Securities Lawyer Blog

It's worth noting so we will. The Securities Lawyer Blog cannot end this month's postings without noting the largest penalty ever imposed on a Wall Street firm.

Two weeks ago, the Securities and Exchange Commission (SEC) revealed that Goldman, Sachs & Co. has agreed to pay $550 million and to reform its business practices for its part in subprime-related investment collapse. The settlement was recently approved by United States District Court Judge Barbara Jones.

In the SEC's complaint filed this past April, the firm was alleged not only to have affirmatively misstated key facts, but also to have omitted them. The problems for the firm centered on the performance of subprime residential mortgage-backed securities. Investors were not told about the role that the hedge fund Paulson & Co. Inc. played in the Collateralized Debt Obligation (CDO) portfolio selection process. Paulson's interests were not aligned with those of investors. In fact, Paulson had "taken a short position against the CDO."

In Goldman's consent, the firm did not admit or deny the allegations, but did acknowledge that its marketing materials contained incomplete information. The firm also called it "a mistake" not to have disclosed the role of Paulson in the portfolio selection process because their interests were "adverse" to Collateralized Debt Obligation (CDO) investors.

Robert Khuzami, Director of the SEC's Division of Enforcement put it this way: "[t]his settlement is a stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing."

As part of the settlement, Goldman is permanently enjoined from violating the antifraud provisions of the Securities Act of 1933. The payment includes $250 million to investors harmed in these transactions. The firm will also be required to reform its review and approval process with regard to mortgage securities offerings, including written marketing materials, as well as the role of key functions in theprocess, including counsel and compliance personnel.

Continue reading "Goldman and the $550 Million SEC Settlement" »

The Securities Lawyer Blog has posted previously on brokers who have paid the ultimate price for creating and allowing market manipulations and other bad dealings. We have also noted when broker-dealers fail to supervise or detect bad dealings.

In a recent case, Deutsche Bank's compliance department apparently did its job and now one of its former brokers is permanently barred. A hearing panel at the Financial Industry Regulatory Authority (FINRA) issued this ruling on a complaint filed by FINRA in December 2008. The decision will be final, unless appealed.

Big Manipulations
Essentially, the broker involved was alleged to have manipulated the price of a biosciences stock seeking to create big gains for a hedge fund client, his family and himself. The panel's litany of findings are a roadmap for noncompliance and self-dealing.

Mr. Edward Brokaw was located in a Connecticut office of Deutsche Bank Securities. He is said to have executed a deliberate effort to drive the biosciences stock value down and in so doing, enhance the value of contingent value rights (CVRs) for this stock.

The hedge fund client held about 18.5 million CVR's for the bioscience stock, which amounted to about 30 percent of the total outstanding CVR's. The broker and his family owned over 200,000 of these. As the stock value dropped the CVR values increased and a big payout would result for CVR holders.

Bad Calls
The evidence against the barred-broker included recorded sell orders that were placed at the firm's trading desk. And the decision by the hearing panel included evidence that orders were taken by the trading desk to sell off large share holdings of the bioscience stock by the hedge fund resulting in a drop of value.

Further, another call "explained the pricing of the CVRs and the strategy behind the hedge fund's instructions to sell close to the market's open and close" and included a statement that this game was to be played for the next 15 days. Ultimately, it was found that this was a deliberate effort to depress the stock's price.

Compliance Works
After three days, Deutsche Bank's compliance personnel picked-up on the aggressive trading pattern and stopped sales of the biosciences stock for the hedge fund. Mr. Brokaw was suspended and terminated for these trades.

Another policy at Deutsche Bank was found to have been violated in that order tickets were not created as received, but rather were aggregated for each day "with a false notation that the order was given by the client directly to the trading desk rather than to Brokaw - thus circumventing automatic branch office compliance review of the orders"

Continue reading "Done Deal -- Former Deutsche Bank Broker Permanently Barred " »