Stock Broker Fraud Blog

The Financial Industry Regulatory Authority (FINRA) announced today that five major brokerage firms have agreed to pay fines totaling $2.4 million for supervision violations and improper mutual fund sales to thousands of investors. These firms must take remedial steps to prevent such actions in the future and pay amounts estimated to exceed $25 million to their clients because of such practices.

According to FINRA, the violations include sales by these firms of load securities, meaning clients were required to pay commissions, when these investors were eligible to make fund exchanges without paying commissions. FINRA’s press release states that “Class B and Class C mutual fund shares and failure to have supervisory systems designed to provide all eligible investors with the opportunity to purchase Class A mutual fund shares at net asset value (NAV) through NAV transfer programs.”

Prudential Securities must pay an $800,000 fine, UBS Financial Services, Inc. was fined $750,000 and Pruco Securities was hit for $100,000 for improper sales of Class B and Class C mutual fund shares. These firms also agreed to remediation plans that will address over 27,000 fund transactions in the accounts of 5,300 households. Merrill Lynch, Prudential Securities, UBS and Wells Fargo must take steps regarding customers who qualified for but did not receive the benefit of NAV transfer programs. It is estimated that total remediation to fhese firms' customers will exceed $25 million.

FINRA also fined Prudential Securities, UBS, and Merrill Lynch $250,000 each for failure to reasonable supervise and offer opportunities for investors to obtain sales charge waivers through NAV transfer programs. As a result of inadequate supervisory systems FINRA found that customers of Merrill Lynch, Wells Fargo, UBS and Prudential Securities eligible for the NAV programs incurred front-end sales loads or purchased other share classes that unnecessarily subjected them to higher fees and sales charges.

FINRA found that Wells Fargo Investments failed to have reasonable supervisory systems and procedures relating to NAV transfer programs but did not impose a fine because the firm made changes before FINRA's inquiry into the practices. FINRA said the firm had initiated a review of its mutual fund sales and acted promptly and in good faith to correct its system and procedures and had reimbursed its customers over $612,000.

"Firms have an obligation to consider all relevant factors when recommending mutual fund investments, to ensure that they recommend the share class that is most advantageous to the customer," said Susan L. Merrill, Executive Vice President and Chief of Enforcement at FINRA. "The supervisory problems here led not only to the sales of inappropriate mutual fund share classes, but to the failure to identify special sales charge waiver programs on mutual fund purchases. We are pleased that through these settlements, millions of dollars will be returned to customers."

The securities law firm of Shepherd, Smith, Edwards and Kantas has represented thousands of institutional and individual investors nationwide with substantial claims for losses caused by wrongdoing of stockbrokers and their firms. Contact us today if you, your firm or someone you know could be the victim to arrange a free, confidential conference with one of our securities attorneys.

Some Investors have complained they were sold mutual funds by the securities firm of Morgan Keegan & Company, Inc. based on representations of safety which were unfounded. At this time such complaints are only allegations and no determination has been made that the firm and/or its representations engaged in any wrongdoing.

The funds in question include RMK High Income Fund (RMH), RMK Advantage Income Fund (RMA), and RMK Multi-Sector High Income Fund (RHY). Reportedly, these funds were heavily invested into collateralized debt obligations (CDO's) based on sub-prime mortgages and have therefore declined sharply in value.

Morgan Keegan is a Memphis, Tenessee based brokerage firm and is a division of Regions Financial Group. The firm's offices are located primarily in the South, including in the states of Alabama, Arkansas, Florida, Georgia, Kentucky, Mississippi, North Carolina, South Carolina, Tennessee and Virginia.

Persons who believe they were sold the above listed mutual funds, or other investments, based of false information or misrepresentations concering the safety of such investments can contact the law firm of Shepherd Smith & Edwards. Our law firm represents investors who have lost money as a result of worngdoing by members of the securities industry, including Morgan Keegan. Contact us today to arrange a free confidential consultation via telephone to discuss your situation with one of our experienced attorneys.

Additional information is available to you here regarding Morgan Keegan & Company and Regions Financial Group.

The director of the Securities and Exchange Commission’s Investment Management Division is calling for mutual funds to rename their 75 basis point “distribution fee” and call it a “sales charge”—regardless of whether the sales charge is deducted right away or over a period of time.

At the Investment Company Institute's 2007 Securities Law Developments Conference in Washington, Donohue issued a call out for “truth in labeling.” He said that financial advisers should notify investors about the sales charge and the information about the charge should also be in the prospectus and the confirmation.

Last year, the mutual fund industry collected 12b-1 fees totally $11.8 billion. These fees are authorized under the 1940 Investment Company Act Rule 12b-1 in 1980.

12b-1 fees were originally intended to cover marketing and distribution costs. However, they are now used to pay consultants and financial advisers, 401k administrators, and fund supermarkets (such as Fidelity and Charles Schwab). The fees are also used to cover a company’s internal expenses.

The Investment Management Division staff wants Class A, Class B, and Class C investors to be treated fairly, rather than having distribution costs be unfairly divided between the three groups. Donohue said the current discrepancy could lead to conflicts of interests for people charged with selling the funds.

Donohue also wants to the industry to look at whether investors are paying over what the NASD rule has set for 12b-1 fees and beyond the maximum sales load. His SEC division staff will suggest reforms that update the 12B-1 factors, which fund boards evaluate when examining 12b-1 plans.

The division will also look at ICA Section 22(d), which mandates that a fund’s public offering price be included in the prospectus. He and his division want to approach the issues from the point of view of a fund investor.

The stockbroker fraud law firm of Shepherd Smith and Edwards represents investors who have lost money because of the negligence or misconduct of security industry members. Contact Shepherd Smith and Edwards today.

Related Web Resources:

Remarks Before the ICI 2007 Securities Law Developments Conference, by Andrew J. Donohue, SEC.gov, December 6, 2007

Division of Investment Management, SEC.gov

The U.S. Securities and Exchange Commission says that a number of mutual funds have started providing risk/return data with the use of interactive reporting language.

Vanguard 500 Index Fund, Allegiant Advantage Fund, Muhlenkamp Fund, and American Funds’ Europacific Growth Fund are among the mutual funds that have taken what the SEC is calling this "significant step.”

The agency says that it will continue to observe the way information can be used to keep mutual fund investors informed. It will also look at whether anything else needs to be done to create greater accessibility for investors.

Mutual fund investors can access the information through EDGAR, which is the SEC’s online database that provides corporate data. XBRL, a computer software language that lets users more easily manipulate and analyze data, powers the interactive information.

Each mutual fund prospectus comes with a risk/return summary that offers details about a fund’s performance history, objectives, costs, and strategies.

SEC Chairman Christopher Cox says that he believes that as more mutual funds use the interactive language to provide information, investors will be more able to easily choose from thousands of funds while sitting in front of their computers.

At least 40 publicly traded companies are using XBRL to file their financial statements.

Shepherd Smith and Edwards represents mutual fund investors that have sustained losses while investing in the securities industry and wish to file a claim against a negligent party. Contact Shepherd Smith and Edwards today if you want to speak with one of our stockbroker fraud attorneys about your case.

Mutual Funds Begin Providing Risk-Return Information Using Interactive Data, SEC.gov, August 21, 2007

EDGAR Database

The Independent Directors Council (IDC) recently provided the Securities and Exchange Commission with a list of “reforms” regarding 12b-1 mutual funds, including that mutual fund directors should oversee the fees. The group claims that the fees are used to pay for advice and shareholder servicing, when the true use is to pay high comissions that can be hidden or obfuscated from investors.

In 2006, the mutual fund industry collected $11.8 billion in 12b-1 fees. The SEC sponsored a roundtable discussion on B-shares in June to discuss whether to do away with such shares. Seeking compromise, The IDC now suggests "clarification" of 12b-1 plans, improved disclosures to investors and send-it-to-committee type delay tactics - all intended to avoid the proposed end to the issuance of such shares.

Three decades ago Wall Street sought to compete with “no-load” mutual funds being sold directly by mutual fund companies. In 1980, it got help from Washington to create “B shares,” so-called because these are authorized under section 12-b of the Investment Advisors Act. While no front end load is paid to buy such shares, sellers are paid up front to sell the shares. Buyers are then charged fees each year for 5 years and, if they try to get our earlier, are charged a penalty for early withdrawal.

Such shares have been the subject of constant concern for more than 25 years. Salespersons often misrepresent the shares as “no load” and seek to avoid volume discounts available on old-fashion front end load A-shares to make higher commissions on the B-shares. While the industry does not want to end this $12 billion per year gravy train, the time has come to simply end the sale of such shares in order to stop the abuse.

Shepherd Smith and Edwards represents investors nationwide in claims against the securities industry. We represent clients who have been victims of wrongdoing by brokers and their firms, including in the sale of B-shares and other mutual funds. To learn whether we can also assist you to recover, contact us to arrange a free consultation with one of our attorneys.

Edward D. Jones & Co. will pay $75 million to settle charges by the Securities and Exchange Commission that it failed to adequately disclose financial incentives to sell mutual funds from its Preferred Families of mutual funds.

The SEC also said that Edward Jones did not make adequate disclosures on its website about its revenue sharing, its directed brokerage payments and other payments for distribution of mutual fund shares. The firm was also accused of failing to disclose information about college savings (or “529") plans it sold.

Edward Jones agreed to pay $37.5 million in civil penalties, as well as $37.5 million in disgorgement, and to alter its website disclosures about the preferred mutual fund family program and the college savings plan, but neither admitted or denied the claims against it.

Shepherd Smith and Edwards represents institutional and individual investors nationwide in claims against members of the securities industry. We have served thousands of victims of misconduct by investment firms and their representatives, including those at Edward Jones & Company. To learn whether our firm can assist you, contact us to arrange a free consultation with one of our attorneys.

After a widespread investigation into late-trading of mutual funds the SEC levied sanctions against various mutual fund management companies and others, including fines as well as orders to disgorge profits and to reimburse the victims of the fraudulent trading. In 2004, Invesco was ordered to pay $325 million and AIM Advisors was ordered to pay $50 million.

The basis of the fraud was simple: Closing prices of mutual fund shares are set based on closing prices of the shares held in the funds. However, inflow and outflow of funds can legitimately occur based on orders placed prior to the close. The fraudulent orders were placed after the market closed but were made to appear as earlier orders. Those transacting the late orders had the unfair advantage of news announced after the close as well as post-closing changes in stock prices.

Over several years, billions were reaped from such improper market timing activities. The victims of the fraud were the millions of legitimate owners of the mutual funds. The SEC has established what it calls “Fair Funds” to reimburse victims of late trading and other scams. This week over $300 million will be also distributed to Time Warner shareholders who bought based on improper financial data. The SEC says that, with these distributions, the total paid from Fair Funds now tops $2 billion.

Shepherd Smith and Edwards represents individuals and institutions who are victims of securities fraud. We have represented thousands of investors nationwide to recover. If you our your firm have lost money in because of misconduct by those in the securities industry contact us to arrange a free consultation with one of our attorneys.

Securities America, Inc. agreed to a $375,000 fine to settle charges by the NASD that it received improperly directed mutual fund commissions on behalf of one of its brokers, failed to supervise and failed to disclose the arrangements to the affected mutual fund owners.

The NASD said that this situation, in which a mutual fund company directed brokerage fees specifically for the benefit of a lone broker, is the first known case of its kind. NASD rules prohibit registered firms from allowing sales personnel to participate in directed brokerage arrangements. NASD fair dealing regulations also require disclosure to clients of such fees and other compensation received through arrangements involving their accounts.

A directed brokerage arrangement is one in which a client, such as a pension fund, directs a planner to use a certain broker-dealer for trade executions. In return for the commissions received on the transactions, the broker-dealer provides other services to the advisor or these can be rebated to the clients. The Securities America broker arranged for such commissions from union-sponsored retirement plan clients to be directed to his firm for his own benefit.

In its sanctioning order, the NASD said the broker negotiated an arrangement with a mutual fund company to have thousands of dollars of brokerage commissions directed to him every month and that Securities America approved the arrangement for almost two years while it received $420,000 in directed commissions from the fund company for the broker’s benefit, of which $262,000 was paid to the broker.

Shepherd Smith and Edwards represents clients that are the victims of securities fraud. If you have lost money in because of misconduct by someone in the securities industry, hiring an experienced law firm can greatly increase the chances of recovering your losses. Contact us to arrange a free consultation with one of our attorneys.

The Securities and Exchange Commission recently made a $37 million disbursement to more than 300,000 investors in the Columbia Funds who were injured in the widespread fraudulent mutual fund market timing scandal. The SEC said this was the first of four anticipated distributions of approximately $140 million total to be paid to 600,000 affected Columbia account holders.

These funds were obtained in a settlement in 2004 with Columbia Management Advisors Inc. and Columbia Funds Distributor Inc. The SEC had charged that between 1998 and 2003, the two entered into or allowed arrangements to market-time Columbia funds.

The SEC has returned more than $1.8 billion through such distributions, said Linda Thomsen, director of the agency's Division of Enforcement. Additional information can be learned by contacting David P. Bergers, John T. Dugan, or Celia D. Moore in the SEC's Boston Regional Office at 617-573-8900.

Shepherd Smith and Edwards represents individuals and institutions with claims against investment firms. If you or your firm are the victim of misconduct by members of the securities industry, contact us to arrange a free consultation with one of our attorneys.

Related Web Resource:

Full Text of the Discribution Plan

Morgan Stanley & Co. Inc. agreed to pay a $250,000 civil penalty to end claims by Rhode Island Regulators that it failed to supervise sales representatives who engaged in unethical and dishonest practices in the sale of mutual funds and variable annuities.

According to the director of the Rhode Island Department of Business Regulation, the practices in question took place in Morgan Stanley's Providence office. Morgan Stanley agreed to the penalty and will undertake a comprehensive review of the practices of the two sales representatives involved to ensure that there are no other violations of the securities statutes and rules involving other clients.

The state's superintendent of securities said the investigation uncovered securities laws violations that occurred over a three-year period and involved a lack of supervision and oversight of the sales representatives. “Morgan Stanley failed to ensure that there were adequate procedures in place reasonably designed to prevent these unlawful practices,” she said.

The investigation reportedly revealed multiple instances where a sales representative sold less-expensive, no-load mutual funds owned by the clients and replaced them with more-expensive mutual funds and variable annuities. This practice resulted in an increase in investment costs to the clients, while reducing the investment diversification of the clients’ portfolios.

According to the claims: That same representative liquidated a certificate of deposit owned by an 80-year-old customer to purchase a variable annuity, a product determined to be totally unsuitable for a person that age and a second representative failed to exchange mutual funds for a customer in a manner that would have avoided the payment of sales charges, and failed to provide the customer with the benefit of available breakpoints on commissions.

The state regulators also determined the sales representatives recommended investments in mutual funds and variable annuities that were not suitable for customers. Morgan Stanley agreed to the sanctions without admitting or denying the allegations.

Shepherd Smith and Edwards represents clients that are the victims of securities fraud. If you have lost money because of misconduct by someone in the securities industry, hiring an experienced law firm can increase the chances of recovering your losses. Contact Shepherd Smith and Edwards today.

The Securities and Exchange Commission filed suit in a New York Federal Court contending that Simpson Capital Management Inc., its owner and its head trader entered into late-trades in hundreds of mutual funds, defrauding the funds and their shareholders of approximately $57 million.

The SEC claims that the defendants placed more than 10,000 unlawful mutual fund trade orders after the market closed, enabling them to take advantage of knowledge of after-market events while receiving the price previously established that day as the fund's closing net asset value. Simpson Capital is the investment adviser to two hedge funds, Simpson Partners L.P. and Simpson Offshore Ltd.

The SEC further charged that the firm's owner, who was also an investor in the Simpson Funds, "personally earned at least $19 million in fees and profits" as a result of the fraudulent transactions, adding that the head trader “received more than $996,000 in salary and bonuses during the late trading scheme." The SEC is asking the court to order permanent injunctions, disgorgement plus prejudgment interest, and civil penalties.

This suit is one of many civil and criminal actions initiated by the SEC and other regulators for improprieties in the operation of hedge funds, as well as actions regarding the late trading of mutual funds by hedge funds, high profile Wall Street investment banks, mutual fund advisors and individuals.

Shepherd Smith and Edwards is committed to fighting for the rights of investors that are the victims of securities fraud. We have helped thousands of U.S. investors recover their financial losses. Call Shepherd Smith and Edwards at 1-800-259-9010 for your free consultation.

Related Web Resource:

SEC's Complaint filed in the NY Federal Court

The NASD fined four firms for mutual fund sales violations and for failures to properly supervise such sales. The fine amounts are $473,000 against MML Investors Services, Inc., $354,000 against NYLIFE Securities LLC, $322,000 against Securities America, Inc. and $100,000 against Northwestern Mutual Investment Services.

The violations charged include sales of Class B and Class B shares, causing investors not to receive the benefits of price breaks on Class A shares, failures to properly notify clients of available cost free transfers from one mutual fund to another at the funds’ net asset values and failure to have adequate supervisory systems and procedures to prevent such violations.

In resolving the case, MML and Northwestern must also pay their clients who qualified for, but did not receive, the net asset transfer benefits and pay refunds to those who did not benefit from the price breaks. Including the refunds already paid, it is estimated that thousands of clients of these two firms will receive a total of more than $6.5 million.

"The cases announced today are the result of NASD's continuing commitment to help ensure that sales of mutual funds - the investment product most commonly held by investors - are made appropriately and with the benefit of full consideration of all available share classes and pricing features," said the NASD’s Head of Enforcement. Each firm consented to the sanctions without admitting or denying the allegations.

Shepherd Smith and Edwards is a securities law firm which represents investors nationwide in claims against investment firms. To learn whether our firm can assist you or your firm, contact us to arrange a free confidential consultation with one of our attorneys.

An SEC administrative law judge found that JB Oxford Holdings, Inc. “violated the forwarding pricing rule” when it executed trades after 4pm EST at the same day price, but found the firms former general counsel was not to blame.

ALJ Robert Mahoney determined that JB Oxford Holdings was involved in over 12,000 late mutual fund trades affecting over 600 funds in violation of "forward pricing" rules but dismissed charges against Scott G. Monson, JB Oxford Holdings Inc.’s former general counsel.

The SEC charges stated that seven JBOC clients were allowed to enter into transactions after market closing at prices established and Monson drafted a procedural agreement which allowed this. However, the ALJ said Monson was not to blame because he did not know what the prices were or that there was any issue regarding the legality of the trade time.

In the decision, Mahoney exonerated Monson since he was not aware there was a “forward pricing” rule during the time in question. Allegations that Monson should have known that the procedural agreement for mutual fund investments he together would play a part in JB Oxford Holdings’s mutual fund investments were also dismissed .

The ALJ said that Monson did act in a matter that “contributed to JBOC’s primary violations, but that Monson was not the reason JBOC violated the rule, regardless of whether or not the procedural agreement was used. The decision added that JBOC personnel did not consider late trading an issue even before Monson drafted the documents in question.

The decision stated that the SEC never charged Monson with determining whether the trading times allowed by the procedural agreement violated securities regulations. Although the ALJ found that Monson changed the times when ordered to do so by operations personnel, the CEO, and the assistant vice president of operations, he did not act independently.

The law judge concluded that the SEC did not prove there was a preponderance of evidence that Monson was aware of, or should have been aware of, the fact that the drafts would lead to JBOC’s primary violations.

Shepherd Smith and Edwards is a securities litigation firm dedicated to helping investors that have been the victims of securities fraud recover their losses. We have a high success rate for helping investors get their money back. Contact Shepherd Smith and Edwards today to schedule your free consultation.

Related Web Resources:

View the ALJ's Initial Decision (PDF)

Late Trading, SEC.gov

"B Share", or "back-end load", mutual fund issues are being reconsidered by The Securities and Exchange Commission. The "B share" nick-name is derived from Rule 12 b-1 of the Investment Company Act of 1949, amended a quarter century ago to allow for the creation of such shares.

To combat a huge growth in "no load" mutual funds in the 1980's, commission based investment firms lobbied for the creation of a product to compete. In response, the U. S. Congress agreed to amend the Investment Company Act to provide for a new class of mutual funds. On such funds, mutual fund companies can, instead of charging the investor an up-front commission, pay commissions to investment firms and their brokers right away, then charge the investor fees over time to recoup those commissions.

Since that time regulators have been besieged with complaints regarding B Shares. Deception, omission and out-and-out misrepresentations have often been made to lure investors into believing such funds are "no load". Most observers acknowledge the potential for such abuse, yet little has been done to address the issue.

As well, such funds do not make adjustments to lower commissions on larger investments as do the much older variety of "A shares". For example, if an investor invests $500,000 into A shares, or a "family" of such funds to diversify, they usually pay smaller percentage commission - perhaps 2% - than someone a total of $25,000, who may pay 4%. An investor usually pays one percent per year for 5 years on B-shares, a total of 5%.

To be sure the commissions already paid by the mutual fund company to investment firms is recovered, a penalty is charged to the investor for cashing out of the fund prior to the five years necessary to recover the sales expense. Many investors discover for the first time that the the fund was indeed not a "no load" fund when they seek to sell.

As further abuse, some brokers used questionable tactics to convinced clients to cash in B shares of one fund, causing a penalty to the client, only to invest the proceeds into B shares of another fund, renewing the period for sales charges and penalty. This is especially prevalent when a client's account is moved from one investment firm to another. Sometimes it is the same broker making the change, who liquidates at one firm then reinvests at a new firm, thereby avoiding detection.

Another abuse is failing to inform investors seeking changes in their portfolios that, instead of liquidating B shares and incurring the penalty, investor can usually move their funds to a different fund within the same family of funds and avoid the penalty.

Even those investment brokers who properly explain B Share fees to their clients seldom warn the significance of being charged an extra 1% per year on their investment. This "deferred sales charge" comes in addition to other fees and costs charged to the investor by the mutual fund.

Therefore an investor can a total of 2%, or even higher, in annual costs on their assets. This means that, instead of enjoying a growth of perhaps 10%, as their investment rises in value, the investor would only earn 8%. A compounding return of 8% is far lower than compounding at 10%. The effect is even more pronounced in a falling market, since total charges of 10% in 5 years can double market losses of 10%.

Investors investing for income are hurt even more by charges and fees on B Shares because instead of earning a rate of perhaps 6% on their investment, that in