Enhanced Yield Reverse Exchangeable Securities with Contingent Downside Protection
Zamansky & Associates has launched an investigation on behalf of investors who purchased Enhanced Yield Reverse Exchangeable Securities with Contingent Downside Protection (”Securities”). The Securities were underwritten by a Norwegian-based financial services group, Eksportfinans A.S.A., beginning in September 2007.
The Securities were marketed primarily to elderly investors on fixed incomes as a high-yield, safe, alternative to plain vanilla investment products such as Certificates on Deposit (CDOs), Treasuries, and other low risk/low yield products, but were in fact extremely risky Reverse Convertible Notes.
Elderly investors with fixed incomes tend to be risk adverse and rely on investment income and the protection of their principal for daily living expenses. Eksportfinans allegedly sold the securities to investors with the promise that their principal investment would be completely protected.
Confused by the complexity of the securities, elderly investors were allegedly misled into paying inflated prices for the Enhanced Yield Reverse Exchangeable Securities. Moreover, investors did not understand that “Contingent Downside Risk” meant that their principal was only protected if the price of the underlying security stayed above a set price. When the Securities matured, investors were left holding shares of stock that were considerably less than the principal they originally paid.
Zamansky & Associates is investigating whether Eksportfinans inappropriately sold the Securities to investors and did not adequately explain the risks. If you purchased Enhanced Yield Reverse Exchangeable Securities with Contingent Downside Protection, please contact Zamansky & Associates by email at amber@zamansky.com or by phone at (212)-742-1414 for a free and confidential consultation.
More Half-Baked Justice from the SEC
by on August 5, 2010
Last year, Judge Jed Rakoff of the United States Southern District of New York struck a blow on behalf of all investors when he ordered the SEC and Bank of America back to the negotiating table. He deemed the settlement agreement the SEC submitted for Bank of America’s alleged failure to disclose billions of dollars of losses at Merrill Lynch as inadequate and poorly constructed. When the SEC and Bank of America went back to the drawing board and agreed to somewhat stricter terms, still without admission of guilt, Judge Rakoff reluctantly approved. But not without a last salvo.
Judge Rakoff proclaimed that the revised settlement represented “very modest punitive, compensatory, and remedial measures that are neither directed at the specific individuals responsible for the nondisclosures nor appear likely to have more than a very modest impact on corporate practices or victim compensation…While better than nothing, this is half-baked justice at best.”
The same “half-baked justice” Judge Rakoff described last year was evident in the SEC’s recent settlement with Citigroup. The SEC alleged Citigroup executives hid $40 billion in toxic mortgage industry assets from its shareholders. Citigroup paid a $75 million fine for what might be one of the biggest accounting scandals on record and managed to avoid using the word “fraud” to describe its actions. Carefully crafted by Citigroup’s attorneys, the terms of the settlement were clearly designed to protect executives from liability and undermine shareholder’s seeking to recover their losses.
Goldman Sachs executives similarly managed to escape blame stemming from the SEC’s accusation that the firm inappropriately constructed the ABACUS CDO transaction. To recall, Goldman created ABACUS so that its clients would unknowingly invest in securities design to fail. To avoid admitting fraud and spare the reputations of senior-level executives, Goldman paid a fine of over $500 million. The settlement was so favorable to Goldman Sachs that its stock price rose 5% percent.
The SEC’s lackluster enforcement record during the financial crisis stands in stark contrast to the country’s state regulators. Attorneys General and securities regulators from many states have done all the heavy lifting, and have extracted meaningful settlements along the way. Most notable is Massachusetts Secretary of State William Galvin. Among Mr. Galvin’s accomplishments is ordering Bear Stearns to pay back 100 percent of any losses suffered by Massachusetts residents who invested in the firm’s infamous, sub-prime laden, hedge funds that spectacularly collapsed in 2007. He also was among the earliest regulators to take action against Wall Street for misleading investors about auction rate securities and he has ordered the Madoff feeder-fund Fairfield Greenwich to pay its investors every penny they lost.
Another active state enforcement official is Mark Connolly, Director of Securities Regulation for New Hampshire, who has accused UBS of fraud for its sales practices related to Principal Protected Notes issued by Lehman Brothers. His case is especially notable because unlike the SEC, he isn’t afraid to use the word “fraud” to describe “misleading investors.”
I could write for hours about all of the significant cases filed by state regulators, but there is a common theme: state securities regulators help investors recover losses from fraudulent schemes and seek to deter it from happening again within their borders.
Unfortunately the same cannot be said of the SEC.
SEC Settlements Lack Personal Accountability
by on August 5, 2010
When a corporation commits fraud, should the S.E.C. just go after the corporation, or should corporate executives also be held personally accountable? That is a question the SEC is apparently struggling with.
After the SEC announced its $75 million settlement with Citigroup for failing to disclose $40 billion worth of toxic subprime mortgage investments to shareholders, SEC enforcement director Robert Khuzami touted that his settlement “sends a message within the company,” and “it sends a message to the industry.”
I disagree that company fines alone deter wrongdoing. I believe the SEC needs to hold high-ranking individuals liable.
Just a few days before the Citigroup settlement was announced, the SEC announced it had reached a $100 million settlement with Dell for overstating its earnings. Michael Dell and Kevin Rollins, the current and former CEO, were each fined $4 million, and James Schneider, Dell’s CFO, was fined $3 million. In announcing the settlement, Mr. Khuzami’s stated that, “Accuracy and completeness are the touchstones of public company disclosure under the federal securities laws. Michael Dell and other senior Dell executives fell short of that standard repeatedly over many years, and today they are held accountable.”
Though Mr. Dell and his cronies probably got off easy, at least they were asked to pony up more than a few thousand bucks. The only Citigroup executives that were fined were the CFO and the IR executive, who paid a paltry $180,000 collectively.
A great example of how personal liability can send shockwaves throughout an industry is the WorldCom class action case, which was led by former plaintiff’s attorney and current candidate for New York Attorney General Sean Coffey. He recovered $6 billion for shareholders and forced WorldCom’s directors and officers to contribute $24.75 million, which was 20 percent of their net worths.
Commenting about Mr. Coffey’s settlement, the CEO of Glass Lewis said, “This may be one of the most important steps toward reinforcing the importance of performing the directorship duties with fidelity toward shareholders. It’s going to be very sobering to board members around the country.”
Corporate executives, especially on Wall Street, could use a similarly sobering moment after operating with impunity for years.
UBS Gets Hit Again
by on August 5, 2010
An arbitration panel ordered UBS to pay a small business in Maryland ten times the amount it lost as a result of its auction rate securities (ARS) holdings. The assets were frozen when Wall Street stopped supporting the ARS market and overnight investors who were told ARS’s were “cash equivalent,” found themselves without liquidity, or “oxygen” as the owner of the Maryland business described it.
As I stated in today’s Wall Street Journal, “This case sends a shot across the bow for Wall Street firms that if they violate securities laws, they can be held liable for consequential damages.”
The Maryland business asserted that because of UBS’ dubious sales practices, their business suffered significant damages. The business went from having 60 employees to 15 because of a lack of cash. Attempting to add insult to injury, UBS tried to argue that the business failed because of its management and not a lack of cash, but an arbitration panel didn’t buy it.
You may remember that David Aufhauser, UBS’s general counsel, was banned from the industry last year and ordered to pay a penalty to settle insider trading charges after he dumped his ARS holdings. He was the recipient of an internal company email warning of risk in the ARS market. Obviously, the Maryland business in this case and hundreds of other UBS customers weren’t afforded that same alert.
This is yet another example of UBS putting its own interest ahead of its customers. Fortunately, an arbitration panel made UBS pay dearly.
UBS to Pay $81 Million in Auction-Rate Case
Wall Street Journal : by on August 5, 2010