Stock Broker Fraud Blog

NYSE Regulation fined 14 of its member firms a total of $10.4 million in fines for failing to deliver trade confirmations to their clients and other violations.

Citigroup Global Markets received the heaviest fine of $2.25 million for failing to deliver trade confirmation documents in more than a million consumer transactions. Lehman Brothers and DeutscheBank were each fined $1.25 million.

Other firms sanctioned included UBS Securities; Bear Stearns & Co.; Credit Suisse Securities (USA) LLC ; Banc of America Securities LLC; Goldman Sachs & Co.; JP Morgan Securities; Wachovia Capital Markets LLC; and Keefe, Bruyette & Woods Inc. Fines levied against these firms ranged from $375,000 to $800,000.

According to the New York Stock Exchange (NYSE) enforcement wing, the violations occurred between July 1, 2003 and Oct 31, 2004. These include failures to ensure delivery of prospectuses to customers who purchased securities and mutual funds, failure to deliver product descriptions to customers purchasing exchange traded funds and failure to establish and maintain appropriate supervisory procedures regarding such activities.

Each of the member firms also agreed to certify that its current policies and procedures are reasonably designed to ensure compliance with current federal securities laws and regulations regarding such requirements. This action was one of the final acts by the regulatory staff of the NYSE prior joining the Financial Industry Regulatory Authority (FINRA) which has taken over all former NASD and NYSE regulatory responsibilities.

Shepherd Smith and Edwards represents investors nationwide in claims against securities firms. We have represented investors in more than 1,000 securities cases. To learn whether we may be able to assist you with a claim contact us to arrange a free consultation with one of our attorneys.

The NASD imposed a $200,000 fine against EKN Financial Services Inc. and levied sanctions against the firm’s CEO, President, Head Trader and Financial and Operations Principal for improper short selling in connection with three unregistered PIPE securities offerings. As part of the settlement, EKN was also suspended for six months from engaging in transactions in PIPES.

"This action represents NASD's continued commitment to ensuring that those firms and individuals who engage in improper activity involving PIPE trading will be held accountable," said the NASD’s Head of Enforcement. "Suspending the firm for six months from future PIPE deals illustrates the seriousness with which we view these violations."

A PIPE is a private offering in which accredited investors agree to purchase restricted, unregistered securities of public companies. The companies agree, in turn, to file a resale registration statement so that investors can resell the shares to the public. Only after the PIPE shares registration is approved by the Securities and Exchange Commission (SEC) are investors free to sell them on the open market.

EKN (formerly known as Ehrenkrantz King Nussbaum, Inc.) reportedly agreed to purchase shares in registered securities, then immediately short positions in the stock without either owning unrestricted shares or borrowing unrestricted shares to cover the short sales. When the PIPE shares were later registered, it covered the short positions.

In addition to the PIPE-related violations, NASD also found that EKN failed to maintain adequate written supervisory procedures and records, including research activities. The regulators also found that EKN failed to report certain customer complaints to NASD, violated net capital rules and allowed transactions through an unregistered agent.

Shepherd Smith and Edwards represents investors nationwide in claims against securities firms. We have represented investors in more than 1,000 securities cases. To learn whether we might assist you with a claim contact us to arrange a free consultation with one of our attorneys.

Last week, a securities law journal published a study illustrating how securities regulators went “soft” last year. According to the study, NYSE and NASD fined securities companies and individuals $111 million in 2006, which was lower than the $184 million in collective fines that their two regulatory units issued in 2005. Regulators only issued 19 actions of $1 million or greater. There were 25 such actions the year prior.

The report cited a similar decrease in penalties at the SEC. Penalties issued in 2005 were $1.5 billion. Penalties went down to $974 million in 2006.

Barbara Roper, Consumer Federation of America’s Director of Communications, says, however, that public-company managements and brokerage firms actually outdid themselves in their handling of research-analyst conflict, accounting scandals, and mutual fund-trading scandals.

Regulators, however, are facing a definite backlash. The U.S. Chamber of Commerce and others have conducted studies that show that the U.S. could be doomed unless it cuts back on regulations and tries to compete with the lower standards that exist in other countries. Roper says that she believes regulatory agencies have reduced enforcement efforts because of the pressure to regulate less.

In 2006, NYSE and NASD brought only four actions tied to variable annuities. 35 such actions were issued in 2005. Five brokerage firms involved in “directed brokerage” cases—where the mutual funds handed the firms more business—were ordered to pay $13.1 million in fines. In 2005, 27 firms were fined $55 million in similar cases.

However, the NYSE issued 281 actions in 2006. It issued only 110 actions in 2005.

It will be important to see whether regulation numbers continue to go down in 2007.

Shepherd Smith and Edwards is a securities litigation firm that represents investors that have lost investments because of broker misconduct. We have helped thousands of investors recoup their losses. To schedule your free consultation, contact Shepherd Smith and Edwards today.

Related Web Resources:

Regulators Catching Zzzs, Not Rogues, Bloomberg.com, October 3, 2007

U.S. Chamber of Commerce

The new Financial Industry Regulatory Authority has launched a section on its website to provide online information for retail investors.

The “Market Data” section on FINRA's website provides data on equities, options, mutual funds and corporate, municipal, Treasury and Agency bonds. The site also provides a page for all stock exchange-listed companies, including a company description, recent news stories and Securities and Exchange Commission filings, and an interactive list of domestic securities the company issues.

The site also provides equities indices and the FINRA-Bloomberg Active U.S. Corporate Bond Indices for investment-grade and high-yield bonds. Additionally, the site features U.S. Treasury Benchmark yields, market news an economic calendar and other information indicating current market conditions.

Although such ratings have been greatly maligned Market Data's coverage also includes credit ratings from the three major rating agencies. Real-time transacted price information is also provided for corporate bonds and municipal bonds along with end-of-day prices are provided for Treasury bonds.

The purpose of the site is unclear, since most online data services along with Yahoo and other search sites make the same information available. One would think that the job of regulation of tens of millions of accounts through hundreds of thousands of brokers at over 5,000 investments firms would keep the non-profit organization of investment firms charged with primary regulation of its members busy enough.

Shepherd Smith and Edwards represents investors nationwide in actions against securities firms and/or their representatives. If you, your firm or your pension fund has sustained losses as a result of fraud, negligence or other wrongdoing contact us to arrange a free consultation with one of our attorneys.

The North American Securities Administrators Association Inc. of Washington (NAASA) plans a vote by its members by the end of this year on a proposal which would make it a violation of state securities regulations to "misuse, mischaracterize or fraudulently represent a designation that has little or no value,” said the President of NASAA, Alabama securities commissioner Joseph Borg.

Mr. Borg announced the NASAA plan at a hearing being held this week by the Senate Special Committee on Aging. Mr. Borg appeared to testify on matters involving securities fraud of the elderly, and within his presentation he chose to specifically adress the use of questionable senior financial adviser designations.

State securities regulators have authority to take action against financial advisers for unethical sales practices, such as churning and selling unsuitable products, he said. “This would be an enhancement to cover fraudulent use of designations,” Mr. Borg said. NASAA initiative is part of ongoing efforts by state and federal regulators to beef up regulatory authority to protect seniors from financial fraud.

Shepherd Smith and Edwards represents investors nationwide in claims against those in the securities industry. If you, your firm or your pension fund has sustained losses as a result of fraud, negligence or other wrongdoing contact us to arrange a free consultation with one of our attorneys.

Justice for investors is simply denied in New York courts and a trend of no justice for investors threatens to spread nationwide as more and more “activist” business-friendly judges are appointed to the federal bench.

The U.S. District Court for the Southern District of New York, known to be friendly to Wall Street, has struck again, this time ruling Ameritrade was not required to route orders to multiple markets to fulfill its duty of "best execution" of trades. This is one of many case filed by investors which was dismissed, with prejudice, in a decision which could affect investors nationwide. (Gurfein v. Ameritrade Inc., S.D.N.Y., No. 04 Civ. 9526 (LLS), 7/17/07

Although language on Ameritrade, Inc.'s Website advertised that it had the capability of distributing customer orders to multiple markets and could thereby seek best execution, the judge decided this did not oblige Ameritrade to route orders to different markets for execution. The judge also found Ameritrade had no duty to the plaintiff to execute the limit order at the "best price" or fulfill the “best execution” regulatory requirement.

According to the court's decision, the plaintiff repeatedly placed limit orders in her Ameritrade account to sell options at the bid price shown on her computer. When the first transaction failed to be executed, she cancelled the order and repeated the process multiple times. Ameritrade later stated that it routes such orders only to the American Stock Exchange (Amex), and never to the Chicago Board Options Exchange or the Philadelphia Stock Exchange where the options were also listed.

The judge stupidly claimed that sending orders to several places may result in multiple executions. Your Honor, I have one word for you: "computers!" It is simple to program coumputers to locate the best prices on multiple markets ard route orders there. Most 8th graders could do it!

A complaint was filed under securities laws but was dismissed in January. A second complaint was then filed claiming breach of contract against Ameritrade for failing to execute the options orders, which the court also dismissed. This, the third complaint, revised breach of contract claim and included failing to execute the order at the "best" price, or with the best execution. Ameritrade again sought summary judgment which was granted, this time with prejudice.

Dismissal of the contract claims is problematic. While the language relied upon could be considered ambiguous, non-waiver provisions of fraud laws and concerning fiduciary duty claims should have prevented any such language to cause a waiver of the investor’s claims.

Yet, of primary concern to observers, is the status of the duty of "best execution" and other requirements of securities regulations. Securities regulations require best execution and courts have for decades held that, when orders are received, brokerage firms have a fiduciary duty to their clients of best execution - timely execution at the best available price.

The New York Court simply ignored such regulations, stating that such regulations did not create any duty for Ameritrade and others in the securities industry and, even if the regulations were violated, this did not give victims a right to recovery. For decades, courts have held that violations of securities regulations are evidence of breach of fiduciary duty, breach of contract and are actionable under other legal claims. One description of the duty is based on the “shingle theory” - that when one hangs a shingle as a member of the securities industry that person can be expected to follow such rules.

As a comparison: There is no "private right of action" if someone runs into your car while speeding or running a stop sign. However, violations of traffic laws are evidence of negligence and other legal claims. We all have a duty to not to act negligently and kill or injure others, or destroy their vehicle. This judge decided that when members of the securities industry violate the "traffic" laws for securities firms, this does not give investors the right to seek damages for such wrongful behavior.

Let’s face it. There are rules for the securities industry and other rules for the rest of us. Meanwhile, judges who are “activist” on behalf of the business community are being appointed to replace those accused of being “activists” regarding the rights of the rest of us. Oh, and your "honor," I actually have a few more words for you.

Shepherd Smith and Edwards represents investors nationwide in arbitration claims against those in the securities industry. If you, your firm or your pension fund has sustained losses as a result of fraud, negligence or other wrongdoing contact us to arrange a free consultation with one of our attorneys.

“There are two things I worry about: Clients dying and the government putting me out of business,” said a Merrill Lynch rep who says he gets about 80% of his revenue from B-shares shares and fee-based business. Apparently, the safety of his clients' assets must be down the list.

Meanwhile, regulators are currently engaged in a crackdown on brokers who shove clients into B-shares when the breakpoints of A-shares are much more appropriate, and those who use wrap accounts then ignore their clients. Hundreds of millions of mutual fund load refunds have been ordered. It has been discoverd that some clients have paid $5,000 to $20,000 per transaction while ignored in fee-based accounts at major firms.

Loss of the fees “would make me wonder whether I should stay in business,” said Curtis Mohr, a Pasco, Wash., broker affiliated with Royal Alliance Associates Inc. Good riddance!

“I’m in trouble” if 12(b)-1 fees are eliminated, said Graham Parsons, an Erie, Pa.-based rep affiliated with LPL Financial Services. “I’ve had sleepless nights over this….They could literally legislate me out of business!” Worth considering. How much sleep has he lost over retirees who may be paying 20% of their income to him and his firm?

The total expense ratio on C-chares is 1.95%, according to Lipper Inc. of New York. Annual B-Share costs are about the same. Fees for separately managed accounts, which are all-inclusive, average 1.68%, according to a consumer group. Unless the assets of diversified portfolios consistently earn 9% (which has never happened over any 10 year period) 20% or more of these clients’ earnings are going to the house!

Thus, if one worked for 40 years to save a half million dollars to retire and put to work at an average of 8%, that person would earn $40,000 - less about a $10,000 haircut to the investment community, leaving the retiree $30,000. One-fourth - 10 years - of the retiree's work went to pay others, including an advisor who lays awake nights thinking he is a victim.

“The 12(b)-1 fee structure ... allows advisers to have relationships with lots of small accounts,” Mr. Nachmany said. An adviser doesn’t “have to be a collection agent.” “12(b)-1s make it easy to sit down with the little guy,” Mr. Mohr said. Changing the current system of 12(b)-1 fees will force brokers to evaluate what they charge each client, Mr. Nachmany said. “The market will tell them they’d be right to charge more than they’re charging now,” he said, and as a result, some small accounts might be dumped.

Such statements need no comment. As a group, stockbrokers earn more than Doctors, Lawyers, CPA’s and Engineers. No special degree is needed, in fact, not even a high school diploma is required to become licensed as a stockbroker, mutual fund or annuity salesperson.

Shepherd Smith and Edwards represents investors nationwide in claims against members of the securities industry. We have represented investors in more than 1,000 securities cases. To learn whether we are able to assist you with a claim contact us to arrange a free consultation with one of our attorneys.

In one of its final regulatory acts before being folded into the NASD, the New York Stock Exchange’s regulatory unit has censured and fined Smith Barney $50 million over illegal trades, failures to supervise and record-keeping violations. The firm agreed to the sanctions without admitting or denying the charges.

The Smith Barney unit of Citigroup Global Markets Inc. will pay a fine of $10 million to the NYSE, and a fine of $5 million to the State of New Jersey, related to a "separate regulatory matter arising out of the same conduct." An additional $35 million will be paid into a restitution fund to compensate victims.

The NYSE regulators say Smith Barney agreed to these huge sanctions to resolve charges related to a variety of fraudulent trading activities, including excessive trading, improper trading in mutual fund shares, improper trading in variable annuity mutual fund sub-accounts, illegal market timing trades, plus the firm’s failures to supervise and to maintain adequate books and records.

The market timing charges also included deceptive acts to conceal the identities of the brokers involved as well as their customers, said the NYSE adding that, during a two year period, Citigroup financial consultants engaged in 250,000 market timing trades, generating approximately $32.5 million in gross revenues.

Shepherd Smith and Edwards represents investors nationwide in claims against members of the securities industry. We have helped numerous clients to recover in claims against both Smith Barney and Citicorp. To learn whether we can also assist you to recover contact us to arrange a free consultation with one of our attorneys.

It seems that Wall Street has convinced state and federal regulators, as well as Congress and Presidential candidates, that the regulatory bar must be lowered if we are to compete in the international securities market (or perhaps Wall Street's donations have affected the judgment of these politicians). Yet, studies continue to show that most investors prize a company’s behavior over rich returns.

After the crash of 1929, and for over 70 years, our securities markets have been regulated by a network of federal and state securities laws. During that period, U.S. financial markets have thrived and becme the envy of the world. Conventional wisdom is that investors want to feel safe in investment waters - as shark free as possible. Yet, those on Wall Street, many of whom have proven themselves to be sharks, lobby regulators and lawmakers to attempt to win a “race to the bottom” in worldwide financial regulation.

Yet a recent study found, for example, that two-thirds of investors say they would sell their shares of a company that engages unethical but legal behavior—even if that behavior brought in higher returns. These results were found through poll research performed by Opinion Research Corp. for Pepperdine University’s Graziadio School of Business and Management.

Sixty-seven percent of the 482 investors polled said they knew about the ethical standards and practices of the companies they invest into and valued such standards even above performance. Only half of the investors said corporate boards are doing a good job of ensuring companies are managed ethically, while 42% said boards were doing fair or poorly.

“Clearly, investors are looking at more than the balance sheet and sales projections when it comes to investments,” said Linda A. Livingstone, dean of the Graziadio School of Business and Management, in a statement. “Corporate Board leadership that is centered on values and ethical behavior plays an important role in how investors evaluate options,” she added.

Similar results have been recorded regarding investment advisors, in which investors reflect that their feelings of trust, comfort and safety outweigh superior performance in their accounts.

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 contact us to arrange a free confidential consultation with one of our attorneys.

Ever notice how impressive titles are thrown around in the field of investments? Just what, if anything, to these mean. The Washington State Securities Division has proposed that that anyone who uses a professional designation that connotes some type financial planning expertise should fulfill the requirements and register as an investment adviser.

The Washington Department of Financial Instututions "notes the growth in the use of professional designations which state or imply that a person has special expertise, certification or training in financial planning," as quoted in a release by the North American Securities Administrators Association Inc. (NAASA).

The state therefore plans to clarify its rules to consider a person who uses such a professional designation as holding himself out as a financial planner. It would also prohibit the misleading use of other professional designations. Washington and other states have expressed the need to limit designations regarding advisors to senior citizens. Washington has now expanded its efforts to control the use of designations to protect investors of all ages.

Shepherd Smith and Edwards represents investors nationwide in claims against members of the securities industry. We have helped clients in more than 40 states, including victims of wrongdoing by those who call themsleves investment advisors, etc. To learn whether we can assist you, contact us to arrange a free consultation with one of our attorneys.

UBS Financial Services, Inc. will pay $23.3 million to settle charges by New York’s Attorney General of "inappropriately steering" of brokerage customers into fee-based accounts. The NYAG said that under the agreement UBS will pay a $2 million fine and $21.3 million to approximately 3,000 customers it inappropriately placed in its InsightOne program.

According to the NYAG office, UBS charged one 91-year-old InsightOne client more than $35,000 over two years, although only four trades transpired in his account, meaning each trade cost him approximately $8,800. In another example, it says an 82-year-old paid approximately $24,000 in InsightOne fees one year in which only one transaction took place.

"UBS convinced customers to rely on its advice and then abused that trust," said NYAG Andrew Cuomo. "This major settlement is a win for customers inappropriately pushed into unsuitable brokerage accounts and a warning to the entire industry that customers' interests must come first."

UBS denied any wrongdoing, said it only settled to avoid litigation and is "disappointed with the AG's statement, which mischaracterizes the program and its operation." Meanwhile, a NYAG spokeswoman said the regulator will continue to investigate fee-based accounts of UBS and other firms statewide.

Our firm has noted that, when fees are charged on each transaction, there is an incentive to "churn" accounts. More recently we have noted that, when accounts are switched to being charged a percentage of the assets in the account, the opposite is true. The number of transactions falls dramatically and many clients are completely ignored as fees are generated.

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/or their representatives. To learn whether our firm may be able to assist you, contact us to arrange a free consultation with one of our attorneys.

Related Web Resources:

Office of New York Attorney General Press Release: "Largest Ever Settlement In Fee-based Brokerage Account History", with attached Complaint and Settlement Agreement

The Securities and Exchange Commission has published a 121-page proposal for dropping the requirement that non-U.S. companies reconcile to the generally accepted accounting principles (GAAP) as required by U.S. firms in financial reports.

The proposal would apply to foreign private issuers that file financial statements to comply with the English language version of IFRS as published by the International Accounting Standards Board. “The Commission has taken a significant step on this important policy matter that was outlined in the 'Roadmap' announced in 2005," said Conrad Hewitt, the SEC chief accountant.

“Along with the Commission's work relating to internal control reporting and deregistration, this proposal to accept financial statements prepared in accordance with IFRS as published by the IASB without a US GAAP reconciliation represents another significant action to tailor the regulatory environment for foreign companies in the U.S. public capital markets," said John White, director of the SEC's Division of Corporation Finance.

This latest move in the “Race to the Bottom” in securities regulation is in response to fear mongering by Wall Street interests. They claim the U.S. will otherwise lose the battle for listing shares and say our nation is on the brink of disaster, since it can not compete with foreign markets with little oversight. This is notwithstanding a multitude of scandals on Wall Street in the past few years, and while record profits are being earned by the perpetrators.

The strictest securities regulation in history began in the U.S. about seventy-five years ago. This came after the stock market crash of 1929, which sent this country into a tailspin followed by the depression years of the 1930’s. Since then, under those regulations, the U.S. economy and capital markets have boomed and become the envy of the world. Yet, to listen to Wall Street, such regulation will soon be our downfall.

Conventional wisdom has held that investors prefer investing into companies and markets which have regulations. The new un-conventional theory is that lawless oversees markets will rob the U.S. of its financial markets. Or could there be a different motive? If we continue to remove restrictions on Wall Street, its participants will not have to worry about behaving – or even paying token fines if caught.

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, hiring an experienced law firm can increase your chances of recovery. Contact us to arrange a free consultation with one of our attorneys.

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Text of SEC Reconciliation Elimination Proposal

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.

On June 11, 2007, we published an article entitled “Should Brokerage Firms Continue to Vote Their Clients' Shares without Permission, Including for Corporate Directors?” State Treasurer Richard Moore of North Carolina has recently answered that question with a resounding “No!”

In a statement, Moore contends that allowing such votes thwarts corporate reform and prevents shareholders of a company from having adequate representation in director elections. Moore is also a board member of NYSE Regulation and called on SEC to approve an NYSE proposal that would change its Rule 452 to eliminate broker voting in all director elections.

Under the NYSE’s current rule, brokers may vote on "routine" proposals if the beneficial owner of the stock has not provided specific voting instructions to the broker at least 10 days before a scheduled meeting. The proposed change would end all voting of customer shares for directors by categorizing all such elections as "non-routine."

Moore cites as an example a recent vote to elect Roger Headrick a director of CVS/Caremark, following a merger between CVS Corp. and Caremark Rx Inc. Headrick had been on Caremark's board of directors and, according to Moore, was criticized for his role in the controversial merger. Moore said that had broker votes been discounted, Headrick "would have become the first major public company director to be unseated by shareholders pursuant to a 'majority vote' bylaw."

“As shareowners, we continue to fight for a real voice and for strong governance measures that support long-term value," Moore said, "but these broker votes are rubber stamps for management, thwarting real change and preventing shareholders' voices from being heard."

Our Law Firm contends that Brokerage firms should do more to encourage shareholders to vote their own shares, rather than to simply ask if they want their identity revealed to companies. The knee-jerk reaction to revealing ones identity is to just say no. Brokerage firms claim they do a public service by helping companies obtain a quorum. Yet, these firms can also use their power to vote their clients' shares as clout over companies to get or keep these companies as investment banking clients.

Shepherd Smith and Edwards represents institutional and individual investors in claims against investment firms. If you have lost in your account at an investment firm contact us to arrange a free confidential consultation with one of our attorneys.

Related Web Resource:

More information on the hearing on investor protection and market oversight is available from the House Hearings Website