News and Articles

The SEC charged OppenheimerFunds Inc. with making misleading statements about two of its mutual funds’ losses and recovery prospects.  According to the SEC, in the midst of the financial crisis, two fixed income retail mutual funds managed by Oppenheimer suffered losses greater than those experienced by similar funds.  The underperformance was mainly caused by the funds’ exposure to AAA-rated commercial mortgage-backed securities (“CMBS’) and total return swaps (“TRS”) contracts, which created substantial leverage in both funds.  When the CMBS market crashed, in late 2008, the funds’ net asset values plunged to unexpected levels, creating staggering cash liabilities for the funds.

The SEC alleged that Oppenheimer was forced to liquidate large portions of their portfolio to meet TRS contract payments and was diligently trying to reduce their CMBS exposure.  As the CMBS market continued to decline, Oppenheimer had to make a $150 million cash infusion into the funds to keep them from collapsing.  When Oppenheimer was questioned by financial advisors and shareholders about the funds’ condition, Oppenheimer represented that the funds had only incurred paper losses that could be reversed once the credit markets returned to normal.  These communications were materially misleading because the funds were committed to substantially reducing their CMBS exposure, which in turned diminished the possibility of recovering CMBS-induced losses.  Additionally, the funds were forced to sell significant portions of their holdings to raise cash to meet their TRS liabilities, resulting in realized investment losses and loss of future income from the bonds.  The SEC investigation also found that through 2008, Oppenheimer distributed a prospectus highlighting the funds’ cash investments without disclosing the funds’ practice  of assuming substantial leverage through its use of derivatives.

Without admitting or denying the SEC’s findings, OppenheimerFunds agreed to pay a penalty of $24 million, disgorgement of $9,879,706, and pre-judgment interest of $1,487,190.  This money will be deposited into a fund for the benefit of investors.

It is unclear at this time whether the FINRA Arbitration process will be appropriate for Oppenheimer investors.  Any investor interested in speaking with a securities attorney may contact David A. Weintraub, P.A., 7805 SW 6^th Court, Plantation, FL  33324.  By phone: 954.693.7577 or 800.718.1422.

The SEC approved the Municipal Securities Rulemaking Board’s (“MSRB”) revised definition of a Sophisticated Municipal Market Professional, or SMMP, to include individuals and other investors with assets of at least $50 million.  Previously, SMMPs were limited to entities with at least $100 million invested in municipal securities.

The MSRB states that the new definition will maintain consistency with Financial Industry Regulatory Authority (“FINRA”) rules.  Pursuant to new Rule 2111, a FINRA member’s customer-specific suitability obligation to an institutional customer will be considered satisfied if the member has a reasonable basis to believe that the institutional customer is capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies.  Members’ suitability obligations are not satisfied unless an investor “affirmatively indicates” independent judgment in evaluating recommendations.  The MSRB noted that investors have greater access to municipal market information, including disclosures, transaction data, market statistics, and educational material offered for free on its EMMA system, compared to 2002, when the initial definition was originated.  The Restated SMMP Notice and FINRA Rule 2111 will become effective on July 9, 2012.

According to the MSRB, SMMPs are experienced municipal bond investors who do not require the same protection as other investors.  The new definition exempts dealers from requirements to make certain disclosures to institutional customers that they must make to other investors.  The revised Notice states that a SMMP can be a customer with an “institutional account” which can include individuals, corporations, partnerships and trusts with total net assets of at least $50 million.  The assets do not need to be in municipal securities.  However, the dealer must have “a reasonable basis to believe [institutional investors are] capable of evaluating investment risks and market value independently, both in general and with regard to particular transactions in municipal securities.”  The MSRB clarifies that when determining a “reasonable basis,” dealers should consider “the amount and type of municipal securities owned or under management by the institutional customer,” and that an SMMP must “affirmatively indicate,“ orally or in writing, to a dealer that they are exercising independent judgment in evaluating recommendations.

The SEC charged John A. Geringer, a California investment advisor, who ran a private investment fund in a Ponzi-like manner.  According to the SEC, since 2005 Geringer raised over $60 million by misrepresenting the performance strategy of the GLR Growth Fund, L.P.  Geringer used false and misleading marketing materials to deceive investors into believing that his fund was successful when it was actually losing money.  To conceal his misrepresentations, Geringer used the money he raised from new investors to pay back earlier investors.

The SEC alleged that Geringer created and distributed marketing materials suggesting that the fund was able to achieve annual returns between 17 and 25 percent from 2001 to 2011, when in reality the fund was created in 2003 and experienced losses throughout.  Geringer claimed that in 2008, in the midst of the financial crisis that caused the S&P 500 to decrease almost 38.5%, the GLR fund had an annual return of nearly 24%.  Geringer deceived investors by falsifying documents such as brokerage account statements and year-end summaries, and misrepresenting the fund’s asset allocation.

The SEC stated, “Geringer painted the picture of a successful fund weathering America’s financial crisis through a diversified, conservative investment strategy… [t]he reality, however, was the complete opposite.  Geringer lost millions of dollars in the market, tied up remaining investor funds in a pair of illiquid private companies, and lied about it in phony account statements.”

It is unclear at this time whether the FINRA Arbitration process will be appropriate for Geringer’s investors.  Any investor interested in speaking with a securities attorney may contact David A. Weintraub, P.A., 7805 SW 6^th Court, Plantation, FL  33324.  By phone: 954.693.7577 or 800.718.1422.

The SEC charged George G. Levin and Frank J. Preve with inducing investors to purchase fraudulent legal settlements from now-convicted Ponzi schemer, Scott Rothstein.   The SEC alleged that from July 2008 to October 2009, Levin and Preve raised more than $157 million from 173 investors to fund the Ponzi scheme, becoming Rothstein’s largest source of capital.   The Rothstein Ponzi Scheme, one of South-Florida’s largest ever, began in 2005 with Rothstein offering others the opportunity to purchase legal settlements at a discount.  Rothstein falsely claimed to represent plaintiffs who had reached confidential settlements in different actions and were willing to assign their structured-settlement payments from Rothstein, Rosenfeldt and Adler trust accounts in exchange for a discounted, immediate cash payment.  In reality, there were never any legal settlements and the plaintiffs and defendants did not exist.

According to the SEC, after personally investing more than $1.7 million in Rothstein’s settlements, Levin used one of his dormant legal entities, Banyon 1030-32 to offer investors promissory notes with the stated purpose of purchasing discounted legal settlements from Rothstein.  Preve handled the paperwork related to these purchases.  Levin and Preve marketed the notes to investors as a minimal risk investment promising large returns.  Levin and Preve distributed to investors offering materials which stated that Banyon 1030-32 had procedural safeguards to ensure the safety of the investments.  Despite their representations, Preve often purchased settlements from Rothstein prior to receiving confirmation that the settlement funds had been wired into an RRA trust account.

The SEC stated, “Levin and Preve fueled Rothstein’s Ponzi Scheme with the false sense of security they gave investors.”  Scott Rothstein is currently serving a 50-year prison sentence.  In a joint statement, attorneys for Levin and Preve said that their clients were “two of the biggest victims of the Rothstein Ponzi scheme.”  They noted that Levin was “the person who first” reported Rothstein’s suspected crime to authorities in October 2009.  The defense attorneys added that Levin and Preve have been “cooperating with the SEC” since December 2009, including testifying and providing documents

The SEC charged Robert W. Kwok, Yahoo’s former Senior Director of Business Management, and Reema D. Shah, a former mutual fund manager at a subsidiary of Ameriprise Financial Inc., with insider trading.  The SEC alleged that Kwok provided Shah with information about Yahoo, including whether Yahoo’s quarterly financial performance was expected to be in line with market estimates, and confirming a partnership between Yahoo and Microsoft Corporation.  In turn, Shah provided Kwok with information she learned through the course of her work, and he used it to help make personal investment decisions.

In January 2008, Shah and Kwok began discussing their respective lines of work.  Shortly thereafter, Shah told Kwok that she had learned of the acquisition of Moldflow Corporation by Autodesk, Inc.  Based on this confidential non-public information, Kwok purchased 1,500 shares of Moldflow in his personal account.  Autodesk and Moldflow announced the acquisition on May 1, preceding Moldflow’s 11% stock increase.  Kwok sold his position for a profit of $4,754.  The SEC alleged that in July 2009, Shah reached out to Kwok seeking material non-public information about a reported partnership between Yahoo and Microsoft.  Kwok breached his fiduciary duty to Yahoo when he tipped Shah about Yahoo and Microsoft’s announcement.   Consequently, Shah prompted certain funds she helped manage to purchase 700,300 shares of Yahoo.  The shares were sold twelve days later, for a profit of approximately $389,000.

The SEC stated, “[w]hen corporate executives and mutual fund professionals misuse their access to confidential information, they undermine the integrity of our markets and violate the trust placed in them by investors.”  In a parallel criminal case, the U.S. Attorney’s Office for the Southern District of New York filed criminal charges against Kwok and Shah.  Kwok has pled guilty to conspiracy to commit securities fraud, and Shah has pled guilty to both a primary and conspiracy charges.