Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Thursday, July 7, 2011


The SEC charged a New York-based brokerage firm, Windham Securities, Inc., and two executives with misappropriating investor funds.  According to the SEC's complaint, Windham Securities, its owner and principal, Joshua Constantin, and former Windham managing director, Brian Solomon, fraudulently induced investors to provide more than $1.25 million to Windham for securities investments and fees by making false claims concerning the intended use of investor funds as well as Windham’s investment expertise and historical returns. Instead of purchasing securities for investors as represented, the defendants misappropriated the investors’ funds and then provided false assurances to investors to cover up their fraud

July 7, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

JPMorgan Chase Settles with States and Feds over Anti-Competitive Bidding Practices in Municipal Bonds Derivatives Market

Both the New York AG and the SEC announced settlements with JPMorgan Chase resulting from investigations that uncovered fraudulent and anticompetitive conduct in the bank’s municipal bond derivative transactions with governments and nonprofits across the country from 1997 to 2005. To settle the SEC’s fraud charges, JPMS agreed to pay approximately $51.2 million that will be returned to the affected municipalities or conduit borrowers. JPMS and its affiliates also agreed to pay $177 million to settle parallel charges brought by other federal and state authorities.

The SEC alleged that from 1997 through 2005, JPMS’s fraudulent practices, misrepresentations and omissions undermined the competitive bidding process, affected the prices that municipalities paid for reinvestment products, and deprived certain municipalities of a conclusive presumption that the reinvestment instruments had been purchased at fair market value. JPMS’s fraudulent conduct also jeopardized the tax-exempt status of billions of dollars in municipal securities because the supposed competitive bidding process that establishes the fair market value of the investment was corrupted. The employees involved in the alleged misconduct are no longer with the company.

The settlement with the states follows a parrallel investigation led by the Attorneys General of New York, Connecticut, Texas and Illinois.  The multistate settlement is the single largest component of coordinated settlements between JPMC and the U.S. Department of Justice’s Antitrust Division, the Securities and Exchange Commission (SEC), the Internal Revenue Service, the Office of the Comptroller of the Currency (OCC), as well as the states. 

JPMC is the third of several financial institutions involved in the ongoing municipal bond derivatives investigation to resolve the claims against it. Bank of America entered into a settlement in December 2010, and UBS entered into a settlement in May 2011.  To date, the state working group has obtained settlements totaling close to $250 million.

Pursuant to the state agreement, JPMC will pay a total of $92 million. Governmental and nonprofit entities nationwide that entered into municipal derivative agreements with JPMC between 2001 and 2005 will be entitled to more than $65.5 million in restitution from the state settlement. The agreement also provides that JPMC will pay the states $3.5 million in penalties and $6 million in fees and costs of the investigation. JPMC will pay another $17 million directly to other governments and nonprofits as part of its resolutions with the SEC and OCC.


July 7, 2011 in Other Regulatory Action, SEC Action | Permalink | Comments (0) | TrackBack (0)

Merrill Has to Pay Hedge Fund $63.7 Million for Unexpected Margin Calls

A FINRA arbitration panel in California awarded a hedge fund, Rosen Capital Management, $63.7 million in its dispute with Merrill Lynch.  The fund asserted that Merrill's Professional Clearing Units, which handled hedge fund accounts, made unexpected margin calls in October 2008 that the firm could not meet.  The firm had to sell off its positions and went out of business.  The award is one of the largest awarded to investors by a FiNRA panel.

Interestingly, courts rarely find for investors when they allege unexpected margin calls.  The broker-dealer has broad discretion under the brokerage contract to protect itself from losses resulting from market changes.  Unfortunately for Merrill, grounds for vacating arbitration awards are very narrow.  WSJ, Merrill Loses Crisis-Era Arbitration Case, to Tune of $63.7 Million

July 7, 2011 in Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Banking Regulators & JPMorgan Chase Settle Allegations Involving Anti-Competitive Bidding

The Federal Reserve Board announced the execution of a Written Agreement between JPMorgan Chase & Co. and the Federal Reserve Bank of New York. The agreement addresses issues associated with anti-competitive activities at JPMorgan Chase by certain employees in conjunction with the sale of certain derivative financial products to municipalities and other non-profit organizations in competitively bid transactions between 1999 and 2005.

In separate, coordinated actions, the Office of the Comptroller of the Currency announced the execution of a Formal Agreement and Consent Order for a Civil Money Penalty with JPMorgan Chase Bank, N.A., a wholly owned subsidiary of JPMorgan Chase & Co. Actions were also taken by the U.S. Securities and Exchange Commission, the Internal Revenue Service, the Antitrust Division of the U.S. Department of Justice, and 25 state attorneys general.

July 7, 2011 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)