InSecurities: Securities Fraud Roundup 7.5.11

July 5th, 2011. By LucyC

Top Securities Fraud Stories

By now you know the script. InSecurities takes a look at some of the latest securities fraud happenings—where folks who thought they’d made some secure investments have found those investments, well, a bit insecure due to fraudulent—or alleged fraudulent—activity. So be prepared for those omnipresent words and phrases—like “materially false and misleading statements”. They tend to pop up here with some regularity, as you’ll see…

New Securities Lawsuits Filed

Our first Madoff Meter contender is Deutsche Bank AG. And DB brings us another of those omnipresent securities fraud phrases: “mortgage-backed securities” (you’ve heard that one before, right?)…

 

Company:                                        Deutsche Bank AG

Ticker:                                             DB

Class Period:                                  Jan-3-07 to Jan-16-09

Date Filed:                                      Jun-21-11

Lead Plaintiff Deadline:                  Aug-20-11

Court:                                             Southern District of New York

Madoff Meter:                      

The Allegations:

Not to be left out of the fray, Deutsche Bank (DB) is facing a securities class action brought on behalf of an institutional investor. Details above, and we’re talking big bucks, allegedly lost on ordinary shares during the period between January 3, 2007 and January 16, 2009 (the “Class Period”).

The complaint alleges that during the Class Period, DB issued materially false and misleading statements regarding their business and financial results and concealed the Company’s failure to write down impaired securities containing mortgage-related debt. Will it ever die?

As a result of defendants’ false statements, Deutsche Bank shares traded at artificially inflated prices during the Class Period, reaching a high of $159.59 per share in May 2007. Later, Deutsche Bank’s shares declined as it reported billions of dollars in losses, many of which were directly or indirectly related to mortgage-backed securities. Recently, the U.S. Department of Justice sued Deutsche Bank for misrepresentations about its mortgage loans. That’s not good for business.

On January 16, 2009, after Deutsche Bank issued an update on its fourth quarter 2008 performance, Fitch Ratings placed Deutsche Bank’s AA- rating on Rating Watch Negative. On this news, Deutsche Bank shares fell to close at $21.27 per share on January 20, 2009 (the next trading day) – a decline of more than 86% from their Class Period high. Lottery tickets are looking better all the time.

I’d say this one merits a 4 out of 5 on our Madoff meter. Next up, Wonder Auto Technology, Inc…

Company:                                   Wonder Auto Technology, Inc.

Ticker:                                         WATG

Class Period:                               May-14-08 to May-6-11

Date Filed:                                   Jun-13-11

Lead Plaintiff Deadline:              Aug-12-11

Court:                                        Southern District of New York

Madoff Meter:                        

The Allegations:

What’s that old adage—it sounds too good to be true? That could probably apply to companies with ‘Wonder’ in the name—like Wonder Auto Technology—which just got hit with a securities lawsuit. The allegations are fairly standard, including violations of federal securities laws, misleading statements, etc. But some of the company’s actions stirred wonder their stock was halted. Wonder why?

On March 1, 2011, Wonder Auto announced that its financial statements for 2008 and 2009 and interim reports for those periods should no longer be relied upon. On May 6, 2011, NASDAQ halted the trading of Wonder Auto stock. On May 12, 2011, the Company disclosed that its Audit Committee had initiated an internal investigation concerning certain investment and acquisition transactions. On May 20, 2011, the Company announced that the investigation was commenced in response to allegations that the Company had failed to properly disclose related-party transactions. And their stock remain halted.

Madoff rating on this one—4 out of 5. On to Community Health Systems, Inc…

Company:                            Community Health Systems, Inc.

Ticker:                                  CYH

Class Period:                        Jul-27-06 to Apr-11-11

Date Filed:                            Jun-22-11

Lead Plaintiff Deadline:        Aug-21-11

Court:                                   Middle District of Tennessee

Madoff Meter:                   

The Allegations:

This is a little worrying…to say the least. Community Health Systems and certain of its officers and/or directors are being sued over allegations of wrongdoing. Specifically, “defendants emphasized the Company’s positive financial performance and future business prospects, but failed to disclose or recklessly disregarded that the Company’s performance has been driven by the improper and undisclosed practice of systematically admitting patients into Community Health Systems’ hospitals despite no clinical need.”

According to the Complaint, “Community Health Systems artificially increased inpatient admissions for the purpose of receiving substantially higher and unwarranted payments from Medicare and other sources that wrongfully inflated its financial performance.” Hey—there’s no business like death, dying and disease.

But this is still pretty disturbing…The lawsuit claims that (1) the Company had for years engaged in the improper practice of systematically admitting patients into hospitals despite no clinical need, most notably by unnecessarily converting emergency-room visits into more lucrative inpatient admissions; (2) the Company’s wrongful admissions procedures were designed to overbill Medicare and other sources for patient admissions; (3) as a result of the improper admissions and improper billing practices, the Company’s reported revenues and earnings were materially and wrongfully inflated; and (4) based on the foregoing, defendants lacked a basis for their positive statements about the Company’s prospects and growth.

The lawsuit goes on to allege on April 11, 2011, amidst Community Health Systems’ $3.3 billion hostile takeover bid of Tenet Healthcare Corp. (“Tenet”), investors and analysts were shocked to learn that Tenet had filed a lawsuit against Community Health Systems, its Chairman and Chief Executive Officer, and its Chief Financial Officer alleging that Community Health Systems had failed to disclose for years certain fraudulent admissions and billing practices, including its practice of systematically admitting, rather than observing, patients despite no clinical need, in order to artificially increase inpatient admissions for the purpose of receiving substantially higher and unwarranted payments from Medicare and other sources.

Following the April 11, 2011 disclosures, Community Health Systems’ common stock declined by $14.41 per share, or 35.7%, on unusually heavy trading volume from a closing price of $40.30 per share on April 8, 2011, to close at $25.89 per share on April 11, 2011.

Isn’t any of this illegal?

A 5 out of 5 on the Madoff Meter. Coming up…Computer Sciences Corporation…

Company:                                      Computer Sciences Corporation

Ticker:                                            CSC

Class Period:                                  Aug-11-10 to May-25-11

Date Filed:                                      Jun-9-11

Lead Plaintiff Deadline:               Aug-8-11

Court:                                          Eastern District of Virginia

Madoff Meter:                       

The Allegations:

A securities class action lawsuit was filed this month against Computer Sciences Corp, over allegations that their common stock was trading at artificially high prices due to materially false and misleading financial statements made to investors. Isn’t that what stock brokers are paid to do?

Short version, on February 1, 2011, Computer Sciences announced that the SEC had initiated a formal investigation into accounting irregularities at the Company. On May 2, 2011, the Company announced, among other things, that it was close to an agreement with the United Kingdom’s National Health Service (“NHS”) on a revised contract. On May 25, 2011, in connection with its announcement of financial results, which missed Wall Street consensus estimates, the Company disclosed that its Audit Committee had begun an internal investigation into accounting irregularities in one of its service sectors. The Company’s shares declined 12% in response to this announcement. Pump and dump…

Madoff meter ranking—3 out of 5. And, hope you’re not invested in these Apple REITs….

Company:                      David Lerner Associates

Madoff Meter:           

David Lerner Associates gets a whopping honorable mention Madoff Meter Clone Award for this one (that comes in as a 5 Bernies, for those counting…)

The Allegations:

David Lerner Associates, (DLA) Inc, its senior officers, Apple REITs Six through Ten (“Apple REITs”) and their principal, Glade M. Knight, were hit with securities lawsuits earlier this month, on behalf of all persons who purchased, subscribed or otherwise acquired shares in the five offerings non-traded Apple Real Estate Investment Trusts (Apple REIT Six through Ten), sold by David Lerner. And the charges have a familiar ring to them…

The lawsuit alleges that DLA sold Apple REITs, which invested in extended stay hotels such as Marriott and Hilton, to many elderly, retired and/or unsophisticated customers, as conservative investments that paid safe and secure returns from earnings. And, the allegations state that DLA negligently misrepresented the risks associated with the Apple REITs which were not conservative investments, and the source of the returns. The complaint also claims DLA misstated the fundamental business model of the Apple REITs, and omitted material information about how the Apple REITs were intended to operate. This sounds like a Madoff thing…

The Complaint goes on to claim that DLA negligently failed to disclose to investors that Apple REITs were sold at artificial prices of $11 per share, and that its 7-8% returns paid to investors were not from income or funds from operations but paid from new investor money or borrowing…hello PONZI…

Since 2007, DLA also allegedly failed to disclose that the Apple REITs were not financially healthy but that they had deteriorated far below the artificial $11 values on investors’ account statements. The Apple REITs also, as alleged, had not paid dividends from earnings for over seven years, and that 7-8% dividends were likely unsustainable in the future. DLA allegedly breached its due diligence obligations, and obligations as financial advisor to customers, and investors have unknowingly suffered large unrealized losses.

For its efforts, DLA received more than $600 million in fees and commissions which represented 60-70% of DLA’s business annually over the last seven years. DLA received 10% of all funds invested, which included underwriting fees and marketing expenses. The Complaint alleges that DLA was unjustly enriched at the investors’ expense. No kidding…

The Complaint alleges that the Apple REITs and its primary principal, Glade M. Knight, as liable for DLA’s acts under agency law. DLA was the exclusive selling agent for the Apple REITs, and sold to its captive customer base of over 120,000 accounts. DLA used radio, the internet and investor seminars to sell Apple REITs. The Complaint alleges that the financial fortunes of DLA and the Apple REITs were so intertwined that the Apple REITs and Knight are liable for its negligence.

As a Madoff Clone—this gets 5/5 on the Madoff Meter.

Securities Settlements

Speak of the devil—HSBC Holdings PLC, settled a securities lawsuit this month, with Europe’s largest bank agreeing to pay $62.5 million to a private group of investors who lost money in association with a Madoff securities fraud.

The investors had placed funds with Ireland-based Thema International Fund Plc, the assets of which were held with Bernard L. Madoff LLC, according to a statement by HSBC. According to a report by Bloomberg “Thema Fund, a so-called Madoff feeder fund, was controlled by Bank Medici AG. Bank Medici with its founder Sonja Kohn is part of a $59 billion suit by the trustee liquidating Madoff’s firm.”

Reportedly, Thema was one of several funds placed in the custodianship of HSBC units and which subsequently funnelled monies to Madoff.

In a statement issued by HSBC, the bank said the settlement “shall in no way be construed” as an admission of fault. HSBC still faces other Madoff-related lawsuits in other countries including Germany, and Luxembourg.

The settlement on is pending court approval.

Tags: Insecurities, Investment Broker, securities, Securities Fraud, Securities lawsuit, securities settlement, Stock Fraud, Stockbroker Fraud

This was posted on Tuesday, July 5th, 2011 at 10:39 am and is filed under Insecurities, Securities . Feel free to respond, or trackback. Read our comments policy.