Compliance June 16, 2009

Participants in Company Stock Suit Fail To Get Class Certification

A court ruled that participants in the First American Corp. 401(k) plan cannot be certified as a class for purposes of a suit questioning the appropriateness of maintaining company stock as an investment choice in the plan.
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The U.S. District Court for the Central District of California first found that the proposed class satisfied the requirements of Rule 23(a): (1) the members of the proposed class must be so numerous that joinder of all claims would be impracticable; (2) there must be questions of law and fact common to the class; (3) the claims or defenses of the representative parties must be typical of the claims or defenses of absent class members; and (4) the representative parties must fairly and adequately protect the interests of the class.

However, where the plaintiffs failed was with their argument that they qualify under Rule 23(b)(1), which allows for certification if prosecuting separate actions by individual class members would create a risk of inconsistent or varying adjudications and establish incompatible standards for defendants, or when a judgment in one suit would be dispositive of the interests of the other class members who were not parties to the suit.

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The court found that potential class members would be able to bring separate lawsuits without affecting the rights of other class members, and additionally said that under 9th Circuit precedent, lawsuits cannot be certified as class actions under Rule 23(b)(1)(A) when the proposed class seeks monetary damages. “Here, the Plan Participants primarily seek monetary damages—damages to the Plan, and demands that the First American Defendants make the Plan whole,” according to the opinion.

The First American Defendants initially opposed the class certification because the participants lack standing under the Employee Retirement Income Security Act, saying they cannot show a loss traceable to the First American defendants. However, the court said that “at the pleading stage, general factual allegations of injury resulting from the defendant’s conduct may suffice” as proof of loss.

The case is In re First American Corp. ERISA Litigation, C.D. Cal., No. 07-01357-JVS.

Compliance June 16, 2009

Recession Foils Ponzi Schemers' Game

Ravaged by the same fiscal turbulence pounding the nation's legitimate businesses, Ponzi operations have been collapsing at a record clip, The Washington Post reported.
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The FBI has almost 500 open Ponzi investigations nationwide—up from about 300 in 2006, bureau officials said, according to The Post. Law enforcement officials with other agencies have noticed similar trends, and authorities said they expect to turn up many more cases in coming months.

The schemes are named after Charles Ponzi, a notorious rip-off artist who stole millions in 1920, and involve investors who are told that they are buying real estate, securities, and other assets, but no investments are ever made. The flow of new money is used to pay “returns” to earlier investors (see “Ponzi Schemes: Side by Side“).

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However, eventually, the flow of new money dries up and everything collapses. By nature, the schemes are vulnerable to the harsh economic climate. Federal officials said they also have become more aggressive in trying to uncover schemes before they implode and the assets evaporate, the news report said.

The cases range from the $65 billion fraud orchestrated by Bernard L. Madoff, a former chairman of the Nasdaq stock exchange, to what is now considered a relatively minor rip-off—a $23 million fraudulent hedge fund run by a Jacksonville, Florida, man guaranteeing a 50% rate of return.

The largest operations were run by Madoff, who is scheduled to be sentenced this month on fraud charges, and what authorities say was an $8 billion scheme managed by R. Allen Stanford, a prominent Texas businessman (see “Madoff Does Not Pass Go” and “Another Billion-Dollar Investment Fraud Unfolds“). The government has filed 140 pages of Madoff witness impact statements for use in preparation for his sentencing that can be viewed here.

Schemers Exposed

With the walls crashing down on Ponzi schemes, insiders have started reporting one other, and some Ponzi operators surrendered to federal agents, hoping to cut deals, The Washington Post reported. Federal prosecutors said Joseph S. Forte of Broomall, Pennsylvania, did just that.

According to the news report, authorities said that, over 12 years, Forte collected $80 million from at least 80 investors who believed that he was putting their cash into Standard & Poor’s index futures contracts. By 2008, Forte’s revenue dried up because he could no longer find anyone willing to invest with him. He couldn’t pay off redemption requests, and he turned himself in to authorities and has pleaded guilty to fraud charges.

“A lot of investors have become more aware of the risks and are asking harder questions,” said Scott Friestad, deputy director of enforcement at the SEC, in the news report.

The SEC has put forth an agenda to crack down on investment fraud (see “What’s Happening at the SEC“).

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