April 12, 2014

FINRA Doesn’t Want Oversight Over Financial Advisers, Says CEO Ketchum

According to Financial Industry Regulatory Authority CEO Richard G. Ketchum, the regulator no longer wants to be given oversight over financial advisers. Speaking to The Wall Street Journal, Ketchum said the self-regulatory agency had done all it could to be granted authority over investment advisers and has decided to stop with additional attempts.

FINRA currently oversees brokers. Meantime, the Securities and Exchange Commission and the states oversee registered investment advisers. The SEC had been exploring having FINRA or another agency police RIAs instead. However, the majority of investment advisers were against such a move because of the way FINRA handles enforcement. They don’t think the regulator understands the way investment advisers operated.

Ketchum is now saying that Congress should give the SEC the resources it needs to enhance its examination program of advisers. The Commission has been asking for more money because it can only afford to examine investment advisor firms about once a decade, which isn’t much oversight at all.

Ketchum also said that he approves of the way investment advisers, like brokers, must now uphold fiduciary standards that mandate that they always act in the best interests of a client. However, it is only brokers who need to ensure that the investment strategies and products they recommend are suitable for a customer.

Meantime, reports InvestmentNews, a five-year bull market is causing advisers to experience the highest levels of compensation and assets under management in seven years. A study just released by Fidelity Investments reports that in the last year approximately 95% of advisers saw their business grow. Also, average compensation was at about $24,000 and average assets under management was at around $60 million. However, many advisory firms are finding it hard to draw in young clients, which could slow long-term growth.

Our securities lawyers represent investors that have lost money because of investment adviser fraud and other forms of financial fraud. Contact Shepherd Smith Edwards and Kantas, LTD LLP today.

Financial Industry Regulatory Authority

Finra Backs Off From Expanding Oversight, The Wall Street Journal, April 10, 2014

Advisers' business booming, but dark clouds looming, Investment News, April 10, 2014

More Blog Posts:
SEC Says Investment Advisors Can Publish Third-Party Endorsements Online, Stockbroker Fraud Blog, April 1, 2014

SEC Reveals Plans to Examine Never-Before-Inspected RIAs, Stockbroker Fraud Blog, February 24, 2014

SEC Sanctions Three Investment Advisory Firms for Custody Rule Violations, Institutional Investor Securities Blog, October 30, 2014

April 11, 2014

Large Hedge Funds Invested in Puerto Rico Bonds

According to The Wall Street Journal, a number of large hedge funds and other nontraditional buyers got involved in Puerto Rico debt last month during the US Territory’s $3.5B bond sale, buying up to 70% of the deal. Brigade Capital Management, Och-Ziff Capital Management (OZM) LLC, Perry Capital LLC, Paulson & Co., and Fir Tree Partners were among those to purchase over $100M of the bonds. Black Rock Inc. (BLK), which is also a hedge fund, bought in as well. However, the list doesn’t indicate whether the firms still hold the bonds or if they have sold them since. (The Municipal Securities Rulemaking says that investors originally holding the bonds have already sold about $1.7 billion of the bond since it was issued.)

Some of the other buyers that bought into the Puerto Rico bond sale in March were Harvard University, OppenheimerFunds (OPY), a unit of Gannet Co., and a number of banks, insurers, and retail investors. (Also, many investors may not be aware of this but as of the end of last year, David Lerner Associates, the privately held broker-dealer that was the exclusive distributor of the troubled Apple non-traded REITs had invested in a big way in Puerto Rico debt via its Spirit of America Hi Yield Fund.)

Since the bond sale, underwritten by Morgan Stanley (MS), Barclays (BARC), and RBC Capital Markets (RBC), the prices of Puerto Rico bonds have dropped. Prior to the sale the major credit rating agencies had downgraded the bonds to junk status, and many investors who bought into Puerto Rico municipal bonds through firms such as UBS (UBS), Banco Santander (SAN), Banco Popular, and other brokerage firms, were already filing securities fraud claims over their investment losses.

Puerto Rico is burdened with over $70 billion in debt and its economy and population are both shrinking considerably. Now, there are reports that the finance arm of Puerto Rico has retained restructuring lawyers and consultants for possible restructuring, which could result in more bondholder losses. The news of the hiring alone caused the price of the bonds to drop further.

Puerto Rico Bond Lawyers
Please contact our Puerto Rico bond fraud attorneys if you sustained losses in either Puerto Rican bonds or bond funds with Puerto Rican bonds. Already, many investors in Puerto Rico and all around the U.S. have filed complaints contending that the investment recommendations violated regulations and laws.

Shepherd Smith Edwards and Kantas, LTD LLP represents investors in Puerto Rico, the US, and internationally to recoup their securities fraud losses. Contact us today and ask for your free case assessment.

Big Hedge Funds Roll Dice on Puerto Rico Debt, The Wall Street Journal, April 9, 2014

Puerto Rico Lures Hedge Funds for Record Junk Deal: Muni Credit, Bloomberg, March 12, 2014

More Blog Posts:
Puerto Rico Bonds Are at Record Low Prices After FINRA Announces It Is Looking At Transactions, Stockbroker Fraud Blog, March 27, 2014

SEC Says At Least 200 Private-Equity Firms Have Imposed Bogus Fees, Institutional Investor Securities Blog, April 9, 2014

Securities Fraud Lawsuit Seeks to Recover $49M From 96 Independent Broker-Dealers Liable Over Sales of Tenant-In-Common Exchanges, Stockbroker Fraud Blog, December 15, 2010

April 9, 2014

SEC Files Charges Over Securities Fraud Scams that Used YouTube, Facebook, Twitter, & Other Social Media

The US Securities and Exchange Commission has filed securities fraud charges against Joseph Signore, Paul L. Schumack II, and their respective companies for their Florida-based Ponzi scam that purportedly used YouTube videos to target hundreds of US investors to get them to invest in virtual concierge machines that were supposed to garner 300-500% returns in four years. The two companies are T.B.T.I. Inc. and JCS Enterprises Inc.

According to the SEC, the two men and their companies falsely promised investors that their money would go toward the purchase of these ATM-like machines, which businesses would then use to promote services and products via touch screen, coupons, or printable tickets. The machines were to be placed at airports, hotels, and stadiums.

Instead, contends the regulator, Schumack, Signore, and their companies used investors' funds in Ponzi scam-fashion, taking new investors money to pay the “returns” of earlier investors and paying for their personal expenses (including credit card bills, restaurants, unrelated business ventures, and family spending).

The men and their companies raised about $40 million in their scam, which they also marketed via e-mail and during investor seminars. The Ponzi scheme failed when investor money ran out.

Meantime, the U.S. Attorney’s Office for the Southern District of Florida has filed a parallel action announcing criminal charges.

Prosecutors are calling the scam an alleged $70 million investment fraud. Investors who put in $3,500 were supposedly guaranteed $300/month over three years from advertising revenue sold on the machines.

Also this month, the SEC is suing a Honolulu woman for pretending to be an expert in hedge funds investments and pursuing investors via Facebook, Twitter, and other forms of social media. Keiko Kawamura allegedly ran two separate scams. She purportedly was able to collect about $700,000 money from subscribers and investors of her self-described hedge fund.

In one investment scheme, Kawamura allegedly published screenshots on Twitter of brokerage account statements showing amazing returns—only the account statements did not belong to her. In a second alleged securities scam, Kawamura bragged about her “professional experience,” and made claims that she made 800% returns in her personal account.

Kawamura is accused of using the money she collected to pay for expensive trips and support herself. She did invest some of the funds, which the SEC says she lost by investing the money in risky options trades.

Social Media and Securities Scam
Unfortunately, with investors turning more and more to the Internet and social media for information about investing and investments, this can make them easy and accessible targets for fraudsters. Online, scammers are able to reach lots of people at low cost while using simple technology to make themselves appear legitimate.

If you think you were the victim of an investment scam, contact our securities fraud lawyers today.

The SEC Order Against Kawamura (PDF)

Investor Alert: Social Media and Investing - Avoiding Fraud, Investor.gov

Read the SEC Order in the Ponzi Scam (PDF)

More Blog Posts:
$550M Securities Fraud Case Between Texas’ Wyly Brothers & SEC Goes to Trial, Stockbroker Fraud Blog, April 2, 2014

PNC Bank Sues Morgan Stanley & Ex-Trust Adviser For “Surreptitious Conspiracy”, Institutional Investor Securities Blog, April 3, 2014

SEC Says Investment Advisors Can Publish Third-Party Endorsements Online, Stockbroker Fraud Blog, April 1, 2014

April 2, 2014

$550M Securities Fraud Case Between Texas’ Wyly Brothers & SEC Goes to Trial

The civil trial is underway between the Securities and Exchange Commission and brothers Sam and Charles Wyly (The latter is deceased after he died in a car crash in 2011). The regulator is accusing the Texas siblings of using offshore trusts to hide over $750M of stock sales in companies in which they are board members and engaging in a $550M securities fraud.

In its Texas securities case, the SEC claims that between 1992 and 2004 the Wylys concealed stock trading in Sterling Software Inc., Sterling Commerce. Inc., Michaels Stores Inc., and Scottish Annuity & Life Holdings Ltd. by using entities and offshore trusts. The brothers also are accused of making $31.7 million in insider trading profits involving Sterling Software after the company was sold in 1999.

At issue is whether the Wylys were in control of the offshore trusts and if so then they may have also violated US tax laws. That said, the statute of limitations for charges involving tax evasion is six years.

The brothers denied any wrongdoing. They claim they weren't the beneficial owners of the stock in the trust. They said their lawyer told them that they did not need to reveal the sales and holdings of the trusts and they were given no indication that their activities were illegal.

Last month, ex-Wyly lawyer Michael French settled with the SEC by admitting to helping the two brothers in their alleged breach of securities disclosure rules. French will pay close to $795,000 and is serving as a witness for the agency in their cases against the brothers. Signing an admission of facts, French acknowledged that he “acted intentionally or recklessly” in relation to the violations described. The SEC is also accusing him of using his positions to establish and trade in offshore entities of his own. Also reaching a settlement related to the SEC case is Louis Schaufele, a former stockbroker for the Wylys.

The Texas securities case has been going on for so many years that the law under the SEC has changed. Last year, the US Supreme Court ruled that the regulator could no longer go after civil penalties for most of the time period under dispute. Because of this, the case is now in two parts.

A jury will rule over one part—regarding the Wylys' alleged failure to disclose the trust and trading in them—and a judge will decide on the insider trading allegations and whether the jury verdict merits a penalty.

This is the second securities case between Sam and the SEC. In 1979 he settled allegations involving undisclosed payments to encourage Wyly Corp. bond purchases. In this latest securities case, the regulator intends to pursue hundreds of millions of dollars in disgorgement of purportedly ill-gotten gains and penalties.

Our Texas securities lawyers represent investors that have sustained losses because of fraud. Please contact Shepherd Smith Edwards and Kantas, LTD LLP today.

Civil Trial to Start of Wyly Brothers in SEC Tax-Haven Case, The Wall Street Journal, March 30, 2014

Wyly brothers' ex-lawyer settles SEC fraud case, admits errors, Reuters, March 20, 2014

More Blog Posts:
Mixed Securities Verdict Reached in SEC Case Against Texas-Based Life Partners Holdings, Stockbroker Fraud Blog, February 19, 2014

In Alleged $400M Texas Securities Fraud Medical Device Maker Pays Over $30M Settlement, Stockbroker Fraud Blog, January 13, 2014

FBI Probes Possible High-Speed Trading, Insider Trading Link, Institutional Investor Securities Blog, April 1, 2014

April 1, 2014

SEC Says Investment Advisors Can Publish Third-Party Endorsements Online

The Securities and Exchange Commission says that investment advisers are allowed to publish comments from the public about their services on an independent social media website but that they must include both negative and positive reviews in unedited form. Also, the adviser must not have any affiliation with the site or the ability to influence it. The SEC made the announcement this week in a guidance update.

SEC rules typically don’t allow “testimonials.” The guidance, however, now says that Commission-registered advisers can direct potential clients to the reviews as long as certain conditions are met. The changes are in part because of the rapidly evolving social media market and the fact that this area is becoming a primary way that businesses communicate with prospective customers.

The regulator said that client reviews could only appear on review sites or independent social media. This means, for example, that they cannot be published on an adviser Facebook page. Also, an adviser cannot promise a customer anything in return for favorable reviews and employees are not allowed to write these testimonials.

Advisers cannot use client endorsements as part of their advertising materials. They can, however, publish these testimonials from an independent review site in a way that is “content-neutral,” such as alphabetically or chronologically.

Investment advisers that want to use Facebook, Twitter, or LinkedIn as part of their business will likely feel relief about the new guidance. The SEC’s guidance says that even a “fan” page of the adviser set up by an independent party would not be a violation of the testimonial rule. The regulator, however, warned against investment advisers including a hyperlink to the third party site on its own web pages.

Our investment adviser fraud law firm is here to help investors recoup their securities fraud losses.


More Blog Posts:
Puerto Rico Bonds Are at Record Low Prices After FINRA Announces It Is Looking At Transactions, Stockbroker Fraud Blog, March 27, 2014

SEC To Examine Exchange Traded-Fund Regulation Again
, Stockbroker Fraud Blog, March 22, 2014

FBI Probes Possible High-Speed Trading, Insider Trading Link
, Institutional Investor Securities Blog, April 1, 2014

March 31, 2014

Bank of America, Its Ex-CEO To Pay $25M to Settle Securities Case with NY Over Merrill Lynch Deal

Bank of America Corp. (BAC) and its ex-CEO Kenneth Lewis have consented to pay $25 million to settle the remaining big securities fraud case accusing them of misleading investors about the financial state of Merrill Lynch & Co. during the 2008 financial crisis. The New York securities case accuses the bank of deceiving shareholders by not disclosing Merrill’s increasing losses before the acquisition deal was closed or letting them know that the deal let Merrill give its officials billions of dollars in awards.

As part of the settlement, the bank will pay the state of New York $15 million and it will enhance its oversight. Lewis, meantime, has consented to pay $10 million and he cannot work at or serve as a director of any public company for three years.

Also named as a defendant in the securities lawsuit but who refused to settle is ex-Bank of America CFO Joe Price. NY Attorney General Eric Schneiderman intends to pursue a summary judgment against him, as well as ask a judge to reach a decision without a trial. Schneiderman reportedly wants Price permanently banned from serving as a director or working at a public company.

Previously, Lewis and other Bank of America directors agreed to pay $20 million to settle a securities fraud lawsuit by investors accusing them of not disclosing needed data about Merrill before the takeover was approved. In 2012, the bank consented to pay $2.43 billion to resolve a class-action securities case with investors accusing the institution and its officers of making misleading and false statements about Merrill’s financial health. Just two year before that Bank of America agreed to pay $150 million to settle with the SEC over charges that it did not disclose material data about Merrill.

Bank of America acquired Merrill in a $50 billion deal in September 2008, which is when Lehman Brothers Holdings went into bankruptcy. While the deal was at first considered good news, especially as the rest of Wall Street appeared to be in so much trouble, analysts started to wonder if Lewis paid too much. There was also Merrill’s losses right before the acquisition was finalized.

Because of investors’ fears about the financial crisis, share prices of Bank of America dropped significantly, causing the value of the deal to drop to about $19 billion by the time it actually was finalized in January 2009. Securities fraud lawsuits then followed.

Bank of America’s decisions to purchase Merrill and Countrywide Financial Corp. have since compelled it to put aside over $42 billion to cover lawsuit costs, reserves, and payouts. Many of the securities cases contend that Countrywide, once one of the biggest subprime mortgage lenders, sold faulty mortgage securities to investors leading up to the 2008 economic crisis.

In October, a jury found Bank of America liable for securities fraud over the mortgages that Countrywide originated as home loans that in then sold to Freddie Mac and Fannie Mae.

Please contact our stockbroker fraud lawyers if you suspect your investment losses are because of financial fraud.

Lewis, BofA Reach $25 Million Pact With N.Y. Over Merrill, Bloomberg, March 26, 2014

Bank of America to pay $2.43B in settlement, Yahoo, September 28, 2012

Bank of America liable for Countrywide mortgage fraud, Reuters, October 23, 2008

More Blog Posts:
$500M MBS Settlement Reached Between Countrywide and Investors, Stockbroker Fraud Blog, May 10, 2013

Dismissal of Double Derivative Delaware Securities Lawsuits Over The Bank of America-Merrill Lynch Merger is Affirmed by the Second Circuit, Stockbroker Fraud Blog, December 22, 2012

Bank of America Settles Mortgage Bond Claims with FHFA for $9.3B, Institutional Investor Securities Blog, March 29, 2014

March 27, 2014

Puerto Rico Bonds Are at Record Low Prices After FINRA Announces It Is Looking At Transactions

According to Bloomberg, Puerto Rico bonds that were issued this month are now at record low prices after the Financial Industry Regulatory Authority announced that it is looking at transactions involving the new securities. The US territory sold $3.5 billion of general obligation bonds, which is the largest junk bond offering in the history of the municipal market.

According to numerous financial news sources, the offering documents for Puerto Rico’s newly issued bonds stated there would be a $100,000 minimum order allowed so that the purchasers of the junk bonds would be limited largely to institutional buyers. Their prospectus says that bonds were to be issued at a $100,000 minimum and “integral multiples of $500,000 in excess thereof” unless Standard & Poor’s, Moody’s Investors Services, and Fitch Ratings raise Puerto Rico’s credit to investment grade. All three credit ratings agencies recently declared the US territory’s credit ratings “junk.”

Nevertheless, many transactions under the $100,000 amount have been reported, despite the lack of an upgrade in the bonds. As a result, scores of Puerto Rico bond transactions issued this month were cancelled. There is also data indicating that some brokers are trading under the $1,000 minimum established by the prospectus.

Additionally, BondBuyer.com is reporting that not only were there deals that violated the $100,000 minimum denomination requirement cancelled but they have been modified as if they never happened and/or were removed from EMMA, which is the Electronic Municipal Market Access system. This, say some, is a failure to make sure that retail investors and the public are being provided with transparency that they are owed. BondBuyer.com noted that as of the end of March 24, just 15 of the 70 illegal Puerto Rico bond trades that it discovered were still there.

While Puerto Rico municipal bonds have been popular with some investors because of the favored tax status they receive, they have sustained huge losses in the last six months. Puerto Rico is now more than $70 million in debt and continues to be on negative credit watch. Nevertheless, Puerto Rican brokerage firms, such as Santander Securities, Popular Securities, UBS (UBS) and Merrill Lynch (MER), as well as many US based brokerage firms, have heavily pushed Puerto Rican debt.

If you invested in Puerto Rico bonds and you sustained losses, you may have grounds for a Puerto Rico muni bond fraud case. Contact Shepherd Smith Edwards and Kantas, LDT LLP today.

Scores of Puerto Rico Trades Sub-$100,000 Voided by Dealers, Bloomberg, March 26, 2014

Problem Puerto Rico Bond Trades Erased, Survey Shows More Troubled Sales, The Bond Buyer, March 25, 2014

Finra Examining Trading in Puerto Rico Bonds, The Wall Street Journal, March 21, 2014

Electronic Municipal Market Access (EMMA), Municipal Securities Rulemaking Board

More Blog Posts:
Puerto Rico Senate Votes to Sell $3.5B in Bonds, Stockbroker Fraud Blog, February 28, 2014

Hedge Funds Interested in Upcoming Puerto Rico Bond Offering Want The Territory to Borrow Money To Last Two Years, Stockbroker Fraud Blog, February 17, 2014

Hedge Funds Are Moving in on Municipal Debt, Including Puerto Rico Debt, Institutional Investor Securities Blog, November 15, 2013

March 26, 2014

Madoff Ponzi Scam: Five Ex-Aides Convicted of Securities Fraud, Victims to Recover $349 Million

In a new round of payments by Bernard L. Madoff Investment Securities LLC trustee Irving Picard, victims of the $17 billion Madoff Ponzi Scam are slated to receive around $349 million. The US Bankruptcy Court in New York must still approve the distribution, which would bring total payouts to $6 billion—34% of the principal lost.

A hearing for the distributions is scheduled in April. Payouts by Picard include up to $500,000 in advances each to victims that were made by the Securities Investor Protection Corp. Picard said that he hope to give victims full reimbursements.

One way he is doing this is by pursuing claims of approximately $3.5 billion from HSBC Holdings PlC (HSBA), UBS AG (UBS) and UniCredit SpA (UCG), which allegedly benefited from the multibillion-dollar Ponzi scam. In January, JPMorgan Chase & Co. (JPM) arrived at $325 million accord with Picard over allegations that the bank was negligent in not identifying the fraud and made money money from Madoff’s scam. Picard was able to recover $10 billion—59% of the principals lost by thousands of Madoff customers. The financial firm also consented to pay another $218 million to settle two related class actions filed with the help of Picard.

Madoff is currently serving a 150-year prison term over his Ponzi scam after he pleaded guilty to securities fraud. At least seven other people, including his brother Peter Madoff, also pleaded guilty to their involvement.

On Monday, a jury convicted 5 ex-Madoff employees of 31 counts of aiding his Ponzi scam. The defendants had argued that their ex-employer was the only one who knew what was really going on and that they had trusted in his honesty.

The government accused portfolio managers Annette Bongiorno and JoAnn Crupi and former operations director Daniel Bonventre of conspiring and lying to customers, falsifying records, and cheating on taxes while they worked at Bernard L. Madoff Investment Securities. Allegations against computer programmers George Perez and Jerome O’Hara included claims that they helped keep the Ponzi scam afloat by designing computer programs that would generate bogus records and trades.

Please contact our securities fraud lawyers if you suspect you were the victim of a Ponzi scam and sustained financial losses.

Jury Says 5 Madoff Employees Knowingly Aided Swindle of Clients’ Billions, NY Times, March 24, 2014

Madoff Victims Set to Get $349 Million From Trustee, Boosting Total to $6 Billion, Bloomberg, March 25, 2014

More Blog Posts:

Madoff Ponzi Scam Victims Win Right to Appeal for Interest, Stockbroker Fraud Blog, January 24, 2014
Madoff Victims May Have Numerous Sources of Recovery Says Secrurites Fraud Attorney, Stockbroker Fraud Blog, December 15, 2008

US Supreme Court Hears Oral Argument on the Impact of SLUSA on the Stanford Ponzi Scams, Institutional Investor Securities Blog, October 17, 2013

March 25, 2014

LPL Financial Fined $950K by FINRA for Supervisory Failures Involving Alternative Investments

FINRA says that LPL Financial, LLC must pay a fine of $950,000 for supervisory deficiencies involving the sale of alternative investment products, such as oil and gas partnerships, non-traded real estate investment trusts, managed futures, hedge funds, and other illiquid pass-through investments. By settling, the independent broker-dealer is not denying or admitting to the FINRA charges. LPL however, has agreed to an entry of the self-regulatory agency’s findings.

A lot of alternative investments establish concentration limits and certain states have even stipulated their own concentration limits for alternative investment investors. LPL also has set its own limits.

According to FINRA, however, from 1/1/08 to 7/1/12 LPL did not properly supervise the sale of alternative investments that violated of concentration limits. The SRO contends that even though initially LPL employed a manual system to assess if an investment was in compliance with requirements for suitability, the brokerage firm sometimes relied on inaccurate and dated data. Later, when LPL put into place a system that was automated to conduct the reviews, the system was purportedly not updated to make sure current suitability standards were correctly reflected and the programming in the database was flawed.

FINRA EVP and Enforcement Chief Brad Bennett said that because LPL did not have a proper supervisory system set up that could correctly and accurately evaluate if a transaction was in accordance to the necessary suitability requirements, the broker-dealer exposed customers to risks that were not acceptable. FINRA is also accused the firm of not properly training its representatives on how to properly follow suitability guidelines.

Meantime, an LPL broker that sold REITs to customers who was at the center of FINRA’s securities case against the firm has been fired. LPL has reportedly improved its supervisory procedures and policies.

Our inadequate supervision securities lawyers work with investors to get back their securities fraud losses. Contact Shepherd Smith Edwards and Kantas, LTD LLP today.

Regulator fines LPL Financial $950,000 over sale of alternatives, Reuters, March 24, 2014

FINRA Fines LPL Financial LLC $950,000 for Supervisory Failures Related to Sales of Alternative Investments, FINRA, march 24, 2014

Read the FINRA action (PDF)

More Blog Posts:
FINRA Bars Ex-LPL Broker Over Nontraded REIT Sales, Stockbroker Fraud Blog, December 27, 2013

LPL Financial Ordered to Pay $7.5M FINRA Fine Over E-Mail Failures, Institutional Investor Securities Blog, May 22, 2013

LPL Financial Continues to Stay On Regulators’ Radar, Stockbroker Fraud Blog, April 10, 2013

March 24, 2014

Securities America Under Investigation by Pennsylvania in Nontraded REIT Probe

The Pennsylvania Department of Banking and Securities is looking into the sales of nontraded real estate investment trusts by Securities America employees. Ladenburg Thalmann & Co. Inc., which owns the broker-dealer and two other independent brokerage firms, said in its yearly report that the state regulator wants the brokerage firm to provide data about nontraded REITs that Pennsylvania residents have been buying since 2007. The request was made in October.

According to InvestmentNews, it is not known at this time if Pennsylvania regulators are just looking at nontraded-REIT sales at Securities America or the investigation extends to other firms. It was just last year that Securities America, along with other independent brokerage firms, settled with the Massachusetts Securities Division over nontraded REIT sales.

Securities America paid $8.4 million in restitution to clients in that state along with a $150,000 fine. According to that probe, firms had difficulties abiding by their own policies as well as to the Massachusetts rule that an investor’s purchase of REITs cannot go beyond his/her liquid net worth.

Each state has its own rules about how many alternative investments brokers can sell to clients. Often, the net worth of an investor impacts this amount.

In an Investor Alert, the Financial Industry Regulatory Authority outlined the risks involved in investing in a non-traded REIT:

• Distributions are not a guarantee and can be impacted by numerous factors.

• There are tax consequences to REIT status and distributions. Distributions for REITS that are from accumulated profits and earnings are taxed as if they are ordinary income. The rate could be up to 20% if you are in the highest tax bracket.

• Non-traded REITs are typically illiquid and come with valuation complexities.

• Early redemption can be costly and is frequently restrictive.

• Fees may accrue, adding to the expenses associated with non-traded REITS. For example, front-end fees alone can take the form of selling compensation and costs, as well as organizational and offering costs.

• Properties are frequently unspecified, which means many non-traded REITS begin as blind pools.

• Non-traded REITS can offer limited diversification.

• The real estate risks are real.

If you are considering investing in non-traded REITs, FINRA says that you should know about and understand what you are getting involved in. Find out what kind of fees your financial representative or his/her firm will be paid in commissions and fees. Make sure that this type of security is suitable for your portfolio and you can handle the degree of risk involved. Will this investment help you meet your long-term investment goals? You want to work with a brokerage firm and financial representative that know what they are doing.

Unfortunately, there are investors who have been persuaded to invest in non-traded REITS but were not apprised of the risks, conditions, or costs involved. If you believe that you were misled by a brokerage firm into getting involved in these investments and you have sustained losses because of it, contact Shepherd Smith Edwards and Kantas, LTD LLP. One of our non-traded REIT fraud lawyers would be happy to offer you a free case assessment.

Securities America focus of second state nontraded-REIT inquiry, Investment News, March 19, 2014

Public Non-Traded REITs—Perform a Careful Review Before Investing

More Blog Posts:
FINRA Bars Ex-LPL Broker Over Nontraded REIT Sales, Stockbroker Fraud Blog, December 27, 2013

Securities America, Ameriprise, Among Independent Broker-Dealers Charged $10.75M by Massachusetts for Nontraded REIT Sales, September 4, 2013

FINRA Plan May Dramatically Change The Way Brokerage Firms Report On Nontraded REITS & Other Illiquid Investments on Client Statements, Institutional Investor Securities Blog, April 28, 2013

March 22, 2014

SEC To Examine Exchange Traded-Fund Regulation Again

The Securities and Exchange Commission is getting ready to revisit a 2008 rule proposal about exchange-traded funds. In the wake of new issues that have cropped up since then, changes to the original proposal are likely.

Speaking at the Investment Company Institute’s Mutual Fund and Investment Management Conference this week, SEC’s Division of Investment Management associate director Diane Blizzard said that a revised rule would likely address the differences between index and active funds, transparency of underlying and direct instruments, inverse leverage, and creative flexibility within the funds.

Currently, there is no specific timeline for a revised proposal roll out. Since no rule is in place at the moment, the Division of Investment Management is in charge of making individual choices about whether to approve new exchange-traded funds. This SEC division is also looking at enhancing disclosure requirements related to variable annuities, including whether senior investors and those seeking to build their retirement funds are being properly and thoroughly notified of the benefits, complexities and costs.

In other ETF news, Financial Advisor is reporting that the number of hedge fund managers getting involved in this investment space is growing. Although ETF investments can grow the managers’ investor roster, they also may compel the firms to cut their investment management fees. Created as a “passive index-tracking investment,” ETFs are more actively handled and employ short selling, arbitrage, and other alternative strategies. They can be traded like common stuck, which makes exchange-traded fund more accessible and easier to market than actively managed mutual funds. Currently, the SEC is looking at a rule that would let ETF managers reveal their holdings less often than they have to now, which is daily.

Also, US asset managers are using ETFs to make their way into China’s stock market. These funds invest in equities that are listed in that country. The ETFs offer investors in the US the opportunity to get into China’s A–shares, which are the renminbi-denominated shares of companies that were incorporated in China. The shares are traded on the Shenzen and Shanghai exchanges. Before, ETFs involved in the A-shares market could only do so via futures contracts, swaps, and other derivatives.

If you are going to invest in an ETF it is important that you know the risks, benefits, and fees involved. You should also have an understanding of its prospectus, which offers information about the instrument’s goal, main investing strategies, costs, risks, and past performance history.

Investing in Exchange-Traded Funds
Consider whether the ETFs goals are in line with your own objectives and long-term plans. You also want to think about if you can handle the risks should the become reality. How much you have to pay in commissions to a brokerage firm is also important because this will cost you when selling and buying ETF shares. It is also essential that you find out what the other costs are in owning an ETF and explore whether other investments are better suited for you.

If you have sustained ETF fraud losses because of the negligence, wrongdoing, or inexperience of a broker or another financial adviser, please contact our ETF investment fraud law firm today.

Exchange-Traded Funds, Investor Bulletin (PDF)

U.S. exchange-traded funds open up China's market, Reuters, March 19, 2014

Hedge Funds Entering ETF Space To Lure More Investors, Financial Advisor, March 20, 2014

More Blog Posts:
Stifel, Nicolaus & Century Securities Must Pay More than $1M Over Inverse and Leveraged ETF Sales, Stockbroker Fraud Blog, January 14, 2014

New Hampshire Investment Adviser Focus Capital Wealth Management Accused of Elder Financial Fraud to Pay Exchange Traded Fund Victims $2.4M, Stockbroker Fraud Blog, March 14, 2013

SEC Charges Filed Against Stifel, Nicolaus & Co. and Former Sr. VP David Noack Over CDO Sales to Wisconsin School Districts, Institutional Investor Securities Blog, August 11, 2013

March 20, 2014

SEC Fraud Charges Filed in $1.9M Microcap Stock Scalping Scam

The Securities and Exchange Commission has filed securities fraud charges against the promoter behind affiliated microcap stock promotion websites. The regulator us accusing John Babikian of using PennyStocksUniverse.com and AwesomePennyStocks.com to engage in “scalping” which is a type of securities fraud. The SEC has also obtained an emergency asset freeze.

According to the Commission, the websites, knowing collectively as “ABS,” sent out e-mails to about 700,000 people on February 23, 2012 and recommended that they invest in America West Resources Inc. (AWSRQ), which is a penny stock. However, the e-mails did not disclose that Babikian was the holder of over 1.4 million of the stock shares, which he had positioned and was going to sell right away via a Swiss bank.

Because of the emails, there was a huge increase in the share price of America West’s stock and trading value. Babikian used this to get rid of the stock during the last 90 minutes of the trading day and raked in over $1.9M.

Over 7.8 million in shares of America West stock were traded that day as the share price hit a record high. Prior to that the stock was thinly traded and low priced. The SEC says that without the emails, Babikian would have only been able to sell over a few thousands shares and at a much lower price.

Scalping is when a financial adviser or stockbroker recommends a security to an investor and then sells the security right after to make a profit. The financial gain occurs because so many investors have raised the price with the purchases they made.

If you think you were the victim of securities fraud related to scalping or another type of financial scheme, contact our securities lawyers today.

SEC Obtains Asset Freeze Against Promoter Behind Microcap Stock Scalping Scheme, SEC, March 13, 2014

The SEC Complaint (PDF)