Insecurities: Securities Fraud Roundup 2.23.11

February 23rd, 2011. By LucyC

Top Securities Fraud Stories

Tired of losing money? WFC (NYSE)—also known as Wells Fargo—was known as Wachovia—is being sued. Hard to believe, I know—especially in these times. But it seems that a retired woman in Florida has had enough of losing money with her IRA investments, and figures the odds of actually recovering her money—never mind making any—are better with seeking a Wells Fargo class action lawsuit. So she’s filed a claim. 

The back story: The plaintiff gave her Wachovia broker a ‘second chance” (why?) to “do a better job” (read ‘make money not lose it’) with her IRA investments—but apparently, that didn’t work out so well. 

In fact, the securities fraud case claims that WFC “breached its duty to make suitable recommendations; mis-marked her investment objective and risk tolerance; and engaged in short term trading and speculating on Latin America and China mutual funds, and on ‘ultra bull’ leveraged exchange traded funds.” That doesn’t exactly read like the manifesto for conservative value investing. 

The WFC broker also stands accused of “excessive trading”: the claim contends that the broker “generated an annual turnover rate of more than 17 times the average monthly equity in Claimant’s IRA.” 

And “Wells Fargo “needed an accurate customer profile to make suitable recommendations in Claimants IRA—including her investment objectives and risk tolerance, time frame, withdrawals, annual income, net worth, investment experience and her employment. Instead, the broker’s key forms included both contradictory and untrue information about Claimant,” the claim alleges. 

And then there’s a raft of securities fraud class actions stemming from unbridled optimism—also known as concealing the facts or ‘failure to disclose’…

Failure to Disclose Club

Where members vie for position on the Madoff meter.

Company:          Bank of America Corporation (BofA)

Ticker:               BAC

Class Period:    Jan-20-10 to Oct-19-10

Court:               Southern District of New York

Madoff Meter Rank:    

Let’s start with BofA (BAC:NYSE), the largest bank in the US. Just how many class actions have they faced in the past 12 months? This latest was filed by an institutional investor on behalf of purchasers of BofA common stock during the period between January 20, 2010 and October 19, 2010 (the “Class Period”). It smells a wee bit like Enron…

The suit claims that BofA “concealed defects in the recording of mortgages and improprieties with respect to the preparation of foreclosure paperwork that harmed BofA’s investors when BofA had to temporarily discontinue foreclosures and admit to the problems it was experiencing. For much of the Class Period, defendants also concealed that BofA had previously engaged in a practice known as “dollar rolling,” wherein it omitted billions of dollars in debt from its balance sheet reported to the public.” (Enron?)

The story is long but suffice to say when the facts regarding BofA’s real debt situation came to light—partially resulting from a nationwide foreclosure halt pending a review of its foreclosure processes—BofA announced a net loss of $7.3 billion and a diluted earnings per share loss of $0.77.

Then more chickens came home to roost when BofA reported receiving $18 billion in claims about faulty home loans that it may have to repurchase. On this news, BofA stock dropped $0.54 per share, to close at $11.80 per share on October 19, 2010—a one-day decline of 5% and a nearly 42% decline from the stock’s Class Period high. (Enron!) That’s no small fall.

And, that, my friends, is what earns BofA a 4 on the Madoff Meter…

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Company:            Best Buy

Ticker:                 BBY

Class Period:       Sep-14-10 to Dec-13-10

Lead Plaintiff Deadline:  Apr-22-11

Court:                  District of Minnesota

Madoff Meter Rank:  

NASDAQ: BBY: One of the largest electronics retailers in the US—Best Buy—stands accused of securities fraud stemming from allegations that it made false and misleading statements concerning demand for the Company’s consumer electronics product offerings. Well—who’s buying big ticket electronics during a recession?

The allegations are that BBY securities failed to disclose the following facts: (i) demand for Best Buy consumer electronics product offerings was weak or declining and could not support the Company’s aggressive fiscal year (“FY”) 2011 sales, revenue, and earnings forecasts; (ii) Best Buy’s FY 2011 earnings forecast could not be achieved without substantial earnings management and, in particular, a sharp reduction and curtailment of SG&A expenses and aggressive share repurchases which reduced the Company’s outstanding shares and increased reported earnings; and (iii) despite defendants’ statements to the contrary, and because of weak sales demand, as of September 14, 2010, Best Buy was not “on track to deliver and exceed (its) annual EPS guidance” of $3.70 per share.

What’s that expression—’if it sounds too good to be true’… 

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Company:          Coinstar Inc

Ticker:               CSTR

Class Period:     Oct-28-10 to Jan-13-11

Court:                Western District of Washington

Madoff Meter Rank:   

Coinstar might have seemed like a good buy in October 2010, but by January 2011 this stock managed to decline almost 30% in the single trading day(!), or almost $15.50 per share, down to $41.50 from the prior day’s close of almost $57.00 per share (what’s that crashing sound I hear?).

So, what caused this staggering lack of investor confidence? Failure to disclose…In particular, Coinstar failed to disclose (during the Class Period) a series of adverse factors which were negatively impacting its business and which would cause it to report declining financial results, well below the market expectations defendants had set with shareholders, including: (1) declining sales as customers purchased fewer DVDs per purchase, and as poor inventory management and controls resulted in the Company removing material amounts of old inventory early in 4Q; (2) lower sales of more expensive “Blue-ray” DVDs and poor title selection was resulting in lower overall sales; (3) the 28-day delay movie studios imposed on Coinstar was adversely affecting the Company—well before 4Q:10; (4) competition from online video streaming providers such as Netflix was adversely impacting the Company more acutely than it led on.

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Company:         MannKind Corporation

Ticker:               MNKD

Class Period:    Jun-25-10 to Jan-19-11

Court:               Central District of California

Madoff Meter Rank:   

Another case of overt optimism involves Mannkind—MNKD (NASDAQ). This securities lawsuit alleges that MNKD issued materially false statements regarding its business and prospects for its lead product candidate, AFREZZA® (insulin human [rDNA origin]) Inhalation Powder (“AFREZZA”) for the treatment of adult patients with Type 1 and Type 2 diabetes. Let’s face it, nothing makes money like disease, but your fix needs to be approved first. And there’s the rub.

The suit alleges that the defendants failed to disclose that the U.S. Food and Drug Administration (“FDA”) had issues with the clinical utility of AFREZZA which might inhibit approval; (ii) AFREZZA was a riskier product than investors were led to believe and would require additional risk disclosure to patients if approved; (iii) the reasons for the FDA’s delay in approval of AFREZZA prior to the beginning of the Class Period were not limited to the inspection of the European facility as defendants had stated; and (iv) given these factors, defendants knew it was highly doubtful that FDA approval would be forthcoming. Maybe not.

Securities Settlements for the Week

And finally, a settlement—this one involving victims of a Canadian trust fund scam—Norbourg. Norbourg trust fund founder Vincent Lacroix, managed to swindle 9,200 investors out of $115 million. That’s not chump change. So suits were filed, and just this month a settlement was reached for $55 million. According to the press release “All Norbourg and Évolution investors as of August 24, 2005 will be notified that the settlement will be submitted to Superior Court Judge André Prévost on March 14, 2011, to approve the transaction concluded with the participating defendants and to determine the amount in fees for their attorneys. “

Tags: Arbitration, Insecurities, Securities Fraud, Stock Fraud

This was posted on Wednesday, February 23rd, 2011 at 4:27 pm and is filed under Emerging Issues, Securities . Feel free to respond, or trackback. Read our comments policy.