 2011, a United States District Court Judge for the Southern District of Florida reversed a jury verdict that awarded class member-Bank Atlantic shareholders $2.41 per share in damages based on alleged fraud. Among other things, the Court held that “there was insufficient evidence to support the Jury’s finding of loss causation [and] even had Plaintiffs made a sufficient showing of loss causation, they did not produce sufficient evidence to support an award of damages in any amount.”

According to a January 10, 2010, Riskmetrics Report, only eight securities class action cases have been tried to a verdict since 1996. Only seven additional securities class action cases have been tried since 1996 (but not to a verdict), where the conduct at issue was alleged to have occurred after the PSLRA was enacted.

SECURITIES CLASS ACTION SETTLEMENTS LOWEST IN 10 YEARS

April 24, 2011 By Jay Eng

According to Cornerstone Research, the number of securities class action settlements approved in 2010 under the Private Securities Litigation Reform Act was the lowest in more than ten years. The number of class action settlements approved in 2010 decreased by approximately 15% from 2009. According to the report, “slightly more than 40 percent of cases settled in 2010 were accompanied by a derivative action filing compared with more than 45 percent of cases in 2009.” Further, institutional investors served as lead plaintiffs in more than 67% of settlements.

SEC SUES SCHWAB OVER YIELD PLUS FUND

January 12, 2011 By Jay Eng

On January 11, 2011, the Securities and Exchange Commission sued Charles Schwab Investment Management and Charles Schwab & Co., Inc. over alleged misleading statements regarding the Schwab YieldPlus Fund and failing to establish, maintain and enforce policies and procedures to prevent the misuse of material, nonpublic information. Schwab agreed to pay more than $118 million to settle the SEC’s charges.

SEC SUES GOLDMAN SACHS FOR SECURITIES FRAUD

April 16, 2010 By Jay Eng

The Securities and Exchange Commission filed a complaint today against Goldman Sachs & Co. for “making materially misleading statements and omissions in connection with a synthetic collateralized debt obligation (“CDO”) [it] structured and marketed to investors.” The Complaint alleges:

“GS&Co marketing materials for ABACUS 2007-AC1 – including the term sheet, flip book and offering memorandum for the CDO – all represented that the reference portfolio of RMBS underlying the CDO was selected by ACA Management LLC (“ACA”), a third-party with experience analyzing credit risk in RMBS. Undisclosed in the marketing materials and unbeknownst to investors, a large hedge fund, Paulson & Co. Inc. (“Paulson”), with economic interests directly adverse to investors in the ABACUS 2007-AC1 CDO, played a significant role in the portfolio selection process. After participating in the selection of the reference portfolio, Paulson effectively shorted the RMBS portfolio it helped select by entering into credit default swaps (“CDS”) with GS&Co to buy protection on specific layers of the ABACUS 2007-AC1 capital structure. Given its financial short interest, Paulson had an economic incentive to choose RMBS that it expected to experience credit events in the near future. GS&Co did not disclose Paulson’s adverse economic interests or its role in the portfolio selection process in the term sheet, flip book, offering memorandum or other marketing materials provided to investors.”

STATE STREET BANK AND TRUST SETTLES WITH SEC OVER MORTGAGE-BACKED SECURITIES

February 5, 2010 By Jay Eng

On February 4, 2010, State Street Bank and Trust Company entered into a settlement with the Securities and Exchange Commission without admitting or denying the findings of the SEC in the settlement Order. During the subprime mortgage crisis the SEC found that State Street engaged in a course of business that misled investors about the extent of subprime mortgage-backed securities held in certain unregistered funds under its management.

As a result of State Street’s conduct, investors in State Street’s funds lost hundreds of millions of dollars during the subprime market meltdown in mid-2007.

State Street offered investments in certain collective trust funds to institutional investors, including pension funds, employee retirement plans, and charities. These funds included two substantially identical funds – referred to together as the Limited Duration Bond Fund (the “Fund”) – made available to different categories of investors. Other actively-managed bond funds and a commodity futures index fund managed by State Street (“the related funds”) also invested in the Fund. State Street established the Fund in 2002 and marketed the Fund by saying it utilized an “enhanced cash” investment strategy that was an alternative to a money market fund for certain types of investors. By 2007, however, the Fund was almost entirely invested in or exposed to subprime residential mortgage-backed securities (“subprime investments”). Nonetheless, State Street continued to describe the Fund to prospective and current investors as having better sector diversification than a typical money market fund, while failing to disclose the extent of its exposure to subprime investments.

When the subprime market collapsed in mid-2007, many investors in the Fund and the related funds were unaware that the Fund had such significant exposure to subprime investments. In fact, the Fund’s offering materials, such as quarterly fact sheets, presentations to current and prospective investors, and responses to investors’ requests for proposal, contained misleading statements and/or omitted material information about the Fund’s exposure to subprime investments and use of leverage. As a result, many investors either had no idea that the Fund held subprime investments and used leverage, or believed that the Fund had very modest exposure to subprime investments and used little or no leverage.

See the SEC Press Release here.

UNITEDHEALTH SECURITIES LITIGATION OBJECTORS, REJECTED.

September 21, 2009 By Jay Eng

On September 4, 2009, District Judge Rosenbaum entered an Order in the In re UnitedHealth Group Incorporated PSLRA Litigation, Case No. 06-CV-1691 (JMR/FLN) (D. Minn. Sep. 4, 2009), denying the petition of certain objectors to the settlement who argued that the Court’s reduction of attorney’s fees to class counsel from $110 million to $64.8 million was in part due to their objection. The Court soundly rejected this contention and had harsh words for objector’s counsel, stating:

“These objectors have contributed nothing. Instead, in a pleading which may charitably be described as disingenuous, Objectors’ Counsel argue they assisted the Court in finding class counsel’s fee request unreasonable. They claim their efforts convinced the Court to reduce class counsel’s fee from $110 million to $64.8 million. They have the temerity to suggest they are the ones who saved the class $45 million in attorney fees, entitling them to a six-figure fee of their own. Their suggestion is laughable. If the Court may be permitted an egregious paraphrase of Winston S. Churchill: Seldom in the field of securities litigation was so little owed by so many to so few….Their goal was, and is, to hijack as many dollars for themselves as they can wrest from a negotiated settlement. Objectors’ eight-page-long, two-week-late pleading presented no facts, offered no law, and raised no argument upon which the Court relied in its deliberation or ruling concerning class counsel’s motion for fees.”

(Emphasis added).

In re UnitedHealth Group Incorporated PSLRA Litigation, Case No. 06-CV-1691 (JMR/FLN), 2009 WL 2868399 (D. Minn. Sep. 4, 2009).

EIGHTH CIRCUIT RULES NOVASTAR COMPLAINT FAILED TO PLEAD FALSE & MISLEADING STATEMENTS WITH SPECIFICITY

September 8, 2009 By Jay Eng

In In re: 2007 Novastar Financial Inc., Securities Litigation, No. 08-2452 (8th Cir. Sept. 1, 2009), the Eighth Circuit recently addressed the issued of whether the plaintiffs’ complaint satisfied the pleading requirements of the PSLRA which requires a plaintiff to “specify each statement alleged to have been misleading [and] the reason or reasons why the statement is misleading.”

In Novastar, the lead plaintiff filed a 104 page consolidated complaint. The consolidated complaint included a thirty-six page section which “reproduce[d], either in their entirety or lengthy excerpts from, press releases, SEC filings, and transcripts of conference calls made by Novastar and the individual defendants during the class period.” Noting that the “PSLRA’s heightened pleading requirements compel the plaintiff to ‘plead the ‘who, what, when, where and how’ of the misleading statements or omissions,’” the Eighth Circuit stated:

[Lead Plaintiff] also argues that the district court erred in concluding that his complaint failed to specify the reasons why the allegedly misleading statements were false or misleading. However, absent an indication of precisely what statements [Lead Plaintiff] alleges to be misleading, it is difficult, if not impossible, to determine whether the complaint adequately specified why each statement was misleading. Even if we were able to identify specific statements that were alleged to be misleading, we would still conclude that [Lead Plaintiff's] complaint failed to specify the reasons why each statement was false or misleading. The complaint does not provide any link between an alleged misleading statement and specific factual allegations demonstrating the reasons why the statement was false or misleading, as the PSLRA requires. See Cerner, 425 F.3d at 1083; 15 U.S.C. § 78u-4(b)(1). Instead, the complaint merely contains “[a] litany of alleged false statements, unaccompanied by the pleading of specific facts indicating why those statements were false.”

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