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Current Investigations
Municipal Arbitrage Losses in 1861 Capital Management
1861 Capital Discovery Domestic Fund, LP was marketed and sold by UBS and other broker dealers as a safe, secure, and low-risk municipal bond portfolio complement. In truth, however, 1861 was a fund, better described as a leveraged municipal arbitrage fund. The 1861 fund was organized as a Delaware partnership whose purpose and investment strategy is to generate attractive returns through trading in municipal bonds, and in residual certificates of tender option bond trusts backed by municipal bonds along with the use of hedging strategies.
DBSI Inc.
DBSI Inc., an Idaho-based commercial real estate investment company, is facing questions from investors after becoming insolvent. DBSI based much of its business on Tenants in Common (TIC) investments. In 2003, the Internal Revenue Service (IRS) amended rules so that investors could avoid capital gains tax by investing proceeds from a property sale into TIC investments. TICs allow individuals to become fractional owners of a single property. Unlike other legitimate TIC investments, DBSI appears to have been involved in circumspect activities.
Medical Capital Holdings and Provident Asset Management
On July 16, the Securities and Exchange Commission charged Medical Capital Holdings Inc. of Tustin, Calif., with fraud in the sale of $77 million of private securities in the form of notes. The same day, the Financial Industry Regulatory Authority Inc. of New York and Washington sent a sweep letter to broker-dealers looking for details into the sale of the product.
On July 7, the SEC charged Provident Asset Management LLC of Dallas with operating a fraud and a Ponzi scheme in the sale of $485 million of preferred stock and limited partnership offerings in oil and gas deals.
Striker Petroleum, LLC
The Securities and Exchange Commission (SEC) has filed a complaint against Striker Petroleum, LLC and its principal operators, Mark Roberts and Christopher Pippin. The complaint alleges that Striker's offering materials contained misrepresentations regarding the use of investor capital, the existence of an independent third party trustee for Striker's collateral, and the actual earnings and asset valuations of the company. Striker's business model involved the acquisition of oil and gas properties with the goal of increasing production.
REITs - Real Estate Investment Trusts
With the collapse of the housing markets and real estate sector, REIT fraud has become more apparent. Investors are bringing claims against their brokerage firm or financial advisors that recommended unsuitable, for fraudulent REITS that were Ponzi schemes or for failing to disclose the high fees and commissions associated with the sale of REIT investments.
Charles Schwab YieldPlus Fund
Charles Schwab's YieldPlus fund was once marketed as a safe alternative to cash and was Schwab's most popular bond fund. But Schwab stuffed mortgage-backed securities into YieldPlus' portfolio to pump up performance and it turned toxic.
Lehman Brothers Principal Protected Notes
Lehman Brothers Principal Protected Notes were recommended as a safe fixed income component with downside risk protection. Structured notes - sometimes known as hybrid financial instruments - are packaged by banks and primarily sold to retail customers.
Citigroup's Falcon, ASTA and MAT Hedge Funds
The decline of Citigroup's fixed income hedge funds has led to investor claims and an investigation of Citigroup, Inc. (NYSE: C) according to a four-law firm legal team with nationally recognized securities law experience.
Auction Rate Securities
In late 2007 and early in 2008, investors who purchased auction-rate securities — in the form of preferred shares in closed-end mutual funds, or corporate or municipal bond instruments — are discovering that these securities are hardly the safe, liquid, slightly higher-yielding, tax-exempt alternative to money-market funds that they were marketed as. We are currently investigating the representations made by Wall Street brokerage firms on behalf of institutional and retail customers.
Morgan Keegan Bond Mutual Fund and Closed End Funds
As of December 31, 2007 Regions Morgan Keegan suffered losses as high as 65 percent of NAV for a one year period. Funds, including Regions Morgan Keegan Select Intermediate Bond Fund, Regions Morgan Keegan Select High Income Bond Fund and other affiliated closed end funds suffered losses as a result of portfolio manager Jim Kelsoe's subprime “intoxication.”
Jefferson County Alabama Bond Failure
The credit crisis and the failure of auction rate securities have wreaked financial havoc to individual investors and communities across the country. Jefferson County, Alabama is at the top of that list.
Problems for Jefferson County, which has more than 650,000 residents and includes the state's largest city, Birmingham, began when county commissioners unsuccessfully tried to refinance $3.2 billion of sewer system debt. Approximately 3 years ago, Jefferson County, with the direct assistance of J.P. Morgan and other brokerage firms, began employing high risk interest rate swaps which are essentially derivative contracts that allow participants to trade exposure to floating rate and fixed debt. Jefferson County sought to lower their borrowing costs in repairing the county's sewer.
Bear Stearns Hedge Funds
In July 2007, the Bear Stearns High Grade Structured Credit Strategies and the Bear Stearns High Grade Structured Credit Strategies Enhanced Leverage Fund announced catastrophic losses in Mortgage Backed Securities (MBS) trading.
Because there is little trading in the securities, current prices may not reflect the highest rate of mortgage delinquencies in MBS securities causing further write downs at the expense of investors.
TICs - Tenant In Common Investments
A Tenant in Common property (“TIC”) allows the seller of real estate to qualify for a 1031 tax free exchange of the property sold in exchange for an ownership interest in another investment property. Brokerage firms have begun selling fractional ownership interests in real estate to persons who have recently sold or are considering the sale of an appreciated piece of property as an alternative investment vehicle that preserves the tax free status of a property exchange.
State Street Bank and Trust Company and State Street Global Advisors, Inc.
Assets in State Street's five bond mutual funds were down sharply in 2007. As of October 2007 assets in the five funds suffered losses of 43% for 2007. The funds were marketed to institutional investors as safe, conservative investments. Investors in the funds included non-profit organizations, private and public sector pension funds and other instructional investors.
CSO Partners Hedge Fund
Citigroup has stopped investor redemptions in its London based hedge fund, CSO Partners. An alliance of securities law firms is representing institutional investors harmed by the subprime crisis and the collapse of mortgage backed securities.
The Fidelity Ultrashort Bond Fund (FUSFX)
The dismal state of Ultrashort bond funds has wreaked havoc on investors and created massive financial losses. Fidelity Ultra-Short Bond Fund, symbol: FUSFX is the subject of investigation, as well as lawsuits from investors who say the funds were marketed to them as safe investments that would provide “higher potential returns than money market funds, with only marginally higher risk.” The fund has plummeted in value under the weight of securities backed by subprime mortgages.
Subprime Investments
Recent turmoil in the credit markets has begun to expose the lack of disclosure and in some cases misleading sales presentations made by brokerage firms to their customer regarding the sale of Mortgage Backed Securities (MBS) or Asset Backed Securities (ABS).
Aravali Fund
The Aravali Fund was recommended by Deutsche Bank and other brokerage firms to income oriented investors who also sought to preserve their capital.
Deutsche Bank told its clients that the Aravali Fund was a safe investment that purchased investment grade or highly rated municipal bonds and acted as a municipal bond replacement fund. The Aravali fund was in fact a highly speculative fund engaged in a complex arbitrage strategy which involved a significant short position in treasury bonds, interest rate swaps and a leveraged pool of municipal bonds.
Berkshire Resources, LLC
On June 8th, 2009, in Indiana, the Securities and Exchange Commission (SEC) filed a complaint against Berkshire Resources, LLC and its affiliates. The charges included violations of securities registration and broker-dealer registration. Berkshire offerings appear to have siphoned $15.5 million from investors.
CIT Group Inc. InterNotes
Bonds issued by recently bankrupt CIT Group Inc. have caught the attention of regulators. An investigation is being made regarding the representations made to investors regarding the risk associated with CIT's InterNotes. Investors who were sold this product may have been led into believing that such an investment was a suitable and stable investment, when the truth has shown CIT InterNotes to be anything but. Banks and brokerage firms who sold CIT InterNotes had a duty to their clients to accurately represent the risks associated with this investment and perform the due diligence necessary to ensure that such representations were correct prior to marketing them to investors.
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