February 3, 2012

FINRA Investor Education Foundation and NFL Player Join Forces To Protect Pro Football Players from Investment Fraud

In an effort to help incoming National Football League members from getting their careers started on solid financial ground, the NFL and the Financial Industry Regulatory Authority Investor Education Foundation are working with each other to help educate players and their families about investment fraud. The joint efforts come in the wake of professional players finding themselves the target of financial scams.

At events held during the East/West Shrine Game in Florida last month, the NFL and FINRA Foundation planed to reach participants through video presentation and other resources regarding:

• Selecting the right financial professionals
• Checking these represenatives' backgrounds
• Becoming educated about debt.

The FINRA Foundation'x Outsmarting Investment Fraud (OIF) curriculum informs players and their parents about the psychological tactics fraudsters have been known to use to get people to make choices based on their emotions rather than logic. This curriculum has been demonstrated to lower susceptibility to financial fraud by up to 50%.

It isn’t just new NFL football players that have been targeted by financial scammers. Earlier this month, a Texas couple pleaded no contest to establishing a bogus international investing firm and bilking ex-NFL player TJ Slaughter and others of hundreds of thousands of dollars. Slaughter, who formerly played for the New England Patriots and other NFL teams, said that he was defrauded of $150,000.

Mary Alice Monteza and Alan Keith Nelson told Slaughter that their company, Castro International, only worked with rich investors and concentrated on high-yield overseas investments. Slaughter says they started avoiding him after he gave them the cash and that he began to suspect that he’d been scammed when they told him five months later that his investment of $150,000 was now worth $7.6 million but refused to give him his initial outlay.

Nelson and Monteza were accused of running a Ponzi scam. The initial charges of securities fraud and three theft counts of theft were reduced to one count of theft after the couple reached a plea deal with prosecutors.

Another ex-NFL player, Kendrell Bell, has said it was his University of Georgia college football coach that bilked him of $2M. The former Kansas City Chiefs and Pittsburgh Steelers linebacker contends that Jim Donnan persuaded him to put his money in liquidation company GLC Limited when in fact the football coach was running a scam.

GLC has since filed for bankruptcy. The company claims that Donnan made improper gains from running an alleged $70 million Ponzi scam.

No one should be targeted for investment fraud—it doesn’t matter if you are a millionaire and the person scams you thinks you can afford it. At Shepherd Smith Edwards and Kantas, LTD, LLP, our stockbroker fraud lawyers represent individual and institutional investors in recovering their losses.

FINRA Foundation and NFL Player Engagement Team Up to Assist Players Avoid Investment Fraud, Make Smart Financial Decisions, FINRA, January 27, 2012

Former NFL player Kendrell Bell says ex-UGA coach duped him, Sports Illustrated, January 27, 2012

Couple admit to scamming football pro, others, My San Antonio, January 9, 2012


More Blog Posts:
FINRA Tells Financial Firms to Heighten Supervision of Complex Products, Stockbroker Fraud Blog, February 2, 2012

SIFMA Wants FINRA to Take Tougher Actions Against Brokers that Don’t Repay Promissory Notes, Institutional Investor Securities Blog, January 17, 2012

Oppenheimer & Co. Must Buyback $6M in Auction-Rate Securities from Investor, Says FINRA Arbitration Panel, Institutional Investor Securities Blog, January 11, 2012

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Posted In: FINRA

Tags: NFL Players

February 2, 2012

FINRA Tells Financial Firms to Heighten Supervision of Complex Products

The Financial Industry Regulatory Authority has put out a formal notice to stockbrokers to let them know that complex financial products must come under the focus of heightened supervision. According to the SRO, a complex product is one with numerous features that can impact its investment returns depending on different scenarios—especially if the average retail investor can’t be expected to easily comprehend what these features are and how they can lead to an investment return.

Examples of complex products:

• Investments linked to the way the markets perform, such as certain exchange-traded products that can expose investors to the volatility of the stock market and products that create leveraged or inverse exposure.

• Products with complicated formulas or limits for calculating investor gains.

• Products that have only partial or conditional principal protections.

• Products with structures that may exhibit significantly different performances than what an investor expected.

• Structured notes that come with “worst off” features and payoffs that can be impacted by a pre-specified group’s worst performance index.

• Products that have contingencies found in losses or gains—especially when multiple mechanisms are involved.

• Products with a hard to comprehend embedded derivative component.

• Asset-backed securities that are secured by a collateral pool, such as consumer credit card payments, mortgages, or future royalties on music.

It is important to note that there are number of products that don’t exhibit these traits but still warrant heightened compliance and supervision because of the risks they present. FINRA says that it is up to financial firms to engage in the enhanced oversight of complex products and ones similar to them or the types of performances they can exhibit.

Brokers should not recommend financial products that they don’t fully understand and are therefore unable to properly explain to someone else. It is also important to make sure that an investor understands the products in which he/she will be investing.

While FINRA isn’t banning complex product, it wants brokerage firms to have written policies in place that would include a customized determination regarding whether a client should be offered them for purchase. Also, those that sell complex products need to be properly trained.

FINRA wants financial firms to establish a proper system of internal controls that allows for the periodic reassessment of complex products so there is current knowledge about their performance and risk profiles, which can affect how they are sold. It also wants broker-dealers to heighten their supervision of how and to whom complex products are sold.

FINRA says that before a complex product is recommended to a retail investors, the right questions should be answered, including:

• Who is the product for?
• How will it be controlled?
• Who shouldn’t the product be offered to?
• What is the product’s investment goal?
• Are their less complex products that can fulfill the same objectives?
• What are the risks involved in investing?
• How will the financial firm and its registered representatives be compensated in exchange for offering the product?
• Are any conflicts of interest involved?
• Is the product liquid?

FINRA wants financial firms to consider developing procedures to oversee how well the product does after they receive approval.

If you’ve suffered financial losses because of a complex product that your investment adviser or broker recommended that was unsuitable for you, you may be able to recoup your money. Contact our stockbroker fraud law firm today.

Read FINRA's Regulatory Notice


More Blog Posts:
FINRA Vows to Step Up Internal Compliance Procedures, Stockbroker Fraud Blog, October 30, 2011

FINRA Cannot Enforce Disciplinary Actions Through the Courts, Says Federal Appeals Court, Stockbroker Fraud Blog, October 6, 2011

FINRA Tells Congress It Is Ready to Act as SRO for Investment Advisors, Stockbroker Fraud Blog, September 13, 2011

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Posted In: FINRA

Tags: Complex products

January 21, 2012

Unsealed Documents in $54.4M FINRA Arbitration Case Reveal that Citigroup Did Not Disclose Municipal Bond Risks to Investors

Last month, a US judge refused Citigroup’s request to overturn a $54.1M arbitration award that a Financial Industry Regulatory Authority arbitration panel had ordered the financial firm to pay investors Gerald D. Hosier, Jerry Murdock Jr. and Brush Creek Capital. The award was the largest amount ever granted to individuals in a securities arbitration proceeding.

Following Citigroup’s request that a United States district court toss out the award, details from what were confidential proceedings have been unsealed. According to the New York Times, documents viewed by the arbitrators show that on a scale of 1 to 5, with 5 signifying the highest risk (usually only assigned to products that potentially carried the risk of an investor losing everything), Citigroup rated these investments as having a 5 rating for risk. Is it no wonder then that investors could and would go on to lose 80% of what they had investments.

The investments, which were municipal arbitrage portfolios, are known as ASTA/MAT. Citigroup Global Markets sold them through MAT Finance LLC.

Per internal e-mails, after the investments began declining in value in early 2008, when Citigroup wealth management head Sallie Krawcheck asked for the MAT’s risk rating,” She was told that it was “3-5.” Also, customers were never told about the 5 rating that their investments were previously given. The Times also reported that during a conference call involving brokers whose clients had sustained losses, the portfolio manager was directed to not discuss internal guidelines, which contained different information than what was in the prospectus that investors had received.

Citigroup eventually would offer to buy back the investments at a discount price but only if investors agreed to not file a securities fraud lawsuit against the financial firm. (Brokers have said they felt pressured by Citigroup to get investors on board with this. For example, a memo with the heading “Fund Rescue Options “noted that if the broker’s client let Citigroup repurchase the instruments, this would not be noted in his/her U-5 regulatory record. If, however, the client chose to sue, then this would appear in the broker’s U-5.)

In their securities fraud case, Claimants accused Citigroup of failure to supervise, fraud, and unsuitability. After the FINRA arbitration panel ordered them to pay the investors, Citigroup argued that panel members had ignored the law and contended that despite verbal statements made to investors, the latter had signed agreements acknowledging that the risk of losing everything was a possibility. Judge Christine Arguello would go on to affirm the FINRA panel’s decision. While the majority of the award was compensation for the claimants’ investment losses, about $17 million was for punitive damages.

Secrets of a Sales Machine, NY Times, January 14, 2012

Citigroup Slammed With $54 Million Award by FINRA Arbitrators in MAT/ASTA Case, Forbes, April 12, 2011


More Blog Posts:
Citigroup Request to Overturn $54.1M Municipal Bond Arbitration Ruling Denied by Judge, Institutional Investor Securities Blog, December 27, 2011

Citigroup Global Markets Settles for $725,000 FINRA Fine Over Failure to Disclose Conflicts of Interest, Stockbroker Fraud Blog, January 20, 2012

Citigroup Global Markets Inc. Sues Two Saudi Investors in an Attempt to Block Their FINRA Arbitration Claim Over $383M in Losses, Stockbroker Fraud Blog, October 22, 2012

Continue reading "Unsealed Documents in $54.4M FINRA Arbitration Case Reveal that Citigroup Did Not Disclose Municipal Bond Risks to Investors " »

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Posted In: Citigroup , FINRA , Financial Firms

January 20, 2012

Citigroup Global Markets Settles for $725,000 FINRA Fine Over Failure to Disclose Conflicts of Interest

FINRA says that Citigroup Global Markets will pay a fine of $725K for not disclosing specific conflicts of interest during public appearances made by research analysts and in research reports. By settling, Citigroup is not denying or admitting to the charges although it has, however, consented to an entry of the findings.

According to the SRO, in research reports published between 1/07 and 3/10, the financial firm did not disclose possible conflicts of interest that existed in certain business connections, including the facts that the financial firm and its affiliates:
• Received revenue or investment banking from certain companies
• Had an at least 1% or more ownership in companies that were covered
• Managed public securities offerings
• Made a market in certain covered companies’ securities

Also, FINRA says that Citigroup research analysts did not reveal these same conflicts when bringing up the covered companies during public appearances.

As a result of these alleged failures to disclose, FINRA contends that Citigroup kept investors from knowing of possible biases in the research recommendations that it made. FINRA says that such disclosures are essential in order to make sure that investors are given all of the information they need when making decisions about investments.

The SRO said that the reason Citigroup did not provide the required information is that the database for identifying and creating disclosures experienced technical difficulties and/or was inaccurate. FINRA also cites a lack of proper supervisory procedures that could have prevented such inaccuracies and disclosure failures. However, Citigroup did self-report a number of the deficiencies and has taken remedial steps to remedy them.

A financial firm can be held liable when failure to disclose key facts about an investment leads to an investor sustaining financial losses. In many instances, such omissions are made to hide or diminish the risk involved in the investment. While some omissions are intentional, others can occur due to inadequate supervision or the lack of proper systems and procedures to make sure such failures to disclose don’t happen.

It is a broker’s obligation to fairly disclose all the risks involved in a potential investment. (Misrepresenting material facts is another way that risks are concealed and investors end up losing money.

It doesn't matter whether malicious intent was involved. If a broker-dealer concealed OR failed to disclose key information related to your investment and you suffered financial losses on your investment, you may have a securities fraud case on your hands that could allow you to recover your losses.


Citi settles with Finra over alleged conflicts at its brokerage, Investment News, January 20, 2012

Finra Fines Citigroup $725,000 For Alleged Research Violations, The Wall Street Journal, January 18, 2012

Financial Industry Regulatory Authority

More Blog Posts:
Citigroup’s $285M Settlement With the SEC Is Turned Down by Judge Rakoff, Stockbroker Fraud Blog, November 28, 2011

Citigroup Global Markets Inc. Sues Two Saudi Investors in an Attempt to Block Their FINRA Arbitration Claim Over $383M in Losses, Stockbroker Fraud Blog, October 22, 2011

Securities Fraud Lawsuit Against Citigroup Involving Mortgage-Related Risk Results in Mixed Ruling, Institutional Investor Securities Blog, November 30, 2010

Continue reading "Citigroup Global Markets Settles for $725,000 FINRA Fine Over Failure to Disclose Conflicts of Interest" »

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Posted In: Citigroup , FINRA , Financial Firms

December 17, 2011

Well Fargo Advisers to Pay $2 Million to Settle Claims that Broker Sold Unsuitable Reverse Convertible Securities to Seniors

To settle Financial Industry Regulatory Authority securities fraud allegations against one of its brokers, Wells Fargo Advisers will pay a $2M fine, as well as repay an unspecified amount to elderly clients that were defrauded. Over 21 senior investors were reportedly targeted by Alfred Chi Chen, who sold them reverse convertible notes even though the majority of them were retired and/or had never invested in this type of complex instrument. A number of investors were in their 80’s and 90’s.

FINRA says that Chen made over $1M in commissions even as the investors sustained losses. He also is accused of not giving discounts on Unit Investment Trust (UIT) transactions even when clients were eligible. As part of its settlement, Wells Fargo will pay restitution to those that should have but did not get the discounts and those that were sold unsuitable investments.

FINRA Executive Vice President and Chief of Enforcement Brad Bennett said that Wells Fargo did not review the reverse convertible transactions to make sure that they were suitable and that investors were harmed as a result. The SRO also determined that Wells Fargo did not give certain clients that were eligible breakpoint and rollover and exchange discounts when they bought UITs because the financial firm’s procedures and systems were not sufficient to properly monitor unsuitable reverse convertibles and ensure that clients got the discounts for which they were eligible. (Discounts should be offered on UIT sales when purchases go beyond certain thresholds or involve termination or redemption proceeds from another UIT during the initial offering period.)

By agreeing to settle, Wells Fargo is not admitting to or denying FINRA’s allegations.

The SRO has filed a separate complaint against Chen, who allegedly exposed clients to risks that were not in line with their investment profiles. As of June 2008, 172 of the accounts he worked with held reverse convertibles. 148 accounts had concentrations over the 50% of their total holdings. 46 accounts had concentrations of over 90%.

Reverse Convertibles
These interest-bearing notes involve repayment of principal connected to an underlying asset’s performance. The specific terms of reverse convertibles may vary. An investor risks loss if the underlying asset’s value drops under a certain maturity level or during the reverse convertible’s term.

It is important for many elderly investors that their investments not expose them to too much risk. For an elderly senior to lose his/her life savings because a financial firm or broker behaved irresponsibly, committed securities fraud, or made an avoidable mistake is unacceptable.

Wells to pay $2M to settle claims broker sold unsuitable investments to seniors, Investment News, December 15, 2011

Wells Fargo Fined by Finra Selling Structured Notes to Aged, Bloomberg, December 15, 2011


More Blog Posts:
Broker-Dealers are Making Reverse Convertible Sales That are Harming Investors, Says SEC, Stockbroker Fraud Blog, July 28, 2011

RBC Wealth Management Unit Ferris Baker Watts to Pay Investors Restitution Over Reverse Convertible Notes Allegations, Says FINRA, Stockbroker Fraud Blog, October 23, 2010

Wells Fargo Settles for $148M Municipal Bond Bid-Rigging Charges Against Wachovia Bank, Institutional Investors Securities Blog, December 8, 2011

Continue reading "Well Fargo Advisers to Pay $2 Million to Settle Claims that Broker Sold Unsuitable Reverse Convertible Securities to Seniors" »

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Posted In: FINRA , Financial Firms , Reverse Convertibles , Senior Investors , Wells Fargo

October 30, 2011

FINRA Vows to Step Up Internal Compliance Procedures

The Securities and Exchange Commission has filed an administrative complaint against the Financial Industry Regulatory Authority accusing one of the latter’s directors of changing three sets of staff meetings minutes that SEC officials had requested. These revisions made the documents, which were delivered in August 2008, incomplete and inaccurate. This could affect FINRA’s chances of becoming the SRO for investment advisers. Currently, FINRA serves that role for just broker-dealers.

It was FINRA that reported the document problem to the Commission and then worked with the agency to resolve the matter. The SRO then appointed new leadership in the Kansas office (the director has since resigned) where the tampering took place and implemented changes that improved procedures for document handling. Modifications included more live and online ethics training, as well as greater document integrity. Other undertakings FINRA has agreed to:

• Train workers about past document integrity problems
• Create a podcast on document integrity to show current and prospective employees
• Talk about the importance of document integrity at yearly regulatory meetings, townhall gatherings, and at Senior Management onsite visits at district offices
• Mandate that senior Office of Liaison and Counsel meet with every business that is about to undergo an on-site exam before the documents are generated for the SEC

The SEC has ordered FINRA to hire an independent consultant, who will review current FINRA policy and procedures and training, determine whether those that already exist are reasonable and properly implemented so that they can guarantee that documents given to the SEC are in integrity, and make recommendations for any improvements.

The Consultant will have to submit a report of recommendations and findings to the FINRA Board. The Board will then have thirty days to implement these recommendations, while also notifying the Consultant of the recommendations it finds to be impractical or burdensome. In such instances, the Board and the Consultant will try to find an alternative recommendation that can fulfill the same objectives that the original recommendation would have satisfied. If an agreement on this alternative is reached, then the Consultant will amend the recommendation and reissue the Report. If no agreement on an alternative is reached, then the FINRA Board will have to adopt the original recommendation made by the Consultant.

By settling the case, FINRA is not admitting to or denying the SEC allegations.

It is FINRA’s job to ensure broker-dealer compliance. It is therefore no wonder why any failure to ensure compliance among its own employees might raise some flags of concern.

Our securities fraud attorneys represent clients that have sustained financial losses because of broker misconduct. Your chances for recovering the maximum amount possible go up when you decide to work with an experienced stockbroker fraud law firm. Shepherd Smith Edwards and Kantas, LLP represents investors across the US.

Finra director doctored records before inspection: SEC, Investment News, October 27, 2011

Finra Settles in Battle of Overseers, Wall Street Journal, October 28, 2011

SEC Orders FINRA to Improve Internal Compliance Policies and Procedures, SEC, October 27, 2011

Read the administrative order


More Blog Posts:
FINRA Cannot Enforce Disciplinary Actions Through the Courts, Says Federal Appeals Court, Stockbroker Fraud Blog, October 6, 2011

FINRA Tells Congress It Is Ready to Act as SRO for Investment Advisors, Stockbroker Fraud Blog, September 13, 2011

FINRA Wants Amerivet Securities Inc.’s Lawsuit Seeking to Inspect the SRO's Records Dismissed, Institutional Investor Securities Blog, March 26, 2011

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Posted In: FINRA

October 22, 2011

Citigroup Global Markets Inc. Sues Two Saudi Investors in an Attempt to Block Their FINRA Arbitration Claim Over $383M in Losses

Citigroup Global Markets Inc. (C) is suing Abdullah and Ghazi Abbar. The Saudi investors have filed a FINRA arbitration claim against the Citigroup unit seeking to recover the $383 million that they say the bank lost their family’s money. The Abbars, who are father and son, are accusing Citigroup Global Markets of mismanaging their family’s savings.

Citigroup, which wants injunctive relief, says that the entities that took care of the the Abbars’ private-equity loan and leveraged option transactions are located abroad and therefore not under FINRA’s jurisdiction for arbitration. The financial firm also says that father, son, and their investment entities are not CGMI clients and their claims are not activities related it. The investment bank has noted that the Abbars chose to pursue it rather than the non-U.S. parties that they actually had agreements with that completed the transactions. The Abbars, however, say that those overseeing the Citigroup entities that took party in the daily management of their credit deal are personnel that are registered with FINRA.

Says Shepherd Smith Edwards and Kantas Founder and Stockbroker Fraud Lawyer William Shepherd, “The financial industry has created its own securities arbitration forum to resolve disputes and claims between and against its members. It is ironic when claims are filed that they often go to court to beg to get out of arbitration, their self-imposed fate. While courts in New York seem to operate to accommodate Wall Street’s wishes, the law for decades has held that decisions regarding the liability of securities firms are for the arbitrators, not the courts. If these investors have properly alleged any wrongdoing by the U.S. securities firm, the court has no business intervening. Such wrongdoing can be simply ‘control person liability,’ which is the failure to control or properly supervise the behavior or operations of a subordinate or subsidiary.”

CGMI placed $343 million of the Abbars money in hedge funds that were included in a leveraged option swap transaction. In their FINRA arbitration claim, the Abbars argue that leading CGMI officers, including ex- global wealth management chief Sallie Krawcheck and Chief Executive Officer Vikram Pandit, pursued them.

Father and son contend that because of alleged “gross misconduct" by CGMI, their wealth was lost. They say that the bank's failure to monitor the investments properly led to their total collapse during the height of the economic collapse in 2008. The Abbars also believe that lendings related to the Citigroup investments played a role in the losses. The Abbars says that Citigroup, which then started managing the positions that remained in the portfolio while implementing a program to redeem it, will “unjustly benefit” by about $70 million from the redemption of these investments.

Citigroup Sues to Block Arbitration of Saudi Investors’ Claim, Bloomberg/Businessweek, October 6, 2011

Citigroup Aims to Stop Arbitration From Proceeding, OnWallStreet, October 7, 2011

More Blog Posts:
Citigroup Global Markets Fined $500,000 by FINRA for Inadequate Supervision of Broker Accused of Bilking Sick and Elderly Investors, Stockbroker Fraud Blog, August 16, 2011

Citigroup Ordered by FINRA to Pay $54.1M to Two Investors Over Municipal Bond Fund Losses, Stockbroker Fraud Blog, April 13, 2011

Citigroup to Pay $285M to Settle SEC Lawsuit Alleging SecuritiesFraud in $1B Derivatives Deal, Institutional Investors Securities Blog, October 20, 2011

Continue reading "Citigroup Global Markets Inc. Sues Two Saudi Investors in an Attempt to Block Their FINRA Arbitration Claim Over $383M in Losses" »

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Posted In: Arbitration , Citigroup , FINRA , Financial Firms

October 10, 2011

Merrill Lynch Faces $1M FINRA Fine Over Texas Ponzi Scam by Former Registered Representative

Two years after San Antonio broker was sentenced to prison for Texas securities fraud, FINRA has fined Merrill Lynch $1M for not properly supervising its former employer. These failures allegedly allowed Bruce Hammonds to run a Ponzi scam that defrauded investors of $1.4M.

Hammonds persuaded 11 people to invest in the Texas Ponzi scam, which he operated under the name B&J Partnership. It was supervisors at Merrill Lynch that gave the green light for him to open an account for B & J. The supervisors also are accused of not monitoring the funds that moved between customers and Hammonds.

Rather than putting investors’ money in a Merrill Lynch fund, he put $1.4 million of their funds in his working capital account. He even gave clients charts showing how the B & J fund was performing even though the fund wasn’t real. Hammonds used the money to pay for his personal spending, including a supposed house-flipping business.

He later pleaded guilty to federal securities charges. In addition to five years behind bars and three year supervised release. Hammond has been barred from the securities industry. All investors have been paid back in full for their losses.

In deciding to fine Merrill Lynch, FINRA found that the financial firm did not have a supervisory system that did a satisfactory enough job of monitoring accounts of employees for signs of possible misconduct. The system was only able to immediately capture accounts opened by an employee if he/she used his/her social security number as the main tax identification number. The SRO also said that between 1/06 and 6/10 Merrill Lynch did not monitor another 40,000 employee/employee-interested accounts.

By agreeing to settle, Merrill is not denying or admitting to the charges.

Failure to Supervise
It is a brokerage firm’s responsibility to establish written procedures for how to properly supervise its employees' activities. These procedures must then be implemented to prevent broker fraud. When misconduct does arise and failure to supervise played a role in allowing the incident to happen, the financial firm can be held liable for securities fraud.

Brokerage companies have to supervise every broker that they license to work for them. Even if an accused broker is later found not liable, there is still a possibility that the brokerage firm or supervisor can be held liable for failure to supervise and be ordered to pay damages. For example, a broker may not have received the proper training or was given the wrong information by the financial firm, and this resulted in Texas securities fraud that caused an investor to suffer losses.

FINRA Fines Merrill Lynch $1 Million for Supervisory Failures That Allowed a Registered Representative to Operate a Ponzi Scheme, FINRA, October 4, 2011

Shepherd Smith Edwards & Kantas LTD LLP is Investigating Merrill Lynch in Light of Recent FINRA Fines Against the Firm for Failure to Supervise, MarketWatch, October 5, 2011

More Blog Posts:
Former Merrill Lynch Employee, Guilty of $1.4 Million Texas Securities Fraud Scheme, Receives Prison Term, Stock Broker Fraud Blog, October 5, 2009

Wedbush Securities Ordered by FINRA to Pay $2.8M in Senior Financial Fraud Case Over Variable Annuities, Stock Broker Fraud Blog, August 31, 2011

Actions of Former Ferris, Baker Watts, Inc. General Counsel Accused of Supervising Rogue Broker to be Reviewed by SEC, Institutional Investors Securities Blog, December 9, 2010

Continue reading "Merrill Lynch Faces $1M FINRA Fine Over Texas Ponzi Scam by Former Registered Representative" »

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Posted In: FINRA , Financial Firms , Inadequate Supervision , Merrill Lynch , Ponzi Scams , Texas Securities Fraud

October 6, 2011

FINRA Cannot Enforce Disciplinary Actions Through the Courts, Says Federal Appeals Court

The United States Court of Appeals for the Second Circuit says that the Financial Industry Regulatory Authority does not have the authority to take its members to court in order to enforce disciplinary actions. The ruling comes after a years-long legal battle involving penny stock brokerage firm Fiero Brothers and owner John J. Fiero.

Fiero and his financial firm were expelled from FINRA and ordered to pay a $1 million fine for naked short selling and other violations of federal fraud statutes. It was in 1998 that NASD Regulation Inc. filed a complaint accusing Fiero and co-conspirators of engaging in the illegal short-selling of securities to purposely push down the price 10 NASDAQ securities. The financial scam eventually led to the collapse of both Hanover Sterling, which served as the securities’ underwriter and Adler, Coleman Clearing Corp. A NASD hearing panel found that Fiero committed extortion and violated short selling rules. The $1 million fine and expulsion were imposed in 2001.

Fiero Brothers and its owner refused to pay. FINRA took them to court to obtain payment. The SRO first brought its case to New York state court, where the state’s highest court eventually threw out a ruling in FINRA’s favor. Fiero then brought the case to federal court. There, he sought a declaratory judgment that FINRA did not have the power to pursue the fine in court. FINRA then counter-sued.

Now, however, the three-judge panel is saying that FINRA’s housekeeping rule from 1990, which gave it the right to go to court to go after monetary sanctions and the country’s foundational securities laws, does not give the SRO the right to collect disciplinary fines through the court system. The federal appeals court’s ruling overturns a lower court’s decision.

Some are saying that the court’s ruling reduces FINRA’s power and vindicates complaints that have been made accusing the SRO of going beyond its statutory power and abusing the process of rule making. Even ex-FINRA enforcement head Susan Merrill believes that the ruling casts a shadow on FINRA’s housekeeping rules. The court said the 1990 rule needs to be more formally examined because rather than just being a matter of housekeeping, it impacts the rights of members that have been suspended or barred.

Banned brokers are not allowed to reenter the industry unless the pay all fines. As a result, obtaining fines is not usually a problem for FINRA. Now, however, seeing as FINRA doesn’t have the right to enforce payment in court, an action that it has taken over the last two decades, it will be interesting to see how other barred brokers may choose to respond to fine demands.

Meantime, FINRA has said that this latest ruing will not limit its ability to enforce securities laws and FINRA rules, protect investors, or discipline financial firms.

Court: FINRA cannot use lawsuits to collect fines, Reuters, October 5, 2011

Court Says Regulator Exceeded Its Power, New York Times, October 6, 2011

NASD Regulation Bars John Fiero, Expels Fiero Brothers, Inc., and Imposes $1 Million Fine For Illegal Short Sales, Market Manipulation and Extortion, NASD/FINRA, January 8, 2011


More Blog Posts:
Five Broker-Dealers Fined by FINRA Over Allegedly Misrepresenting Commissions as Fees to Clients, Stockbroker Fraud Blog, September 16, 2011

Texas Securities Fraud: FINRA Fines Bluechip Securities for Ex-Employee’s Alleged Churning of Public Customer Accounts, Stockbroker Fraud Blog, August 28, 2011

Wedbush Ordered By FINRA Panel To Pay $3.5M to Trader Over Withheld Compensation, Institutional Investor Securities Blog, July 16, 2011

Continue reading "FINRA Cannot Enforce Disciplinary Actions Through the Courts, Says Federal Appeals Court" »

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Posted In: FINRA

September 19, 2011

Morgan Stanley Smith Barney Employee Fined and Suspended by FINRA Over Unauthorized Signatures

The Financial Industry Regulatory Authority has imposed a 60-day suspension on Carmela L. Knieriem, a former Morgan Stanley Smith Barney female employee over allegations that while employed by the financial firm, she signed other employees’ signatures without obtaining the required approvals and authorizations. FINRA is also fining Knierem $5,000. While she has submitted a Letter of Acceptance, Waiver and Consent to settle the charges, Knierem is not denying or admitting to the findings.

According to Forbes.com, Between November 2009 and October 14, 2010, Knieriem was associated with the financial firm’s Rancho Bernardo Branch, where she was tasked with providing branch managers, financial advisers, and other employees with administrative support. Part of her job was to prepare specific internal administrative forms related to the processing and documenting of verbal requests, known as “Verbal Forms,” that were made by customers.

FINRA says that when Knieriem made the unauthorized signatures when preparing these Verbal Forms she violated FINRA Rule 2010 10 times. The SRO contends that in six instances, at the request of the financial advisor EP, she prepared an instruction form documenting a client’s verbal request for journal funds between the client’s accounts, the transfer of money from a client’s account, the release of account statements to a third party, and the issuance of a $75,397.22 check from the customer’s account. Knieriem also is said to have followed a financial advisor GT’s request to prepare an instruction form for a client’s verbal request that a stop payment be placed on one of his checks. She also followed the request of a financial adviser CL, who asked her to prepare an instruction form to issue a $95.62 for a client. Also, FINRA says that branch manager RL asked her to prepare an instruction form to journal funds between accounts.

Morgan Stanley also conducted its own investigation into the matter. Knieriem has since voluntarily left the financial firm.

Shepherd Smith Edwards & Kantas LTD LLP founder and stockbroker fraud lawyer Bill Shepherd said: “The only surprise here would be if she kept her job or if any other firm would hire her. Every licensed securities person knows this is a very serious violation. Brokers at large firms manage tens of millions, and often hundreds of millions, of dollars. Those who violate the rules in this manner do not belong in that position. Moreover “uttering a forgery” is not just a rule violation, it is a crime even if there was no financial harm. The only legal defense would be if the person whose name was signed specifically gave her permission and was authorized to do so.”

Shepherd Smith Edwards and Kantas
Our stockbroker fraud law firm is dedicated to helping investors that have lost money as a result of broker misconduct. We are committed to recovering clients’ financial losses.

Morgan Stanley Smith Barney Female Employee Suspended and Fined for Unauthorized Signatures, Forbes, September 23, 2011

FINRA


More Blog Posts:
Ex-Morgan Stanley Trader’s $25k Settlement Over Alleged Concealment of Proprietary Trades is Inadequate, Says SEC Commissioner Aguilar, Stockbroker Fraud Blog, July 20, 2011

Morgan Stanley, Barclays, and Merrill Lynch Lose ‘Hot News’ Misappropriation Case Against Theflyonthewall.com Inc. in Appeals Court, Stockbroker Fraud Blog, June 20, 2011

$63 Million Mortgage-Backed Securities Lawsuit Against Bank of America is Second One Filed by Western and Southern Life Insurance Co. Against the Financial Firm, Institutional Investors Securities Blog, August 29, 2011

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Posted In: FINRA , Financial Firms , Morgan Stanley

September 13, 2011

FINRA Tells Congress It Is Ready to Act as SRO for Investment Advisors

Speaking before a House Financial Services Committee, Financial Industry Regulatory Authority Chief Executive Richard Ketchup said that the self-regulatory organization is ready to set up a new entity to oversee investment advisers and make sure they are in compliance with federal securities laws. Ketchum also said the SRO would hire experienced staff to do the job and that regulatory oversight to tailored to investment advisers would be put into place.

Currently, the Securities and Exchange Commission is the watchdog for investment advisers. Staffing issues, however, prevent the commission from doing a thorough and frequent job—checks are about once every 11 years. Last year, the SEC was only able to examine 9% of all registered investment advisers.

Yet there are many in the financial industry that have expressed a preference for this status quo, or, if change has to happen, they would like state regulators to do the job. Some have expressed worry that FINRA would uphold investment advisers to rules more that applicable to broke-dealers. Others are not sure that the SRO is up to the task. Many are still not happy with FINRA’s performance as a financial industry watchdog prior to financial crisis. (It is important to note that FINRA has taken some responsibility for not discovering the Bernard Madoff Ponzi scam earlier.)

Right now, the SEC and Congress are assessing new regulatory policies for investment advisers and broker-dealers. The commission has put out a study regarding:

• Setting up user fees that would pay for the SEC’s adviser exam program
• Handing over oversight of persons that are registered as both investment adviser and broker to FINRA
• Establishing a law that would allow for an SRO for investment advisers

A bill has been drafted calling for a new SRO for advisers, but it doesn’t specify whether that self-regulatory group would be FINRA or the SEC. The sponsor of the bill, called the Investment Adviser Oversight Act of 2011, is House Financial Services Committee Chairman Spencer Bachus, R-Ala. Bachus.

Meantime, the Investment Adviser Association has said that it doesn’t want an SRO for investment advisers. Its executive director, David Tittsworth, has said that an SRO would add expensive bureaucracy and create a burden for advisory firms. Tittsworth believes that SEC is the best organization to do the job and that imposing user fees is a less expensive alternative.

FINRA currently examines about 4,500 broker-dealers. If it were to oversee advisers, that would be an additional over 11,000 firms. The Securities Industry and Financial Markets Association, the Financial Services Institute Inc., the Association for Advanced Life Underwriting, the Consumer Federation of America, and the National Association of Insurance are among those that support appointing FINRA as the investment adviser SRO.

Our stockbroker fraud law firm has helped thousands of victims of broker fraud and investment adviser fraud recoup their losses.

Financial Services Committee Debates Changes to Advisor, Broker Regulations, Financial Planning, September 13, 2011

FINRA makes pitch to oversee investment advisers, Reuters, September 13, 2011

Finra oversight of advisers gaining 'mo, Investment News, September 13, 2011


More Blog Posts:
FINRA Will Customize Oversight to Investment Adviser Industry if Chosen as Its SRO, Stockbroker Fraud Blog, April 8, 2011

Financial Services Institute Wants FINRA to Serve as SRO for RIAs, Stockbroker Fraud Blog, January 3, 2011

Former Texas Securities Regulator Says Self-Regulation of Securities Industry Does Not Work, Stockbroker Fraud Blog, July 6, 2011

Posted by Shepherd Smith Edwards & Kantas LTD LLP | | Email This Post

Posted In: FINRA , Investment Advisers

August 31, 2011

Wedbush Securities Ordered by FINRA to Pay $2.8M in Senior Financial Fraud Case Over Variable Annuities

A FINRA arbitration panel has fined Wedbush Securities Incorporated, founder Edward Wedbush, and broker Debbie Michelle Saleh to pay $2,865,885 in damages. The victim of this securities case was Rick Cooper, an elderly investor. His securities claim alleged breach of fiduciary duty, fraud, negligent misrepresentation, failure to supervise, intentional misrepresentation and omissions, unauthorized transaction, unsuitable transactions, emotional abuse, elder abuse, and churning related to transactions of unspecified variable annuities.

Cooper’s securities fraud lawyers claim that Saleh sent him bogus monthly account statements, forged his signature, and conducted transactions that he hadn’t authorized, including the buying and selling of annuities and other financial products that were not suitable for him.

While Cooper’s account balances went down to one-third of $1.86 million, Saleh is accused of making money from fees and commissions that she charged him. The FINRA panel found that Saleh purposely misrepresented information about Cooper’s investments and she did make unauthorized transactions. The panel believes that Saleh of acting intentionally to defraud her clients. They said her actions either bordered on or actually were acts of “criminal misconduct.”

Of the $2.9 million, Saleh must pay $500,000 plus $1 million in punitive damages. Wedbush and its founder have to pay $500,000. Saleh, Wedbush, and Edward Wedbush also have to pay 10% annual interest on the damages, Cooper’s legal fees, and his other costs. Wedbush has to pay 100% of the arbitration forum fees, which is about $33,300. Two years ago, Saleh, who is no longer with Wedbush, has been permanently barred from the securities by FINRA.

Cooper is not the only person to file a securities claim against Saleh accusing her of misconduct. She is at the center of 4 investigations and 10 client complaints.

Wedbush has been named in at least 53 regulatory events and 52 arbitrations. Failure to supervise was a common complaint.


Failure to Supervise
Our securities fraud lawyers cannot stress how important it is for broker-dealers and investment advisers to properly supervise their brokers, advisers, other employees, and independent contractors. Not only must appropriate supervision take place, but also procedures of supervision have to be designed, implemented, and executed. Also, an employee assigned a supervisory role must complete specialized training to receiver a supervisor license from the National Association of Securities Dealers (NASD).

In the event that the broker engages in any type of misconduct or other wrongdoing, his/her supervisor and the financial firm can be held liable for allowing the alleged acts to take place—even if the employee that actually engaged in the wrongdoing isn’t found liable. You will want to work with a securities fraud law firm that knows how to prove that failure to supervise occurred.

FINRA Panel Orders Wedbush, Former Broker to Pay Investor $2.9M, OnWallStreet.com, August 31, 2011

FINRA Arbitrators Award Millions in Elder Abuse Case, Forbes, September 1, 2011


More Blog Posts:
FINRA Panel Orders Wedbush Securities to Pay $233,000 in Securities Fraud Damages, Stockbroker Fraud Blog, March 28, 2011

Wedbush Ordered By FINRA Panel To Pay $3.5M to Trader Over Withheld Compensation, Institutional Investor Securities Blog, July 16, 2011

SEC Charges Filed in $22M Ponzi Scam that Targeted Florida Teachers and Retirees, Stockbroker Fraud Blog, August 29, 2011

Continue reading "Wedbush Securities Ordered by FINRA to Pay $2.8M in Senior Financial Fraud Case Over Variable Annuities " »

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Posted In: FINRA , Financial Firms , Senior Investors , Wedbush Securities

August 25, 2011

Financial Industry Regulatory Authority Alerts Investors About Gold Stock Scams

FINRA has put out an alert warning investors about financial scams touting gold stocks. The name of the investor alert is "Gold" Stocks—Some Investments Mine Your Pocketbook. The caution comes as the cost of bullion reaches level highs and the increase in the number of websites, blogs, Tweets, and YouTube videos about investing in gold.

How to Detect a “Gold” Stock Scam
Unfortunately, some of these “golden” opportunities and stocks that are being marketed don’t have a lot of value or may be scams. Gold-related investment scams usually involve exploration companies’ and/or gold mining companies’ stock with a value that is usually based on gold reserves are challenging to accurately assess. Some statements made by stock promoters are purposely misleading.

FINRA's warning signs of a possible “gold” stock scam:

• Predictions/price targets of rapid and exponential growth.
• Claims of being a “buyout target” for mining companies.
• Claims that stock performance is related to the rise in the price of gold.
• Warnings of an economic meltdown or inflation.
• A revision to the company’s trading symbol or name so that it is more closely linked with gold.
• Claims that making money by investing in gold is easy.
• Use of news headlines about gold.
• Use of the names of major investment institutions or major investors in order to appear more credible.
• Statements about how much easier for lower priced stocks, as opposed to their higher-priced counterparts, to rise in value.
• Pressure that you in invest right away.

FINRA also says to watch out for “free lunch” programs offering to give you information about investing in gold. It was just last year that the Securities and Exchange Commission charged six people with running a $300 million Ponzi scam involving “gold” investments that defrauded over 3,000 investors in the US and Canada. The fraudsters claimed they represented an independent financial education company that had found a way to make up to 36% yearly returns by getting involved in gold mining investments.

In fact, the financial scammers were investing in shell companies that were owned by two of the men. Investors’ money was moved through different accounts in Europe, Asia, and South America and then used to pay investors their “interest,” fund a few companies that were not profitable, and enrich the fraudsters. Merendon Mining Corp. Ltd. is the name of the supposedly successful gold mining and refining company that was supposed to give investors their profits.

Earlier this year, the Commodity Futures Trading Commission took three separate actions against precious metal companies accused of financial scams involving different precious metal investments. In one alleged financial scheme, a boiler room telemarketing company allegedly defrauded investors of over $23 million.

If you lost money from investing in “gold” opportunities, contact our stockbroker fraud law firm immediately.

"Gold" Stocks—Some Investments Mine Your Pocketbook, FINRA

SEC Charges Perpetrators of $300 Million Ponzi Scheme Involving Purported Gold Mining Investments, SEC, June 10, 2010

CFTC Charges Florida Firm, American Precious Metals, LLC, and Principals, Sammy J. Goldman and Harry Robert Tanner, Jr., with Fraud, CFTC, May 17, 2011

Precious Metal Financing Agreement Scams, Fraud Guides


More Blog Posts:
Commodity Options Fraud Charges by CFTC Prompts District Court to Freeze Assets and Records of 20/20 Trading Co. Inc. & 20/20 Precious Metals Inc., Stockbroker Fraud Blog, May 6, 2011

FBI Investigates Former HFI Securities Inc. Vice President After Gold and Silver Coins Worth Millions of Dollars Found in His Basement, Stockbroker Fraud Blog, September 29, 2008

SEC and FINRA Alerts Retail Investors About Structured Notes with Principal Protection, Stockbroker Fraud Blog, May 30, 2011

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Posted In: FINRA

August 16, 2011

Citigroup Global Markets Fined $500,000 by FINRA for Inadequate Supervision of Broker Accused of Bilking Sick and Elderly Investors

Two months after a federal grand jury indicted Tamara Lanz Moon for misappropriating more than $800,000 in clients’ money, the Financial Industry Regulatory Authority (FINRA) has fined Citigroup Global Markets $500,000 for failing to properly supervise her. Moon is charged with six counts of mail fraud. The acts of broker misconduct allegedly took place between 2001 and 2008, when the 43-year-old broker was employed by Citigroup Global Markets as a registered sales assistant with Series 7 and 63 licenses.

Court documents report that Moon targeted at least 22 Citigroup clients who were sick, elderly, or for some reason couldn’t properly monitor their accounts. Her alleged victims included an elderly client suffering from Parkinson’s disease. Moon also allegedly forged signatures, changed account documents, opened accounts with deceased clients’ social security numbers, created bogus letters of authorization, revised customer addresses, and made unauthorized trades. She was fired in 2008 after Citigroup finally discovered her alleged misconduct. FINRA would go on to permanently barred her from the industry. Moon, who was arrested by the FBI following recent indictment, is out on bail.

According to FINRA, Citigroup failed to investigate or detect a number of “red flags” that should have let the financial firm know that Moon was improperly handing client funds. The SRO is also accusing FINRA of failing to put into place reasonable controls and systems related to the supervisory review of client accounts, which allowed Moon to falsify records, and neglecting to identify suspicious activity related to disbursements and transfers in the accounts that she was using to misappropriate clients’ money.

FINRA says that Moon was able to use Citigroup’s “lax supervisory practices” to bilk the financial firm’s “most vulnerable” clients. The SRO says that Citigroup could have and should have stopped her.

Among the warning signs that Citigroup is accused of not responding to:
• Address discrepancies in exception reports regarding an elderly widow whom Moon bilked of almost $80,000. When Moon explained to Citigroup that the inaccuracy occurred because the client had moved to Arizona, Citigroup accepted the reason she provided, which allowed her to keep misappropriating client money.

• Even after Citigroup was told that one customer had died, Moon was still able to create an account in that person’s name and that dead client’s widow. She then transferred money from the deceased client’s bogus account to the widow’s fraudulent account, wrote checks from the widow’s account, and transferred several thousand dollars to her personal account.

• Even though Moon set up a fraudulent account in her dad’s name, transferred $150,000 of a customer’s account into the bogus account, and took $90,000 of that money that she moved into one of her accounts, Citigroup didn’t detect her misconduct. FINRA says that this because Citigroup’s review of customer account records was deficient.

By agreeing to settle, Citigroup is not denying or admitting to the securities charges.

FINRA Fines Citigroup $500,000 for Failing to Supervise Sales Assistant Who Misappropriated Customer Funds, FINRA, August 9, 2011

Citigroup Global Markets Fined $500,000 in FINRA Failure to Supervise Case, Forbes, August 10, 2011

Citigroup Aide Stole From Widows, Father, Finra Says, Bloomberg, August 25, 2009


More Blog Posts:
Citigroup Global Markets Sales Assistant Accused of Stealing from Clients is Banned by FINRA from the Securities Industry, Stockbroker Fraud Blog, September 4, 2009

Texas Securities Fraud: Insurance Agent Could Get 100 Years Behind Bars for Using Fraudulent Annuities to Bilk Elderly Seniors of Over $5M, Stockbroker Fraud Blog, August 9, 2011

Citigroup Ordered by FINRA to Pay $54.1M to Two Investors Over Municipal Bond Fund Losses, Stockbroker Fraud Blog, April 13, 2011

Federal Judge to Approve Citigroup’s $75M Securities Settlement with SEC Over Bank’s Subprime Mortgage Debt Reporting to Investors, Stockbroker Fraud Blog, September 29, 2010

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Posted In: Citigroup , FINRA , Financial Firms , Securities Fraud , Senior Investors

August 15, 2011

CapWest Loses $940,000 Dallas Securities Case in FINRA Arbitration

Financial Industry Regulatory Authority (FINRA) has ordered CapWest Securities Incorporated to pay nearly $940,000 in a Texas securities fraud case filed by a group of investors over the recommendation and sale of numerous illiquid, risky, convertible debentures. The claimants had accused CapWest of breach of fiduciary duty, breach of contract, state and federal securities law violations, fraud, gross negligence, negligence, and other actions.

Last month, the FINRA arbitration panel ordered CapWest to pay claimant Robert E. Lee, both as an individual and as a Robert Earl Lee Revocable Trust trustee, $137,000 in compensatory damages. CapWest was also ordered to pay $478,500 in compensatory damages to Beatrice M. McCrae and Buford E. McCrae, both as individuals and on behalf of B.E. McCrae Family Limited Partnership. Robert E. Lee was also to receive $37,330 in interest for the period of October 25, 2008 through July 15, 2011 at a 5% per annum rate. For Buford E. McCrae and Beatrice E. McCrae, the interest of 5% per annum was $95,180 for the period of October 16, 2006 through July 15, 2011. Under the Texas Deceptive Trade Practices Act, Robert E. Lee is to receive $17,450 in punitive damages. Buford E. McCrae and Beatrice M. McCrae are to get paid $57,370. Payment of the claimants’ costs, legal fees, and other fees were also granted.

Convertible Debentures
This kind of loan can lets its holder convert it into stock. In certain cases, the bond’s issuer may also do this. When employing the convertibility option, the issuer is allowed to pay a reduced interest rate on the loan. Companies use these financial instruments to get capital that they need to maintain or grow their operation.

This Dallas securities fraud case isn’t the only arbitration case that CapWest has recently lost. Also last month, a FINRA arbitration panel awarded CapWest clients and former broker Attila Toth $438,000 in damages and another $130,000 in legal fees and interest.

CapWest sold two private placements--$22 million in Provident Royalties LLC-issued private placements and $30.6 million in Medical Capital Holdings Inc. notes that the SEC claims were fraudulent. Once a leading seller of private placements, CapWest is in financial trouble. Earlier this year, the broker-dealer reported that a drop in net capital, an increase of securities fraud lawsuits against it, and three years of losses in a row have raised concerns over whether the financial firm can stay in operation.

Texas Securities Fraud
If you are an investor who has sustained financial losses from working with a broker-dealer or an investment adviser, our Texas securities fraud law firm can advise you of your options. Securities claims and lawsuits can be complex cases and you do not want to go into arbitration or court without an experienced Houston securities fraud lawyer representing you.

To obtain your free case evaluation, contact our Dallas stockbroker fraud law firm today. Our Texas private placement attorneys have helped thousands of investors recoup their losses.

Will arbitration loss cap CapWest?, Investment News, August 15, 2011


More Blog Posts:
Texas Securities Fraud: Insurance Agent Could Get 100 Years Behind Bars for Using Fraudulent Annuities to Bilk Elderly Seniors of Over $5M, Stockbroker Fraud Blog, August 9, 2010

Accused Texas Ponzi Scammer May Have Defrauded Investors of $2M, Stockbroker Fraud Blog, August 3, 2011

Houston Securities Fraud: Ex-Citigroup Broker Accused of Stealing Millions from Wealthy Mexican Investors is Barred from FINRA, Stockbroker Fraud Blog, July 29, 2011

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Posted In: Arbitration , CapWest Securities , FINRA , Financial Firms , Texas Securities Fraud

July 6, 2011

Former Texas Securities Regulator Says Self-Regulation of Securities Industry Does Not Work

According to Ex-Texas State Securities Board Denise Voigt Crawford, giving oversight of nearly 12,000 investment advisers to the Financial Industry Regulatory Authority to cut costs is a bad idea and one for which investors will end up paying the price. FINRA is Wall Street’s self-funded regulator. Already charged with overseeing brokers, it is now pushing to take over the U.S. Securities and Exchange Commission’s role as adviser regulator.

Crawford says that having FINRA oversee the industry’s activities doesn’t make sense when FINRA is the industry. She also points out that since the SRO was established in 2007, it hasn’t been successful in protecting investors, while imposing fines that are usually a fraction of the damages they sustained from securities fraud and other misconduct. Last year, FINRA fined members just $43 million while the SEC imposed over $1 billion in penalties.

Also, according to U.S. Securities and Exchange Commission data, investors who received FINRA arbitration awards usually got under half of what they initially sought. In 2010, FINRA ordered that harmed investors get $6 million in restitution, while the SEC ordered that investors recover $1.82 billion. However, through May of this year, FINRA had already ordered that investors who sustained losses get recoup $9.8 million. The SRO believes that it is ideally suited to do the job for a number of reasons, including its technological capabilities and resources and the fact that most advisers are already affiliated with broker-dealers.

FINRA says that it responded to all 3,208 complaints submitted by customers last year, and, when required investigated the allegations. This year, the SRO accelerated its enforcement efforts. Also, compared to 2010, FINRA has upped the fines it levied by 118% and made 463 disciplinary actions between January and May 2011.

Our Texas securities fraud lawyers
Related Web Resources:
Investors May Lose as Congress Saves Money on Adviser Oversight, Bloomberg, June 27, 2011

Industry blasts move that would expand Finra's authority over advisers, InvestmentNews, October 30, 2009

Texas State Securities Board

FINRA


More Blog Posts:
No Need for New SRO Overseeing Investment Advisers, Says NASAA Official to Congress, Stockbroker fraud Blog, April 10, 2011

FINRA Will Customize Oversight to Investment Adviser Industry if Chosen as Its SRO, Stockbroker fraud Blog, April 8, 2011

Financial Services Institute Wants FINRA to Serve as SRO for RIAs, Stockbroker fraud Blog, January 3, 2011

Posted by Shepherd Smith Edwards & Kantas LTD LLP | | Email This Post

Posted In: FINRA , Investment Advisers , Texas Securities Fraud

June 11, 2011

Houston Securities Arbitration: FINRA Panel Orders Penson Financial Services, Inc. to Pay Boushy North Investments, Ltd. $500,000

In Houston, a FINRA arbitration panel has awarded Boushy North Investments, Ltd. $500,000 in its securities arbitration case against Penson Financial Services, Inc. Boushy North Investments had initially sought $4M in punitive damages and more than $3.8M in compensatory damages for negligence, unauthorized trading, breach of fiduciary duty, and gross negligence. At the Texas securities arbitration hearing, however, the Claimant amended and reduced its compensatory damages and withdrew punitive damages and legal fees.

Boushy North Investments accused Penson of failing to prevent an unsuitable and unauthorized day-trading strategy for its family limited-partnership account. Meantime, Penson denied the allegations, asserted specific defenses, and submitted a Third-Party Complaint against Thomas Cooper and Second Mile Wealth Management, Inc., which asserted causes of action over crack of contract, indemnification, and rascal linked to the Third-Party Respondents’ purported element representations about the trade and the direction of the trading in Claimant’s account. Penson eventually discharged its Third-Party Claim’s result of action for fraud.

The claim for unauthorized trading hadn't been included in the Original Statement of Claim submitted in September 2009. The first effort to amend that was February. However, FINRA denied it because different or new pleadings cannot be turned in after a panel has been chosen and if a leave to amend hasn't been granted. Last month, however, after the proper motions were submitted, the panel granted the unauthorized trading count.

Penson Faced Multi-Million Dollar Day-Trading Claim in FINRA Arbitration, Broke and Broker, June 1, 2011

Multi-Million Dollar Day-Trading Claim Hits Penson in FINRA Arbitration, Forbes, May 31, 2011


More Blog Posts:
District Court in Texas Decides that Credit Suisse Securities Doesn’t Have to pay Additional $186,000 Arbitration Award to Luby’s Restaurant Over ARS, Stockbroker Fraud Blog, June 2, 2011

Texas Securities Commissioner's Emergency Cease and Decease Order Accuses Insignia Energy Group Inc. of Misleading Teachers, Stockbroker Fraud Blog, May 23, 2011

Texas-Based AIG’s Largest Private Shareholder Says US Will Likely Sell Its Shares in the Insurer At Lower Price than Expected, Stockbroker Fraud Blog, May 13, 2011

Continue reading "Houston Securities Arbitration: FINRA Panel Orders Penson Financial Services, Inc. to Pay Boushy North Investments, Ltd. $500,000" »

Posted by Shepherd Smith Edwards & Kantas LTD LLP | | Email This Post

Posted In: Arbitration , FINRA , Securities Fraud , Texas Securities Fraud

June 9, 2011

SEC Approves Proposed FINRA Rule Change Subjecting Back Office Personnel of Broker-Dealers to Registration and Qualification Examination Requirements

The Securities and Exchange Commission has approved the Financial Industry Regulatory Authority’s proposed rule change subjecting certain back office personnel of broker-dealers to registration and qualification examination requirements. The changes would be made to FINRA Rule 1230(b)(6).

The SEC says it is approving the proposed change on an expedited basis because it is in line with the 1934 Securities Exchange Act requirement that FINRA rules should protect investors while preventing securities fraud and manipulation. As part of the rule change, registration category and a qualification exam category would be set up for certain operations personnel, who would also be subject to continuing education requirements. The Commission believes that this rule change will take care of certain regulatory gaps that still exist in the industry.

Those subject to the rule change would be three categories of persons:
• Senior management in charge of covered functions (these include customer account data; document maintenance, collection, maintenance and reinvestment of funds; stock loan/securities lending; and delivery and receipt of fund and securities)
• Personnel accountable for authorizing work that advances the covered functions
• Persons authorized to commit a member’s capital to directly advance the covered functions

FINRA is recommending that the new requirements be phased in. The SEC is currently soliciting comments.

Related Web Resources:
US SEC Approves Registration of Brokerage Back-Office Employees, Wall Street Journal, June 17, 2011

FINRA to Share Details on New Back-Office Staff Rules, AdvisorOne, June 20, 2011

1934 Securities Exchange Act


More Blog Posts:
SEC Approves FINRA’s Proposal to Give Investors an All-Public Arbitration Panel Option, Stockbroker Fraud Blog, February 12, 2011

Dodd-Frank Reforms Will Lower Deficit by $3.2B Over the Next Decade, Estimates CBO, Institutional Investors Securities Blog, April 8, 2011

Fiduciary Standard in Securities Industry Doesn't Need New Definition, Stockbroker Fraud Blog, November 26, 2010

Continue reading "SEC Approves Proposed FINRA Rule Change Subjecting Back Office Personnel of Broker-Dealers to Registration and Qualification Examination Requirements" »

Posted by Shepherd Smith Edwards & Kantas LTD LLP | | Email This Post

Posted In: FINRA , SEC Enforcement

June 8, 2011

David Lerner & Associates Ignored Suitability of REITs When Recommending to Investors, Claims FINRA

FINRA has filed securities charges against David Lerner & Associates, Inc. accusing the broker-dealer of not taking into account suitability when soliciting vulnerable investors—in particular, elderly clients, to buy shares in the non-traded, $2B Apple REIT Ten offering. The SRO is also accusing the broker-dealer of posting misleading information online about distributions.

DLA has been Apple REITs only underwriters for nearly two decades. The broker-dealer has sold almost $6.8B of the securities into about 122,600 customer accounts. The series has made $600M in fees and other earnings for the broker-dealer, making up 60 to 70% of the firm’s yearly business. Since January, DLA also has been sole underwriter for Apple REIT Ten, which has sold over $300M of a $2B offering of shares. DLA associates earn numerous fees, including 10% of all offerings.

The SRO says that for at least seven years, the closed Apple REITs have “unreasonably valued” their shares at $11 (notwithstanding performance declines, market fluctuations, and increased leverage). The REITs, which were launched from 2004 and 2008 and were used mainly used to buy extended hotel stays, have managed to keep up “outsized” distributions of 7-8% through leveraged borrowing and returning of capital to investors. The SRO contends, however, that DLA did not disclose on its website that the income from real estate was not enough to support these. FINRA also claims that DLA provides “misleading” distribution rates on its website for all past Apple REITs.

DLA is denying the allegations.

Finra Sues David Lerner Firm, Wall Street Journal, June 1, 2011

FINRA Charges Firm With Ignoring Suitability, Providing Bad Data on REITs, BNA, June 1, 2011

REITs


More Blog Posts:
Ameriprise Must Pay $17 Million for REIT Fraud, Stockbroker Fraud Blog, July 12, 2009

W.P. Carey & Co Settles SEC Charges Over Payments of Undisclosed REIT Compensation, Stockbroker Fraud Blog, March 25, 2008

UBS Financial Services Fined $2.5M and Ordered to Pay $8.25M Over Lehman Brothers-Issued 100% Principal-Protection Notes, Institutional Investors Securities Blog, April 12, 2011

Continue reading "David Lerner & Associates Ignored Suitability of REITs When Recommending to Investors, Claims FINRA" »

Posted by Shepherd Smith Edwards & Kantas LTD LLP | | Email This Post

Posted In: David Lerner & Associates , FINRA , Financial Firms , REITs

June 7, 2011

FINRA Wants Brokers Selling Regulation D Private Placements to Take Part in Tougher Due Diligence Process

The Financial Industry Regulatory Authority is calling on broker-dealers that sell high-risk Regulation D private placements to step up their due diligence efforts, including “pushing and pulling” for information about the financial products. FINRA chief executive and chairman Robert Ketchum says that although granted, levels of due diligence will not be the same for each deal, broker-dealers still need to play an active role when examining a Reg D offering.

Due diligence related to the sale of private placements has become a focus of attention since the Provide Royalties LLC and Medical Capital Holdings Inc. deals collapsed and the Securities and Exchange Commission charged them with fraud. With both deals, many of the broker-dealers that sold them depended on third-party firms to write the due diligence reports about the offerings. Yet, despite not doing any due diligence of their own, these broker-dealers still received a 1% “due-diligence fee” as part of the sale.

Ketchum says that attending a “canned information session” or just reading a document is not enough when part of one’s job is to actively sell or offer advice about private placements. He even suggested that in certain instances, such as when selling gas and oil well partnerships, broker-dealers should visit some of the key production areas.

Regulation D Private Placements
Regulation D Private Placements are usually sold to “accredited” investors” and a limited number of non-accredited investors. In addition to investigating Regulation D private placements before selling them, a broker-dealer must have reasonable grounds to believe that the investment is suitable for each customer and that each client fully comprehends the risks involved in investing.

Related Web Resources:
Finra's Ketchum: B-Ds must ‘push and pull' for Reg D details, Investment News, June 8, 2011

FINRA Sets Regulatory Guidance for Investigating Private Placements, FINRA, April 20, 2010

More Blog Posts:
Ameriprise to Sell Securities America Even as it Finalizes Securities Settlement with Investors of Medical Capital Holdings and Provident Royalties Private Placements, Stockbroker Fraud Blog, April 26, 2011

Provident Royalties Faces $485 Million Texas Securities Fraud, Says SEC, Stockbroker Fraud Blog, July 26, 2009

Continue reading "FINRA Wants Brokers Selling Regulation D Private Placements to Take Part in Tougher Due Diligence Process " »

Posted by Shepherd Smith Edwards & Kantas LTD LLP | | Email This Post

Posted In: FINRA , Private Placements

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