The Markets August 29, 2011

Con Artists Profiting from Economic Uncertainty

The North American Securities Administrators Association (NASAA) released its annual list of phony financial products and practices, including several that are taking advantage of lingering economic uncertainty and stock market volatility. 
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NASAA reports that some investor complaints have been based on claims such as: “Realize safety and appreciation in gold;” “Wave energy: the future to power our homes;” “Synthetic fuels take the oilman out of our pockets;” and “Invest in foreclosed homes, help others and make a fortune!”

“Con artists follow the news and seek ways to exploit the headlines to their advantage while leaving investors holding an empty bag,” said David Massey, NASAA President and North Carolina Deputy Securities Administrator.

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“Promoters often offer investors an opportunity to get in on the ‘ground floor’ of new technology or ideas to help others and make a great economic return,” Massey continued. “Unsuspecting investors can be lured into these schemes, especially if they sound familiar. These offerings require careful research and a strong reminder that if it sounds too good to be true, it probably is not true, nor will it be profitable to anyone but the promoter.”

NASAA’s Enforcement Section identified the top ten financial products and practices (five of each) that threaten to trap unwary investors:

Products: distressed real estate schemes, energy investments, gold and precious metal investments, promissory notes, and securitized life settlement contracts.

Practices: affinity fraud, bogus or exaggerated credentials, mirror trading, private placements, and securities and investment advice offered by unlicensed agents.

“Investors should do business only with licensed brokers and investment advisers and should report any suspicion of investment fraud to their state or provincial securities regulator,” Massey concluded.

The full list, with details, can be found at http://www.nasaa.org/NASAA_Newsroom/Current_NASAA_Headlines/14822.cfm.  

Compliance August 29, 2011

Court Denies Attorneys’ Fees in Institutional Versus Retail Shares Case

A district court has denied participants’ request for attorneys’ fees in their attempt to sue their employer over the selection of funds in their 401(k) plan.
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The Bureau of National Affairs (BNA) reports the U.S. District Court for the Central District of California ruled that participants in Southern California Edison Co.’s tax code Section 401(k) plan are not entitled to attorneys’ fees for succeeding “minimally” in their action alleging the plan’s fiduciaries breached their fiduciary duties when they selected three retail-class mutual funds for the plan instead of attempting to secure institutional-class mutual funds.  

Judge Stephen V. Wilson reconsidered a decision from December 2010 in which he exercised his discretion to award fees. Wilson said that at the time of the earlier ruling, he had not considered who was the “prevailing party” in the case. In the minute order, Wilson explained Edison was the prevailing party, as the participants had only “succeeded minimally on only part of one of ten of their claims.”  

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However, the court held that Edison could offset its prevailing party costs up to the amount of the participants’ requested fee award. The court said that after the offset, neither party would receive fees or costs.  

The lawsuit against Edison and its associated companies was filed in 2007. In July 2010, the court found that fiduciaries of Edison’s Section 401(k) plan breached their duty of prudence when they selected three retail-class mutual funds for the plan instead of attempting to secure institutional-class mutual funds (see “Court Buys Retail vs. Institutional Fee Claims“). However, BNA said, in 2009, the court had dismissed the bulk of the participants’ claims.  

In December 2010, the court found that a limited award of attorneys’ fees was appropriate. However, in light of the participants’ limited success, the court directed them to adjust their requested fees. The participants originally sought $2.5 million in attorneys’ fees and nontaxable costs, but later revised that amount to roughly $410,000.  

The case is Tibble v. Edison International, C.D. Cal., No. 2:07-cv-05359-SVW-AGR.

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