Tumultuous upheaval in the financial markets has led to a rash of arbitration claims from retail and institutional investors on charges their financial advisors and brokerages misrepresented the risk levels of certain investment products. Some of the central players in these claims: Morgan Keegan & Company and Charles Schwab.

In the case of Memphis-based brokerage Morgan Keegan, investor complaints involve a group high-yield bond funds that the company allegedly marketed and sold as conservative investment options – products designed to provide high yields without excessive credit risks. Instead, the RMK funds made large investments in illiquid and toxic securities, including asset- and mortgage-backed securities and collateral debt obligations (CDOs).

Other funds responsible for the influx of arbitration claims include Charles Schwab & Co.’s YieldPlus funds. 

For more than a year now, investors nationwide have complained to the Financial Industry Regulatory Authority (FINRA), as well as the Securities and Exchange Commission (SEC), that Charles Schwab represented the YieldPlus funds as investments similar to money-market funds, while failing to disclose the fact they held large concentrations of toxic products like mortgage-backed securities. Ultimately, these holdings caused the YieldPlus funds to lose up to 80% of their value.

As reported July 6 by the Wall Street Journal, aggrieved individuals who do file claims with FINRA for their investment losses are likely to experience a more “investor-friendly” process than in the past because of recent changes to how an arbitration hearing is conducted and the composition of the arbitration panel.

Specifically, FINRA launched a pilot program in October 2008 that allows 276 cases against 11 participating brokerage firms to be heard annually by an all-public, three-person panel versus having one of the panel members associated with the securities industry. The program is a win for investor advocates, who contend having an industry-affiliated arbitrator reside on an arbitration panel not only can create bias but also sway other panel members against the investor.

A group of public Ohio and Texas pension funds will lead a securities class-action lawsuit on behalf of investors against Bank of America (BofA) and the acquisition of brokerage firm Merrill Lynch.

On June 30, Judge Denny Chin of the U.S. District Court for the Southern District of New York granted lead plaintiff status to the State Teachers Retirement System of Ohio, the Ohio Public Employees Retirement System and the Teachers Retirement System of Texas. They are joined by two European pension funds: Fjärde AP-Fonden and Stichting Pensionfonds Zorg en Welzijn. 

Investors in the case allege Bank of America purposefully misled them about the fiscal health of Merrill Lynch before the purchase on Jan. 1, 2009. In its fourth quarter, Merrill reported a loss of $15.4 billion. 

As reported July 2 by the New York Times, the BofA/Merrill Lynch merger has prompted Congressional hearings into why Bank of America failed to back out of the acquisition or disclose more information about Merrill’s financial status. In addition, lawmakers want to know the extent to which federal regulators may have pushed Bank of America to close the deal.

On June 26, 2009, a Washington, D.C., arbitration panel of the Financial Industry Regulatory Authority (FINRA) ruled in favor of investor David Cutler and his claim (FINRA No. 09-00300) against Charles Schwab & Company and its Schwab YieldPlus Fund.

The panel awarded Cutler $11,400.

Cutler’s complaint against San Francisco-based Charles Schwab is similar to hundreds of other arbitration claims filed with FINRA by investors who allege that Charles Schwab misrepresented the risks of the Schwab YieldPlus fund by failing to disclose important information about the risky securities it held.

Specifically, the Schwab YieldPlus fund was marketed and sold as a safe and conservative alternative investment to money market funds. Later, investors learned the YieldPlus fund was heavily concentrated in high risk and toxic subprime mortgage-backed securities and in even more risky collateral debt obligations (CDOs). Ultimately, Schwab’s failure to diversify the fund’s portfolio caused investors to collectively lose approximately $1.3 billion in 2008.

In 2008, approximately 74% of customer claimant cases filed with FINRA resulted in monetary settlements or awards for the investor.

New York-based Prime Capital Services (PCS) and several of its brokers – Eric J. Brown, Matthew J. Collins, Kevin J. Walsh and Mark W. Wells – face enforcement action by the Securities and Exchange Commission (SEC) for allegedly luring senior citizens and retirees to buy unsuitable variable annuities.

According to the SEC complaint, Prime Capital Services and its parent company, Gilman Ciocia of Poughkeepsie, New York, recruited the majority of clients by offering free-lunch seminars in Florida, encouraging elderly investors to schedule private appointments with PCS representatives. What the meetings reportedly failed to reveal, however, was key information relating to the variable annuities, including their high costs and lock-in periods.

The SEC contends Prime Capital Services and its brokers earned millions of dollars in sales commissions and that many of the variable annuities sold were unsuitable investments for customers due to their age, liquidity, and investment objectives.

In addition, the SEC says representatives from Prime Capital Services told customers that the annuities were “guaranteed” not to lose money, while failing to disclose the fact that the guarantee only occurs upon the death of the person holding the annuity. Prior to that, the value of a variable annuity can fluctuate widely depending on the performance of a portfolio’s securities.

The SEC also named Prime Capital Services’ President Michael P. Ryan in its complaint, along with PCS employees Rose M. Rudden and Christie A. Andersen.

In 2005, Prime Capital Services faced similar allegations and settled with the Financial Industry Regulatory Authority (FINRA). Without admitting any wrongdoing, the company paid a $200,000 fine, replaced the firm’s compliance officer and reportedly enhanced its compliance policies.

More investors are scoring legal victories in their claims against Morgan Keegan & Company and a group of proprietary mutual funds. As reported June 7, 2009, by The Birmingham News, 16 of investors’ 20 wins came in the past 25 arbitration hearings with the Financial Industry Regulatory Authority (FINRA). In April, the Memphis-based investment firm suffered six consecutive losses in arbitration negotiations with investors.

Many investors who have filed claims with FINRA lost up to 95% of their money the Morgan Keegan mutual funds.

The claims against Morgan Keegan involve several collapsed bond funds that plummeted in value following the onset of the mortgage loan crisis. The common theme in the majority of investors’ claims is that Morgan Keegan misrepresented the mutual funds as corporate bonds and preferred stocks, giving the illusion of diversification and low risk levels.

Later, losses in the funds – which entailed more than $2 billion between March 31, 2007, and March 31, 2008 – were traced back to the underlying investments made by Morgan Keegan. The investments included risky and untested types of subprime mortgage securities, collateral debt obligations (CDOs) and other debt instruments.

Hyperion Brookfield Asset Management now manages the funds at the center of the ongoing litigation.

A Birmingham arbitration panel (FINRA Case Number 08-00926) ruled against Morgan Keegan & Company in a claim involving the RMK Select High Income-C Bond Fund. 

In March 2008, investors Richard and Carolyn Bland filed their claim with the Financial Industry Regulatory Authority (FINRA), charging Morgan Keegan of failing to disclose certain risks about the Select High Income-C Bond Fund, unsuitability, failure to supervise and breach of fiduciary duty.

On June 10, 2009, a FINRA panel awarded the Blands $21,000 plus interest, deciding Morgan Keegan failed to properly supervise trading activity in the claimants’ account, allowing all of their assets to be deposited into the Morgan Keegan Select High Income-C Bond Fund to the exclusion of other investments.

Shattered dreams and broken spirits were, in part, vindicated today when a federal judge formally sentenced disgraced financier Bernie Madoff to 150 years in federal prison.

Before Judge Denny Chin of U.S. District Court in New York imposed the sentence, several victims, including former friends of Madoff’’s, told their stories of how the money manager’s $65 billion Ponzi scheme had destroyed their lives. One victim said Madoff’s scam not only ruined her financially, but forced her to turn to food stamps and to scavenging for food in dumpsters. 

Madoff, who was arrested Dec. 11, 2008, orchestrated his money scheme over what investigators now believe is decades by presenting his firm, Bernard Madoff Investment Securities, as a genuine investment advisory business. In actuality, the company served as a front for a Ponzi scheme, with Madoff using money from new investors to make payments to previous ones, thus creating a false sense of legitimacy. Regulators now contend Madoff’s business hadn’t made a trade in at least 13 years. 

Madoff’s roster of clients entailed the who’s who of Hollywood, including director Steven Spielberg, charities, universities, friends, money managers, global firms and even his own sister.

Today, investigators are continuing to look for others who may have collaborated with Madoff. To that end, on June 23, the Securities and Exchange Commission (SEC) filed civil fraud charges against Cohmad Securities, its chairman, Maurice Sonny Cohn, his daughter, chief operating officer Marcia Cohn, and vice president and broker Robert Jaffe. A second SEC lawsuit named investment adviser Stanley Chais, a Beverly Hills philanthropist, who allegedly oversaw three funds that invested the entirety of their assets – nearly $1 billion – with Madoff.  In channeling the money to Madoff, the SEC says the associates collected several hundred million dollars in fees.

Madoff’s sentence is the maximum allowed under federal law. After hearing the sentence read aloud, the courtroom erupted into universal applause.

The case is U.S. v. Madoff, 09-cr-00213, U.S. District Court for the Southern District of New York (Manhattan).

On March 23, 2009, a St. Louis, Missouri, FINRA arbitration panel awarded investor Philip Rein $220,944 plus interest on his claims of fraud, breach of fiduciary duty and negligence against Stifel, Nicolaus & Company. 

According to award documents (FINRA # 07-01495), the claimant alleged that St. Louis-based Stifel Nicolaus failed to heed his stated investing objectives, which were focused on generating money for retirement income. Instead, Stifel created a retirement portfolio for Rein by investing a portion of his assets in a Pacific Life Variable Annuity and another portion of assets in three aggressive, all equity, money-management funds.

Ultimately, because of the Stifel’s selected investments, the investor said he lost the majority of his principal.

Charles Schwab & Company has been hit with yet another arbitration award connected to its Schwab YieldPlus Fund. On May 29, 2009, a FINRA arbitration panel in Minneapolis, Minnesota, awarded more than $14,500 plus interest to Gary Wilhelm on claims of negligence and misrepresentation on the part of the San Francisco-based investor firm and the sale of the Schwab YieldPlus Fund. 

According to the award (FINRA # 08-02118), Wilhelm invested a portion of his retirement IRA in the Schwab YieldPlus Fund based on recommendations by Charles Schwab that it was a “safer alternative to money market funds but with higher yields.” Despite assurances from Charles Schwab that the YieldPlus fund was low risk, it actually contained a high concentration of mortgage-backed securities. Following the onset of the mortgage loan crisis in 2007, the Schwab YieldPlus Fund plummeted in value and produced millions of dollars in losses for investors.

The Financial Industry Regulatory Authority (FINRA) announced on June 25 that it had fined Wachovia Securities, LLC of St. Louis $1.4 million for the firm’s failure to deliver prospectuses and product descriptions to customers who purchased various investment products from July 2003 through December 2004. FINRA also cited Wachovia for related supervisory failures.

Specifically, FINRA found widespread deficiencies relating to the delivery of prospectuses for certain classes of securities, including exchange-traded funds (ETFs), collateral mortgage obligations (CMOs), auction-rate market preferred securities, corporate debt securities, preferred stocks, mutual funds, alternative investment securities, equity syndicate initial public offerings (IPOs) and secondary purchases of equity non-syndicate initial public offerings.

FINRA’s investigation of Wachovia showed that it failed to deliver the required prospectuses to customers in approximately 6,000 of approximately 22,000 transactions occurring between July 2003 and December 2004. The market value of the 6,000 transactions was approximately $256 million, according to FINRA.

At the time the activity at issue took place, Wachovia Securities, LLC was a subsidiary and non-bank affiliate of Wachovia Corporation. On Jan. 1, 2009, Wachovia Corporation merged with Wells Fargo & Company.