Securities and Investment Fraud Attorney

Case Studies

CASE STUDIES

Set forth below are summaries of cases that Mr. Karen has handled during his 30+ year career as a civil litigation attorney.*

The First Jersey Securities Scandal

Mr. Karen began to handle securities fraud litigation shortly after beginning in private practice in the mid-1980's.  Within a year of being admitted to the California Bar, in 1985 he filed the nation's first securities fraud class action against Robert E. Brennan and First Jersey Securities, alleging penny stock fraud on a massive scale.  First Jersey specialized in promoting "Pump and Dump" penny stocks to unsuspecting investors, many of them elderly, who lost their entire investments when the stocks inevitably crashed.  The First Jersey Securities scandal eventually involved many other lawsuits filed by other attorneys and nationally these cases were ultimately consolidated via the Judicial Panel for Multidistrict Litigation,  In re:  First Jersey Securities Litigation, MDL Docket number 681, Civ. No. 85-6059, in the Eastern District of Pennsylvania.  This case ultimately settled for $10 million.  Karen was counsel of record for class action plaintiffs in the case he filed and the attorney of record for claimants as well as for a large number of investors who pursued their claims through arbitration before the National Association of Securities Dealers ("NASD") (presently known as the Financial Industry Regulatory Authority ("FINRA").  All of these cases were privately settled.  First Jersey itself went bankrupt in 1987 and Brennan was found guilty of securities fraud in 1994.  The SEC held the Defendants liable for $75,000,000.00.  Brennan declared bankruptcy in 1995 but committed another fraud when he did not declare all of his assets to the court.  In 2001, Brennan was found guilty of money-laundering and bankruptcy fraud and sentenced to a prison term of nine years and two months. On appeal, in 2003 the sentence was upheld.


The San Diego Realty Exchange Case

The firm also represented approximately sixty-five percent of the creditors in the consolidated bankruptcy proceedings arising from the collapse of San Diego Realty Exchange and Donald Dean Cook, styled In re: Donald Cook, Debtor, U.S. Bankruptcy Court, S. Dist. Ca. Consolidated Case No. 90-03752-B7, Case No. 90-08996-B-07, Adversary Proceeding No. 91-90032.  The Cook case arose from a multimillion dollar Ponzi scheme involving fictitious IRS Code 1031 exchange transactions.   Cook, a CPA and Realtor, formed a company called "San Diego Realty Exchange" for the purpose of facilitating IRS Code Section 1031 Exchanges.  Cook absconded with money entrusted to his company by its exchange clients.  On December 5, 1991, in the case of People v. Donald Dean Cook, San Diego County Superior Court No. CR122699, Cook was convicted by a jury of 32 counts of grand theft; 19 counts were for amounts taken in excess of $25,000.00, and 10 counts were for amounts taken exceeding $100,000.00 (Penal Code sections 487, subd. 1, 12022.6, subds. (a) and (b)).  He was sentenced to serve a total of 10 years in state prison.  Cook was incarcerated in the Centinela State Prison in Imperial, California.  In the case filed by Karen, he obtained a nondischargeable multimillion dollar verdict against Cook. 


The James Earl Davis Case

In one noteworthy securities fraud case involving a stockbroker and insurance agent named James Earl Davis,  Mr. Karen represented 54 individuals and two churches who were defrauded of $2.65 million by Davis, who was the Church Treasurer at the time of the fraud.  Davis sold the congregation and churches fictitious variable annuities and pocketed the money.  Davis was ultimately apprehended by the FBI and went to prison.  One of Mr. Karen's clients confided to him that although losing the money due to fraud was bad, the worst part about the case was that he had considered Davis to be his best friend, the two had gone camping together and spent holidays together.  Working in conjunction with well know trial lawyer Harvey Levine, Mr. Karen recovered $3.3 million for defrauded investors from the insurance company and brokerage house that had employed Davis.  After fees and costs had been fully deducted, the victims recovered 100% of their actual investment losses.


The firm was also class co-counsel in a class action lawsuit filed against FundAmerica, Inc.  This was a securities fraud class action case involving a pyramid scheme.  The case was informally consolidated with the consolidated class actions in Nguyen v. FundAmerica, et al., No. C 90-2090 MHP filed in the United States District Court for the Northern District of California.  The combined class action litigation ultimately settled for approximately $15 million.

The FundAmerica, Inc. Case


The firm represented over 100 investors who suffered investment losses in excess of $35 million due to the collapse of the Towers Financial Corporation.  Towers Financial Corporation allegedly was involved in factoring hospital receivables.  It sold private placement type securities that guaranteed a steady rate of return.  The CEO of Towers was Steven Hoffenberg.  Hoffenburg used Towers in a Ponzi scheme and in reality, the firm had little or no legitimate earnings from its factoring activities. The firm collapsed in 1993, and in 1995, Hoffenberg pled guilty to bilking investors out of $475 million and was sentenced to prison.   At the time the SEC considered the fraud to be "one of the largest Ponzi schemes in history."  Mr. Karen represented Towers victims in arbitration cases before the National Association of Securities Dealers ("NASD") (presently known as the Financial Industry Regulatory Authority ("FINRA") and in many Court cases filed in State and Federal Court.  

The Towers Financial Case


The Bennett Funding Group were accused of being perpetrators of one of the largest Ponzi schemes in U.S. history. The leasing & funding company was based in Syracuse, New York. BFG operated under the Bennett Receivables Corporation, Bennett Receivables Corporation II, Bennett Management and Development Corporation, The Processing Center, Inc., Resort Service Company, Inc., American Marine International, Ltd., Aloha Leasing, and Aloha Capital Corporation brands.   On March 28, 1996, the SEC filed a civil action against The Bennett Funding Group, Inc., its chief financial officer, Patrick R. Bennett, and other companies Bennett controlled, in connection with a massive Ponzi scheme. The SEC alleged that the defendants fraudulently raised more than several hundred million dollars, purportedly to purchase assignments of equipment leases and promissory notes.  Mr. Karen represented a substantial number of victims of the Bennett Funding fraud in arbitration and court cases. 

The Bennett Funding Case


During the 1980s and 1990s, Prudential Securities Incorporated (PSI), formerly a division of Prudential Financial, was investigated by the Securities and Exchange Commission (SEC) for suspected fraud.  During the investigation, it was found that PSI had defrauded investors of close to $8 billion, the largest fraud found by the SEC in US history to that point.  The SEC charged that Prudential allowed rogue executives to cheat customers on a large scale and blithely ignored a 1986 SEC order to overhaul its internal enforcement of securities laws.  In all, some 400,000 individual investors lost money on the deals. 

Mr. Karen represented 75 investors in private lawsuits and arbitrations and in SEC restitution proceedings.  Additionally, the firm participated In re: Prudential Limited Partnership Litigation, MDL 1005, Southern District of New York, the class action that resulted in a $110 million settlement with Prudential Securities, and Mr. Karen was in the objector group In re:  Prudential Energy Income Partnerships Securities Litigation, MDL 888, Eastern District of Louisiana, which was resolved for $92.5 million.
 

The Prudential Limited Partnership Cases


In 1996, the US Department of Justice charged 24 major NASDAQ securities firms with price fixing transaction costs for investors.  In a civil class action lawsuit that was based upon these allegations, Mr. Karen was among the class co-counsel in proceedings consolidated In Re: NASDAQ Market Maker Antitrust & Securities Litigation, MDL 1023, Southern District of New York, which was recently settled for approximately $1 billion.  The class action alleged that NASDAQ market-makers set and maintained wide spreads pursuant to an industry-wide conspiracy. 

NASDAQ Market Maker Antitrust & Securities Litigation


Susan H. (not her real name) was a middle age divorcee who had received a substantial sum in a divorce settlement, which was invested on the advice of a financial adviser, who she knew as a member of her community and church.  Susan had been a high school counselor, but she was fully disabled due to a life threatening automobile accident that involved a freeway head on collision that left her in a coma for an extended period and with permanent brain damage.  Due to her brain injury, Susan knew that she required the assistance of a financial professional to manage all of her financial affairs.  The Defendant adviser, who was also a lawyer, became involved in many aspects of her life, including selling a residence, shopping for and buying a replacement home, negotiating the terms of her divorce settlement, giving her advice on her children, and recommending that she purchase a large number of life insurance policies, which she did not need and could not afford.  The Defendant earned huge fees and commissions from these policies.  At one point, the total premiums that Susan had to pay each year on these policies exceeded the total amount of her annual income from all sources.  Due to her brain impairment, Susan did not know she had been defrauded.  Susan was tipped off that something was wrong when a bank employee commented on her financial situation, and as a result, she changed financial advisers.  Her new financial adviser immediately recognized that she had been defrauded and referred her to Mr. Karen, who commenced a lawsuit against the adviser and numerous securities firms and insurance companies that employed the adviser.  Because Susan had a mental impairment, it was necessary for a trusted friend to be appointed her guardian for the duration of the lawsuit, which was ultimately settled confidentially. 

Susan H. v. Major Securities Firms and Insurance Companies


Joan C. (not her real name) was a widow in her 70's whose nephew was an insurance agent and financial adviser.  At her husband's funeral, her nephew approached her and told her that now that her husband was dead, he would assist her with her financial affairs.  Since her nephew was a trusted family member,  Joan went along with this suggestion, and eventually engaged in a series of transactions that included cancelling existing life insurance policies that she already owned, and buying several new policies, which were then sold by her nephew in a Viatical Settlement.  After a period of time she realized that she needed a different financial adviser.  When she consulted with a different adviser, he immediately notified her that she had been defrauded and she then retained Mr. Karen, who filed a lawsuit against the nephew and against the insurance companies that had issued the policies sold by the nephew.  The case was confidentially settled. 

Joan C. v. Securities Firms and Insurance Companies


Nancy L. (not her real name) was a single woman in her mid-80's.  She had gotten into a friendship with her stockbroker, a charming man roughly half her age.  The two developed a close relationship.  As a result, she ended up making many private placement investments on his advice, but she was not provided with much, if any documentation for many of these investments.  She also gave the stockbroker a large sum of money to invest in a project that were not approved by his employer, a national brokerage house.  The stockbroker deposited this money into his own personal bank account and Nancy was not given any paperwork to show what, if anything, it was invested in.  In fact, she never really knew what it was that she was investing in with this money. 

After many of the investments that the stockbroker had recommended failed, Nancy decided to get a second opinion.  The adviser that she consulted with notified her that he felt she had been defrauded and she hired Mr. Karen.  Mr. Karen filed a lawsuit, but the case confidentially settled in the early stages.

Nancy L. v. Stockbroker and Firm
 


Alex J. (not his real name) was an employee of a technology firm who had undergone a life threatening brain tumor removal surgery that left him a little slower mentally than he had been prior to the surgery.  Alex's job was to clean the high tech equipment in the laboratory where the higher paid employees worked.  Alex was not highly educated or highly paid.  However, the technology firm he worked for issued stock options to all employees and as a result, Alex owned highly appreciated company stock that was worth a substantial sum.  Alex was not aware of this fact until one of his co-workers mentioned that he planned to retire and live off of the profits from the sale of his company stock.  Alex came from a very humble background and he had never owned stock before, nor had he ever made any investments.  Because he knew nothing about investing, he decided to seek the expertise of a stockbroker employed at one of the largest brokerage houses in the world.  When he went into the firm and was introduced to his new broker, he was somewhat taken aback by the fact that the stockbroker seemed very young, far too young to be in a position to know how to invest wisely.  However, the broker assured Alex that he relied upon the research department at his firm and was in fact, an expert on investing.  Alex related to the broker the fact that he has undergone brain surgery to remove a tumor.  On the advice of the stockbroker, Alex liquidated his company stock, which was worth about $1 million.  The broker put Alex into a high frequency investment program on margin.  When the account went up, the stockbroker suggested to Alex that he could afford to build his dream house with is new found wealth.  The stockbroker even started the paperwork for Alex to obtain a loan to build his dream house from his firm, using the stock purchased on margin as collateral for the home loan.  

Alex was sitting at home in a meeting with an architect going over plans for his dream house when he received a call from the stockbroker telling him that due to a market drop, he had to make a huge cash deposit and if he did not, he would be wiped out.  Virtually the entire amount he had on deposit at the firm would be gone, as the the firm had to liquidate his stock to pay for a margin call.   Alex did not have the cash so his account was liquidated and he was wiped out.  Alex later learned that he had a huge tax bill owed to the IRS as a result of paper gains he had experienced before he was wiped out.

Alex retained Mr. Karen who filed a lawsuit against the firm and the stockbroker.  The case was ordered into arbitration with NASD/FINRA and was intensely litigated.  A pitched battle ensued over allegedly missing email evidence, which the firm claimed had been destroyed in 9/11.  The case continued all the way up until just before the date of the hearing, when it settled after the Defendants tried unsuccessfully to remove the Chairperson of the arbitration panel for alleged bias.   The settlement terms are confidential.

Alex J. v. World's Biggest Brokerage House


Dr. James Long (not his real name) was a highly successful and prominent plastic surgeon who had money to invest and who was also very interested in exploring the spiritual side of life.   He chose as his financial adviser a stockbroker and insurance agent who had a full service financial firm that also offered personal development and life coaching services.  Dr. Long was a specialist who worked extremely long hours in his medical practice and in charitable activities for disfigured children.  He began each work day about at 4:00 a.m. and did not slow down until roughly 10:00 p.m.  Dr. Long believed that he was not qualified to manage his own investment affairs so he hired someone who he felt was an expert to do that. 

The financial firm that he hired was headed by a smooth talking adviser who seemed to also be on the same spiritual path as Dr. Long, and in letters sent by the adviser to Dr. Long, the adviser used salutations along the lines of "may your path lead to enlightenment."   The facts of the case that later development support the conclusion that this was pure snake oil designed to lower Dr. Long's guard and that the adviser was a fake spiritualist who used new age jargon to gain Dr. Long's trust.

As it happened, the securities traded by the advisers firm were traded through a brokerage firm that was of the "matchbook" variety, meaning that the brokerage house solicited stockbroker representatives remotely to act as independent sales representatives for the sale of securities and these registered representatives were expected to have their own business offices maintained at their own expense.  The brokerage house was located in a different state and it exercised virtually no day-to-day supervision over its stockbrokers, who were left to "self-supervise."  

The adviser recommended that Dr. Long invest in several illiquid variable annuities, but did not disclose to Dr. Long that by making this recommendation, the adviser earned huge sales commissions, which ultimately were paid for by Dr. Long.  Also, the adviser turned over the handling of Dr. Long's securities account to an employee who had formerly been involved in a criminal Ponzi Scheme.  This employee also had huge debts with the IRS and a lien on his home for these debts. 

To make matters worse, the brokerage house compensation system involved a direct deposit of the trade commissions into the bank account of this employee, so that if the employee needed money in a hurry, he could obtain it immediately merely by buying or selling a security in Dr. Long's account.   The employee used Dr. Long's account as a virtual ATM machine.  Needless to say, the employee engaged in high frequency trading in the account which caught the attention of Dr. Long's CPA, who alerted Dr. Long that in his opinion, the account was being churned.  At this point, Dr. Long retained our firm. 

The case for Dr. Long was litigated by our firm in NASD/FINRA arbitration proceedings through hearing and an award of damages was made by the NASD Panel in favor of Dr. Long.  After this award was made, our firm commenced a lawsuit designed to seek punitive damages and attorney's fees pursuant to the written agreement that the brokerage firm utilized, which specified that claims for attorney's fees or punitive damages had to be pursued in Court rather than arbitration.  At this point, the case confidentially settled. 

Dr. James Long v. Matchbook Brokerage House and Heavily Indebted-Broker


Bre-X was a group of companies in Canada. A major part of the group, Bre-X Minerals Ltd. based in Calgary, was involved in a major gold mining scandal when it reported it was sitting on an enormous gold deposit at Busang, Indonesia (on Borneo). Bre-X bought the Busang site in March of 1993 and in October of 1995 announced significant amounts of gold had been discovered, sending its stock price soaring. Originally a penny stock, its stock price reached a peak at CAD $286.50 (split adjusted) in May of 1996 on the Toronto Stock Exchange (TSE), with a total capitalization of over CAD $6 billion. Bre-X Minerals collapsed in 1997 after the gold samples were found to be a fraud.  Bre-X shares were sold in the US by a major brokerage house that has since become defunct.  One of the more peculiar facts about the Bre-X scandal is that in March of 1997, Michael de Guzman, Bre-X's chief geologist, allegedly committed suicide - jumping out of his helicopter from 800 feet - after tests began to show hardly a trace of the gold he and Bre-X had claimed existed.  The scandal was the source of many articles and numerous books, including the well reviewed Bre-X: Gold Today, Gone Tomorrow, by James Whyte Vivian Danielson. 

Our firm handled a certified class action against the brokerage house that sold Bre-X shares in the US which was premised upon the fact that the firm had endorsed Bre-X without first having conducted reasonable due diligence into whether its claims were likely to be true.  In the Court hearing on the case, the Judge who certified the case as a class action commented that growing up he had heard stories of promoters putting gold into a shot gun and blasting it into the walls of mines in order to trick unsophisticated investors into believing the mine had a gold vein.

Bre-X Goldmine Fraud Class Action


Our firm handled a very interesting case against one of the best known global real estate brokerage firms and an owner of one of its franchise residential real estate office outlets.   The branch manager owned a franchise office near the US-Mexico border and also operated a brand name branch of the same franchise in Baja California, selling units in existing or planned ocean view condo projects situated on the Baja coastline.  He marketed real estate investment opportunities in the US and in Baja California and offered all expense paid bus tours of properties in the Baja.  In his advertising, the manager created the impression that he was an officer of the giant real estate company and that his firm was actually one and the same with the globally known real estate brokerage, rather than just a small independently owned franchise outlet.  In this way, he fooled investors into thinking that they were dealing with a huge, reputable and well known company, rather than a small business owned and operated by one man. 

Additionally, the branch manager instituted a promotional program in which extra compensation could be earned by his sales staff if they solicited members of their families to invest in these projects.  This incentive program proved effective.  Ultimately, he was able to find investors for real estate development projects in Baja California and in San Diego.  Unfortunately for these investors, the manager pocketed investor money and when the projects failed, both the manager and his company filed bankruptcy.  

Our firm represented the investors in a variety of legal proceedings.  Lawsuits were filed against the US and Mexican divisions of the global real estate firm premised upon the allegation that the manager had used the company trade name to defraud investors due to a failure to properly supervise his activities as a franchisee.  These cases were confidentially settled.  Further, an order was obtained from the bankruptcy Court permitting a lawsuit to be filed against the manager in the Superior Court and this ultimately led to a default judgment against the manager and his real estate firm.   Our firm then filed a claim based upon the judgment with the California Department of Real Estate ("DRE") fraud recovery account department and this claim was ultimately paid in the full amount permitted by law.

Unsophisticated Real Estate Investors v. Huge Real Estate Firm and Crooked Branch Office Manager


David J. (not his real name) was in his late teens riding his motorcycle in the desert when it collided with a dune buggy.  He was life-flighted by helicopter to a hospital and nearly died, and lost 100% of his eyesight due to the accident.  David lived with his mother and was fully disabled due to the accident.  His mother was a single parent and did not earn much and was unemployed from time to time, so money was very tight.  David received a six figure personal injury settlement as a result of the accident.  Because neither he nor his mother had any experience investing, he retained a financial adviser employed by one of the largest financial firms in the US.   His adviser advised him to invest in oil and gas well "working interests" in Texas.  David went with his mother to the offices of the huge brokerage house to sign the papers for this investment.  The adviser told him that the investment would generate steady income each month that could be used to pay his bills.  The adviser did not reveal to David or his mother that her employer did not approve of the investment and its rules prohibited the sale of any investment that was not approved in advance by the firm.  She also did not reveal that as compensation for obtaining investors in the project, her family was given free investment interests in the wells.  She also did not tell him that the project amounted to "wildcatting."   Wildcatting means to drill for oil in places where oil is not know to already be.  This is an extremely high risk, speculative type of project, for which there can never be any guarantees of success.  It is more akin to gambling than investing. 

When the income that was promised did not appear, David complained.  He was told that he could sell his investment back to the promoter for $10 and for that amount, buy into a new well, that would pay the promised income.  A meeting was held in a hotel room attended by David, his mother, the adviser, and an executive from the oil company, who made statements to the effect that he was being helped out because he was such a nice young man. 

This new investment also did not pay income, and soon David received notice that the company was in bankruptcy and was being sued the SEC for securities fraud.  The SEC had also commenced a proceeding to bar the adviser from the securities industry.   By all indications, David had lost his entire investment in the oil and gas project, due to fraud by his adviser and the promoters of the project.  Later developments tended to suggest that the promoters of the investments planned to use investor funds to pay for exploratory drilling, with the idea that if oil was found, rather than going to investors, the oil would be tapped from an angle by a different well to be owned by the promoters.  In short, the plan was never designed to benefit investors, but rather, was a fraud from the outset.

When the brokerage house learned of the transaction, it terminated the adviser for cause.  Virtually all of the corporations involved in the oil and gas venture went bankrupt.  The SEC ultimately barred the adviser from the securities industry. 

David retained our firm and we made a claim against the brokerage house for failing to adequately supervise the adviser, and this claim was privately settled.  Our firm then filed a lawsuit against the adviser and the officers who ran the corporation that promoted the investment.  When the adviser filed bankruptcy, we filed a lawsuit against the adviser with the bankruptcy court to obtain an order that the debt owed by the adviser was non-dischargeable.  This claim was later settled.  One of the officers settled and we obtained a default judgment against two other corporate employees involved in the fraud.  In all, we filed three different lawsuits on behalf of our client over the failed oil and gas investment. 

Blind Young Man v. Gas and Oil Scammers

* A court record exists for most, if not all, of these cases.  Names of clients have been omitted or changed to protect their privacy and the names of the Defendants have been omitted or changed in order to comply with the requirements of written settlement agreements.  You should be aware that what took place in prior cases handled by Mr. Karen is not intended to guarantee that you will obtain a successful result if you retain Mr. Karen as your attorney.  No guarantees of a successful outcome can ever be made in civil litigation.

 

* A court record exists for most, if not all, of these cases.  Names of clients have been omitted or changed to protect their privacy and the names of the Defendants have been omitted or changed in order to comply with the requirements of written settlement agreements.  You should be aware that what took place in prior cases handled by Mr. Karen is not intended to guarantee that you will obtain a successful result if you retain Mr. Karen as your attorney.  No guarantees of a successful outcome can ever be made in civil litigation.