Securities Law Blog

A whistleblower group has made allegations that Bank of New York Mellon Corp.’s (BNY Mellon) currency traders used a foreign-exchange system to create fake trades and overcharge Virginia pension funds by at least $20 million. The lawsuit was filed by a Delaware shell company called FX Analytics, who also filed a 2009 lawsuit in Florida against the bank.

According to the recently unsealed court documents, currency traders at BNY Mellon at times waited for hours before cherry-picking prices beneficial to them that they would charge the Virginia state pension fund. Instead of pricing the currency trade for the pension fund at the time it was made, BNY Mellon allegedly identified higher prices if the pension fund was buying currencies, and pocketed the difference. The suit claims the monthly custody report sent to the fund only showed the falsified rate.

The whistleblower group alleged that in an October 2009 trade, BNY Mellon profited after carrying out a foreign exchange of Canadian dollars for a client at the worst U.S. dollar-Canadian dollar rate of the day, enabling the bank to pocket about 141,250 Canadian dollars.

The state is investigating claims that the bank didn’t charge the pension funds the currency rates that the bank paid but consistently charged them the highest currency-conversion prices of the day, and pocketed the difference. The suit says the bank also overcharged when the pension fund exited the trades.

The suit is one of many related to the widening probe by state prosecutors into whether custody banks such as BNY Mellon shortchanged public pension funds in executing currency trades used to complete financial transactions abroad.

The recently unsealed lawsuit filed in federal bankruptcy court against J.P. Morgan Chase & Co. by the trustee seeking to recover money for Bernard Madoff’s Ponzi victims, Irving Picard, claims that bankers at J.P. Morgan discussed the possibility that Madoff was running a Ponzi scheme but failed to report its suspicions. The 115-page lawsuit states that “JPMC was at the very center of the fraud, and thoroughly complicit in it.”

The complaint paints the picture of a long relationship between Madoff and Chase, which served as his primary bank since 1986. The suit references an ongoing internal battle between senior Chase bankers who pursued profitable deals with Madoff, and the risk management unit who argued against continuing any involvement with Madoff’s “too good to be true” investments. Despite numerous doubts being raised about the legitimacy of Madoff’s investments, J.P. Morgan continued business as usual, selling complex derivatives linked to various Madoff feeder funds.

The lawsuit reported that on one day in 2002, Madoff initiated 318 separate payments of exactly $986,301 to one wealthy Chase customer’s account, and in December 2001, Madoff received a $90 million check from the customer’s account “on a daily basis.” Trustee Picard asserts that the bank’s money laundering software should have picked up on the transactions and raised red flags at the bank.

According to the complaint, in the summer of 2007, an evidently high-level risk management officer for Chase’s investment bank sent an e-mail to colleagues to report that another bank executive “just told me that there is a well-known cloud over the head of Madoff and that his returns are speculated to be part of a Ponzi scheme.” It goes on to state that after Madoff’s arrest, a bank employee referred to the agenda for a committee meeting that considered the Madoff deals in June 2007 and wrote, “Perhaps best this never sees the light of day again!”

Nearing the end of 2008, J.P. Morgan allegedly pulled out approximately $276 million it had invested in funds that channeled money to Madoff, and asked those funds to keep the move quiet, according to the lawsuit.

The complaint seeks the return of nearly $1 billion in J.P. Morgan’s profits and fees, and $5.4 billion in damages.

The Financial Industry Regulatory Authority (FINRA) issued its annual Priorities Letter regarding key issues facing the financial industry, including recent developments in rulemaking and examination priorities.

The industry regulator provided a breakdown of what new rules are expected to be implemented during 2011, as well as firms’ requirements regarding supervisory systems as they relate to the activities described in the letter.

New rules to go into effect this year will include concerns related to suitability of investments, firm’s reporting requirements to FINRA, and using “reasonable diligence” to get to know every customer. FINRA’s letter stresses the firm’s risk management responsibilities when dealing with high-yield investments, non-conventional investments, exchange-traded funds and non-public securities. Internally, the letter reminds firms of their responsibility to be aware of electronic communication and social media, hiring and compensation practices, and close monitoring of outside business activities of registered persons.

A copy of the full document can be viewed at the FINRA website.

http://www.finra.org/web/groups/industry/@ip/@reg/@guide/documents/industry/p122863.pdf

Maxwell Technologies Inc. has agreed to pay more than $6.3 million to settle bribery charges brought by the Securities and Exchange Commission (SEC). The SEC claimed that the San Diego based energy-related products manufacturer violated the Foreign Corrupt Practices Act (FCPA) by repeatedly paying bribes to government officials in China to obtain business from several Chinese state-owned entities.

The SEC complaint alleges that Maxwell’s wholly-owned Swiss subsidiary Maxwell Technologies SA paid more than $2.5 million in bribes to Chinese officials from 2002 to May 2009. The bribes were reportedly classified in invoices as either “Extra Amount” or “Special Arrangement fees, and were made to improperly influence decisions by foreign officials to assist Maxwell in obtaining and retaining sales contracts for high voltage capacitors produced by Maxwell SA. As a result, the awarded contracts generated more than $15 million in revenues and $5.6 million in profits for Maxwell.

According to the complaint, Maxwell failed to devise and maintain an effective system of internal controls and improperly recorded the bribes on its books. The payments were allegedly made with the knowledge and approval of certain former Maxwell officials.

In a related criminal proceeding, Maxwell has agreed to pay an $8 million penalty to the U.S. Department of Justice.

The owners of the NY Mets, Fred Wilpon and Saul Katz, are being sued by the trustee representing the victims of Bernard L. Madoff’s Ponzi scheme. Irving Picard’s lawsuit was unsealed in federal bankruptcy court in Manhattan and seeks $1 billion dollars, claiming that the owners either knew or should have known that Madoff’s investment operation was a potential fraud.

The lawsuit claims that Mr. Wilpon and Mr. Katz ignored or failed to heed “red flags” about the potentially suspect nature of Madoff’s operation. The complaint also alleges that as wealthy and successful officers of the corporate holding company, Sterling Equities Associates, “they should have known Madoff was not trading any securities and was engaging in a Ponzi scheme.”

The lawsuit cites several instances in which third parties made clear their concerns to Wilpon and Katz about investing with Madoff. According to the suit, the chief investment officer at Sterling Stamos, the co-owned hedge fund of Sterling Equities and businessman Peter Stamos, repeatedly warned the men and their families that Madoff’s returns were “too good to be true.” Ivy Asset Management, which was approached in 2002 to advise Sterling Stamos, told Mr. Katz and two of his partners of its suspicions about Madoff’s investment business. A consultant to Sterling Stamos told Mr. Katz in 2003 that the consultant “couldn’t make Bernie’s math work.” A partner in the Sterling Stamos hedge fund, Peter Stamos, refused to put the firm’s money in Madoff’s hands. Reportedly no one inside or outside Sterling could replicate Madoff’s remarkable returns either in their own investment funds or through modeling.

The suit is seeking $300 million in what it is calling “fictitious profits,” and roughly $700 million beyond those profits because the two men allegedly “consciously disregarded” suspicions for so long, enabling their businesses to profit.

According to the suit, the pair began investing with Madoff as far back as 1985, throughout which time Mr. Wilpon and Mr.Katz, and their partner at Sterling Equities, never did meaningful due diligence on Madoff and his firm. The suit also alleges that Sterling partners referred nearly 200 investors to Madoff but shielded Madoff from any inquiries by those investors, and even screened out certain “sophisticated investors who were denied access.”

The returns received by the Wilpon family are said to have been channeled into the Mets and SNY, the team’s television network, commercial real estate ventures, and investment funds. The lawsuit is speculated to imperil Katz and Wilpon’s ownership of the Mets, as well as much of their other holdings.