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A Financial Industry Regulatory Authority (FINRA) arbitration panel says that UBS Financial Services (UBS) must pay $18.6 million to customers Rafael Vizcarrondo and Mercedes Imbert De Jesus for their losses from investing in Puerto Rico closed-end bond funds.  The two investors, both UBS clients, accused the broker-dealer of breach of contract, breach of fiduciary duty, and other securities violations. They claim that UBS placed their money in unsuitable investments and did not properly supervise the broker who worked with them. As part of the award, Impert De Jesus and Vizcarrondo will receive $12.7 million in compensatory damages, $2.5 million of interest, $3.2 million in legal fees and $163,000 in expert witness fees.

Vizcarrondo is a prominent lawyer in Puerto Rico. His legal team said that UBS had attempted to portray him as a “sophisticated” investor, someone who should have known what he was getting involved in when he invested in the territory’s bonds.  The firm described Vizcarrondo as having been “fully informed” when he decided to concentrate his investments in UBS’s Puerto Rico closed-end funds. However, as Vizcarrondo’s attorney noted, not all professionals are “sophisticated investors.” Based on its decision, the FINRA arbitration panel obviously agreed with the claimant.

This is the largest FINRA arbitration award issued over Puerto Rico bond funds to date. There are over a thousand cases still pending. These claims were brought by investors seeking to recover the financial losses they suffered from investing in the island’s beleaguered securities. Although a number of firms, including Banco Santander (SAN), Banco Popular, Merrill Lynch and others have been named in Puerto Rico bond and closed-end bond fraud claims, UBS and affiliate UBS Financial Services Inc. of Puerto Rico (UBS-PR) have been the largest target of these claims. In fact, the TheStreet.com reports that on November 2, UBS AG, the parent company of UBS and UBS-PR, notified the U. S. Securities and Exchange Commission in a filing that about $1.9 billion in Puerto Rico municipal bond funds and closed-end fund claims have been brought against it. The firm has already paid out $740 million to claimants.

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The Financial Industry Regulatory Authority (“FINRA”)  has fined Merrill Lynch, Pierce, Fenner & Smith Inc (“Merrill Lynch”) $6.25 million and imposed a restitution penalty of $780,000 over Merrill Lynch’s inadequate supervision of its customers that employed leverage in brokerage accounts, as well as its failure to supervise the way that these customers were able use the proceeds from their loan managed accounts (“LMAs”). LMAs are credit lines that let customers use the securities in their brokerage accounts as collateral in order to borrow funds from a bank affiliate.  However, these LMAs are not supposed to be used to purchase additional securities.

The $780,000 will go to customers that invested in Puerto Rico municipal bonds and Puerto Rico closed-end bond funds. By settling Merrill Lynch is not admitting or denying FINRA’s findings.

According to FINRA, Merrill Lynch did not have these adequate procedures and supervisory systems at issue in place from 1/2010 through 11/2014. FINRA found that even though Merrill Lynch’s policy and non-purpose LMA agreements barred customers from using LMA proceeds to buy different kinds of securities, there were thousands of times during the relevant period that, within two weeks of getting LMA proceeds, Merrill Lynch brokerage accounts collectively purchased hundreds of millions of dollars of securities. Merrill Lynch also set up over 121,000 LMAs, with Bank of America (“BAC”) extending over $85 Billion in aggregate credit. FINRA said that all of this was able to happen because the firm’s supervisory procedures and systems were inadequate.

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A Financial Industry Regulatory Authority (“FINRA”) panel is ordering UBS Financial Services, Inc. (“UBS”) to pay Puerto Rico residents over $700,000 in damages.  The FINRA panel ordered UBS to pay $549,000 in compensatory damages to a defunct car rental business belonging to Luis Vega, as well as over $165,000 to Teresa Rosas, who is Vega’s former wife. The firm must also pay over $100,000 in costs and hearing session fees.

Vega and Rosas filed their case against UBS accusing the brokerage firm of securities fraud, negligence, recklessness, and deceit. Vega, 87, invested almost $8 million through his Condado Motors with UBS broker Jose Chaves between ’06 and ’11. During that time, Chaves invested approximately 95% of the money in three of UBS’s Puerto Rico close-end funds, even taking out loans to cover some of the costs. The couple’s lawyer claims that Chavez did not disclose any risks involved other than what was noted in the funds’ prospectus.  Additionally, Rosas bought over 17,000 shares of the UBS Puerto Rico Fixed Income Fund III.

The couple saw their investments lose the bulk of their value when the prices for the Puerto Rico bonds and Puerto Rico closed-end funds dropped in 2013. According to their lawyer, Condado Motors lost $3.9 million in value, as well as $823,650 in net out-of-pocket losses, during 2013. The couple said that their financial problems played a part in their decision to get a divorce.

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The Financial Industry Regulatory Authority is ordering VALIC Financial Advisors Inc. to pay a $1.75M fine for purported conflicts of interest that impacted the way that the firm compensated brokers for selling annuities. According to the self-regulatory organization, from 10/2011 through 10/2014, the Houston-Based financial firm established a conflict of interest when it said registered representatives would receive financial incentives for recommending that clients transfer their money from VALIC variable annuities into a Valic fixed index annuity or onto its fee-based platform. FINRA said that the firm created even more conflict when it told representatives they would not get compensation from moving customer money to a non-Valic product from a Valic variable annuity.

FINRA said that because of these conflicts, a significant amount of assets were moved to the firm’s advisory platform and sales of  VALIC ’s proprietary fixed index annuity increased by over 610% after it was included in the firm’s compensation policy.

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Minnesota-Based Investment Adviser Gets Six-Year Jail Term
According to the Minnesota Department of Commerce, Levi David Lindemann was ordered to serve a 74-month prison sentence—that’s six years—for bilking clients in a Ponzi scam.  Lindemann owned Gershwin Financial, which did business using the name Alternative Wealth Solutions. He pleaded guilty to money laundering and federal mail fraud charges.

Minnesota Commerce Commissioner Mike Rothman said that Lindemann abused his position as a financial adviser when he defrauded clients, including older investors. He did this by promising to invest their funds in safe investments but instead used their money to make Ponzi-type payments to clients and pay for his own expenses.

Lindemann’s guilty plea states that he solicited money from about 50 investors. He attempted to hide the securities fraud by generating fake secured notes as supposed evidence of the clients’ investments. The SEC permanently barred him from the securities industry earlier this year.


SEC Accuses Barred Broker of Selling Securities to Older Investors 

According to the SEC, ex-Morgan Stanley (MS) broker Rafael Calleja solicited $2.7M from 10 retiree and elderly investors after he had already been barred from the securities industry. The regulator claims that Calleja told investors their principal was insured and they would get a fixed return rate in a year. Meantime, he allegedly used at least $12K of their funds to pay for cruises, golf outings, and other personal expenses. He also purportedly failed to tell investors that his broker license had been revoked.

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Broker-Dealer Owner and His Firm Settle SEC Case Alleging Overconcentration of Investor Money In Illiquid Investments

Jason Vanclef and his brokerage firm VFG Securities Inc. have settled the Financial Industry Regulatory Authority’s case accusing them of not adequately supervising their brokers so that clients’ portfolios did not end up concentrated in illiquid investments. Vanclef and VFG Securities, however, are not denying or admitting to the claims made in the complaint.

According to FINRA, from 11/2010 to 6/2012, nearly 95% of the broker-dealer’s revenue came from direct participation programs (DPP) and nontraded real estate investment trusts (nontraded REIT) sales. The illiquid investments were sold retail customers.

FINRA claimed that Vanclef had used “The Wealth Code,” which was the book that he authored, as a sales tool to promote investing in DPPs and nontraded REITs and to attract potential investors. The settlement with the regulator notes that in the book Vanclef repeatedly touted both types of illiquid investments as offering capital preservation and better returns—claims that FINRA said are “inaccurate and misleading” and conflict with information that the firm offered in prospectuses for the nontraded REITs and DPPs.

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The Financial Industry Regulatory Authority says that Oppenheimer & Co. (OPY) must pay $3.4M in sanctions. According to the regulator, for eight years the firm was about four years late when submitting 365 filings about disciplinary actions that it brought against its brokers and in arbitration and litigation settlements. FINRA is also accusing Oppenheimer of not giving seven claimants the documentation they needed in their arbitration against Mark Hotton, an ex-registered representative, and of overcharging 825 customers more than $1M collectively for mutual fund shares over a six-year period.

The self-regulatory organization claims that the late filings to FINRA took place between 2008 and 2016 and that Oppenheimer failed to provide claimants the documentation related to the Mark Hotton allegations between 2010 and 2013. The failure to apply the appropriate fee waiver discount for mutual fund shares purportedly occurred between 2009 and 2015.

Already, Oppenheimer has paid over $6M to settle customer disputes alleging inadequate supervision of Hotton and another $1.25M to 22 customers who did not file arbitration cases but suffered losses, too. Oppenheimer also was ordered to pay a $2.5M fine to FINRA last year over the Hotton claims. The former broker, whom FINRA permanently barred from the securities industry three years ago, was sentenced sentenced to 11 years in prison for stealing client monies and excessively trading their brokerage accounts.

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Ex-Newbridge Securities Broker Involved in $131M Fraud Pleads Guilty 
Gerald Cocuzzo, has pleaded guilty to securities fraud related to his involvement in a $131M market manipulation scam involving Forcefield Energy Inc. (FNRG). According to the U.S. Justice Department, between 1/2009 and 4/2015, Cocuzzo and others sought to bilk investors in the publicly traded company that globally distributes and provides LED lighting products. They did this by artificially manipulating the volume and price of the shares that were traded.

Meantime, Cocuzzo received kickbacks for buying Forcefield stock in his clients’ brokerage accounts. He did not tell the customers that he was receiving these payments. Instead, he and several others sought to hide their involvement.

Newbridge Securities fired Cocuzzo earlier this year following the federal indictment. Before working at Newbridge, he was registered with IAA Financial, previously called CBG Financial Group Inc.

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Investment Adviser Who Bilked Pro Athletes Gets CFP Board Suspension
The Certified Financial Planner Board of Standards has issued a temporary suspension against Ash Narayan. The California-based investment adviser is accused of bilking professional athletes of millions of dollars.

Narayan was recently named in a Securities and Exchange Commission complaint. In June, the regulator accused him of misrepresenting his professional qualifications and misappropriating client monies when he allegedly siphoned funds from investors’ accounts and invested the money in Ticket Reserve, a flailing online sports and entertainment ticket business.

Narayan is accused of moving  $33M of investor funds to the company and did not tell the athletes that he was a member of Ticket Reserve’s board, owned stock in the company, and was paid a $2M in finder’s fees for making the investments. The CFP Board called the investments “unsuitable” and not in line with clients’ objectives. The board also noted that some of the investments were made without client consent or knowledge.

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Secretary of State William Galvin is accusing Texas-based brokerage firm Investment Professionals of selling investment products to elderly customers even though the investments were not suitable for them. The San Antonio broker-dealer allegedly ran high-pressure sales contests at several partner community banks in the New England state between 2013 and 2016. Galvin said that the purported “sales gimmicks” were  “unacceptable” and that his office would not tolerate them.

The Texas-based brokerage firm allegedly prioritized sales volume over whether or not the investments they were selling were suitable for the older customers. The customers had accounts at the local Massachusetts banks. For example, one bank customer, who was suffering from terminal cancer, saw so many of her assets placed in a variable annuity that she could not access her savings.

Galvin charged that these sales contests were not in alignment with Investment Professionals’ own procedures and policies and his office accused the firm of inadequate supervision, in particular of the Texas broker-dealer’s representatives who worked out of the Massachusetts banks. He noted that sales contests are “contrary to investor protections.”

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