January 11, 2016

Massachusetts Charges Citizens Securities in Elder Fraud Case

William Galvin, the securities regulator of the state of Massachusetts, has filed charges against Citizens Securities for purportedly selling an older investor funds that were too high risk for her investment tolerance level. He wants restitution for the investor, who lost approximately $7,000.

Citizens Securities operates out of Citizen Bank locations. According to the state, even though she had a low risk tolerance level, the woman was sold alternative and emerging markets funds and funds that purchase high-yield bonds. She also purchased a market-linked CD, investing $100K, without comprehending that it was riskier than a regular CD.

Her financial consultant, whom she met at Citizens Bank, purportedly did not give adequate disclosures of the branch’s brokerage activities or tell her the name of his employer. This caused the investor to think that he worked for the bank.

The advisor is accused of disregarding the elderly investors stated goals and not asking about her investment experience or education. The administrative complaint says that she told the financial consultant that she didn’t want to be exposed to the stock market. It also said that financial consultants at Citizens Bank are not supervised daily or in-person.

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December 22, 2015

Fidelity Must Pay $1M Penalty For Failing to Detect Elder Financial Fraud

The Financial Industry Regulatory Authority (FINRA) has imposed an over $1 million penalty on Fidelity Investment’s Fidelity Brokerage Services (Fidelity) for failing to protect clients from a financial fraud committed by a woman pretending to be a broker for the firm. Lisa A. Lewis (Lewis) stole over $1 million from customers, most of whom were elderly investors. FINRA says that the firm’s retail brokerage arm should have been able to detect the scam, but Lewis was able to perpetrate her fraud because Fidelity’s supervisory controls were lax.

According to the self-regulatory organization (SRO), from August 2006 to May 2013, Lewis told customers from a firm she was fired from for purported check-kiting and improperly borrowing customer funds that she was with Fidelity, when she had no such connection to the firm. Lewis set up Fidelity accounts by using the personal data of nine people and placed the accounts in their name, as well as established joint accounts with them in which she named herself co-owner. Lewis then had all communication regarding the accounts sent to her. Lewis was able to set up over 50 individual and joint accounts at the firm. She proceeded to convert assets from these accounts for her own benefit.

Last year, Lewis pleaded guilty to wire fraud related to the elder financial fraud scam, and she is now behind bars where she is serving a 15-year prison term. She also has to pay over $2 million in restitution to the customers she harmed.

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December 15, 2015

LPL Financial to Pay $750K in Nontraded REIT Case Involving Elderly Investor in New Hampshire

New Hampshire’s Bureau of Securities Regulation says that LPL Financial has consented to pay $750,000 to resolve charges involving the sale of nontraded real estate investment trusts to an elderly investor. The state says that transactions were not only unlawful but also they were suitable for the 81-year-old customer.

The state says that the sale of the nontraded REITs were unsupervised, causing the investor to sustain substantial losses in 2008. Aside from the $750K, which includes $250K to the bureau, $250K in administrative fees, and $250K to the investor education fund, LPL will offer remediation to any client in New Hampshire that bought a nontraded REIT through the firm since 2007 if the sale did not meet the firm’s product-specific limitations or guidelines.

Nontraded REITS
Nontraded REITs can be high-risk investments. They are liquid and may come with substantial front-end fees of up to 15%. Distributions are not guaranteed and are determined by the alternative investments' board of directors. REITs are not traded on exchanges and there is a limited secondary market for them, which can make them difficult for investors to sell.

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December 12, 2015

Securities Fraud News: Texas REIT’s Share Price Drops Following Ponzi Allegations, Morgan Stanley, Ex-Broker Are Found Jointly Liable in $1M Elder Fraud Case, and Brokerage Firm Resolves Variable Annuities Claims for $475K

United Development Funding IV Shares Fall After Allegations of Texas Ponzi Scheme
United Development Funding IV (“UDF IV”), a Texas-based real estate investment trust (“REIT”), saw its share price drop after Harvest Exchange published a post that said the REIT had been run like a Ponzi scheme for years. United Development was a nontraded REIT that became traded when it listed on Nasdaq last year under the symbol “UDF”.

In the report on the Harvest site, the anonymous author said that the UDF umbrella had traits indicative of a Ponzi scam, such as, it uses new capital to pay distributions to current investors and UDF companies and gives substantial liquidity to earlier UDF companies to pay earlier investors. The article said that once the funding of retail capital to the most current UDF stops, the earlier UDF companies do not seem able to stand on their own. This purportedly indicates that the structure will likely fail and investors will be the ones sustaining losses.

After the report by the online professional network of investors, UDF IV saw its share price plunge from $17.53 to $10.10. It later dropped further to $8.55/share.

Over $1M Awarded in Senior Financial Fraud Case Against Morgan Stanley and a Former Financial Adviser
A Financial Industry Regulatory Authority Inc. arbitration panel has awarded 92-year-old Genevieve Lenehan (“Mrs. Lenehan”) over $1M in her claim against Morgan Stanley (MS) and former Morgan Stanley advisor Justin Amaral (“Amaral”). Mrs. Lenehan accused Amaral of churning and reverse churning her account. Amaral also advised Mrs. Lenehan’s husband until his death five years ago.

Continue reading "Securities Fraud News: Texas REIT’s Share Price Drops Following Ponzi Allegations, Morgan Stanley, Ex-Broker Are Found Jointly Liable in $1M Elder Fraud Case, and Brokerage Firm Resolves Variable Annuities Claims for $475K" »

October 23, 2015

Ex-Coastal Investment Advisors President Admits to Bilking Investors, Including Seniors

Ex- Coastal Investment Advisors Inc. President Michael Donnelly and the firm’s affiliated broker-dealer will settle Securities and Exchange Commission charges accusing him of bilking brokerage customers and advisory clients of close to $2M. According to the SEC complaint, Donnelly’s 13 victims included unsophisticated investors and older investors belonging to the 64 to 85 age group.

Donnelly would get clients to write checks to Donnelly Advisors Group. The money was supposed to pay for their investments. Instead, the regulator says, rather than investing the funds, Donnelly took investor money and used them to pay for his own living expenses and for his children’s private school tuition.

From ’07 to ’14, he hid the securities scam by providing bogus trade confirmations, account statements, and other fake information that made it appear as if investors had actual investments that were doing well. For example, he generated portfolio reports that listed fake investments. He even set up an online report for at least one client in which he inserted ticker symbols of stocks he supposedly bought for that individual. Donnelly also modified brokerage statements and trade confirmations to make clients think they were holding certain investments.

According to the criminal action against him, which is discussed below, when one couple asked Donnelly for their money, he allegedly convinced another investor to liquidate part of an annuity while making it seem as if the funds were to go toward buying out another investor. He then used the money to give the couple back their funds. Donelly’s investment scam failed last year after he was caught.

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October 15, 2015

Ex-Edward Jones Advisor Gets Five Years Behind Bars for Bilking 56-Year-Old Disabled Woman

Jason Wade Cox, a former advisor for Edward Jones, was sentenced to five years in prison after pleading guilty to charges of mail fraud, wire fraud, and money laundering involving the account of a 56-year-old disabled woman. Cox had been managing the account of Jodene Beaver ever since the death of her father three years ago.

Beaver, who has mental and physical impairments, was left a trust by her father, who chose Cox as her financial adviser. Unfortunately, rather than helping Beaver, Cox stole thousands of dollars, taking money from the original account, moving the funds into her checking account, and then spending a lot of the cash on gambling. Not only did Cox spend all of Beaver’s money, but also he recommended that she sell her condominium and transfer to an apartment that had bed bugs.

According to the Internal Revenue Service, Cox got around federal banking rules by taking out from Beaver's account just under the amount that would have required him to file currency transaction reports. When bank officials asked Beaver about the money she was withdrawing for the financial adviser, she replied that they were business partners but wasn’t sure what kind of business they were involved in. Her bank closed her accounts and notified the police.

In addition to the prison sentence, Cox must serve three years supervised release and pay over $412,000 in restitution.

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September 28, 2015

NASAA Board Releases Proposed Model Act to Protect Vulnerable Adults from Financial Exploitation for Comment

The North American Securities Administrators Association announced that its Board of Director has approved to release for comment a proposed model act to tackle the problems faced by brokerage firms, investment adviser firms, and their representatives when dealing with signs that older senior investors, or other vulnerable adults, may be suffering from financial exploitation. The proposed model is called "An Act to Protect Vulnerable Adults From Financial Exploitation."

If approved, the act would mandate that qualified investment advisers and brokerage firm employees notify their securities regulator, as well as Adult Protective Services, if they have reason to believe that a vulnerable adult has been subject to financial exploitation. They would also be able to notify a third party that had been previously designated by that client of their suspicions, as long as that person is not the one suspected of the exploitation. The act would let qualified firm employees provide records related to the attempted/suspected exploitation to the authorities.

Brokerage firms and investment advisers who fulfill the requirements of the act would be granted immunity from civil or administrative liability related to the elder financial fraud. Also, advisers and broker-dealers would be granted the authority to delay account disbursements if they thought that something untoward was happening.

A vulnerable adult in such scenarios would be someone who is age 60 or older or an adult who is vulnerable in other ways that could prevent him/her from being able to self-protect from exploitation. NASAA’s proposal comes soon after the one that was issued by the Financial Industry Regulatory Authority.

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September 12, 2015

US Study Says Older People Are More Susceptible to Financial Fraud Because of How The Brain Works

According to a study published previously in the Proceedings of the National Academy of Scienceshttps://www.nia.nih.gov, the reason why elderly people are more susceptible than younger folk to financial fraud is because the ability to identify trustworthiness decreases with age. The researchers looked at two different groups—one group was comprised of younger adults (ages 20 to 42) and older adults (ages 55-84.)

The groups judged faces in photographs. These faces had been pre-rated for approachability and trustworthiness.

While both groups identified those that had been pre-rated as neutral or trustworthy as approachable and trustworthy, the older group was more likely than the younger group to identify the faces that had been pre-rated as ‘untrustworthy’ as trustworthy. Shelly Taylor, a UCLA psychologist who was involved with the study, said that the reason for this was that older adults did not detect certain “easily distinguished” facial cues indicative of untrustworthiness.

The researchers asked another forty-four participants to undergo functional magnetic resonance while rating the faces. While the older adults did not display much of an activation in the anterior insula, which is the part of the brain known for regulating "gut feelings” that affect decision-making, the younger adults’ anterior insula exhibited a stronger response. Taylor said that while the younger adults were getting that ‘uh-oh’ feeling, the older adults were not.

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August 22, 2015

FSC Securities to Be Held Accountable for $1.2M FINRA Arbitration Award Issued to Victims of Ponzi Scammer Who Faked His Death

A Financial Industry Regulatory Authority Inc. panel said that FSC Securities Corp. is responsible for a $1.2 million arbitration award for compensatory damages to investors that were bilked by Aubrey Lee Price, the infamous Ponzi scammer from Georgia who tried to fake his death to in 2012. FSC Securities is a broker-dealer with AIG Advisor Group (AIG).

The eight claimants contend that the brokerage firm did not supervise a number of brokers who sold them fraudulent securities that were part of Price’s $40 million Ponzi scam. According to their securities lawyer, Price and two other ex-FSC brokers persuaded clients to invest in the PFG fund, an unregistered investment fund, which was the main product of the scheme.

When the trading account sustained huge losses Price prepared account statements for investors that noted fake asset amounts and investment returns. The claimants believe that FSC failed to properly supervise its brokers and had numerous chances to detect that Price and the other brokers were selling away into the PFG fund while claiming “preposterous” return rates.

Price was an FSC broker from 2006 to 2008. Prior to that he worked at Citigroup Global Markets (C) and Banc of America Investment Services (BAC). Last year, a federal judge sentenced him to 30 years behind bars for bank fraud.

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July 14, 2015

LPL Financial Fined $250K by Massachusetts Over Misrepresentations Made to Senior Investors

Massachusetts Secretary of the Commonwealth William Galvin has fined LPL Financial (LPLA) $250K to resolve charges that its representatives misrepresented their qualifications when working with older investors. The state’s regulator claims that the brokerage firm approved having brokers use senior-specific titles on their business cards. The titles were not in compliance with the state’s regulations regarding senior designations.

After Galvin’s office discovered one such incident, LPL conducted an internal probe and discovered that at least 10 brokers may have been using titles that were not in compliance with the state’s Senior Designations Regulations. The regulator said that the firm had even approved the title on one broker’s business card more than once.

Galvin contends that since June 2007, LPL failed to establish or enforce a procedure allowing it to look at senior-specific titles to make sure they complied. He noted the importance of not using titles that imply one has an expertise in advising senior investors when there is none. The Senior Designations Regulations prohibit the use of titles that imply a training or certification that the titleholder doesn’t actually possess.

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July 11, 2015

Massachusetts Regulator Charges Securities America Over Bait and Switch Ads By Broker Accused of Targeting Senior Investors

Massachusetts Secretary of the Commonwealth William Galvin is charging Securities America with inadequate supervision of a broker who is accused of using a “grossly deceptive” radio ad campaign to target older investors. The state regulator said that the financial firm shouldn’t have approved the spots that Barry Armstrong ran on his AM radio show. His show, which airs on WRKO-AM, is syndicated on different stations.

The broker purportedly ran ads asking listeners to call for information related to Alzheimer’s Disease when what Armstrong really was doing was collecting their contact information so he could offer to sell them financial advice. Galvin’s office said that the broker engaged in ‘bait and switch’ by falsely advertising one service when he was really selling another type of service.

The regulator contends that Securities America failed to identify or prevent Armstrong’s unethical conduct by neglecting to ask even one question about the content of the ads or attendant mailing materials. Now, the state wants a censure, a cease-and-desist order, and a fine imposed against the firm.

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July 4, 2015

FINRA Orders BNP Paribas Securities to Pay Retired Couple $16.6M for Unsuitable Investment Sale

The Financial Industry Regulatory Authority says that BNP Paribas Securities Corp. has to pay retirees James and Margaret Eringer $16.6 million for selling them a leveraged derivative call option, which was not a suitable investment for them. This securities claim, which was brought in 2010, is the longest running case that FINRA has presided over. The arbitration panel finally issued a ruling after over 90 days of hearings.

The Eringers made their money when they sold a bakery business that belonged to one of their parents. The British couple spent about 60% of their investible assets on the investment in 2007.

According to their securities attorney, they made the purchase through Ontonimo Limited, which is a corporate entity that BNP Paribas mandated they create since the firm could not directly sell this kind of security to retail investors. This type of investment product is usually sold to institutional clients and hedge funds.

The Eringers paid BNP over $2 million for costs and fees. The firm also purportedly made James Eringer sign an agreement indicating that he was an investment adviser himself even though he had no professional financial experience nor did he have a securities license. Within 18 months, the Eringers’ contend, their investment became “worthless.”

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June 25, 2015

New SEC Program Will Examine Financial Firms and Their Retirement-Planning Guidance

The Securities and Exchange Commission said it would perform a number of exams on financial advice firms as part of its plans to more closely examine the guidance that investors are getting as they plan for retirement. The regulator’s new program is called the Retirement-Targeted Industry Reviews and Examinations Initiative. The SEC’s Office of Compliance Inspections and Examinations will conduct exams. OCIE is responsible for more than 10,000 advisory firms and 4,500 brokerage firms.

Areas of scrutiny will include firm oversight and investment sales processes and procedures, as well as the areas where retail investors seeking to save for retirement may be at risk of sustaining financial losses. The SEC wants to look at whether the compensation provided to advisers establishes conflicts of interest and how firms deal with this.

The regulator also wants to examine the marketing material provided to customers and whether they are accurate, as well as if financial advisers are conducting enough due diligence on investments. Marketing collateral will be checked for accuracy, including making sure documents disclose the necessary information and are not misleading or contain omissions. The Commission will also study specific recommendations that are being made to clients.

In its alert about the initiative, the SEC acknowledged that a lot of retail investors have become more dependent than ever on their own investments to support them during retirement. OCIE will look at the complex and changing factors that investors deal with when deciding where to invest their money, including the wide variety of investments that are made available in this constantly changing market environment. The regulator will also study registrant sales, and disclosures.

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June 22, 2015

Investor Want Wells Fargo Advisers to Pay $100K in Damages Over F-Squared Investment Losses

A client of Wells Fargo Advisors (WFC) is looking to recover at least $100,000 in damages for losses he sustained from investing with F-Squared Investments Inc. The arbitration case comes six months after F-Squared consented to pay $35 million to resolve Securities and Exchange Commission charges accusing the asset manager of making false claims about its flagship investment product’s performance. The 68-year-old widower’s claim will test whether investors can pursue broker-dealers for selling F-Squared products.

The claimant, a moderately conservative investor who was looking for moderately conservative growth for his retirement account assets, began working with a Wells Fargo financial adviser in 2011. The brokerage firm made F-Squared managed-accounts available to advisors in 2013.

According to InvestmentNews, The investor’s advisor put about $900K of the client’s money—most of his savings, says his attorney—in products managed by two ETF strategists. Over 50% of the money went into F-Squared’s AlphaSector Allocator Select. Meantime, the investor said it paid Wells Fargo about $19,000 in fees for recommending the products. He believes that the firm had a conflict when it recommended investments because they came with such high commissions. Also, the fees erased potential capital gains for the claimant.

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June 15, 2015

FINRA Pursues Broker For Allegedly Trying to Bilk Elderly Investor with Alzheimer’s of $1.8M

The Financial Industry Regulatory Authority Inc. has filed an elder financial fraud case against broker John Waszolek, who worked for UBS Wealth Management (UBS) at the time of the allegations. According to the self-regulatory organization, in 2009, Waszkolek took advantage of an 81-year-old client when he had her appoint him as a beneficiary of her trust even though she lacked the “testamentary capacity” to make such decisions and would not have been able to protect herself from exploitation. Testamentary capacity refers to a person’s mental and legal ability to make or modify a will.

The elderly widow lived by herself and had been a client of Waszolek since 1982. However, contends FINRA, it wasn’t until 2008 as her health worsened that the broker allegedly began to go above and beyond his professional obligation to her. He was the one that purportedly took her to see the doctor, who diagnosed her with Alzheimer’s. The regulator also says that he met with an estate planning lawyer so that he could be appointed as his client’s agent and given power of attorney. He wanted her trust modified so that he would be named the residual beneficiary.

When the estate planning lawyer refused because the elderly women lacked testamentary capacity, Waszolek purportedly suggested that his client see another lawyer. The amendment made to her trust would cause some $1.3 million that was supposed to be divided among four charities to go to the broker instead. That figure would eventually go up to $1.8 million.

Continue reading "FINRA Pursues Broker For Allegedly Trying to Bilk Elderly Investor with Alzheimer’s of $1.8M" »

May 16, 2015

Financial Fraud Headlines: “The Financial Coach” to Pay $3.6M in Restitution to Investors, SEC Charges Father and Son with Insider Trading, and Massachusetts Accuses Investment Firm of Elder Financial Fraud

"The Financial Coach" Pleads Guilty to Wire Fraud
Bryan C. Binkholder, also known as the “The Financial Coach,” will serve nine years in prison for bilking clients. Binkholder used books, a talk show, and YouTube videos to market his “hard money lending” program.

According to prosecutors, he touted himself as serving real estate developers that wanted to flip houses but he only made limited number of loans. Instead, he used investors’ funds to pay for his personal spending, give his wife a salary, and pay interest to other investors.

Binkholder’s financial scam took place from about 2008 to 2013. He pleaded guilty to four counts of wire fraud and must pay over $3.6 million in restitution.

Father & Son Charged in $1.1M Insider Trading Scam
The U.S. Securities and Exchange Commission is charging Sean R. Stewart and his father Robert with running an insider trading scam. Sean, who is a managing director at a renowned investment bank, purportedly tipped his father about upcoming mergers and acquisitions involving clients of two investment banks where he has worked. Robert, a technology company CFO and a certified public accountant, made trades based on these tips that were related to at least half a dozen acquisition and merger announcements. They made some $1.1 million in illegal profits over four years.

Meantime, the U.S. Attorney’s Office for the Southern District of New York has filed a parallel action against them.

Massachusetts Regulator Charges Firm With Illegal Security Sales to the Elderly
Massachusetts Secretary of State William F. Galvin’s office has charged Charles Nilosek and his investment firm Positions Benefit with illegally selling escurites to elderly investors. Both Nilosek and his firm acted as unregistered investment advisers when they sold $4 million of securities that were not registered to more than 140 state residents.

Galvin accused Nilosek and the firm of engaging in “bait-and-swtich” tactics to get investors to buy risky commercial mortgage securities. Position Benefits is accused of selling shares of these securities to retirees, as well as people getting ready to retire, and making it seem as if these investments came with a guaranteed return, which they did not.

Also, the SEC ordered Woodbridge Structured Funding LLC, which made the securities sold by Position Benefits, to pay a penalty of $250,000 for its involvement. The California company has consented to pay back the investors.

Even when regulators bring claims and prosecutors file criminal charges against fraudsters, you should still have an experience securities lawyer representing you to pursue the compensation you are owed. Our investment adviser law firm represents investors throughout the United States. Contact Shepherd Smith Edwards and Kantas, LTD LLP today.

The Financial Coach’ gets 9 years in prison for fraud, BizJournals, May 15, 2015

Secretary Galvin Charges Plymouth Man and Firm for Acting as Unregistered Investment Advisers, Orders California Funds to Offer Refunds and Pay a Civil Penalty for Selling Unregistered Mortgage Loans (PDFs)

Read the SEC Complaint against the Stewarts (PDF)

April 27, 2015

FINRA and SEC Unveil Report on Senior Investors, Cite Concerns About Unsuitable Recommendations

The Financial Industry Regulatory Authority and the Securities and Exchange Commission have put out a report, the Senior Investment Initiative, to help brokerage firms come up with better procedures and policies for older investors. With the current low yields on traditional savings accounts and investments that are more low risk, FINRA and the SEC’s Office of Compliance Inspections and Examinations are worried that broker-dealers could be recommending investments that may be to risky or unsuitable for seniors who want higher returns. They are also worried that the firms are not properly disclosing the terms and risks of these securities.

Considering that by 2040 there are expected to be some 79 million Americans in the 65 and over age group, information in this report is important for helping tackle investment issues as they relate to seniors. OCIE’s Director Andrew J. Bowden pointed out that seniors are now more than ever more dependent on their investments to help with retirement. Bowden noted that it is important that older investors are treated fairly and get suitable recommendations and appropriate disclosures about the risks, costs, and benefits of their investments.

The two agencies examined some 44 brokerage firms. They looked at brokerage firm reps training, communications, arresting, account documentation, use of certain designations, disclosures, supervision, and customer complaints.

The SEC and FINRA discovered that most older investors are buying open-ended mutual funds, variable annuities and other more simple products. However, there are some firms that are recommending investments that are not suitable to seniors seeking the higher returns. The agencies are concerned that these investors are making financial decisions without fully understanding the risks.

According to the report, the eight securities that generate the most revenue according to their purchase by senior investors:

• open-end mutual funds
variable annuities
• equities
• fixed income investments
• exchange-traded funds
• unit investment trusts
nontraded real estate investment trusts
• alternative investments
• structured products.

FINRA and the SEC said there was evidence showing that 34% of the firms made at least one or more recommendation of variable annuities to a senior investors even though the investment was not suitable for that person. 14% of broker-dealers made potentially unsuitable recommendations that investors purchase alternative investments, which can be hard to value, come with high buying costs, frequently lack liquidity, and have limited historical data.

On a positive note, over 77% of firms had training specifically addressing senior investors and the issues that can arise. 13% of broker-dealers told reps to report suspicions of elder financial fraud or suspected diminished capacity of a client. You can read more about the report here. (link to report).

Senior Financial Fraud

Our elder financial fraud lawyers at Shepherd Smith Edwards and Kantas, LTD LLP are here to help investors recoup their losses. Unfortunately, senior investors can be vulnerable to financial fraud, whether by someone they know or an unscrupulous financial representative. This can prove financially devastating to an investor that is now dependent on their investments for financial support.

Read the Report (PDF)

More Blog Posts:
Financial Should Pay $3.6M in Fines, Repayments for REIT Sales to Older Investors, Says NH Regulator, Stockbroker Fraud Blog, April 7, 2015

SIFMA Says White House Isn’t Entirely Right About The Cost of Abusive Trading to Investors, Stockbroker Fraud Blog, March 30, 2015

BlackRock Advisors Settles SEC Charges Over Conflict of Interest Disclosures for $12M, Institutional Investor Securities Blog, April 25, 2015

April 7, 2015

LPL Financial Should Pay $3.6M in Fines, Repayments for REIT Sales to Older Investors, Says NH Regulator

The New Hampshire Bureau of Securities Regulation wants LPL Financial (LPLA) to pay clients $2.4 million in buybacks and restitution for 48 sales of nontraded real estate investment trusts that were purportedly unsuitable for elderly investors. The regulator, which says the firm did not properly supervise its agents, is also fining LPL $1 million plus $200,000 in investigative expenses.

The securities case springs from transactions involving an 81-year-old state resident that purchased a nontraded REIT from the firm in 2008. The investor, whose liquid net worth was $2.5 million and invested $253,000 in the financial instrument, would go on to lose a significant amount of money. A probe ensued.

The state regulator contends that the 48 REIT sales, totaling $2.4 million lead to concentration that went beyond LPL guidelines and that the firm sold hundreds of nontraded REITs to clients in New Hampshire on the basis of “clearly erroneous “client financial data, while frequently violating its own policies. LPL has reportedly admitted that 10 of the 48 transactions deemed unlawful by the state were unsuitable according to its own guidelines. The Securities Bureau wants to take away the firm’s license to sell securities in New Hampshire.

Meantime, a former LPL Financial broker has been permanently barred from the securities industry by the Financial Industry Regulatory Authority. Raymond Daniel Schmidt, previously affiliated with LPL Financial Holdings Inc. in Southern California, violated industry rules when he borrowed funds from seven clients between ’09 and ’12. He settled with the self-regulatory organization without denying or admitting to FINRA’s findings.

Schmidt borrowed close to $2.3 million to build the Pakalana Sanctuary, a vacation rental property on Hawaii’s big island. He admitted his involvement in the retreat center/vacation center in a public regulatory filing in 2013. However, said FINRA, Schmidt actually purchased the property in 2009, opening it for business as its owner and operator three years later.

Brokers are not allowed to borrow money from clients. They also can’t take part in business activities outside the firm without telling the company and typically require the latter’s approval.

FINRA says that Schmidt failed to tell LPL about the property or the loans from customers even when he filled out yearly questionnaires required by the firm. Even when he eventually told the firm about the real estate, he denied that he owned interest in the property.

Earlier this year, Schmidt told the regulator's enforcement unit that he wouldn’t give over documents or cooperate with its probe. He is currently the subject of an elder abuse and negligence case related to the Hawaiian real estate investment that the plaintiff made.

Contact our REIT losses lawyers to explore your legal options.

NH regulators seek $3.6m judgment against LPL Financial over risky real estate, Union Leader, April 7, 2015

Watchdog bars ex-LPL broker who tapped client funds for Hawaii retreat, Reuters, March 26, 2015

New Hampshire Bureau of Securities Regulation

More Blog Posts:
Ex-LPL Financial Adviser, James Bashaw from Texas, Lands at New Brokerage Firm, Stockbroker Fraud Blog, October 30, 2014

CNL Lifestyle Properties REIT Dips in Value, May Sell Ski Resorts, Institutional Investor Securities Blog, March 16, 2015

Broker and Adviser News: Morgan Stanley Sues Ameriprise Broker, Former UBS Broker Alleges Investor Risk Levels Were Mischaracterized, and Ex-Bank of America Merrill Lynch Trainees Seek Overtime, Institutional Investor Securities Blog, March 5, 2015

March 30, 2015

SIFMA Says White House Isn’t Entirely Right About The Cost of Abusive Trading to Investors

The Securities Industry and Financial Markets Association claims that the White House is employing a methodology that is flawed to make the claim that investors are losing around $17 billion in retirement funds yearly because of trading practices that are abusive. SIFMA is against imposing tougher rules against brokers, including a draft rule expected to be released by the U.S. Department of Labor mandating that those who offer retirement plan advice meet a fiduciary standard and place their clients’ best interests before their own. Right now, brokers must only satisfy a suitability standard of care with the requirement that they make appropriate recommendations even if they aren’t necessarily the best.

President Obama wants the Labor Department to go ahead with the rule proposal. In February, the White House put out a report finding that some brokers use excessive trading and costly investments to enhance their commission, as well as take part in other practices that end up costing investors big time.

SIFMA, however, in its new report, claims that the White House is disregarding how similar rule changes such as the one the DOL is expected to propose, impacted investors in the United Kingdom where approximately 310,000 lost their brokers during the first quarter of 2014 alone because their accounts were too small for the representative to handle. Another 60,000 investors were rejected by brokers for their low balances. However, while the U.K.’s rule prohibits brokers from getting paid commissions from mutual funds, the DOL doesn’t plan to institute such a ban.

The SIFMA report, by NERA Economic Consulting, claims that the White House doesn’t appreciate the intangible benefits clients get from brokers or the fact that mutual fund fees have gone down over the past 15 years. Also, the report notes that aggregate number used by the White House factors in the whole $600 billion annuities market for individual retirement account annuities without anyone explaining why all of that is included. SIFMA chief executive and president Kenneth Bentsen Jr. said that the White House was employing data that was “nonconclusive” to arrive at conclusions that were “questionable.”

Earlier this month, Securities and Exchange Commission (SEC) chairwoman Mary Jo White gave testimony in front of the House Financial Services Committee. She said that the regulator is moving forward with its fiduciary standards drafts that would mandate for tougher disclosure requirements.

When Republican lawmakers said that she should do a better job of coordinating with the DOL when it comes to crafting financial adviser regulations, she noted that the SEC and the Labor Department are distinct agencies, each responsible for its own rules. Republicans and the business community, however are worried that having two different rules from the respective agencies would lead to market confusion while low-income Americans will find that the financial advisory industry is no longer accessible to them.

Shepherd Smith Edwards and Kantas, LTD LLP is a securities fraud law firm.

SIFMA claims White House figures on DOL rule flawed, InvestmentNews, March 16, 2015

Republicans grill SEC chief over financial adviser regs, The Hill, March 24, 2015


More Blog Posts:
U.S. Department of Labor’s Fiduciary Rule for Retirement Advisers Hits Another Snag, Stockbroker Fraud Blog, February 6, 2015

U.S. Department of Labor’s Fiduciary Rule for Retirement Advisers Hits Another Snag, Stockbroker Fraud Blog, February 6, 2015

Hanson McClain Sues Investment Adviser, Ameriprise Financial Services Over Client Information, Institutional Investor Securities Blog, January 12, 2015

February 24, 2015

401K Fees in the Spotlight, With $62M Lockheed Settlement & Edison Class Action Case Before the Supreme Court

Lockheed Martin Corp. has agreed to pay $62 million to settle a lawsuit accusing its employee 401(k) retirement plan of charging excessive fees to participants. As part of the settlement, the defense company will take part in monthly assessments of its plan, offer participants low-cost funds, and get bids from at least three outside companies that know how to deal with administrative matters involving big company retirement plans.

There are 100,000 participants and $27 billion of assets in Lockheed’s retirement plan. The civil case accused the company of not acting wisely when managing the retirement savings of employees, charging high fund fees, keeping a significant quantity of participants’ savings in low-yield funds, and paying record-keeping fees that were excessive.

Lockheed denied the allegations. Even though it is settling, the company is not admitting wrongdoing.

The Employee Retirement Income Security Act states that companies that sponsor 401(k) plans have a fiduciary obligation to act in employees’ best interests. There are currently over a dozen settled or pending cases contending that certain U.S. companies have not. Allegations have included the failure to watch out for excessive fees, directing employee savings into investment products overseen by affiliate companies, and perferencing costly retail mutual funds over less expensive options.

This week, the U.S. Supreme Court heard arguments in Tibble v. Edison, a class action securities case also alleging excessive investment fees, this time charged to participants of Edison International’s 401(k) plan. The complaint claims that the company breached its duty to act in employees’ best interests over six fund options. Pricier mutual fund options were purportedly selected even though nearly identical funds that charged lower fees could have been picked instead.

Edison contends that based on ERISA’s statute of limitations, participants of a 401(k) plan may only sue over funds that have been in a plan for no more than six years. The company argued that it therefore should not be held liable for three of the funds at issue, which have been part of the 401(K) plan since 1999. The 401k excessive fees lawsuit was filed just eight years ago.

A district court and an appeals court sided with Edison. The plaintiffs appealed.

After listening to oral arguments, the Supreme Court justices suggested that they will make 401(k) plans monitor the investment options they offer on a periodic basis. They also indicated that they would revive claims contending that Edison’s 401(k) plan should have transferred investors from the three funds’ retail class shares into institutional class shares that were identical but came with lower fees.

Please contact our securities fraud lawyers today if you suspect you were the victim of financial fraud.

Lockheed Martin to pay $62 million to settle 401k lawsuit
, Fortune, February 20, 2015

Employee Retirement Income Security Act, Department of Labor

Supreme Court to hear case that could impact your 401(k) fees, CNN, February 24, 2015

More Blog Posts:
SEC Examines Whether Banks Are Complying With Capital Rules, Institutional Investor Securities Blog, February 20, 2015

DOJ Investigating UBS Over Losses Related To Firm’s V10 Enhanced FX Carry Strategy, Stockbroker Fraud Blog, February 17, 2015

EU Fines ICAP $17M for Helping Traders Manipulate Yen Libor, Institutional Investor Securities Blog, February 17, 2015