June 23, 2015

Morgan Stanley and Scottrade to Pay FINRA $950K FINRA for Inadequate Supervision of Third Party, Customer Account Transfers

The Financial Industry Regulatory Authority said that Morgan Stanley Smith Barney, LLC (MS) and Scottrade, Inc. will pay fines of $650K and $300K, respectively. The firms are settling claims accusing them of not putting into place supervisory systems that could reasonably monitor customer funds transmitted to third-party accounts. The self-regulatory organization cited both financial firms for having weak supervisory systems a few years back, but they purportedly did not take the necessary steps to remedy the deficiencies.

The SRO contends that from 10/08 to 6/13, three Morgan Stanley-registered representatives in two of the firm's branch offices converted $494,000 from thirteen customers by setting up fraudulent wire transfer orders and branch checks from the clients’ accounts to third-party accounts. One example of such an instance involves representatives transferring funds from several customer accounts into their own bank accounts.

FINRA said that Morgan Stanley should have put into place systems and procedures that would have allowed it to review and monitor such transmissions. The regulator said that instead, the supervisory failures let the conversions occur without detection.

Continue reading "Morgan Stanley and Scottrade to Pay FINRA $950K FINRA for Inadequate Supervision of Third Party, Customer Account Transfers" »

May 19, 2015

Morgan Stanley to Pay $2M for Violations Involving Short Sales and Short Interest Reporting

The Financial Industry Regulatory Authority is fining Morgan Stanley & Co. LLC (MS) $2M for violations involving short sale and short interest reporting rules. The violations purportedly took place over six years. The financial firm is also accused of not putting into place a supervisory system designed in a reasonable enough manner that it could identify and prevent such violations.

Financial firms are supposed to report to the SRO on a regular basis their total short positions involving equity securities in proprietary firm and customer accounts. However, according to the self-regulatory organization, Morgan Stanley did not accurately and completely report such positions in certain securities that involved billions of shares. FINRA also said that the firm’s supervisory system was deficient.

Meantime, under U.S. Securities and Exchange Commission’s Regulation SHO for regulating short sales, firms are supposed to aggregate their positions in a security to determine whether they are short or long. Through an aggregation unit, Regulation SHO lets firms track positions in a security separate from other positions at the firm and via certain trading desks or operations.

An aggregation unit cannot include the security positions of customers at non-brokerage firm affiliates. FINRA said that Morgan Stanley, however, included the positions of such customers in a number of aggregation units when determining the net position of each unit.

By settling and agreeing to pay the $2 million fine, Morgan Stanley is not denying or admitting to the securities charges. It has, however, agreed to the entry of FINRA’s findings.

Short Sales
Most short sales are legal but there are those that are not when conducted under abusive practices. Short sale transactions are vulnerable to fraud and they may result in losses.

Contact SSEK Partners Group today.

FINRA's Action Against Morgan Stanley (PDF)

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Morgan Stanley Sued by Home Shopping Founder’s Widow for $170M, Institutional Investor Securities Blog, April 27, 2015

LPL Financial to Pay $11.7M Fine for Supervisory Failures, Institutional Investor Securities Blog, May 6, 2015

May 6, 2015

LPL Financial to Pay $11.7M Fine for Supervisory Failures

The Financial Industry Regulatory Authority Inc. said that LPL Financial (LPLA) must pay $11.7M in fines and restitution for widespread supervisory failures involving complex products sales. The self-regulatory organization said that from 2007 up to last month, the firm did not properly supervise certain exchange-traded funds, nontraded real estate investment trusts, and variable annuities. It also did not properly deliver over 14 million trade confirmations to customers and failed to properly supervise communications, including advertising, as well as the consolidated reports used by brokers.

According to the Letter of Acceptance, Waiver, and Consent, To grow LPL, its wholly-owned brokerage firm subsidiary, LPL Financial Holdings Inc. employed a strategy that included acquiring financial services firms, consolidating them with the broker-dealer, and bringing in more registered representatives. Unfortunately, said the SRO, the firm failed to dedicate enough resources to allow LPL to fulfill its supervisory duties.

As just one example, LPL did not have a system for either monitoring the duration of time customers held securities in accounts or enforcing concentration limits on complex products. Its system for reviewing trading activities in accounts had numerous deficiencies. Also, LPL did not submit trade confirmations in over 67,000 customer accounts.

In certain transactions involving variable annuities, LPL purportedly allowed sales to go through without disclosing surrender fees. With certain mutual fund “switch transactions,” the firm is accused of using an automated surveillance system that left these trades out of supervisory review. When supervising non-traded REITs, LPL did not identify which accounts were eligible to receive volume sales charge reductions. Also, LPL’s surveillance system did not issue alerts for certain activities that were high risk, did not keep track of trading activities that were overdue for supervisory review, failed to report certain trades to FINRA and MSRB, and neglected to give regulators full and accurate data about certain variable annuity transactions.

The penalty includes a fine of $10 million and restitution of $1.7 million to customers who bought certain ETFs. Following a review of procedures and systems, these customers may also receive more compensation. By agreeing to pay the fine, LPL is not denying or admitting to the findings.

With approximately 18,000 brokers in the U.S, LPL is one of the biggest brokerage firms in the country. This fine comes two years after the firm paid a $7 million for similar issues involving the way LPL monitored emails between customers and brokers. That was also the year that The New York Times reported that the brokerage firm had been subject to an unusual number of penalties from regulators for purportedly letting brokers sell complex products to investors who weren’t sophisticated enough for the financial instruments. Complex products tend to bring with them bigger commissions than mutual funds, which are less costly.

Read the FINRA Action (PDF)

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March 30, 2015

FINRA Fines J.P. Turner, LaSalle St. Securities, and H. Beck For Report Supervision Lapses

The Financial Industry Regulatory Authority Inc. is fining J.P. Turner & Co., LaSalle St. Securities, and H. Beck Inc. $100K, $175K, and $425K, respectively, for lapses in supervising reports sent to clients. The reports provided asset summaries, and the self-regulatory organization is concerned that they had the potential to hide fraudulent activities.

A consolidated report typically contains information regarding most if not all of a customer’s financial holdings, wherever they are held. FINRA requires that these reports are accurate and clear. Failure to supervise these documents can cause regulatory issues, such as the possibility of inaccurate communication, data that is misleading or confusing, supervisory control lapses, and the use of consolidated reports for unethical or fraudulent reasons. The SRO’s regulatory notice 10-19 states that if a firm cannot properly supervise these reports then it should not distribute them and must make sure that registered representatives abide by this restriction.

During routine exams, FINRA found that representatives from the three firms prepared and issued consolidated reports to customers even if the documents hadn’t been properly reviewed beforehand. LaSalle St Securities, which had written procedures pertaining to consolidated reports, failed to enforce these and did not properly trained representatives on how to use the reports. The disciplinary action against the broke-dealers was related to private placement-involved matters.

J.P. Turner and H. Beck lacked the written procedures tackling consolidated reports and their supervision and use, said FINRA. The action against H. Beck also dealt with violations linked to unit investment trust sales. FIRNA said that all three firms had representatives who used consolidated report systems that let them submit customized values for investments or accounts that were held away from the firm. However, the firms’ procedures lacked the safeguard to confirm their accuracy. By settling, the three firms are not denying or admitting to the self-regulatory organization’s findings.

The SSEK Partners Group is a securities law firm.

FINRA Sanctions Three Firms for Inadequate Supervision of Consolidated Reports, FINRA, March 30, 2015

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FINRA Orders J.P. Turner to Pay $707,559 in Exchange-Traded Fund Restitution to 84 Clients, Stockbroker Fraud Blog, December 10, 2013

Ex-Rabobank Trader Banned from Financial Services Industry in Britain for Libor Manipulation, Another Pleads Not Guilty in the US, Institutional Investor Securities Blog, March 29, 2015

Ex-Nomura, RBS Trader Enters Guilty Plea to Bond Fraud, Institutional Investor Securities Blog, March 11, 2015

March 25, 2015

First New York Securities to Pay $916K to FINRA for Illegal Short Selling

The Financial Industry Regulatory Authority has sanctioned First New York Securities LLC for short selling prior to participating in 14 public securities offerings. To settle, the firm, which is not denying or admitting to the charges, will pay a $400,000 fine, disgorgement of $516,000 plus interest, and is barred for six months taking part in secondary or follow-on offerings. It also has consented to an entry of the self-regulatory organization’s findings and will modify its supervisory system to make sure it is in compliance.

According to FINRA, from 9/10 through 4/13, First New York sold securities short within the five days going into the pricing of the public offerings in the securities. It would then buy securities in the offerings—purchasing over 670,000 shares after short selling 187,060 securities shares during those five days. The short sales artificially dropped share prices, which let First New York purchase the stocks at a lower cost. The firm bet against shares of companies that included Kinder Morgan Inc. and BlackRock Inc. (BLK).

Under the Securities Exchange Act of 1934’s Rule 105 of Regulation M, brokers are not allowed to buy securities in secondary offerings when during the restricted period prior to the pricing of the secondary offering the buyer sold short the security that is the offering’s subject. Please contact our securities lawyers to request your free case consultation. SSEK Partners Group represents high net worth individual investors and institutional investors who wish to get their securities fraud losses back.

First New York Fined Again by Finra Over Illegal Short Sales, Bloomberg, March 25, 2015

FINRA Sanctions First New York Securities L.L.C. $916,000 for Illegal Short Selling in Advance of 14 Public Offerings, FINRA, March 25, 2015

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Ponzi Scams: Madoff Victims to Get $93M, Fraud Lawsuits Name Insurance Brokerage Head in $10M Scheme, Stockbroker Fraud Blog, March 24, 2015

Bank of America’s Merrill Lynch to Pay $2.5M to Massachusetts Over Compliance Rule Relapse, Institutional Investor Securities Blog, March 23, 2015

January 27, 2015

John Carris Investments Expelled by FINRA

A FINRA panel has expelled John Carris Investments LLC, along with Chief Executive Officer George Carris from the securities industry. Both are accused of suitability violations and fraud.

According to the panel, Carris and JCI were reckless when selling shares of stock and promissory notes. They purportedly left out material facts and used misleading statements. Both have been barred for manipulating Fibrocell’s stock price via the unfunded purchases of big stock blocks and engaging in trading that was pre-arranged through matched limit orders.

The FINRA panel said that JCI and Carris acted fraudulently when they did not reveal the poor financial state of parent company Invictus Capital yet sold the latter’s stock and notes. Material facts were purportedly left out of offering documents. Rather than shutting down operations when it ran out of net capital compliance, JCI kept selling Bridge Offering notes to investors and using money from the sales to remedy its net cap deficiency while not telling customers that was were the money went. Offering sales were also used by Carris to cover his personal spending.

Carris and his firm are accused of keeping inaccurate records and books, not remitting payroll taxes for employees, failing to put into place anti-money laundering procedures and policies, and not setting up and enforcing a reasonable supervisory system.

Registered representative Andrew Tkatchenko was suspended for two years for recommending the stock and promissory notes without having reasonable grounds. Jason Barter, the head trader, received an 18-month suspension for his involvement. Both also must pay fines.

Our securities lawyers represent investors seeking to recover their financial fraud losses.

FINRA Hearing Panel Expels John Carris Investments and Bars CEO George Carris for Fraud, FINRA, January 14, 2014

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December 22, 2014

WGF Investments, Deutsche Bank Securities, Royal Bank of Canada Subject to Fines for Securities Violations and Misconduct

FINRA Fines WGF Investments $700,000 for Supervisory Failures
The Financial Industry Regulatory Authority is fining WGF Investments $700,000 for failing to commit the attention, time, and resources to certain duties related to supervising registered representatives. WGF is a midsize independent brokerage firm.

According to the self-regulatory organization, from 3/07-1/14, WGF did not supervise private securities transactions of one representative and failed to keep up an adequate supervisory system to make sure that the customer transactions taking place were suitable. The broker-dealer also is accused of not properly supervising one representative’s alternative investment sales.

And, for over a year, WGF purportedly gave a rep a blanket waiver from having to comply with written supervisory procedures related to the sale of private equity, real estate investment trusts, and other alternative investments. A number of the rep’s clients invested over 25% of their liquid net worth in alternative investments, with certain clients putting in over 90%. Meantime, this rep, who is no longer with WGF, routinely spoke on the radio, making misleading and exaggerated statements abut both conventional and alternative investments while favoring the latter. WGF was cited for not properly supervising the radio broadcasts.

The firm is settling without denying or admitting to the FINRA charges.

Deutsche Bank Securities Ordered by CFTC to Pay $3M for Improper Investments and Supervisory, Reporting, and Recordkeeping Violations

Deutsche Bank Securities Inc. (DBSI) has agreed to settle U.S. Commodity Futures Trading Commission charges by paying a $3 million fine. The regulator says the firm did not properly invest customer aggregated funds, failed to put together and file financial reports that were accurate, neglected to keep up the necessary books and records, and committed supervisory failures. Fortunately no investors sustained losses.

According to the CFTC’s order, from 6/18/12 to 8/15/12 Deutsche Bank did not file accurate financial statements with the agency in a timely fashion. The firm purportedly lacked the automated processes to make sure that the financial reporting, some of which had errors, was accurate. Also, says the agency, from 6/18/12 through 8/15/12 Deutsche Bank did not accurately calculate how much there were in customer funds on deposit. Because of certain miscalculations, the firm invested customer funds in specific money market mutual funds during that time. The amounts exceeded the 50% asset-based concentration limit.

Royal Bank of Canada Must Pay $35M for Bogus Sales, Illegal Wash Sales, and Noncompetitive Transactions
A U.S. federal judge is ordering Royal Bank of Canada (RY) to pay a $35 million penalty for its involvement in over 1,000 illegal wash sales, fake sales, and noncompetitive transactions. The ruling comes out of a CFTC complaint in 2012 accusing the bank of wash sales and fictitious sales.

The agency accused senior Royal Bank of Canada personnel of designing a trading strategy that was partially created to generate tax benefits. The sales were noncompetitive transactions, which are prohibited under CFTC regulations.

Finra fines WFG Investments $700,000, Investment News, December 22, 2014

CFTC Orders Deutsche Bank Securities Inc. to Pay $3 Million to Settle Charges of Improper Investment of Customer Segregated Funds, Reporting and Recordkeeping Violations, and Supervision Failures, CFTC, December 22, 2014

Federal Court Orders Royal Bank of Canada to Pay $35 Million Penalty for Illegal Wash Sales, Fictitious Sales, and Noncompetitive Transactions
, CFTC, December 18, 2014

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Moody’s Reduces American Realty Capital Properties Credit Rating to Junk Status, REIT’s Founder Nicholas Schorsch Steps Down, Institutional Investor Securities Blog, December 18, 2014

December 11, 2014

Citigroup, Credit Suisse, Deutsche Bank, Merrill Lynch, & Other Firms Ordered by FINRA to Pay $43.5M Over Activities Related to Toys “R” Us IPO

The Financial Industry Regulatory Authority is fining 10 firms $43.5 million in total for letting their equity research analysts solicit investment business and offering favorable research coverage related to the the planned Toys “R” Us initial public offering. The firms were fined: $2.5 million for Needham & Co. LLC; $4 million for Wells Fargo Securities, LLC (WFC), Deutsche Bank Securities Inc. (DB), Morgan Stanley & Co., LLC (MS), and Merrill Lynch, Pierce, Fenner & Smith Inc. respectively; and $5 million each for JP Morgan Securities LLC (JPM), Barclays Capital Inc. (BARC), Goldman Sachs & Co. (GS), Citigroup Global Markets Inc. (C), and Credit Suisse Securities USA LLC (CS). FINRA rules state that firms are not allowed to use research analysts or promise favorable research to garner investment banking business.

In 2010, Toys “R” Us and its private equity owners asked the ten firms to compete for involvement in an initial public offering. The self-regulatory organization said that all of the institutions used equity research analysts when soliciting for this role.

The company asked the analysts to create presentations to determine what their views were on certain issues and if they matched up with the perspectives of the firms’ investment bankers. The firms knew that how well their analysts did with this would impact whether or not they would be given the underwriting role in the IPO.

In the presentations, the firms explicitly or implicitly made known that they would provide reasonable research coverage in exchange for involvement in the IPO. While Toys “R” Us offered each firm a part in the IPO, ultimately the actual offering never went through. FINRA also said that Needham, Barclays, JP Morgan, Citigroup, Goldman Sachs, and Credit Suisse lacked the adequate supervisory procedures for research analyst involvement in investment banking pitches.

By settling, the firms are not denying or admitting to the charges. They are, however, consenting to an entry of the SRO’s findings.

FINRA also just fined Citigroup $3 million for its failure to deliver exchange-traded fund paperwork on over 250,000 customer purchases. The bank failed to send prospectuses on 160 ETFs that clients purchased in 2010 and on more than 1.5 million exchange-traded funds that were bought between 2009 and 2011. Over 250,000 brokerage clients were affected.

The self-regulatory organization said that Citigroup lacked the correct procedures to oversee this process. Instead, the bank depended on a manual system that was missing a definite chain of supervision to verify whether prospectuses had been sent. The firm discovered the issue in 2011, self-reporting to FINRA. Citi paid a $2.3 million for similar issues in 2007.

FINRA Fines 10 Firms a Total of $43.5 Million for Allowing Equity Research Analysts to Solicit Investment Banking Business and for Offering Favorable Research Coverage in Connection With Toys"R"Us IPO, FINRA, December 11, 2014

Citigroup Fined by Finra for Failing to Deliver ETF Prospectuses
, Bloomberg, December 12, 2014

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CFTC, FINRA, and SEC Fight Investor Fraud Together, Stockbroker Fraud Blog, December 5, 2014

November 29, 2014

Citigroup Global Markets Ordered by FINRA to Pay $15M Fine for Supervisory Failures Involving Equity Research, IPO Roadshows

The Financial Industry Regulatory Authority says it is fining Citigroup Global Markets, Inc. (C) $15 million for not adequately overseeing communications between clients and equity researchers and trading staff and sales members, as well as for letting one of its analysts indirectly take part in road shows that marketed IPOs to investors.

According to the self-regulatory organization, from 1/05 to 2/14, Citigroup did not satisfy its supervisory duty related to possible selective dissemination involving non-public research to clients and trading and sales teams. Citigroup had put out about 100 internal warnings about equity research analyst communications during this time. Yet, despite detecting violations related to client communications and selective dissemination, notes FINRA, there were long delays before the firm would discipline analysts. Also, contends the regulator, the disciplinary measures were not severe enough to discourage repeat violations.

The SRO reports that “idea dinners" were held, hosted by the equity research analysts at Citigroup, and attended by certain trading and sales personnel, as well as institutional clients. At the dinners, the analysts would talk about stock picks that were sometimes not in alignment with their published research. Even though Citigroup knew there was the risk of improper communications at these gatherings, the firm did not adequately monitor communications or give analysts proper guidance regarding what was considered permissible communications. In another purported instance, an analyst that worked with a Citigroup affiliate in Taiwan gave out research data about Apple Inc. to certain clients. A Citigroup equity sales employee then selectively disseminated the information to other clients.

Also, notes FINRA, in 2011 a Citigroup senior equity research analyst helped two companies prepare presentations for investment banking road shows. During that time and into last year, Citigroup did not prohibit equity research analysts from helping issuers work on materials for road show presentations.

By settling, Citigroup is not denying or admitting to the FINRA charges.

Contact The SSEK Partners Group if you suspect that you were the victim of securities fraud.

FINRA Fines Citigroup Global Markets Inc. $15 Million for Supervisory Failures Related to Equity Research and Involvement in IPO Roadshows, Stockbroker Fraud Blog, November 24, 2014

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, Stockbroker Fraud Blog, August 27, 2014

DOJ Launches Criminal Probe Into JPMorgan, Citigroup Foreign Exchange Business, Institutional Investor Securities Blog, November 4, 2014

October 28, 2014

FINRA Fines Merrill Lynch $6M For Supervisory Failures and REG SHO Violations

The Financial Industry Regulatory Authority is fining and censuring Merrill Lynch, Pierce, Fenner & Smith Incorporated $2.5M for not setting up, maintaining, and enforcing supervisory procedures and systems related to certain areas, including Regulation SHO. The self-regulatory organization is fining Merrill Lynch Professional Clearing Corp. $3.5M, also for Reg SHO violations. Bank of America (BAC), which acquired Merrill Lynch in 2008, will pay the $6M fines to FINRA.

Reg SHO is an SEC rule governing short sales. One of its purposes is to curb abusive naked short selling. The regulation also seeks to lower the incidents of sellers neglecting to deliver securities in a timely manner by requiring firms to timely “close out” fail-to-deliver positions by purchasing or borrowing securities of similar type and quantity. It lets firms reasonably allocate fail-to-deliver positions to brokerage firm clients that contributed or caused those positions.

According to the SRO, from 9/08 through 7/12, Merrill Lynch PRO failed to close out certain fail-to-deliver position, and, for most of that period, lacked the necessary procedures and systems to handle REG Show close-out requirements. FINRA said that from 09/08 through 3/011, the firm’s supervisory systems and procedures were not sufficient, making it possible for the firm to improperly allocate fail-to-deliver positions to the brokerage firm’s clients on the basis of clients’ short positions while not having to heed clients played a part in the fail-to-deliver positions.

In August, it was the U.S. Commodity Futures Trading Commission that imposed a $1.2 million fine against Merrill Lynch. The regulator charged the brokerage firm with inadequate supervision that led to customers being charged excessive fees from at least 1/10 through 4/13. The settlement was reached without admission or denial of the findings.

The CFTC claims that for over two years, there were problems with firm’s process for fee reconciliation, which involves noting and fixing discrepancies between the invoices from exchange clearinghouses and how much customers were charged. Because of this, some Merrill clients were undercharged and others were overcharged. This resulted unexplained extra fees of $451,318 that were paid by 196 clients.

The agency said that Merrill Lynch failed to hire qualified staff to oversee and perform fee reconciliations and did not provide completed manuals to staff on how to perform fee reconciliations until at least last year. Staff was inadequately trained on how to conduct fee reconciliations.

FINRA Fines Merrill Lynch a Total of $6 Million for Reg SHO Violations and Supervisory Failures, FINRA, October 27, 2014

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

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FINRA Arbitration Panel Orders Stifel Nicolaus to Pay $2.7M to Ex-Head Trader, Institutional Investor Securities Blog, May 24, 2014

September 20, 2014

SEC News: Regulator to Review Rule Change on New Hire Background Checks, Prepares Mutual Fund Regulations, and is Defendant of Oxfam America Lawsuit

FINRA Sends Background Check for New Hires Rule to the SEC
The Financial Industry Regulatory Authority is moving ahead with a rule change that would mandate that broker-dealers do a better job of vetting new hires. The SRO sent a rule to the Securities and Exchange Commission that would obligate brokers to implement written procedures to confirm the accuracy of information provided in an applicant’s U4 form.

Already, firms must review applicants for jobs. However, under the new rule, they would have to look into their public records.

FINRA says that because a lot of firms already have a system for background checks the rule shouldn’t be too expensive to implement. Some, however, feel that this could prove costly for smaller and medium-sized broker-dealers, who would likely have to hire a third-party provider.

Meantime, FINRA is going to review all financial public records in a one-time sweep to make sure its BrokerCheck database of representatives is current. There are about 630,000 brokers registered with the agency.

The SEC has 90 days to approve the rule change after the Federal Register publishes it. Meantime, it is soliciting public comment.

SEC Prepares Rules to Enhance Oversight of Mutual Funds, Hedge Funds
The SEC is in the process of developing new rules to improve oversight of firms, including mutual funds and hedge funds, as part of its attempt to obtain greater insight into whether the asset management industry presents any risk to the financial system. The requirements are likely to compel asset managers to provide regulators with more information about their mutual-fund portfolio holdings and require stress tests on funds to assess how well they would do in the event of economic turmoil.

The SEC is worried that derivatives are being used by certain mutual funds to enhance their returns. Officials are also interested in restricting the hedge fund-like tactics of alternative mutual funds, which include trading futures contracts and betting certain stocks against other stocks.

The potential rules would not be unlike the requirements placed on large financial institutions that regulators think might present a risk, should the economic or financial systems collapse. According to The Wall Street Journal, asset managers might have to limit using derivatives in the mutual funds bought by small investors. Firms would have to implement policies to manage certain product risks.

Oxfam Sues SEC to Incite Changes to Dodd-Frank Enforcement
Oxfam America wants the SEC to hurry its enforcement of certain Dodd-Frank Wall Street Reform and Consumer Protection Act provisions that impact oil companies and their disclosure of overseas payments. The international development charity filed its lawsuit in federal court.

OxFam says that the agency needs to speed up the finalization of a rule related to public disclosure of payments that companies, registered with the SEC, make to governments in return for mining and drilling rights. Until the rule is finalized the SEC can’t enforce it.

The SSEK Partners Group is a securities law firm. Contact our financial fraud lawyers today so that we can help you explore your legal options.

Oxfam America sues federal Securities and Exchange Commission to spur changes in Dodd-Frank enforcement, Business Journal, September 19, 2014

Rule proposal for new hire background checks moving to SEC, InvestmentNews, Septemer 18, 2014

SEC Preps Mutual Fund Rules, The Wall Street Journal, September 7, 2014

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September 12, 2014

FINRA Headlines: SRO Considers Revised Broker Bonus Plan, To Discuss Potential Dark Pool Rules, May Instigate Civil Action Against Wells Fargo, &Warns Investors About Frontier Markets

FINRA to Revive Proposal Mandating that Brokers Disclose Recruitment Incentives
The Financial Industry Regulatory Authority has decided to revive a proposal that would obligate brokers to notify clients of any incentives they received for being recruited by another firm. The self-regulatory organization had withdrawn the rule in June after getting over 180 comment letters.

Now, however, according to the agenda for FINRA’s next board meeting, the SRO intends to look at a revised recruitment practices policy that would make the recruiting firms delineate their compensation packages to clients who are thinking of moving their assets from the a broker’s previous firm to the financial representative’s new firm.

Also during the meeting, the SRO intends to look into possible rule-making initiatives for alternative trading systems, including dark pools that would enhance their transparency.

Wells Fargo May Be Subject to FINRA Action Over Anti-Money Laundering Allegations
Recently, Wells Fargo Advisors received a Wells Notice warning of possible FINRA action over alleged anti-money laundering policy-related failures. The notice, issued in July, indicated that the SRO intended to recommend disciplinary action for the firm’s purported failure to put into place procedures and policies designed to achieve Bank Secrecy Act compliance. The company is also accused of not putting into place regulations allowing it to identify and report suspect activity.

The probe involves a specific Wells Fargo Advisors branch office. Also, in 2010, Wachovia Corp., which Wells Fargo had acquired, paid $160 million to resolve charges alleging that it had laundered drug money from Mexico.

FINRA Issues Alert Warning Investors About Frontier Markets
This week, the SRO put out an alert encouraging investors and their financial advisors to consider the pluses and minuses of investing in frontier markets, such as Argentina, Lebanon, Slovenia, Vietnam, and Nigeria. According to INRA's senior vice president for investor education, investors looking to make higher returns in frontier funds should know that greater risks are typically also involved.

“Frontier market” usually refers to nations that are less developed than emerging markets, such as China, Russia, and Brazil. Their regulatory, legal, and financial accounting infrastructures may be weaker, and there also may be political instability. The SRO is recommending that investors know the risks involved in each market, including currency and political risks, watch for changes in index components, take into consideration fees and costs, which tend to be higher with frontier funds than emerging market ones, and look at a fund’s performance history.

Our FINRA arbitration lawyers represent investors in getting their money back. We work with high net worth individuals and institutional clients. Contact The SSEK Partners Group today.

FINRA Issues New Investor Alert, Frontier Funds—Travel With Care, FINRA, September 11, 2014

Wells Fargo facing possible Finra action over anti-money-laundering failures, Wells Fargo, September 8, 2014

FINRA Mulls Revised Broker Bonus Plan
, ThinkAdvisor, September 12, 2014

Regulators Weighing New Rules for Private Trading Venues, Wall Street Journal, September 10, 2014

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Securities Regulations News: SEC Looks to Delay Principal Trading Rules, FINRA Adds More Time to REIT Price Changes and 2nd Circuit Says Dodd-Frank’s Whistleblower Protections Don’t Apply Overseas, Stockbroker Fraud Blog, August 22, 2014

FINRA Claims Wedbush Securities Engaged in Supervisory and Anti-Money Laundering Violations, Institutional Investor Securities Blog, FINRA

August 26, 2014

FINRA Claims Wedbush Securities Engaged in Supervisory and Anti-Money Laundering Violations

The Financial Industry Regulatory Authority has filed a disciplinary complaint against Wedbush Securities Inc. that accuses the firm of violations related to anti-money laundering and systemic supervision. The self-regulatory organization says that from January 2008 through August 2013, Wedbush did not put enough of its resources towards a supervisory systems, risk-management controls, and procedures. At the time, the firm was one of the largest market access providers, making millions of dollars from the business.

Because of purported violations, contends FINRA, market-access customers, including non-registered participants, were able to permeate U.S. exchanges and make thousands of trades that could have been manipulative and may have even involved spoofing and manipulative layering. The agency says that even though it was Wedbush’s duty to look out for suspect and possibility manipulative trades, the firm depended mostly on its market access customers to self-report such trading, as well as self-monitor.

FINRA contends hat even though Wedbush received notice about the risks involved in its market access business, the firm ‘s supervisory procedures and risk management controls were not reasonably designed to deal with these factors. Wedbush even established incentives for compensation to be based on the value of market customer access trading. FINRA says that Wedbush should have set up, kept up, and enforced satisfactory AML policies and procedures, and it purportedly failed to report suspect transactions.

The disciplinary complaint is the start of FIRNA's formal proceeding against Wedbush. However, the findings with regards to the allegations made have not been made yet. Now, Wedbush can respond to the complaint. To date, the firm remains adamant that its supervisory procedures and market-access risk procedures were designed to reasonably achieve compliance with regulatory requirements.

In June, the Securities and Exchange Commission filed similar charges against Wedbush, Jeffrey Bell, who is ex-EVP in charge of market access, and Christina Fillhart, a market access division Sr. VP. The Commission’s claims are over alleged violations that would have taken place between 7/11 and 1/13. Wedbush says the trading activities under examination in the SEC’s case didn’t lead to any losses. The firm is challenging the claims.

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

Wedbush Securities Defends Market-Access Risk Management Practices, The Wall Street Journal, August 19, 2014

FINRA Charges Wedbush Securities for Systemic Market Access Violations, Anti-Money Laundering and Supervisory Deficiencies, FINRA, August 18, 2014

More Blog Posts:
SEC Sues Wedbush Securities and Dark Pool Operator Liquidnet Over Regulatory Violations, Institutional Investor Securities Blog, June 6, 2014

Goldman to Buy Back $3.15B in RMBS to Resolve FHFA Claims
, Stockbroker Fraud Blog, August 26, 2014

Bank of America to Pay $16.65 Billion to Settle DOJ Mortgage Probe, Institutional Investor Securities Blog, August 23, 2014

August 15, 2014

FINRA Panel Orders Morgan Stanley Unit to Pay Banamex Unit $4.5M Over Alleged Unauthorized Third Party Loans

According to a Financial Industry Regulatory Authority arbitration panel, Morgan Stanley & Co. (MS) must pay Banco Nacional de Mexico SA unit $4.5 million for allegedly letting funds from a family’s trust account be utilized for paying back third-party loans without authorization. The Mexican bank, also known as Banamex, was trustee to the account. It filed its securities arbitration case in 2012.

The trust was established in 2007 with proceeds from a property that members of a family had inherited and decided to sell. Banamex and the beneficiaries of the trust worked with a Morgan Stanley (MS) broker, who ran their accounts. The trust accounts were at a Morgan Stanley banking unit. They were set up in such a way that the assets were not supposed to be used as guarantees to pay third-party loans that another family member’s account had taken.

Morgan Stanley is accused of compelling the trust accounts to guarantee payment of a third-party loan without getting Banamex’s consent. According to the plaintiffs, the brokerage firm improperly guaranteed or recorded the trust assets for the relative, who did not belong to the trust.

The securities arbitration panel said that Morgan Stanley was negligent and engaged in negligent supervision. The damages are compensatory.

A spokesperson for Morgan Stanley said the broker-dealer was disappointed in the hearing's outcome. The firm maintains that the evidence demonstrates that the head of the family pledged the trust accounts as collateral for loans. Banamex is a Citigroup Inc. (C) subsidiary.

In other FINRA arbitration news, the self-regulatory organization has extended the deadline for how long the SEC has to vote on its proposed measure that would restrict who qualifies as a public arbitrator to resolve investor disputes. The SEC had 45 days from when FINRA published the proposed rule in the Federal Register. Now, the deadline has been moved to October 1. The postponement provides the Commission with additional time to go over comment letters that were sent about the proposal.

The rule is supposed to deal with the perceived perception that bias may be a factor in arbitration panels that adjudicate claims between broker-dealers and investors. If approved, no one from the securities industry would be allowed to serve as a public arbitrator. Instead, these individuals could only serve on the panel in the role of nonpublic arbitrator. Anyone that has worked in the industry for at least 15 years would be permanently barred from serving.

At The SSEK Partners Group, our FINRA arbitration lawyers represent high net worth individuals and institutional investors to recouping their losses. Your best chances of getting back your investment fraud losses is to work with a securities law firm that knows how to help you.

Morgan Stanley must pay $4.5 million to Banamex: panel, Reuters, August 15, 2014

Finra delays decision on public arbitrators, Investment News, August 5, 2014

More Blog Posts:

Former MIT Professor and His Son Plead Guilty to $140M Hedge Fund Fraud, Stockbroker Fraud Blog, August 14, 2014

LPL Financial to Pay Illinois $2 Million Fine Related to Variable Annuity Exchanges, Stockbroker Fraud Blog, August 13, 2014

Christ Church Cathedral Sues JPMorgan Chase Over Proprietary Product Sales, Institutional Investor Securities Blog, August 13, 2014

June 24, 2014

FINRA Arbitration Panel Orders Stifel Nicolaus to Pay $2.7M to Ex-Head Trader

A Financial Industry Arbitration Panel says that Stifel Financial Corp. (SF), the brokerage unit of Stifel Nicolaus, must pay $2.7 million to, Sean Horrigan. Stifel’s ex-head trader claims that the brokerage firm defamed him and withheld his bonus without just cause. Now, the panel is holding the broker-dealer liable.

Horrigan was fired from Stifel in 2012. According to his lawyer, his termination happened several weeks after he overheard a phone call in which a manager insulted his wife to a salesperson. Horrigan’s wife was also employed at Stifel at the time. After the incident, he reacted emotionally. It was after trading hours. The firm then demoted him before letting him go just weeks prior to giving him his bonus for 2011.

Stifel contended that Horrigan was not entitled to get that money because on the day that the bonuses were issued he no longer worked for the firm. His attorney, however, says that unless an industry professional signs a contract mandating that an employee has to be employed on bonus payout day, he/she is still entitled to that money.

The brokerage firm wrote in his dismissal paperwork that the ex-head trader behaved in a manner that was “detrimental to management and co-workers.” This information was included in his form U5, which states the “reason for termination.” Form U5s have to be sent to the Central Registration Depository.

The FINRA panel found that the language used to describe Horrigan’s termination was defamatory. Its members recommended that the verbiage "was not in parity with management's new strategy” be used instead.

The panel decided that Stifel was liable and would have to pay Horrigan $1.9 million plus interest in compensatory damages, and over 5,800 in Stifel, Nicolaus, and Co., Inc. stock (or the cash equivalent).

Compensation disputes involving financial firms and their employees are not uncommon. Recently, ex-Goldman Sachs Inc. (GS) trader Deeb Salem said he wants the firm to pay him significantly more than the $8.25 million bonus he received for his work in 2010. Salem says that he helped the bank make over $7 billion that year. The former Goldman Sachs trader contends that the bonus he should have gotten was unfairly docked due to a written warning regarding a 2007 self-evaluation.

A FINRA arbitration panel rejected Salem’s claims. Now, his lawyer has filed a petition in New York State Supreme Court. Salem wants $16.5 million in deferred compensation from Goldman Sachs.

FINRA Withdraws Proposal Ordering Brokers To Reveal Big Bonuses
In other news regarding broker bonuses, FINRA has withdrawn a proposal that would obligate brokers to tell clients about any substantial bonuses they received for switching to another firm. The move comes in the wake of criticism from the brokerage industry that the rule would be too expensive to implement.

The SRO intends to revise its proposal. It believes that customers should know about any financial incentives their representative got to switch firms and whether it will cost them for following the adviser or if their holdings will be impacted.

Stifel Nicolaus to pay 'defamed' trader more than $2.7 mlm, Reuters, May 12, 2014

A Young Ex-Goldman Trader Thinks His $8.25 Million Bonus Was Too Low, Business Trader, June 19, 2014

Finra Withdraws Proposal Requiring Brokers to Disclose Big Recruitment Bonuses, Wall Street Journal, June 23, 2014

More Blog Posts:
SEC Chairman Mary Jo White Wants Reforms Made to Bond Market, Stockbroker Fraud Blog, June 23, 2014

Pennsylvania Private Equity Firm Settles SEC Charges Over “Pay to Play” Violations Related to Political Campaign Contributions, Institutional Investor Securities Blog, June 23, 2013

Ex-ArthroCare CEO and CFO Convicted in Texas Securities Fraud Case, Stockbroker Fraud Blog, June 11, 2014

June 17, 2014

FINRA Orders Merrill Lynch to Repay $89M in Restitution, $8M Fine for Excessive Mutual Fund Fees for Charities, Retirement Accounts

FINRA says Bank of America (BAC) Merrill Lynch failed to waive mutual fund sales charges for a number of retirement accounts and charities. Now the wirehouse must pay as restitution $89 million and a fine of $8 million. The firm settled without denying or admitting to the findings.

The majority of mutual funds with the firm’s retail platform are supposed waive specific fees for charities and retirement plans that qualify for this consideration. However, Merrill Lynch neglected to ensure that its advisers were correctly implementing these waivers. This impacted 41,000 accounts.

The SRO says that from about ’06 – ’11, firm advisers put tens of thousands of accounts into certain funds, including Class A mutual fund shares, and promised to waive specific sales charges for charities and retirement accounts. It then did not act to ensure that all of the fees were actually waived.

In a statement, FINRA said that Merrill Lynch’s formal procedures don’t offer enough guidance or information about these waivers. Even when the firm found out that the waivers weren’t implemented in all eligible accounts, it still depended on its advisers to waive the fees. The regulator believes that Merrill Lynch did not properly supervise the sales nor did it notify or train its staff that there might be less costly alternatives they could offer investors.

A spokesman for Bank of America Merrill Lynch said the issue is a legacy one from prior to the merging of Bank of America with Merrill Lynch Pierce Fenner & Smith Inc. The discrepancy was discovered after the acquisition. FINRA said that even though the firm discovered the problem as early as in 2006, it did not notify the SRO about it until 2011.

Investors have already been repaid $65 million of the $89 million in restitution. $21.2 million will go to some 13,000 small business retirement accounts. More than 2.1 million 403(B) retirement accounts will get $3.2 million.

Please contact the SSEK Partners Group today.

Finra tags Merrill Lynch with $8 million fine for mutual fund sales charges
, Investment News, June 16, 2014

FINRA Fines Merrill Lynch $8 Million; Over $89 Million Repaid to Retirement Accounts and Charities Overcharged for Mutual Funds, FINRA, June 16, 2014

More Blog Posts:
FINRA Headlines: SRO Fines Goldman Sachs, Merrill Lynch, and Barclays Capital $1M Each & Makes Dark Pool Data Available, Stockbroker Fraud Blog, June 7, 2014

NY Hedge Fund Adviser Faces SEC Charges Over Conflicted Transactions and Whistleblower Retaliation, Institutional Investor Securities Blog, June 16, 2014

Ex-ArthroCare CEO and CFO Convicted in Texas Securities Fraud Case, Stockbroker Fraud Blog, June 11, 2014

June 12, 2014

Regulator Headlines: SEC Commissioner Stein Wants Updated Capital Rules for Brokerage Firms, FINRA’s BrokerCheck Link Proposal Faces Opposition, & CFTC Appoints New Enforcement Head

SEC Commissioner Wants Big Broker-Dealers To Hold More Capital
Securities and Exchange Commissioner Kara M. Stein wants the regulator to modify its capital rules for large brokerage firms so that they would be required to hold more capital in the event of a funding crisis. Stein wants the regulation to better factor the risk involved in short-term funding markets on which brokers depend. She also would like the latter to protect against failures that could upset the financial system.

Right now, the SEC is looking at new funding rules for brokers and placing limits on leverage, not unlike what regulators require for banks. However, Stein believes that the agency’s current approach, which is to protect customers but without considering how to keep companies in operation, needs work. The SEC Commissioner believes that the agency’s capital rules for big brokers should be based on preventing the failure of “systemically significant” firms. Stein also wants the SEC to finally implement the rules that were called for by the 2010 Dodd Frank Ac, including those that would limit the risks involving swap contracts.

FSI Unhappy With FINRA’s Proposal that Firms Link to BrokerCheck Site
The FSI, an interest group that represents independent broker firms, does not a approve of a Financial Industry Regulatory Authority proposal that would mandate that they include links to the latter’s BrokerCheck Database in broker-dealers’ online communications and on their websites. FINRA also wants a link to BrokerCheck.com included in firm registered representatives’ profiles.

The FINRA proposal, which has already been revised, is geared toward upping investor use of the BrokerCheck database. Since it was originally presented, the self-regulatory organization has removed a mandate that would require the links to go straight to a broker’s summary page on the database.

However, FSI wants FINRA To totally get rid of the requirement that firms include a link to BrokerCheck.com third party sites and in social media. While the proposal doesn’t mandate that brokerages include a link to BrokerCheck on individual messages posted on social media platforms, it does call for one in the “about” sections of Facebook, Twitter, PinInterest, and YouTube profile pages, as well as in the “background summary” area found on LinkedIn accounts.

New Chairman and Enforcement Division Heads at the CFTC
The U.S. Senate confirmed Timothy G. Massad as the Commodity Futures Trading Commission’s new head last week. J. Christopher Giancarlo and Sharon Y. Bowen were also confirmed as CFTC commissioners. They join commissioners Scott D. O’Malia and Mark Wejen.

Massad's first major appointment as CFTC Chairman is Aitan D. Goelman, who is now the new head of the CFTC’s enforcement division. Goelman is a 45-year-old trial lawyer and a former federal prosecutor. He takes over for David Meister, who is also an ex-federal prosecutor.

Our securities lawyers represent institutional investors and high net worth individuals that have sustained fraud losses. Contact The SSEK Partners Group today.

Brokers Need More Capital for Crisis, SEC’s Stein Says, Bloomberg, June 12, 2014

FSI gives revised Finra BrokerCheck link rule the thumbs down, InvestmentNews, June 12, 2014

Commodities Regulator Names New Enforcement Chief, The New York Times, June 10, 2014

CFTC Chairman Massad Announces the Appointment of Aitan Goelman as Director of Enforcement, CFTC, June 10, 2014

More Blog Posts:
State Senator Reprimanded For Violating the Texas Securities Act, Stockbroker Fraud Blog, May 8, 2014

Bank of America Could Settle Mortgage Probes for $12B, Institutional Investor Securities Blog, June 7, 2014

$500M MBS Settlement Reached Between Countrywide and Investors, Stockbroker Fraud Blog, May 10, 2014

May 24, 2014

FINRA Delays Submitting REIT Share Price Rule to the SEC, Revises Trading Surveillance System, Gets Approval to Rule Limiting Self-Trading

The Financial Industry Regulatory Authority is postponing when it will send to the U.S. Securities and Exchange Commission its proposed new rules that would give investors a more accurate overview of the costs involved in buying nontraded real estate investment trust shares. The proposed change to NASD Rule 2340, if approved by the SEC, would no longer allow brokerage firms to list a nontraded REIT’s per-share value at the common price of $10, which is the price that they are sold to clients.

Instead, the different fees and commissions that deal managers and brokers are paid would have to be factored in, which would lower each nontraded REIT’s share price in a customer’s account. Independent brokerage firms and their affiliated reps are the ones that would be most affected since practically all they sell is nontraded REITs. Unlisted private placements would also be impacted.

Although the comment period on the proposed rule changes ended in March, FINRA now says that it is not yet done looking at these comments. One group, the Investment Program Association, wants the proposed rule changes—in particular, the one that modifies to the way REIT valuations show up on client statements—delayed until 2015 so that nontraded REIT sponsors and brokerage firms that sell these investments have enough time to make their modifications so they are in compliance.

The SEC recently approved another rule change. This one will limit-self trading. FINRA Rule 5210 will mandate that firms implement procedures and policies that are reasonably designed to review trading activity and prevent self-trading from orders coming from a trading desk or algorithm. Self-trades raise concerns because they may not be a sign of real trading interest.

In other FINRA news, the SRO is modifying the design of Cards, its trading-surveillance system. The changes will give smaller brokers that don’t work with clearing firms greater flexibility to send commission and trade information either straight to FINRA or with the help of a contractor.

Cards is supposed to automate the SRO’s analysis of suspect broker activity, decreasing the agency’s dependence on live exams, which don’t always catch all violations. However, there were those who had problems with Cards, noting it would bring up data-security risks and privacy risks not just for brokers and investors. Big expenses over compliance could also be likely.

In a speech earlier this month, FINRA Chief Executive Officer Rick Ketchum said that based on meetings with brokerage firms to comprehend the benefits and costs of Cards, the agency has modified its original concept, including offering flexibility in data reporting to address cost complaints. The changes will be incorporated into a proposal to be issued this summer.

Our REIT Fraud lawyers represent investors seeking to recoup their losses.

Finra holds off sending nontraded REIT share price rule to SEC, InvestmentNews, May 20, 2014

FINRA Rule Change to Limit Self-Trading Approved, FINRA, May 2, 2014


Finra Trade-Surveillance System to Be Revised, Ketchum Says, Bloomberg, May 20, 2014

More Blog Posts:
SEC Roundup: The Regulator Charges Ex-Deloitte Chief Risk Officer with Auditor Rule Violations, Ex-Clearing Firm Officials With Regulation SHO Violations, & Rafferty Capital Markets with Illegal Trade Facilitation, Institutional Investor Securities Blog, May 23, 2014

SEC Warns About Investment Scams Involving Marijuana, Stockbroker Fraud Blog, May 24, 2014

AIG Wants to Stop Former CEO Greenberg From Naming It as a Defendant in Derivatives Lawsuit Against the US, Stockbroker Fraud Blog, April 13, 2013

May 21, 2014

FINRA Conducts 170 Probes Into Possible Algorithmic Abuse

The Financial Industry Regulatory Authority says that is looking to identify and stop trading incidents linked to algorithmic abuses. The self-regulatory agency is currently conducting about 170 investigations into this matter.

FINRA wants to find out if any brokerage firms either engaged in algorithmic abuses to trade or did not properly supervises advisers who committed such abuses. The SRO is worried that there are algorithms that are specifically intended set off illegal, manipulative behaviors on the market.

The use of algorithms to influence the markets have garnered lots of attention lately, specially with the release of author Michael Lewis’s book, “Flash Boys: A Wall Street Revolt.” He contends that high-frequency traders have the greater advantage because their extremely fast computers can manipulate stock prices to their benefit.

This month, FINRA and financial exchanges run by IntercontinentalExchange Group Inc., NASDAQ OMX Group Inc., and CBOE Holdings Inc., announced that they were fining trading firm HAP Trading LLC and its CEO Harsh Padia $1.5 million for manipulating the options market and not properly supervising an employee. The trader, Saagar Gupta, is accused of taking part in “cross-product manipulation” for HAP Trading on several occasions between May and July 2010.

Chicago Board Options Exchange has suspended him from trading for three months and he must pay a $250,000 fine. The $1.5 million that Hap Trading and Padia were told to hand over is $1.25 million in profits and pay $250,000 as penalty.

The FINRA probes come in the wake of the U.S. Securities and Exchange Commission’s “market access” rule, which mandates that brokerages that have direct access to the market make sure that there are supervisory procedures and risk management controls in place.

The SSEK Partners Group is an institutional investor fraud law firm.

HAP Trading, chief fined $1.5 million for options manipulation, MSN, May 12, 2014

FINRA probing 170 instances of possible algorithmic abuses, Reuters, May 19, 2014

More Blog Posts:
SEC Chair White Says High-Frequency Trading Markets Not Rigged, Stockbroker Fraud Blog, April 29, 2014

Illegal High Frequency Trading: Trillium Brokerage Services LLC and 11 individuals agree to settle FINRA Charges for $2.27M, Institutional Investor Securities Blog, September 22, 2010

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

April 19, 2014

The Brokerage Industry Responds to FINRA’s Broker Compensation Proposal

A number brokerage firms, including Morgan Stanley Wealth Management, LPL Financial (LPLA), and Stifel Nicolaus (SF) have responded to the Securities and Exchange Commission’s request for comments about FINRA-proposed rule about broker compensation. Proposed rule 2243 would require greater disclosure about the financial incentives that is offered to representatives who change jobs. The information would need to be conveyed to the self-regulatory agency.

Under Rule 2243, clients who go with a broker to a new firm would have to be apprised of any recruiting compensation the representative gets if the amount is $100,000 or greater. This would include bonuses at the front and back ends, signing bonuses, transition assistance, and accelerated payouts. The disclosure would be applicable for one year after the representative begins association or employment with the new broker-dealer.

The rule also would apply if the brokerage firm expects total compensation paid during the representative’s first year of association to result in a $100,000 or 25% increase in compensation from the year prior. Firms also would have to notify FINRA about such a rise in compensation. (The SRO wants to use the data to look for signs of potentially related sales abuses.)

FINRA says that it wants these disclosures to be activated by any action that a recruiting firm makes to convince customers to move their assets to the new firm of a broker. Notice would also have to be provided if such a move were to result in additional costs for a customer.

InvestmentNews reports that based on some of the comments received, there are those in the brokerage industry who worry that complying with the proposed rule could prove challenging. For example, Commonwealth Financial Network is reportedly worried about “transition assistance,” which FINRA views as upfront payment. This money helps new representatives cover their work-related expenses during the time it takes to completely move from one place of business to the next. Meantime, the Securities Industry and Financial Markets Association has expressed concern that it might be hard to set up the needed supervisory systems to make sure the rule is followed.

However, wirehouses generally appear to be on board with FINRA's proposed rule. These firms typically shell out huge upfront payments to get brokerage teams to join, and the rule could be used as incentive to make these offers smaller.

Broker Fraud
Brokers are required to provide customers with a certain duty of care. This means making financial recommendations that are in their best interests. Brokers are not allowed to place their own profit over this obligation.

Unfortunately, there are brokers who do take advantage of customers’ trust to make more money for themselves. This can place an investor’s portfolio in peril and result in substantial financial losses.

Please contact our broker fraud lawyers today. We can help you determine whether you have grounds for a securities case.

Brokerage industry sounds off about Finra broker compensation proposal, Investment News, April 18, 2014

Board of Governors Authorizes FINRA to File Recruitment Compensation Proposal With the SEC, FINRA, September 19, 2013

Proposed Rule Change to Adopt FINRA Rule 2243 (Disclosure and Reporting Obligations Related to Recruitment Practices), FINRA

More Blog Posts:
FINRA Broker Bonus Plan Would Require Brokers to Disclose Their Recruitment Compensation, Institutional Investor Securities Blog, September 22, 2013

Lawyers, Investor Advocates Want to Know More About SEC Supervision Of FINRA’s Arbitrator Selections, Institutional Investor Securities Blog, December 2, 2013

FINRA Doesn’t Want Oversight Over Financial Advisers, Says CEO Ketchum, Stockbroker Fraud Blog, April 12, 2014

March 19, 2014

Non-traded REITS Exhibit Unbelievable Resistance to FINRA Disclosure Rules

The non-traded real estate investment trust industry want to delay the implementation of the Financial Industry Regulatory Authority disclosure rule until the end of 2015. The rule would require that investors be given more accurate data about the valuation of direct participation programs and nontraded REITs. This should provide investors a more accurate picture of how much it costs to buy nontraded REIT shares. Currently, the self-regulatory authority’s proposal would put the rule change into effect at the end of 2014, which would be about six months after obtaining Securities and Exchange Commission approval.

Almost all Nontraded REIT vendors are independent brokerage firms. Generating close to $20 billion in sales last year, which is twice as much as the year prior, broker-dealers and their representatives have gotten commission boosts due to their typical 7% commission.

If the disclosure rule is approved, broker-dealers would no longer be able to list a nontraded REITs per-share value at $10, which is the price their clients would typically pay. Instead, commissions and fees paid to dealer and broker managers would have to be factored. This would lower the share price on every customer account.

In a letter to the SEC, the Investment Program Association said it is asking for an 18-month implementation period to avoid unfavorable consequences not just for nontraded REIT industry and others that depend on unlisted DPPs and REITs as capital sources, but also for investors. The industry trade group wants to slow down changes to the way REIT valuations are presented on client account statements and give brokerage formers and Nontraded REIT sponsors more time to make adjustments to any new requirements. Already, contends IPA Chairman and Carey Financial President Mark Goldberg, the expected changes are having a negative impact on new offerings of Nontraded REITs and DPPs.

Goldberg says that the industry supports greater disclosure as well as the reduction of commissions. He also wrote that net investments should be calculated by just subtracting dealer manager fees and commissions. He believes this is in line with the “point of sale cost deduction approach” employed for other securities.

Commenting on the industry’s move to delay the implementation of the disclosure rule, Shepherd Smith Edwards and Kantas, LTD LLP Founder and stockbroker fraud lawyer William Shepherd said: “Any attempt to delay implementation of new rules to help investors know the true value of any investment is scandalous. Consumer protection groups have often been critical of FINRA, which is a trade association itself operated by the brokerage industry. Yet, financial advisory firms are fighting to keep from being subject even to FINRA regulation. By now opposing a requirement of greater disclosure of the true value of non- traded (and often unmarketable) REIT investments, we see just how far a financial investment trade organization will go to obscure information regarding problem investments such as many of these REIT’s!”

If you think that your non-traded REIT losses are a result of securities fraud, please contact our stockbroker fraud lawyers immediately. We represent retail and institutional investors in getting their non-traded REIT investment losses back.

Nontraded REITs want delay in Finra's proposed disclosure rule, InvestmentNews, March 14, 2014

Download the Investment Program Association's Letter (PDF)

More Blog Posts:

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

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

Mortgage REITs See a Slump, Institutional Investor Securities Blog, August 14, 2013

January 28, 2014

Lawyers Say Electronic Communication Retention Will Lead to More Securities Enforcement Actions

At a webcast on January 22, lawyers said that the electronic communication issues and the retention of e-mail would be a big part of broker-enforcement by Financial Industry Regulatory Authority and the SEC this year. E-mails are reportedly now a key factor in investigations by the two regulators. Also now subject to retention, supervision, and other requirements are instant messages and any other electronic communications and methods that brokerage firms us to dialog internally, as well as with customers and the public.

Last month, Barclays Capital agreed to pay a $3.75 million FINRA fine for allegedly not keeping all of its electronic messages and improperly storing records in a format that was non-rewritable. Barclays also purportedly did not keep over 3 million instant messages, which violates FINRA and SEC rules, and failed to retain email attachments. Earlier in 2013, LPL Financial (LPLA) was ordered by the SRO to pay $7.5 million for allegedly not adequately supervising e-mails.

Statistics show that electronic communications was the number one enforcement issue for FINRA last year. The self-regulatory organization’s amended Rule 8210 could also lead to additional litigation and enforcement actions over the books and records that it requests from firms and individuals. The change makes clear the degree to which FINRA can inspect and copy the records and books of associated persons and members and gives adjudicators the right to copy and inspect information that are under the control or custody of those that the SRO has jurisdiction over. Due to the fact that FINRA is not a governmental authority, firms are unable to invoke the Fifth Amendment regarding this matter. They also cannot formally oppose a Rule 8210 request to give over the material requested. Doing so can lead to possible disciplinary action.

The SSEK Partners Group
Please contact our securities law firm today if you suspect that you were the victim of institutional investor fraud.

SEC Approves Amendments to Rule 8210, FINRA

Read the Full Notice (PDF)

More Blog Posts:
Barclays to Pay $3.75M FINRA Fine for E-mail Retention and Record Preservation Violations, Stockbroker Fraud Blog, December 30, 2013

FINRA Orders LPL Financial to Pay $7.5M Over Allegedly Inadequate Supervision of E-Mails, Stockbroker Fraud Blog, May 23, 2013

FINRA Fines Piper Jaffray $700,000 for E-mail Retention Issues and Other Violations, Stockbroker Fraud Blog, June 7, 2010

December 27, 2013

FINRA Considers System That Would ‘Red Flag’ Customer Accounts at Brokerage Firms

The Financial Industry Regulatory Authority is looking at a system that would let the SRO run analytics on the customers accounts at brokerage firms that would allow it to identify “red flags” involving business and sales misconduct involving branches, firms, and registered representatives. The agency is now seeking comments for its proposal for the Comprehensive Automatic Risk Data System (CARDS).

Upon implementation of CARDS, clearing firms and self-clearing firms would regularly turn in, in standardized, automated format, specific data about customer accounts and the customers accounts of each member account that they clear for. This would allow FINRA to conduct analytics so it can identify excessive commissions, churning, markups, pump and dump scamps, and mutual fund switches. The information would also be used to examine broker-dealers.

FINRA says it wants to be able to find the risks and red flags earlier. According to a notice from the SRO, the agency says that this type of automated reporting would get rid of some of the one-off reporting that brokerage firms now have to engage in. This would also let FINRA compare broker-dealers and identify trends and patterns in the industry.

CARDS is part of FINRA’s efforts, since the 2008 financial crisis, to go from depending on individual financial firm exams to surveillance that is broader and occurs on an ongoing basis. The SRO says it conducted a successful trial of CARDS earlier in 2013. 300 introducing firms were involved.

To make CARDS a working reality, brokers might have to gather historical data. Meantime, clearing firms would need to construct a system that would let them turn in the information and oversee data transmission. FINRA CEO and Chairman Robert Ketchum said that the purpose of CARDS isn’t to “replace the compliance officer.” He said the SRO wants to be able to swiftly place attention on firms and their branches where there may be a “concentration in assets that are more likely to be hit."

The SSEK Partners Group works with institutional investors and high net worth individual investors to get back their money that they lost due to securities fraud. Contact our broker fraud law firm today.

Finra Plans System To 'Red Flag' Customer Accounts At Broker-Dealers, Financial Advisor, December 23, 2013

FINRA Solicits Comment on Comprehensive Automated Risk Data System (CARDS) Proposal, Reuters, December 23, 2013

FINRA Requests Comment on a Concept Proposal to Develop the Comprehensive Automated Risk Data System, FINRA

More Blog Posts:
Deutsche Bank to Pay $1.9B to FHFA Over Mortgage-Backed Securities Sold to Freddie Mac and Fannie Mae, Institutional Investor Securities Blog, December 26, 2013

Fannie Mae Sues UBS, Bank of America, Credit Suisse, JPMorgan Chase, Citigroup, & Deutsche Bank, & Others for $800M Over Libor, Institutional Investor Securities Blog, December 14, 2013

Former Merrill Lynch, Oppenheimer, Deutsche Bank Broker is Ordered by FINRA To Pay Investor $11M Over Alleged Securities Fraud, Stockbroker Fraud Blog, April 19, 2013

December 2, 2013

Lawyers, Investor Advocates Want to Know More About SEC Supervision Of FINRA’s Arbitrator Selections

The Public Investors Arbitration Bar Association (PIABA) is working with consumer rights group Public Citizen to get the US Securities and Exchange Commission to release documents about its oversight of the Financial Industry Regulatory Authority’s selection of the arbitrators who preside over disputes between broker-dealers and investors. According to PIABA President Jason Doss, because customers are “forced” into only having securities arbitration as a resolution venue when they sign documents to set up brokerage accounts (in the event of future disputes), they should be allowed to know how FINRA decides who hears the arbitration cases.

PIABA is a lawyers’ group that represents investors with securities arbitration claims. Contending that this is an issue of “transparency,” the attorneys have been trying to gain access to these documents for the last few years.

The group’s efforts started in 2010 with a Freedom of Information Act query to the SEC asking for documents that address how the regulator inspects FINRA’s process for selecting arbitrators and looking into their backgrounds. However, even though FOIA grants the public access to federal agency records, it has exemptions. (The exemption exists to protect sensitive matters, such as customer’s private financial data.)

The Commission invoked such an exemption as its reason for turning PIABA’s request. The group made a second attempt to get the documents but this also proved unsuccessful and the lawyers’ group then sued the SEC. They lost their case earlier this year.

Now, Public Citizen’s legal arm has submitted a brief for PIABA in a federal appeals court to overturn the district court’s ruling, which allowed the records to stay undisclosed. (In June, after Reuters reported that a FINRA arbitrator presiding over a securities arbitration case involving Goldman Sachs had been criminally indicted in the past, FINRA modified the way it vets its arbitrators, of which there are about 6,000. Previous to that arbitrators were only vetted once as candidates for the job. Now they must be vetted yearly.)

Still, it will be up to the U.S. Court of Appeals for the District of Columbia Circuit to determine what kind of examination reports are in the exemption that the SEC is claiming. PIABA wants the court to restrict the exemption reports regarding the financial activities of an institution while allowing disclosure of information about FINRA’s administrative duties.

The SSEK Partners Group represents investors with securities arbitration claims against broker-dealers, investment advisers, brokers, hedge fund managers, mutual fund managers, and others. You want to work with an experienced FINRA arbitration lawyer that knows how to pursue your claim.

Our securities law firm knows how upsetting it can be to sustain financial losses caused by professional misconduct or negligence. We are here to help our investor clients recover their investment losses.

Investor advocates push to see trove of arbitration records, MSN, December 5, 2013

Public Investors Arbitration Bar Association

Public Citizen

More Blog Posts:
Broker-Dealer National Planning to Pay $6.2M FINRA Arbitration Award to Two Minnesota Investors Over REITs, Stockbroker Fraud Blog, December 3, 2013

Financial Firms in the Headlines: UBS Charges Financial Planning Fees, MF Global Customers Seek to Cap Ex-Leaders’ Legal Defense Expenses, Ex-Thompson REIT CFO is Suspended, Stockbroker Fraud Blog, July 2, 2013

US Hedge Fund Industry is Worried About Tax Implications Under EU Directive, Institutional Investor Securities Blog, November 27, 2013

November 7, 2013

Lawmakers & Industry Folk Address the DOL Amending the Definition of Fiduciary, Reg A Plus Offerings, Oversight, Rogue Brokers, and Expungement Rules

US House Passes A Bill Prohibiting the US Labor Department DOL From Amending Its Definition of “Fiduciary” Until SEC’s Uniform Conduct Standard is Established
A bill that would not allow the Department of Labor to amend its rules regarding the definition of the term “fiduciary” until after Securities and Exchange Commission adopts its own rule that places broker-dealers and investment advisers under a uniform standard of conduct has passed in the US House of Representatives. The DOL has been trying to revise its definition of “fiduciary” in the Employee Retirement Income Security Act (ERISA). Those who voted to prohibit revising the definition have been worried about possibly ending up with two rulemakings that were inconsistent with one another.

Reg A Plus Offerings and Their Oversight Get Capitol Hill Debate
At a Senate Banking Committee’s Securities, Insurance, and Investment Subcommittee hearing about developments involving the Jumpstart Our Business Startups Act, discussion ensued about Reg A Plus offerings. The SEC has yet to put out a proposal about “Reg A Plus,” which is the term used by its staff to refer to the new Reg A threshold.

Per the JOBS ACT’S Title IV, the SEC has to put in place a rule that will give exemption to certain offerings of up to $50 million (the current Reg A exemption is $5 million). While Reg A plus offerings would be exempt from SEC registration, they will have to adhere to state level registration unless found on a national securities exchange or sold to a “qualified purchaser.” Already, some in the industry are calling for a “workable definition” of what constitutes a “qualified purchaser” so that certain offerings would be exempt from state registration requirements.

There are those who believe that Reg A Plus offerings would benefit “Main Street businesses” that are not the likeliest candidates for other JOBS Act provisions. That said, the existing blue sky registration process puts in place additional limitations and burdens that might discourage those who would use a new Reg A Plus exemption.

Meantime, the North American Securities Administrators Association has put out a proposal (and is seeking comment) on streamlining the review of Reg A Plus offerings by the states. NASAA says long standing state policies will have to be modified and a “peel back” of certain requirements is necessary to make the offerings more viable.

Sen. Markey Worries About Rogue Brokers, Expungement of Violations from Public Records
In letters to the SEC and the Financial Industry Regulatory Authority, US Sen. Edward Markey (D-Mass) expressed his concerns about the high rate of broker-dealers that are able to get certain complaints removed from their records. Markey co-authored the bill that eventually led to the creation of FINRA’s BrokerCheck, which is the online database that provides information about the records of broker-dealers and brokers that the public can access. However, he worries that with such a high expungement rate for these advisers, investors are not getting an accurate picture of these people’s records.

The senator from Massachusetts believes that expunging settlement deals from a broker’s records should be prohibited. Meantime, FINRA said it has started to make changes to preserve the integrity of its BrokerCheck system and enhance investor protections.

Markey also voiced worry about a report in the Wall Street Journal noting that millions of dollars in arbitration awards aren’t paid because some firms file for bankruptcy instead. Markey wants the SRO to make brokerage firms carry insurance to cover arbitration awards. He is dismayed that there are thousands of brokers who keep selling securities even after being kicked out by FINRA. He told the SRO that it needs to do a better job of finding “rogue brokers” who stay in business even though they’ve been expelled.

The SSEK Partners Group represents individual and institutional investors that have sustained losses from broker fraud. Contact our stockbroker fraud law firm today.

U.S. House passes bill to delay fiduciary rules at SEC, Labor Dept, Reuters, October 29, 2013

NASAA Outlines Plan for Streamlined State Review of JOBS Act-related Multi-State Offerings, North American Securities Administrators Association, October 30, 2013

Senator: Finra too weak to go after deadbeat broker, Investment News, October 25, 2013

More Blog Posts:

Judge Dismisses Shareholder Lawsuit Suing Bank of America For Allegedly Concealing AIG Fraud Case, Institutional Investor Securities Blog, November 6, 2013

JPMorgan’s Admission to CFTC of “Reckless” Trading Could Lead to More Securities Fraud Cases, Institutional Investor Securities Blog, November 4, 2013

Why did UBS Financial Advisors Recommend Puerto Rico Muni Bonds to Elderly and Retired Investors?, Stockbroker Fraud Blog, November 6, 2013

September 22, 2013

FINRA Broker Bonus Plan Would Require Brokers to Disclose Their Recruitment Compensation

The Financial Industry Regulatory Authority’s Board of Governors has approved a proposal mandating that brokerage firms disclose how much recruitment compensation they were paid to move to another firm. The rule applies to up-front and back-end bonuses, signing bonuses, accelerated payouts, loans, and transition assistance of $100,000 or greater, as well as future payments upon performance criteria.

While the $100,000 threshold is not going to be relevant for many independent representatives, since the majority of their packages don’t reach this benchmark, this could impact independent brokerage firms with higher forgivable notes of up to 40% and may hurt their recruitment.

Now, it is up to the Securities and Exchange Commission to look at the plan and either give its approval or present the proposal to the public for comment.

If the plan is approved, brokers also would have to tell customers that follow them to their new place of business for a full year after the transfer about their recruitment package. In addition to the disclosure duty, FINRA would have to be notified of any total compensation increases that are “significant” to be paid to representatives that are newly recruited.

Also, firms would have to tell customers about the compensation being paid to transferring representatives according to range—from $100k to $500K and $500K to $1M, and upward. They would need to disclose whether expenses would go up if a customer opted to move its assets to the new firm, as well as if there were assets that would not be transferrable. FINRA is hoping that such reporting will help identify sales abuses that could be motivated by a rise in compensation, as well as help provide information about any rulemaking over compensation incentives.

Broker Fraud
The SSEK Partners Group represents institutional investors that have suffered losses due to broker fraud. The incentive of more compensation is one reason that securities misconduct can arise. Please contact our stockbroker fraud law firm today.

FINRA Broker Bonus Plan Would Be ‘Nonevent’ for Many Reps: Henschen, ThinkAdvisor, September 19, 2013

FINRA tightens screws on Wall Street broker bonus disclosures, Reuters, September 19, 2013

Financial Industry Regulatory Authority

More Blog Posts:
Imperial Petroleum Charged by SEC with Defrauding Investors, Stockbroker Fraud Blog, September 18, 2013

Many Financial Fraud Victims Don’t See It Coming, Says Survey, Stockbroker Fraud Blog, September 7, 2013

Former Broker Claims He is the Reason FINRA’s Regional Director Resigned, While Ex-JP Morgan Broker Files Arbitration Claim Against His Former Employer, Institutional Investor Securities Blog, June 18, 2013

September 14, 2013

Broker Gets 1-Year Suspension From FINRA Over Inadequate Due Diligence and Supervision

Gary Mitchell Spitz, a broker and a registered principal of an Iowa-based brokerage firm, is suspended from associating with any FINRA member for a year and must pay a $5,000 fine. The SRO says that Spitz did not perform proper due diligence of an entity—a Reg D, Rule 506 private offering of up to $2 million—even though this action is mandated by his firm’s written supervisory procedures.

FINRA’s finding state that because of Spitz’s inadequate review, he did not make sure that the offering memorandum had audited financials of the issuer or make sure that these financials were accessible to non-accredited investors prior to a sale—also, a Regulation D requirement. The SRO says that Spitz let certain registered representatives, who were associated with the firm, to sell the entity’s shares and turn in offering documents that customers had executed directly to that entity. This meant that Spitz did not get copies of the documents or perform a suitable review of the transactions before they were executed. Certain customers even invested in the entity prior to Spitz getting the subscription documents from these representatives.

Spitz also is accused of not acting to make sure that the representatives made reasonable attempts to get information about the financial status, risk tolerance, and investment goals of customers. FINRA says he did not retain and review these representatives’ email correspondence and that they worked for a company that was the entity’s manager. Spitz let these representatives use the company’s email address to dialogue with customers and prospective clients but that the firm’s server did not capture the correspondence.

FINRA also says there weren’t any procedures to make sure that employees that were dually employed sent email correspondence from external email addresses to Spitz for retention and review. This let the representatives make unwarranted, exaggerated, and possibly misleading statements to customers.

Spitz consented to FINRA’s findings without denying or admitting to them.

Failure to Supervise
Brokerage firms need to have written procedures for properly supervising brokers and other employees. When failure to execute these procedures allows for negligence or misconduct, the firm and the supervisor can be subject to liability for broker fraud.

Gary M. Spitz, BrokerCheck

Financial Industry Regulatory Authority

More Blog Posts:
FINRA Enhances Its Arbitrator Vetting Policy, Stockbroker Fraud Blog, August 26, 2013

Former Broker Claims He is the Reason FINRA’s Regional Director Resigned, While Ex-JP Morgan Broker Files Arbitration Claim Against His Former Employer, Institutional Investor Securities Blog, June 18, 2013

Citigroup Must Pay $11M Claimant for Royal Bank of Scotland Investment Losses, Says FINRA Arbitration Panel, Institutional Investor Securities Blog, August 7, 2013

September 11, 2013

FINRA Fines Santander Investment Securities Inc. $350,000 For Not Supervising Foreign Fund Offerings

The Financial Industry Regulatory Authority is fining Santander Investment Securities Inc. $350,000 over allegations that the brokerage firm failed to adequately supervise foreign fund offerings. The SRO says that the broker-dealer did not have a system in place to properly oversee communications between brokers, a registered firm principal, non-registered employees, and investors about the purchase of non-US funds.

FINRA found that the principal had the job of determining interest from institutional investors in the US for funds overseen by a fund manager who was affiliated with the firm but was not regulated by SRO or based in the US. The principal and those mentioned above contacted investors about buying non-US funds in the future.

FINRA says that Santander Investment Securities should have had a registered individual supervising the registered personnel in relation to these communications. It also found that these interactions took place at presentations where sales materials were given out to prospective investors. However, notes the SRO, the brokerage firm did not appoint an individual registered with the firm to make sure procedures and policies were being enforced at these gatherings, nor did it apply these protocols with the public or look at and approve the fund presentations and other materials. Copies of the material that was distributed were not kept, as required. FINRA says that the materials included claims that were exaggerated.

Santander Investment Securities turned in its letter of acceptance, consent, and waiver after FINRA entered its findings.

Broker Fraud

It is the duty of broker-dealers to set up and execute a reasonable supervisory system so that customers are shielded from abusive and negligent sales practices. Failure to set up such procedures and policies can be grounds for securities fraud liability if investors sustain losses because of inadequate supervision.


More Blog Posts:

Former Broker Claims He is the Reason FINRA’s Regional Director Resigned, While Ex-JP Morgan Broker Files Arbitration Claim Against His Former Employer, Institutional Investor Securities Blog, June 18, 2013

Radio Host Dave Ramsey and Financial Advisers Get Into Twitter Fight, Stockbroker Fraud Blog, June 14, 2013

Brokerage Firms Change Hands as Insurers Divest In House Securities Firms, While REIT Manager Schorsch Buys First Allied Securities, Stockbroker Fraud Blog, June 12, 2013

September 6, 2013

NEXT Financial Group Gets $250,000 FINRA Fine Over E-Mail Violations

NEXT Financial Group, Inc. will pay a $250,000 fine and perform an audit to identify all non-company email accounts that were used by the firm’s registered persons to conduct communications that were securities-related. It will also identify whether the accounts were captured by its servers, reviewed during regular email surveillance, and retained according to federal securities laws and FINRA rules. NEXT Financial will then present a written statement to the SRO describing the audit results and any corrective action to make sure that emails are captured, retained, and reviewed in the future.

FINRA says that for four years, two of NEXT Financial’s registered representatives ran an outside business activity that was approved and, during certain times, they outside business email addresses to communicate with customers about out securities-related matters. The SRO says that firm’s written supervisory procedures let registered persons communicate with NEXT Financial customers via the non-firm email accounts as long as the external domain names were firm-hosted and approved and could be captured and reviewed on the company’s server.

However, says the SRO, during a yearly branch audit, NEXT Financial found that registered representatives’ outside emails were not being maintained or captured on the server and, as a result, no review was taking place. FINRA contends that even after discovering this, NEXT financial did not take corrective action.

NEXT Financial consented to the sanctions described by FINRA, as well as to the entry of findings but did not deny or admit to them.

FINRA E-mail Enforcement Actions
According to InvestmentNews, FINRA has been stepping up its e-mail enforcement actions as of late, with the number of e-mail related violations rising. The SRO imposed $6.5 million in fines over this matter last year—an 81% rise from the year prior—over 632 email cases.

FINRA and the Securities and Exchange Commission mandate that brokerage firms set up systems and written procedures to catch and hold all e-mail communications with members of the public for three years. The firms also must pre-approve or regularly examine at least some e-mail samplings sent to customers by brokers. Unfortunately, proper retention and review of emails is proving to be a struggle for some brokerage firms.

Finra going all out to control e-mail, InvestmentNews, May 26, 2013


More Blog Posts:

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

Next Financial Ordered to Pay One Million Dollars for Supervisory Deficiencies that Led to Texas Securities Fraud, Stockbroker Fraud Blog, August 4, 2009

FINRA NEWS: Goldman Sachs Appeals Vacating of Securities Award, Non-Customers of Brokerage Firm Can’t Compel Arbitration, & Three Governors Named To FINRA Board, Stockbroker Fraud Blog, August 21, 2013

Continue reading "NEXT Financial Group Gets $250,000 FINRA Fine Over E-Mail Violations" »

September 4, 2013

FINRA Fines Expected to Drop 41% in 2013

Even though the number of disciplinary actions from the Financial Industry Regulatory Authority has dropped just slightly this year, fines paid to the SRO are expected to be 41% lower from what was assessed in 2012.

In its Disciplinary and Other FINRA Actions report for the first half of 2013, FINRA said there were $23 million of fines—compare that to the same time period last year when the SRO fined brokerage firms and associated individuals $39 million. The total in fines it would assess for 2012 would reach $78 million. This year’s total is estimated to reach $46 million.

One reason for the decline might be that FINRA had already brought its biggest cases related to the market collapse. A decrease in supersize fines of those over $1 million has also occurred during the year’s first six months. However, in July, the SRO reported fining a financial firm $7.5 million while another had to pay investor restitution of $1.5 million. Supersize fines were also imposed on other broker-dealers.

ThinkAdvisor lists the leading five enforcement issues for FINRA for the first half of this year (figures were reported in Disciplinary and Other FINRA Actions): municipal securities, with 25 case at $4.3 million; electronic communication, with 25 cases at $2.5 million; mutual funds with 18 cases at $21 million; suitability, with 31 cases at $1.7 million; and short selling, with 16 cases at $1.5 million.

FINRA is the biggest independent regulator of securities firms in the US—4,215 broker-dealers (and their branches) and about 633,620 brokers. It is here to protect investors and ensure market integrity.

FINRA Arbitration
Many securities cases are resolved via FINRA arbitration. You want to work with an experienced FINRA arbitration lawyer that can help your recover your investment fraud losses. Our securities fraud law firm represents investors throughout the country.

FINRA Fines On Track to Fall 41% This Year, ThinkAdvisor, September 6, 2013

Financial Industry Regulatory Authority

US Securities and Exchange Commission

More Blog Posts:
FINRA Enhances Its Arbitrator Vetting Policy, Stockbroker Fraud Blog, August 26, 2013

Citigroup Must Pay $11M Claimant for Royal Bank of Scotland Investment Losses, Says FINRA Arbitration Panel, Institutional Investor Securities Blog, August 7, 2013

GAO Wants SEC to Look At Other Criteria for Who Qualifies As An Accredited Investor, Institutional Investor Securities Blog, July 31, 2013

August 7, 2013

Citigroup Must Pay $11M Claimant for Royal Bank of Scotland Investment Losses, Says FINRA Arbitration Panel

A FINRA arbitration panel has decided that Citigroup (C) and Edward J. Mulcahy, one of the firm’s ex-branch managers, has to pay $11 million to investor John Fiorilla. Fiorilla is a legal adviser to the Holy See who went to Citigroup because he wanted to de-risk a $16 million stock position in Royal Bank of Scotland (RBS).

According to the claimant, he asked Citigroup to employ derivatives to assist in hedging his position against losses but the firm did not fulfill the request. When the market failed in 2008 his account suffered over $15 million in losses.

Fiorilla is claiming breach of contract, failure to control and supervise, breach of fiduciary duty, gross negligence, negligence, and other violations. His claim against Mulcahy is over an alleged failure to supervise.

The FINRA arbitration panel says Citigroup has to pay $10,750,000 and 9% interest from 5/1/09 until full payment of the award is reached. Mulcahy, who retired from Citigroup recently, must pay $250,000 and interest.

Citigroup denies the securities fraud allegations and is disappointed with the arbitration ruling.

Arbitration is one venue through which securities disputes between parties are resolved. To be eligible to be heard before a FINRA panel, cases must involve a FINRA-registered individual or entity and an investor (including broker v. investor, broker-dealer v. investor, brokerage firm and stockbrokers v. investors) or multiple FINRA-registered entities and/or individuals (such as broker v. broker, broker v. brokerage firm). Claims need to be submitted within six years that the events leading to the dispute happened.

Investors have to arbitrate before FINRA if this is mandated in their written agreement together, the dispute is with a FINRA member, and involves that member’s securities business. Industry members must arbitrate their disputes with each other before FINRA if a brokerage firm/broker’s securities business activities are involved. Brokerage firms and brokers have to enter into FINRA arbitration if the investor requests it.

The best way to increase the chances your FINRA securities case will come out in your favor is to hire an experienced FINRA arbitration lawyer.

Citigroup Ordered to Pay Investor $11 Million, On Wall Street, August 10, 2013

Arbitration Overview, FINRA

More Blog Posts:
Texas Money Manager Sued by SEC and CFTC Over Alleged Forex Trading Scam, Stockbroker Fraud Blog, August 6, 2013

GAO Wants SEC to Look At Other Criteria for Who Qualifies As An Accredited Investor
, Institutional Investor Securities Blog, July 31, 2013

Sonoma County Files Securities Lawsuit Over Libor Banking Debacle, Institutional Investor Securities Blog, July 2, 2013

June 18, 2013

Former Broker Claims He is the Reason FINRA’s Regional Director Resigned, While Ex-JP Morgan Broker Files Arbitration Claim Against His Former Employer

According to former broker David Evansen, he is the reason that Mitchel C. Atkins, the Financial Industry Regulatory Authority Inc.’s District 7 region director, resigned. His claim differs from the SRO’s statement about how Atkins decided to step down “pursue other interests.” Aktins, as FINRA regional director, was in charge of Florida, Atlanta, New Orleans and Dallas, and he worked with the agency for 20 years.

Evansen said that he wrote to FINRA chief executive Richard Ketchum and regulatory operations EVP Susan Axelrod to let them know that Atkins was indicted on both a misdemeanor and felony charge in Louisiana two decades ago. He said that he couldn’t confirm for sure that his letter is why Atkins resigned but he is convinced that it is.

Per Evansen, Atkins purportedly used bingo game earnings for non-charitable purposes, which is illegal in that state. While the felony charge was dropped, Evansen said that Atkins pleaded guilty to the misdemeanor charge. After Atkins complied with his sentence term, which included conditional probation, community service, and other specifics, his record was expunged.

Evansen is no longer a member of the industry. A FINRA hearing barred him last year after he purportedly answer questions regarding a number of customer complaints made against him during his time at Newbridge Securities Corp. Evansen is appealing the ban, claiming he was not properly told about the inquiry. He also maintains that he did answer FINRA’s questions.

Another broker who recently has been making waves is Bryant Tchan, who was formerly with JP Morgan (JPM) and his now with U.S. Bancorp Investments Inc. Tchan filed an arbitration claim against J.P. Morgan Securities LLC, the bank’s securities unit, claiming that commissions to brokers for outside fund trades were withheld in order to push proprietary fund sales.

Tchan contends that there was an internal review system that identified nonproprietary fund trades and brokers had 30 days to respond to inquiries or risk losing compensation. He says that the system withheld pay despite the fact that outside mutual fund trades took place and clients were billed sales fees. Meantime, Tchan claims, he was discouraged from using other vendors.

He says he was forced to step down from his job and exit a “hostile work environment.' Tchan contends that after complaining about the supervisory system, a compliance officer and his supervisor implied he would be let go because they didn't believe him when he said that specific switches he made, which included changing certain clients’ stock mutual funds into bond funds that were nonproprietary, were executed to help portfolios better meet client goals.

If you suspect that your losses are a result of stockbroker misconduct or securities fraud, contact our broker fraud law firm today to request your free case assessment.

Finra Regulator Resigns After 1993 Bingo Fraud Is Leaked, Bloomberg, June 14, 2013

Ex-J.P. Morgan broker: Firm pushed house funds, Investment News, June 11, 2013

More Blog Posts:
Radio Host Dave Ramsey and Financial Advisers Get Into Twitter Fight, Stockbroker Fraud Blog, June 14, 2013

Brokerage Firms Change Hands as Insurers Divest In House Securities Firms, While REIT Manager Schorsch Buys First Allied Securities, Stockbroker Fraud Blog, June 12, 2013

SEC Risk Fin Director Wants Public Input About Investor Protection-Related Costs and Benefits, Stockbroker Fraud Blog, June 15, 2013

May 22, 2013

LPL Financial Ordered to Pay $7.5M FINRA Fine Over E-Mail Failures

The Financial Industry Regulatory Authority says that LPL Financial LLC must pay a $7.5 million fine for inadequately supervising more than 28 million business emails between 2007 and 2013. This is the largest fine the SRO has ever imposed over an e-mail case.

According to FINRA, LPL’s systems for overseeing and storing e-mails failed a minimum of 35 times. It contends that the firm did not succeed in fulfilling its duty to retain e-mails, supervise its representatives, and properly respond to requests by regulators. The SRO attributes these problems to the brokerage firm’s failure to put enough resources toward updating its e-mail system as its business grew quickly.

Among the e-mail failures:

• Not keeping up access to hundreds of millions of emails during migration to a less costly email archive (80 million emails were corrupted)
• Not retaining and reviewing 3.5 million Bloomberg messages over a seven-year period
• Not archiving emails received by customers via third party advertising platforms transmitted via e-mail.

In addition to the paying the fine, LPL will have to set up a $1.5 million fund to pay brokerage customers that may have been affected by the e-mail failures. However, by settling this FINRA case, the broker-dealer is not denying or admitting to wrongdoing. The financial firm maintains that it is the one that reported the e-mail issues to FINRA in 2011. It also says that it has taken on a thorough redesign of its e-mail systems, policies, and procedures while working with independent experts to make sure the proper actions are taken.

Institutional Investment Fraud Lawyer William Shepherd disagrees with LPL’s claim that no wrongdoing occurred: “Some observers claim that this firm has done nothing but carry insurance and not supervise its brokers for years. They all but said so when they asked one of their client OSJs to consider taking over conducting supervision for them. In other words they wanted to become some sort of clearing firm that also gets a piece of the commission pie. This fine and action demonstrates in no uncertain terms that they simply did not supervise.”

FINRA also claims that during its investigation into this matter, LPL made misstatements, including the statement that the e-mail problems weren’t identified in June 2011 when firm staff had information that could have allowed the issues to be sussed out in 2008. A LPL is also accused of making the misstatement that there were no red flags to help identify these e-mail issues when actually there were.

The e-mail system problems resulted in the firm’s failure to produce all the emails that state and federal regulators asked for. The SRO speculates that the brokerage firm may have even failed to give certain private litigations and FINRA arbitration claimants the emails that they needed.

LPL to Pay $9 Million for Systemic Email Failures and for Making Misstatements to FINRA, FINRA, May 21, 2013

FINRA fines LPL Financial $9 million for email violations, Reuters, May 21, 2013

More Blog Posts:
LPL Financial Continues to Stay on Regulators’ Radar, Stockbroker Fraud Blog, April 10, 2013

LPL Financial Ordered to Pay $100K for Lack of Adequate Oversight that Resulted in Unsuitable Investments for Clients, Stockbroker Fraud Blog, November 29, 2011

SEC Submits Request for Data on Whether to Make Brokers & Investment Advisers Abide by Uniform Fiduciary Standard, Stockbroker Fraud Blog, April 4, 2013

April 28, 2013

FINRA Plan May Dramatically Change The Way Brokerage Firms Report On Nontraded REITS & Other Illiquid Investments on Client Statements

The Financial Industry Regulatory Authority’s board of governors has a plan that could radically modify the way brokerage firms report illiquid investments’ value on the account statements of clients. The SRO, which wants to give investors more transparency in regards to the actual value of such investments, has been trying to modify its rules about REITs and private placement valuations on client statements for well over a year.

Earlier this month, in changes it is proposing to Rule 2340, the FINRA board presented two reporting alternatives for brokerage firms. With the first option, a brokerage firm wouldn’t need to have the per-share estimated value of an REIT or a private placement that is unlisted included in customers’ account statements. The second choice lets a brokerage firm chose from three options:

• A valuation done by an external service at least one time every three years.
• A valuation performed by a service that performs valuations according the methodology revealed in the prospectus.
• For a couple of years after the initial investment, a “net investment” valuation that is comprised of the offering price without cash that is distributed to investors and “organization and offering expenses” paid for via the offering or borrowing of proceeds.

The majority of nontraded real estate investment trusts sell at $10/share and they generally stay at that value on a client’s account statement until a year and a half has passed since the REIT ceased to raise funds. This means that years may go by without a client being able to see that the nontraded REIT has a value that differs from that $10/share price.

However, when the recent credit crisis hit, some of the biggest nontraded REITs experienced steep drops in valuation each quarter, and advisers and investors found it difficult to figure out how, why, and to what extent the valuation declines occurred. The matter of the way a nontraded REIT should be valued (and a brokerage firm’s duty to make sure that valuation is stated on client account statements) has become a highly charged issued.

Also, to the dismay of FINRA, its examiners, who have studied quite a number of retail sellers of nontraded REITs in the last couple of years, have found that firms selling these instruments didn’t perform much reasonable diligence before selling them or failed to determine whether the product was appropriate for investors. In comments made to a Securities Industry and Financial Markets Association forum last year, FINRA executive vice present of member regulation sales practices Susan Axelrod said that when REITs have gotten into financial trouble, there were usually red flags that brokerage firms could have assessed first before making more sales.

Our REIT lawyers represent investment fraud victims. Contact Shepherd Smith Edwards and Kantas, LTD LLP today.

Finra plan could upend illiquid investment reporting, Investment News, April 24, 2013

Public Non-Traded REIT Tip Sheet


Why nontraded REITs are in Finra's cross hairs, Investment News, October 1, 2012

More Blog Posts:
Majority of Non-Traded REITs Underperform Compared to Benchmarks, Reports New Study, Stockbroker Fraud Blog, August 25, 2012

Apple REIT Arbitration: FINRA Rules Against David Lerner Associates in First of Hundreds of Cases, Stockbroker Fraud Blog, May 26, 2012

David Lerner Associates Must Pay $14M Over Apple REIT Ten Sales and Allegedly Excessive Markups Involving CMOs and Municipal Bonds—$12M to Go to Investors, Institutional Investor Securities Blog, October 22, 2012

March 11, 2013

Financial Firms Settle with FINRA: ES Financial Services Resolves Solicitation of Non-US Investors Allegations and Lincoln Financial Securities Consents to Entry of Findings Alleging Inadequate Supervision

ES Financial Services Resolves Solicitation of Non-US Investors Allegations
E.S. Financial Services, Inc. has turned in a Letter of Acceptance, Waiver, Consent to the Financial Industry Regulatory Authority over allegations that it acted as a placement agent and solicited specific non-US investors to get involved in a commercial paper program that a foreign-based affiliate was offering. The firm is accused of providing misrepresentations in certain materials, including that like other commercial products, the program was a cash component of the customer’s portfolio, and also, that the investment was a low-risk, conservative proposition.

ES Financial is also accused of not sufficiently describing the risks involved and for close to four years failing to conduct the proper due diligence for the commercial paper program sales. FINRA’s findings note that the financial firm did not adopt, implement, or enforce written due diligence procedures customized for these instruments. Fortunately, investments were paid back in a timely manner and no investor lost funds. However, this does not mean that ES Financial succeeded in conducting a proper investigation into various issues.

ES Financial Services has agreed to a censure and will pay a $200,000 fine. However, by consenting to the sanctions and the entry of findings, this does not mean it is denying or agreeing that the allegations are true.

Lincoln Financial Securities Consents to FINRA’s Entry of Findings Alleging Inadequate Supervision
Lincoln Financial Securities Corporation will pay $500,000 to settle FINRA allegations that even thought it executed a policy mandating that registered representatives manually fill out a variable redemption cover sheet for any variable annuity redemptions effected, it did not make sure that employees were completing the VRCS forms. Because most of them did not fill out the form, the financial firm is accused of not succeeding in enforcing its supervisory system set up to make sure the recommendations to surrender or liquidate VAs to fund the buying of fixed annuities or equity-indexed annuities were suitable.

Per the findings, the firm’s WSPs did not let registered representatives earn commissions for security transactions taking place in customer accounts where these persons did not have licenses in the state where the customer was residing when the transaction occurred and also in the state of solicitation. Lincoln Financial Securities allegedly failed to detect about 2,500 transactions in these accounts even though the representatives on them were unlicensed in the state where the customer lived. It also is accused of not enforcing procedures and policies to make sure that all representatives had the proper licensing in the states where they executed securities transactions for clients.

Another alleged shortcoming by Lincoln Financial was the improper supervision of and lack of an adequate system related to communications of non-securities related matters and securities-related emails via firm email accounts and external accounts. FINRA also contends that Lincoln Financial did not properly supervisor client account files and activities for producing managers, even though it was a requirement, and during one year, the latter did not complete a proper Rule 3012 report because it did not deal with deficiencies that it knew about.

By settling, Lincoln Financial is not denying or admitting to the allegations.

If you believe that you have sustained losses because a broker committed similar actions, contact our institutional investment fraud lawyershttp://www.securities-fraud-attorneys.com today.


More Blog Posts:
NASAA Wants Investment Advisers To Be Banned From Forcing Clients Into Mandatory Arbitration, Institutional Investor Securities Blog, March 7, 2013

FINRA Pulls Back on Regulating Registered Investment Advisers,
Stockbroker Fraud Blog, February 19, 2013

SEC Needs to File Securities Fraud Lawsuits Sooner, Rules the US Supreme Court, Institutional Investor Securities Blog, February 28, 2013

March 5, 2013

Securities Roundup: Venecredit Fined $25K for Working with Foreign Finders, Ex-Merrill Lynch/LPL Financial Rep. Faces Fraud Charges, & BrokersXpress Broker is Suspended Over Private Placement-Related Misconduct

Venecredit Fined $25K for Working with Foreign Finders to Generate Retail Investor Business
According to the Financial Industry Regulatory Authority, Venecredit Securities must pay a $25,000 fine for allegedly using foreign finders to get new retail investor business. The financial firm has now been censured for two years.

The SRO says that the foreign finders served as the primary contacts between Venecredit and the clients and had access to account information via the clearing firm’s platform. These finders worked for a foreign brokerage firm that shares directors and officers with Venecredit and its wholly owned entity. FINRA contends that not only did Venecredit fail to create and put into effect proper supervisory measures that would have allowed it to look at customer complaints about the employees at the foreign brokerage firm, but also it failed to keep electronic correspondence from both the foreign traders and the personal email accounts of its registered representatives.

Ex-Merrill Lynch/LPL Financial Rep. Faces Fraud Charges in Missouri
Missouri Secretary of State Jason Kander has charged former LPL Financial, LLC (LPLA) representative Greg John Campbell with serious misconduct. Prior to working for LPL, Campbell was with Merrill Lynch, Pierce, Fenner & Smith Inc. (MER)

Per the complaint, while registered with both financial firms, Campbell established a line of credit against the brokerage accounts of clients without their knowledge or permission. He then allegedly modified their addresses in their accounts so that they stopped getting their statements and correspondence from the firms and forged account statements for them showing the wrong balances. Using forged signatures, he allegedly moved over a million dollars from these to his accounts without their knowing or consent.

BrokersXpress Broker is Suspended from FINRA and NFA Over Alleged Securities Misconduct
BrokersXpress broker Tracy Morgan Spaeth is suspended from associating with any member of the Financial Industry Regulatory Authority or the National Futures Association. Per FINRA’s disciplinary action, Spaeth failed to ask for or receive the necessary written approval for private placement transactions that occurred between October and December 2010 when he solicited over 100 clients to buy shares in ProfitStars Int'l Corp., raising $8 million in the process. He also allegedly provided a deficient webinar to the investing clients that did not disclose the strategy risks involved and included forecasts about the security’s future performance. Spaeth’s bar from FINRA is two years and he has to pay a $50K fine.

Meantime, the NFA’s suspension of Spaeth comes after his alleged involvement with Profitstars Intl Corp. and International Commodity Advisors, which were both disciplined for using ParagonFX Enterprises, LLC, an unregistered and unregulated company, as a counterparty to the trading of their customers. The organization contends that Spaeth used deceptive and misleading promotional materials to get clients to invest in the companies even though he did not conduct the necessary due diligence on them. NFA says that Spaeth had a deal with a least one of the companies that gave him 50% of gross profits from his clients’ accounts (and perhaps even a referral bonus even if a client suffered a net loss following fees). His bar from the NFA is three years and he has to pay a $5K fine.

Related Web Resources:
Ladue advisor took $1.5 million, regulators say, St. Louis Post-Dispatch, February 20, 2013

NFA files complaint against Tracy Morgan Spaeth charging him with multiple misleading forex practices, Forexmagnates.com, November 23, 2012

More Blog Posts:
SEC Needs to File Securities Fraud Lawsuits Sooner, Rules the US Supreme Court, Institutional Investor Securities Blog, February 28, 2013

Plaintiff Must Arbitrate Faulty Investment Advice Claim With TD Ameritrade But Can Proceed With Litigation Against Oakwood Capital Management, Stockbroker Fraud Blog, October 29, 2012

Judge that Dismissed Regulators’ Claims Against Morgan Keegan to Rule on ARS Lawsuit Again After His Ruling Was Reversed on Appeal, Institutional Investor Securities Blog, November 27, 2012

January 10, 2013

FINRA To Take Closer Look at High-Frequency and Algorithmic Trading, Will Continue to Monitor Private Placements, Complex Products, and Other Areas

This month, the Financial Industry Regulatory Authority announced that it would be placing “significant resources” into monitoring high-frequency and algorithmic trading. The SRO said that following a number of market disruptions last year, it is worried about the way firms oversee these two systems.

In its yearly examination and regulatory priorities letter, FINRA spoke about how despite the fact that many high-frequency trading strategies are legitimate, others can be employed for purposes that are volatile, which is why the SRO wants to keep surveillance of this a priority and make sure that abusive trading doesn’t happen.

FINRA also said that it wants to take a closer look at alternative trading systems due to disclosure and operational concerns and high volume trading. It is examining firms that run ATS, as well as their affiliates. The SRO wants to figure out whether firms are accurately and consistently representing and disclosing different parts of their ATS operations to subscribers. Sweep letters were sent by FINRA to broker-dealers inquiring about ATSs in August.

FINRA also plans to make part of its examinations in 2013 the areas of suitability and complex products, leveraged loan products, exchange- the marketing and sale of private offerings, structured products, business development companies, commercial mortgage-backed securities (MBS).

The SRO has specific concerns about yield chasing conducts, sales practice abuses, and the effect of external stress events, market corrections, or market dislocation on market prices. It intends to use information from the newly Securities and Exchange Commission approved Rule 5123 to improve the way it engages in its risk-based supervision of the private placement market. Under the rule, FINRA members that sell securities of an issuer in a private placement must file a copy of the offering document with the SRO.

Other areas that continue to cause FINRA to worry include high-yield debt instruments, traded notes and funds, exchange-traded funds and notes, municipal securities, structured products, non-traded REITs, closed-end funds, and variable annuities, as well as the issues of data integrity, cyber-security, microcap fraud, anti-money laundering, branch office supervision, automated investment advice, and insider trading.

FINRA to Scrutinize Trading Platforms, Algorithmic and High-Frequency Trading, Bloomberg/BNA, January 16, 2013

Read FINRA's 2013 regulatory and examination priorities letter (PDF)

More Blog Posts:
FINRA Provides Guidance As It Opens Up Arbitration Process to Investment Advisers, Stockbroker Fraud Blog, November 9, 2012

Plaintiff Must Arbitrate Faulty Investment Advice Claim With TD Ameritrade But Can Proceed With Litigation Against Oakwood Capital Management, Stockbroker Fraud Blog, October 29, 2012

MSRB Seeks Public Comment on New Fiduciary Duty Rule for Municipal Advisors, Institutional Investor Securities Blog, February 21, 2011

August 8, 2012

Institutional Investor Securities Roundup: Biremis, Corp. Settles Securities Violation Charges with Industry Bar, FINRA Contacts Broker-Dealers About Conflicts of Interest Via Sweeps Letters, & Regulators Examine Financial Market Infrastructures

Broker-dealer Biremis Corp. and its CEO and president Peter Beck agreed to be barred from the securities industry to settle Financial Industry Regulatory Authority allegations that they committed supervisory violations related to the prevention of manipulative trading, securities law violations, and money laundering. The SRO says that even though the financial firm’s specialty was executing trades for day traders, it had only obtained order flow from two clients outside the US from June 2007 through June 2010 and that both had connections to Beck.

FINRA contends that the broker-dealer and Beck did not set up a supervisory system that could be expected to comply with the regulations and laws that prohibit trading activity that is manipulative, such as “layering,” which involves making non-bona-fide orders on one side of the market to create a reaction that will lead to an order being executed on the other side. The SRO also says that Beck and Biremis did not set up an anti-money laundering system that was adequate, which caused the brokerage firm to miss warning signs of certain suspect activity so that it could report them in a timely manner.

Meanwhile, FINRA has also been attempting to deal with the issue of conflicts of interests via sweep letters, which it sent to a number of broker-dealers. The SRO is seeking information about how the financial firms manage and identify conflicts of interest. In addition to requesting meetings with each of them, FINRA wants the brokerage firms to provide, by September 14, the department and employee names of those in charge of conflict reviews, information about the kinds of documents that are prepared after such evaluations, and the names of who gets the final documents and reports after the conflict reviews.

Another area where regulators have been taking a hard look is the financial market infrastructures. The International Organization of Securities Commissions and the
Committee on Payment and Settlement Systems put out a joint report last month providing guidance about resolution and recovery regimes that apply to financial market infrastructures. The “Recovery and resolution of financial market infrastructures” is a follow-up report to the "Key Attributes of Effective Resolution Regimes for Financial Institutions" by the Financial Stability Board.

The board had said that financial market infrastructures needed to be subject to resolution regimes in a manner that was appropriate to them. This report tackles these matters as they apply to financial market infrastructures, including important payment systems, central counterparties, central securities depositories, trade repositories, and securities settlement systems.

FINRA Expels Biremis, Corp. and Bars President and CEO Peter Beck, FINRA, July 31, 2012

Recovery and resolution of financial market infrastructures (PDF)

FINRA Launches Conflict-of-Interest Sweep of BDs, AdvisorOne, August 9, 2012

More Blog Posts:

Texas Securities Roundup: Morgan Stanley Smith Barney Sued Over Financial Adviser’s Ponzi Scam, Judge Dismisses Ex-GE Executive Whistleblower’s Lawsuit Over His Firing, & Ex-Stanford Financial Group CIO Pleads Guilty to Obstructing the SEC’s Probe, Stockbroker Fraud Blog, July 3, 2012

MSRB Seeks Public Comment on New Fiduciary Duty Rule for Municipal Advisors, Institutional Investor Securities Blog, February 21, 2011

$1.2 Billion of MF Global Inc.’s Clients Money Still Missing, Stockbroker Fraud Blog, December 10, 2011

Continue reading "Institutional Investor Securities Roundup: Biremis, Corp. Settles Securities Violation Charges with Industry Bar, FINRA Contacts Broker-Dealers About Conflicts of Interest Via Sweeps Letters, & Regulators Examine Financial Market Infrastructures " »

July 14, 2012

Goldman Sachs Execution and Clearing Must Pay $20.5M Arbitration Award in Bayou Ponzi Scam, Upholds 2nd Circuit

The U.S. Court of Appeals for the Second Circuit is allowing a $20.5M award issued by a Financial Industry Regulatory Authority arbitration panel against Goldman Sachs Execution & Clearing LP to stand. The court turned down Goldman’s claim that the award should be vacated because it was issued in “manifest disregard of the law” and said that the clearing arm must pay this amount to the unsecured creditors of the now failed Bayou hedge fund group known as the Bayou Funds, which proved to be a large scale Ponzi scam.

Goldman was the prime broker and only clearing broker for the funds. After the scheme collapsed in 2005, the Bayou Funds sought bankruptcy protection the following year. Regulators would go on to sue the fund’s funders over the Ponzi scam and the losses sustained by investors. Meantime, an Official Unsecured Creditors’ Committee of Bayou Group was appointed to represent the debtors’ unsecured debtors. Blaming Goldman for not noticing the red flags that a Ponzi fraud was in the works, the committee proceeded to bring its arbitration claims against the clearing firm through FINRA. In 2010, the FINRA arbitration panel awarded the committee $20.58M against Goldman.

In affirming the arbitration award, the 2nd Circuit said that in this case, Goldman did not satisfy the manifest disregard standard. As an example, the court pointed to the $6.7M that was moved into the Bayou Funds from outside accounts in June 2005 and June 2004. While the committee had contended during arbitration that these deposits were “fraudulent transfers” and could be recovered from Goldman because they were an “initial transferee” under 11 U.S.C. §550(a), Goldman did not counter that the deposits weren’t fraudulent or that it was on inquiry notice of fraud. Instead, it claimed the deposits were not an “initial transferee” under 11 U.S.C. §550 and the panel had ignored the law by finding that it was.

Offering a rejoinder, the court agreed with the district court that Goldman’s argument for manifest disegard doesn’t succeed due to the recent case of Bear Stearns Securities Corp. v. Greddin, during which the Southern District of New York upheld the arbitration favoring the Creditors’ Committee. The court said it therefore could not conclude that arbitrators “manifestly disregarded the law” when they applied the legal principles in Greddin to impose on Goldman transferee liability.

The appeals court also found that arbitrators did not manifestly disregard the law as this relates to the $13.9M in transfers from the original Bayou fund to four new ones in March 2003. It affirmed the lower court’s decision that prejudgment interest should be awarded to the committee per the federal rate in 28 USC §961 and not the New York statutory rate.

If you are an institutional investor that was suffered financial losses due to fraud, contact our securities fraud law firm today.

Goldman Sachs Execution & Clearing LP v. Official Unsecured Creditors’ Committee of Bayou Group LLC

2d Circuit Agrees Goldman Clearing Arm Must Pay $20.5M Bayou Arbitration Award, Bloomberg/BNA, July 6, 2012

Goldman Battles Bayou Decision, The Wall Street Journal, October 15, 2011

More Blog Posts:

Goldman Sachs to Pay $22M For Alleged Lack of Proper Internal Controls That Allowed Analysts to Attend Trading Huddles and Tip Favored Clients, Institutional Investors Securities Blog, April 14, 2012

$698M MBS Lawsuit Seeking Damages from Goldman Sachs Group Can Take on Class Action Status, Says District Judge, Institutional Investors Securities Blog, February 23, 2012

Ex-Goldman Sachs Director Rajat Gupta Pleads Not Guilty to Insider Trading Charges, Stockbroker Fraud Blog, October 26, 2011

July 12, 2012

Institutional Investor Roundup: Evergreen Ultra Short Investor Lawsuit Settled for $25M, FINRA Launches Pilot Program for Huge Claims, Ex-AmeriFirst Funding Manager’s Conviction Appeal is Rejected, & EU Regulator Examines Credit Raters’ Bank Downgrade

Evergreen Investment Management Co. LLC and related entities have consented to pay $25 million to settle a class action securities settlement involving plaintiff investors who contend that the Evergreen Ultra Short Opportunities Fund was improperly marketed and sold to them. The plaintiffs, which include five institutional investors, claim that between 2005 and 2008 the defendants presented the fund as “stable” and providing income in line with “preservation of capital and low principal fluctuation” when actually it was invested in highly risky, volatile, and speculative securities, including mortgage-backed securities. Evergreen is Wachovia’s investment management business and part of Wells Fargo (WFC).

The plaintiffs claim that even after the MBS market started to fail, the Ultra Short Fund continued to invest in these securities, while hiding the portfolio’s decreasing value by artificially inflating the individual securities’ asset value in its portfolio. They say that they sustained significant losses when Evergreen liquidated the Ultra Short Fund four years ago after the defendants’ alleged scam collapsed. By settling, however, no one is agreeing to or denying any wrongdoing.

Meantime, seeking to generally move investors’ claims forward faster, the Financial Industry Regulatory Authority has launched a pilot arbitration program that will specifically deal with securities cases of $10 million and greater. The program was created because of the growing number of very big cases.

Under the voluntary program, parties would be able to “customize” the arbitration process. The SRO says it wants parties to have a “formal” approach that gives them greater control and flexibility over their claims, including “additional control” over choosing arbitrators and “expanded” discovery.

In other securities news, the U.S. Court of Appeals for the Fifth Circuit has turned down ex-AmeriFirst Funding Inc. manager Jeffrey Bruteyn’s appeal to his criminal conviction. Bruteyn was convicted of 9 counts of securities fraud in 2010 for running a scam that used the sale of secured debt obligations to defraud investors of millions of dollars.

The SDO’s were sold to raise capital for AmeriFirst Funding, which financed used car buys. Bruteyn is accused of making the sales by generating promotional materials that overstated insurance coverage while understating investor risk and falsely telling investors that that his family, which owned Hess Corp. (HES) would cover any losses sustained. Bruteyn was ordered to pay $7.3M in restitution and sentenced to 25 years in prison and three years of supervised release.

In Europe, regulators are examining the recent decisions made by credit rating agencies Moody’s (MCO), Fitch, and Standard & Poor's to downgrade banks affected by the eurozone sovereign debt crisis and the economic contraction. The European Securities and Markets Authority says it wants make sure that “transparent” and “rigorous” analyses were part of the credit raters’ decision-making process. ESMA is especially interested in a “block” rating that Moody’s issued to a number of Spanish banks last month.

ESMA is allowed to fine credit rating agencies for not following correct methodology or applying proper resources. It can also force a credit rater’s “de-registration.”

Throughout the US, our institutional investment fraud lawyers are committed to helping our clients recoup their losses from securities fraud.

$25 Million Settlement Submitted In Re Evergreen Ultra Short Opportunities Fund Securities Class Action, Yahoo Finance, July 2, 2012

FINRA Announces Pilot Program for Large Cases, FINRA, July 2, 2012

US v. Bruteyn

EU market regulator is suspicious of rating agencies, RT, July 2, 2012

More Blog Posts:

CFTC Accuses Peregrine Financial Group of Securities Fraud Related to $200M Customer Funds Shortfall, Institutional Investor Securities Blog, July 10, 2012

Will the JOBS ACT Will Expand Private Offerings But Hurt Public Markets?, Institutional Investor Securities Blog, July 6, 2012

SEC to Push for Money Market Mutual Fund Reform Provisions Despite Opposition, Stockbroker Fraud Blog, July 6, 2012

June 16, 2012

Ex-Morgan Stanley Smith Barney Broker Settles with FINRA for Allegedly Failing to Notify Firm of Previous Arrest

Broker Bruce Parish Hutson has turned in a Letter of Acceptance, Waver, and Consent to settle allegations of Financial Industry Regulatory Authority rule violations involving his alleged failure to advise Morgan Stanley Smith Barney (MS) of his arrest for retail theft at a store in Wisconsin. FINRA has accepted the AWC, which Hutson submitted without denying or admitting to the findings and without adjudicating any issue.

The Ex-Morgan Stanley Smith Barney broker (and before that he worked for predecessor company Citigroup Global Markets Inc. ((ASBXL)), had entered a “no contest” plea to the misdemeanor charge in February 2010. He received a jail sentence of nine months, which was reduced to 12 months probation. On August 16, 2010, Hutson, turned in a Form UT (Uniform Termination Notice for Securities Industry Registration) stating that he was voluntarily let go from Morgan Stanley Smith Barney because the financial firm accused him of not properly reporting the arrest.

Also, although Form U4 (Uniform Application for Securities Industry Registration or Transfer) doesn’t mandate the disclosure of a mere arrest but does contemplate a criminal charge (at least), many industry members obligate employees to disclose any arrests. Yet when it was time to update this form by March 18, 2010, FINRA says that Hutson did not report the misdemeanor theft plea. Then, when he filled out Morgan Stanley Smith Barney’s yearly compliance questionnaire on May 19, 2010, he again denied having been arrested or charged with a crime in the past year or that he was statutorily disqualified.

FINRA contends that Hutson willfully violated its Article V, Section 2 (C) by-laws by not disclosing the criminal charge. The SRO also says that his later “no contest” plea to the misdemeanor theft violated FINRA Rule 2010 (when he made the false statement that he hadn’t been charged with any crime in the 12 months leading up to his completion of the compliance questionnaire) and he again violated this same rule when it was time to fill out the questionnaire. Per the AWC terms, Hutson is suspended from associating with any FINRA member for five months and he must pay a $5,000 fine.

“A broker can have a dozen complaints by investors and lose a half-dozen claims of wrongdoing, in which arbitrators reimburse these investors only part of their millions in collective losses, yet the broker is neither fined nor suspended,” said Shepherd Smith Edwards and Kantas, LTD, LLP founder and Securities Attorney William Shepherd. “A shoplifting charge in one’s past - very bad. Repeated misrepresentations to investors – so what. Perhaps FINRA should get its priorities straight.”

Broker Bruce Parish Hutson, Forbes, June 27, 2012

More Blog Posts:
Investor Groups, Securities Lawyers, and Business Community Comment on the JOBS Act Reg D’s Investor Verification Process, Institutional Investor Securities Blog, June 24, 2012

SEC Wants Proposed Securities Settlements with Bear Stearns Executives to Get Court Approval, Stockbroker Fraud Blog, February 28, 2012

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

Continue reading "Ex-Morgan Stanley Smith Barney Broker Settles with FINRA for Allegedly Failing to Notify Firm of Previous Arrest" »

June 5, 2012

FINRA Initiatives Addressing Market Volatility Approved by the SEC

The Securities and Exchange Commission has approved a one-year pilot for a plan meant to shield equity markets from volatile price changes. The plan is based on two initiatives from the Financial Industry Regulatory Authority and the national securities exchanges.

One initiative involves a "limit up-limit down" proposal that would not allow for trades in US listed stocks beyond a certain range to be determined by recent prices. This will replace single-stock circuit breakers.

With the new mechanism, trades in individually listed equity securities wouldn’t be able to take place beyond a certain price band, which would be a percentage level lower and higher than the price of the security in the most recent five minutes. For securities that are more liquid, set levels would be 5% or 10%, with percentages doubling during closing and opening periods. For securities priced at $3/share or lower, there will be wider price bands.

The second proposal involves modifying current market-wide circuit breakers that can stop trading taking place in exchange-listed securities on US markets. The current market-wide circuit breakers have only been triggered once (in 1997) since they were adopted nearly 24 years ago. These changes will reduce the percentage-decline threshold for triggering a trading stop that is market-wide, while shortening the duration of time that the cessation lasts.

SEC Chairman Mary Schapiro has said that the initiatives are the result of a lot of work done to come up with a sophisticated, effective, and doable way to take care of markets in the wake of too much volatility. She also talked about how in today’s electronic markets, there is a need for a properly calibrated automated way to limit or pause trading should prices change too much or too quickly.

The SEC, FINRA, and the exchanges plan to closely monitor the pilot to ensure that any rules that are permanently approved are as effective as possible. February 4, 2013 is the deadline for implementing all these changes.

Shepherd Smith Edwards and Kantas, LTD LLP Partner and securities lawyer William Shepherd, however, is already skeptical of this new plan: “Such limits are not new and are of questionable value. Commodities markets have limit circuit breakers, as do a number of stock markets outside the US. The SEC has employed limits from time to time, notably after the stock market crash of 1987. This latest effort comes as a result of the so-called ‘flash crash’ in 2010. While no definitive cause was ever determined, many observers insist that stock manipulation by large players was involved. If implemented at all, as before, any such limits would likely be short lived.”

Our securities lawyers at Shepherd Smith Edwards and Kantas, LTD, LLP represent institutional and individual investors.

SEC Approves Proposals to Address Extraordinary Volatility in Individual Stocks and Broader Stock Market, SEC, June 1, 2012

SEC approves plan to ease volatility in US stocks, Reuters, June 1, 2012

More Blog Posts:
Look Out for Rule Recommendations on Consolidated Audit Trail, Market-Wide Circuit Breaker Changes, and Limit Up-Limit Down Mechanisms, Institutional Investor Securities Blog, March 10, 2012

Several Claims in Securities Fraud Lawsuit Against Ex-IndyMac Bancorp Executives Are Dismissed by Federal Judge, Institutional Investor Securities Blog, May 30, 2012

SEC and CFTC Say They Found Out About JPMorgan’s $2B Trading Loss Through Media, Stockbroker Fraud Blog, May 31, 2012

May 29, 2012

Institutional Investment Securities Round-Up: Citigroup Agrees to $3.5M FINRA FIne Related to Subprime RMBS, Ex-Broker Consents to $600K CFTC Fine Over Alleged Options Trading Scam, and Senate Ag Chair Presses Regulators To Fully Implement Dodd-Frank

Citigroup Global Markets Inc. (CLQ) has consented to pay the Financial Industry Regulatory Authority a $3.5M fine to settle allegations that he gave out inaccurate information about subprime residential mortgage-backed securities. The SRO is also accusing the financial firm of supervisory failures and inadequate maintenance of records and books.

Per FINRA, beginning January 2006 through October 2007, Citigroup published mortgage performance information that was inaccurate on its Web site, including inaccurate information about three subprime and Alt-A securitizations that may have impacted investors’ assessment of subsequent RMB. Citigroup also allegedly failed to supervise the pricing of MBS because of a lack of procedures to verify pricing and did not properly document the steps that were executed to evaluate the reasonableness of the prices provided by traders. The financial firm is also accused of not maintaining the needed books and records, including original margin call records. By settling, Citigroup is not denying or admitting to the FINRA securities charges.

In other institutional investment securities news, in U.S. District Court for the Southern District of New York, Kent Whitney an ex-registered floor broker at the Chicago Mercantile Exchange, agreed to pay $600K to settle allegations by the Commodity Futures Trading Commission that he made statements that were “false and misleading” to the exchange and others about a scam to trade options without posting margin. The CFTC contends that between May 2008 and April 2010, Whitney engaged in the scam on eight occasions, purposely giving out clearing firms that had invalid account numbers in connection with trades made on the New York Mercantile Exchange CME trading floors. He is said to have gotten out of posting over $96 million in margin.

The CFTC says that before an option was about to expire, Whitney would make orders to sell front-month out-of-the-money options. By doing this, he was “implicitly” representing that the accounts were open and had enough margin to cover trades (In truth, the accounts had no margin and were closed). When the clearing firms would turn the trades down because the accounts were closed, they would give back the trades to the executing floor brokers’ clearing firms. The following day, Whitney would give account numbers that were valid to clear the trades. The CFTC says that this process allowed him to avoid the margin posting. Also, when Whitney traded, he would allegedly collect the options premium. By settling, he is not denying or admitting to the CFTC allegations.

Meantime, Senate Agriculture Committee Chairman Debbie Stabenow (D-Mich.) has written a letter to the heads of the Securities and Exchange Commission, the CFTC, the US Treasury Department, the Federal Reserve Board, the Comptroller of the Currency, and Federal Deposit Insurance Corporation urging them to go ahead and complete its implementation of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. Right now, regulators are a year behind on the deadline for most of the law’s rules.

Stabenow cited JPMorgan Chase's (JPM) recent over $2 billion trading loss and MF Global Inc.’s (MFGLQ) bankruptcy last fall as clear examples of the need to pass Dodd-Frank. She worried that there hasn't been sufficient rulemaking to enforce the act’s new derivatives laws. She said that now is the time to finish writing the rules and “fully” implementing the law.

Our institutional investment lawyers at Shepherd Smith Edwards and Kantas, LTD, LLP represents investors throughout the US. We also have clients that are located abroad.

FINRA fines Citigroup Global Markets $3.5 million, Reuters, May 22, 2012

Federal Court in New York Orders Chicago Resident and Former Floor Broker, Kent R.E. Whitney, to Pay $600,000 for Margin Call Avoidance Scheme, CFTC, May 23, 2012

Chairwoman Stabenow: It Is Time To Fully Implement Wall Street Reform, AG.Senate.gov, May 18, 2012

More Blog Posts:

SEC Practice of Settling Enforcement Actions Without Requiring Defendants to Deny or Admit to Allegations Gets Support from Federal Judges and Democrats, Institutional Investor Securities Blog, May 26, 2012

Alleged Ponzi-Like Real Estate Investment Scam that Defrauded Victims of $9M Leads to SEC Charges Against New Jersey Man, Institutional Investor Securities Blog, May 24, 2012

SEC Charges New York-Based Fund Manager and His Two Financial Firms Over Alleged $11M Ponzi Scheme, Stockbroker Fraud Blog, May 28, 2012

April 14, 2012

Goldman Sachs to Pay $22M For Alleged Lack of Proper Internal Controls That Allowed Analysts to Attend Trading Huddles and Tip Favored Clients

Accused of not putting in place policies to prevent analyst huddles, Goldman Sachs Group Inc. (GS) will settle for $22 million the allegations made against it by US regulators. According to the Securities and Exchange Commission and FINRA, due to the nature of the financial firm’s internal control system research analysts were able to share non-public information with select clients and traders.

To settle the securities case, Goldman will pay $11 million each to FINRA and the SEC. It also consented to refrain from committing future violations and it will reevaluate and modify its written policies and procedures so that compliance won’t be a problem in the future. The financial firm has agreed to have the SEC censure it. By settling Goldman is not denying or admitting to the allegations.

Meantime, FINRA claimed that Goldman neglected to identify and adequately investigate the increase in trading in the financial firm’s propriety account before changes were made to analysis and research that were published. The SRO says that certain transactions should have been reviewed.

This is not the first time that Goldman has gotten in trouble about its allegedly inadequate control systems. Last year, it agreed to pay $10 million to the Massachusetts Securities Division over ASI and the huddles. In 2003, the financial firm paid $9.3 million over allegations that its policies and controls were not adequate enough to stop privileged information about certain US Treasury bonds from being misused.

The latest securities actions are related to two programs that the financial firm created that allegedly encouraged analysts to share non-public, valued information with select clients. The SEC says that during weekly “huddles” between 2006 and 2011, Goldman analysts would share their perspectives on “market color” and short-term trading with company traders. Sales employees were also sometimes present, and until 2009, employees from the financial firm’s Franchise Risk Management Group who were allowed to set up large, long-term positions for Goldman also participated in the huddles.

Also in 2007, the financial firm established the Asymmetric Service Initiative. This program let analysts share ideas and information that they acquired at the huddles with a favored group made up of approximately 180 investment management and hedge fund clients.

The SEC contends that ASI and the huddles occurred so that Goldman’s traders’ performances would improve and there would be more revenue in the form of commissions. The financial firm even let analysts know that it would be monitoring whether ideas discussed at the huddles succeeded and that this would be a factor in performance evaluations. The Commission said that the two programs created a serious risk, especially considering that a lot of ASI clients were traders who did so often and in high volume.

Meantime, FINRA claimed that before changes were made to published analysis and research, Goldman would neglect to identify and adequately investigate the increase in trading in the financial firm’s proprietary account. The SRO says that there were certain transactions that should have been reviewed.

This is not the first time that Goldman has gotten in trouble over its allegedly inadequate control systems. Last year, it agreed to pay $10 million to the Massachusetts Securities Division over ASI and the huddles. In 2003, the financial firm paid $9.3 million over allegations that its policies and controls were not adequate enough to stop privileged information about certain US Treasury bonds from being misused.

Read the SEC order in this case (PDF)

Read the FINRA order in this case (PDF)

Goldman Sachs to Pay $22 Million Over Analyst Huddle Claims, Bloomberg, April 12, 2012

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Whistleblower Lawsuit Claims Taxpayers Were Defrauded When Federal Government Bailed Out Houston-Based American International Group in 2008, Stockbroker Fraud Blog, May 5, 2011

Wirehouses Struggle to Retain Their Share of the High-Net-Worth-Market, Institutional Investor Securities Blog, April 6, 2012

Continue reading "Goldman Sachs to Pay $22M For Alleged Lack of Proper Internal Controls That Allowed Analysts to Attend Trading Huddles and Tip Favored Clients" »

March 27, 2012

Citigroup Ordered by FINRA to Pay $1.2M Over Bond Markups and Markdowns

FINRA says that Citigroup Inc. subsidiary Citi International Financial Services LLC must pay over $1.2M in restitution, fines, and interest over alleged excessive markdowns and markups on agency and corporate bond transactions and supervisory violations. The financial firm must also pay $648,000 in restitution and interest to over 3,600 clients for the alleged violations. By settling, Citi International is not denying or admitting to the allegations.

According to FINRA, considering the state of the markets at the time, the expense of making the transactions happen, and the value of services that were provided, from July ’07 through September ’10 Citi International made clients pay too much (up to over 10%) on agency/corporate bond markups and markdowns. (Brokerages usually make clients that buy a bond pay a premium above the price that they themselves paid to obtain the bond. This is called a “markup.”) Also, from April ’09 until June ’10, the SRO contends that Citi International did not put into practice reasonable due diligence in the sale or purchase of corporate bonds so that customers could pay the most favorable price possible.

The SRO says that during the time periods noted, the financial firm’s supervisory system for fixed income transactions had certain deficiencies related to a number of factors, including the evaluation of markups/markdowns under 5% and a pricing grid formulated on the bonds’ par value rather than their actual value. Citi International will now also have to modify its supervisory procedures over these matters.

In the wake of its order against Citi International, FINRA Market Regulation Executive Vice-President Thomas Gira noted that the SRO is determined to make sure that clients who sell and buy securities are given fair prices. He said that the prices that Citi International charged were not within the standards that were appropriate for fair pricing in debt transactions.

If you believe that you were the victim of securities misconduct or fraud, please contact our stockbroker fraud law firm right away. We represent both institutional and individual investors that have sustained losses because of inadequate supervision, misrepresentations and omissions, overconcentration, unsuitability, failure to execute trades, churning, breach of contract, breach of promise, negligence, breach of fiduciary duty, margin account abuse, unauthorized trading, registration violations and other types of adviser/broker misconduct.

Before deciding to work with a brokerage firm that is registered with FINRA, you can always check to see if they have a disciplinary record by using FINRA’s BrokerCheck. Last year, 14.2 million reviews of the records of financial firms and brokers were conducted on BrokerCheck.

Read the Letter of Acceptance, Waiver, and Consent

Citigroup Fined for Bond Markup, The Wall Street Journal, March 19, 2012

FINRA BrokerCheck®

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Bank of America’s Merrill Lynch Settles for $315 million Class Action Lawsuit Over Mortgage-Backed Securities, Institutional Investor Securities Blog, December 6, 2011

Continue reading "Citigroup Ordered by FINRA to Pay $1.2M Over Bond Markups and Markdowns" »

January 26, 2012

Merrill Lynch, Pierce, Fenner & Smith Ordered to Pay $1M FINRA Fine for Not Arbitrating Employee Disputes Over Retention Bonuses

FINRA says that Merrill Lynch, Pierce, Fenner & Smith must pay a $1M fine because it didn’t arbitrate employee disputes about retention bonuses. Registered representatives that took part in the bonus plan had signed promissory notes stating that should such disagreements arise, they would go to New York state court and not through arbitration to resolve them. FINRA says this agreement violated its rules, which requires that financial firms and associated individuals go through arbitration if the disagreement is a result of the business activities of the associated person or the firm.

It was after merging with Bank of America that Merrill Lynch set up a bonus plan to keep high-producing registered reps. The financial firm gave over 5,000 registered representatives $2.8B in retention bonuses that were structured as loans in 2009. By agreeing that they would go to state court, the representatives were greatly hindering their ability to make counterclaims. FINRA also says that because Merrill Lynch designed the bonus program so that it would seem as if the money for it came from MLIFI, which is a non-registered affiliate, the financial firm was able to go after recovery amounts on MLIFI’s behalf in court, which allowed Merrill Lynch to circumvent the arbitration requirement. After a number of registered representatives did leave the financial firm without paying back the amounts due on the promissory notes in 2009, Merrill Lynch filed more than 90 actions in state court to collect these payments.

Since September 14, 2009, FINRA has been expediting cases involving claims made by brokerage firm over associated persons accused of not paying money owed on a promissory note. Such disputes are supposed to be resolved through arbitration.

The SRO has also been known to get involved in other types of financial firm-employee disputes. For example, in another recent FINRA proceeding, an arbitration panel ordered Citigroup to pay a former investment advisor team and their administrator $24M for not fairly compensating them for transactions involving an institutional client that they brought with them when they moved from Banc of America Securities. Robert Vincent Minchello, his brother James Bryan Minchello, and Martha Jane Sullivan claimed that Citigroup only partially compensated them for a few of the transactions before cutting them out of that business relationship.

Merrill fined $1 mln for failure to arbitrate, Reuters, January 25, 2012

SEC Approves Rule Establishing Expedited Procedures for Arbitrating Promissory Note Cases, FINRA, September 14, 2009

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Securities Claims Accusing Merrill Lynch of Concealing Its Auction-Rate Securities Practices Are Dismissed by Appeals Court, Stockbroker Fraud Blog, November 30, 2011

Merrill Lynch Faces $1M FINRA Fine Over Texas Ponzi Scam by Former Registered Representative, Stockbroker Fraud Blog, October 10, 2011

Bank of America’s Merrill Lynch Settles for $315 million Class Action Lawsuit Over Mortgage-Backed Securities, Institutional Investor Securities Blog, December 6, 2011

Continue reading "Merrill Lynch, Pierce, Fenner & Smith Ordered to Pay $1M FINRA Fine for Not Arbitrating Employee Disputes Over Retention Bonuses" »

January 17, 2012

SIFMA Wants FINRA to Take Tougher Actions Against Brokers that Don’t Repay Promissory Notes

The Securities Industry and Financial Markets Association wants the Financial Industry Regulatory Authority Inc. to prevent brokers from being able to plead poverty to escape arbitration payment orders. The promissory notes provide money for retention and recruiting incentives, and as long as a broker agrees to stay with a financial firm for an agreed up on time, they are structured as forgivable notes.

Many brokers obtained such deals following the economic crisis. Since then, financial firms have gotten more active about submitting arbitration claims to get brokers to pay them back. In 2011 alone, 778 promissory note cases were filed. 1,152 such cases were filed the year before. In most cases, it is the financial firm that ends up winning.

When a broker won’t pay an arbitration award, FINRA files an action against him/her that could lead to suspension. However, if the broker demonstrates that he/she can’t pay it, then suspension may be avoided.

Many SIFMA members believe that FINRA should take more aggressive measures to get brokers to pay up. The trade group wants the SRO to prevent brokers from being able to claim that they cannot pay when slapped with a case from an industry claimant.
Such a move would likely mean that if a broker were unable to repay a promissory note, he/she would likely be suspended or have to file for bankruptcy. SIFMA also wants enhanced disclosure of awards that brokers don’t pay, because it believes that the consequence of having this failure made public is incentive for the broker to make good on the matter.

In a letter to FINRA that it sent last November, SIFMA voiced members’ concerns that the inability-to-pay defense was being abused and that not only was this resulting in compliance and regulatory risks, but also it was creating an unnecessary risk to investors. SIFMA claimed that FINRA Rule 9554 discriminates against industry claimants, who aren’t given the same protections as customer claimants, who don’t have to contend with the inability-to-pay defense from a broker. The trade organization noted that the Securities and Exchange Commission obligates FINRA to take appropriate disciplinary action against defendants that use this defense in bad faith.

SIFMA, Finra clash over deadbeat brokers, Investment News, January 15, 2012


Securities Industry and Financial Markets Association

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Micah S. Green, Expected New CEO of Largest Securities Industry Group, Resigns During Scandal, Stockbroker Fraud Blog, May 18, 2007

Continue reading "SIFMA Wants FINRA to Take Tougher Actions Against Brokers that Don’t Repay Promissory Notes" »

January 11, 2012

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

A Financial Industry Regulatory Authority arbitration panel has ordered Oppenheimer & Co. to repurchase the $5.98 million in New Jersey Turnpike ARS that it sold Nicole Davi Perry in 2007. The investor reportedly purchased the securities through Oppenheimer Holdings Inc. (OPY).

Perry, who, along with her father, filed her ARS arbitration claim against the financial firm in 2010, accused Oppenheimer of negligence and breach of fiduciary duty. She and her father, Ronald Davi, were reportedly looking for liquidity and safety, but instead ended up placing their funds in the auction-rate securities. They contend that they weren’t given an accurate picture of the risks involved or provided with a thorough explanation of the securities’ true nature.

Oppenheimer disagrees with the panel’s ruling. In addition to buying back Perry’s ARS, the financial firm has to cover her approximately $134,000 in legal fees.

It was just in 2010 that Oppenheimer settled the ARS securities cases filed against it by the states of New York and Massachusetts. The brokerage firm consented to buy back millions of dollars in bonds from customers who found their investments frozen after the ARS market collapsed and they had no way of being able to access their funds.

Oppenheimer is one of a number of brokerage firms that had to repurchase ARS from investors. These financial firms are accused of misrepresenting the risks involved and inaccurately claiming that the securities were “cash-like.” A number of these brokerage firms' executives allegedly continued to allow investors to buy the bonds even though they already knew that the market stood on the brink of collapse and they were selling off their own ARS.

Auction rate securities are usually corporate bonds, municipal bonds, and preferred stock with long-term maturities. Investors receive interest rates or dividend yields that are reset at each successive auction.

ARS auctions take place at regular intervals—either every 7 days, 14 days, 28 days, or 5 days. The bidder turns in the lowest dividend yield or interest rate he or she is willing to go to purchase and hold the bond during the next auction interval. If the bidder wins at the auction, she/he must buy the bond at par value.

Failed auctions can happen when there are not enough bidding buyers available to acquire the entire ARS block being offered. A failed auction can prevent ARS holders from selling their securities in the auction.

There are many reasons why an auction might fail and why there is risk involved for investors. It is important that investors are notified of these risks before they buy into the securities and that they only they get into ARS if this type of investment is suitable for their financial goals and the realities of their finances.

Panel Says Oppenheimer Must Buy Back $6M In Auction-Rate Securities, Wall Street Journal, January 10, 2012

Oppenheimer settles with Massachusetts, NY, Boston, February 24, 2010

More Blog Posts:
Oppenheimer Funds Investors Can Proceed with Their Securities Fraud Lawsuit, Stockbroker Fraud Blog, November 19, 2011

Investors in Oppenheimer Mutual Funds Considering Opting Out of $100M Class Action Settlement Have Until August 31, Institutional Investor Securities Blog, August 6 2011

Raymond James Settles Auction-Rate Securities Case with Indiana Securities Division for $31M, Stockbroker Fraud Blog, August 27, 2011

Continue reading "Oppenheimer & Co. Must Buyback $6M in Auction-Rate Securities from Investor, Says FINRA Arbitration Panel" »

December 27, 2011

Citigroup Request to Overturn $54.1M Municipal Bond Arbitration Ruling Denied by Judge

A US judge has denied Citigroup’s request that the $54.1M Financial Industry Regulatory Authority arbitration award issued to investors that sustained losses in municipal bond funds be overturned. This is one of the largest securities arbitration awards that a broker-dealer has been ordered to pay individual investors. Brush Creek Capital, retired lawyer Gerald D. Hosier, and investor Jerry Murdock Jr. are the award’s recipients. However, these Claimants are not the only investors to come forward contending that they were told the funds were suitable for investors that wanted to preserve their capital.

The investor losses were related to several leveraged municipal bond arbitrage funds that saw their value significantly drop between 2007 and 2008. Citigroup Global Markets had sold the municipal bond funds through MAT Finance LLC. Proceeds were invested in longer-term muni bunds while borrowing took place at low, short-term rates. The strategy proved to be unsuccessful, resulting in investors losing up to 80% of their money.

According to The Wall Street Journal, when it issued its ruling the arbitration panel appeared to reject three defenses that financial firms usually make:

• The financial crisis, and not the financial firm, is to blame for the losses.
• Sophisticated, rich investors should have known what risks were involved.
• The prospectus had warned in advance that investors could lose everything.

The Claimants alleged fraud, failure to supervise, and unsuitability. They had sought no less than $48 million in compensatory damages, fees, lost-opportunity costs, commission, lawyers’ fees, and interest.

The FINRA arbitration panel awarded $21.6 million in compensatory damages, plus 8% per annum, to Hosier, $3.9 million in compensatory damages, plus 8% per annum, to Murdock, Jr, and $8.4 million in compensatory damages, plus 8% per annum, to Brush Creek Capital LLC.

All Claimants were also awarded $3 million in lawyers’ fees, $17 million in punitive damages, $33,500 in expert witness fees, $13,168 in court reporter expenses, and $600 for the Claimant’s filing fee.

Following the FINRA ruling, Citigroup contended that the arbitration panel had ignored the law when arriving at the award. The brokerage firm also claimed that investors could not have depended on verbal statements that the financial firm had expressed about purchases because the clients had acknowledged through signed agreements that they could lose everything they invested. By denying Citigroup’s request to throw out the arbitration award, Judge Christine Arguello, however, said that the court found Citigroup’s “argument wholly unpersuasive.”

A Crack in Wall Street’s Defenses, New York Times, April 24, 2011

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

Citigroup loses suit to overturn $54-million ruling, Reuters, December 22, 2011

More Blog Posts:

JPMorgan Chase to Pay $211M to Settle Charges It Rigged Municipal Bond Transaction Bidding Competitions, Stockbroker Fraud Blog, July 9, 2011

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

Citigroup’s $285M Mortgage-Related CDO Settlement with Raises Concerns About SEC’s Enforcement Practices for Judge Rakoff, Institutional Investor Securities Blog, November 9, 2011

Continue reading "Citigroup Request to Overturn $54.1M Municipal Bond Arbitration Ruling Denied by Judge" »

November 28, 2011

FINRA May Put Forward Another Proposal About Possible SEC Rule Regarding Fiduciary Duty

According to FINRA CEO and Chairman Richard G. Ketchum, the SRO may put out a second concept proposal about its stance regarding disclosure obligations related to a possible Securities and Exchange Commission rulemaking about formalizing a uniform fiduciary duty standard between broker-dealers and investment advisers. Currently, the 1940 Investment Advisers Act defines the investment advisers’ fiduciary obligation to their clients, while broker-dealers are upheld to suitability rules that will be superseded next August by two FINRA rules regarding broker-dealer suitability standards.

The Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 913, however, said that it is SEC’s responsibility to determine whether these current regulatory and legal standards s are still effective and if any regulatory shortcomings that exist need to be filled. In July 2010, the SEC asked stakeholders for feedback about this mandates. After receiving over 3,000 public comments, it issued a study recommending that there be a uniform fiduciary standard for both types of representatives when giving advice to retail clients. The SEC could put out its proposed rule by the end of this year.

FINRA is working with the Commission on this and plans to stay involved in the process. It was just last year that the SRO put out a concept proposal seeking public comment about the idea that broker-dealers should have to provide retail investors with certain disclosures at the start of a business relationship. These clients would be required to give a written statement detailing the kids of services and accounts they provide, any conflicts of interests, and limits on duties that they are entitled to expect. FINRA said that regardless of what a unified fiduciary standard would look like, retail investors would benefit from getting this disclosure document at the start and that such a mandate is an “outright necessity.

Regard this proposed fiduciary standard rule, Shepherd Smith Edwards and Kantas founder and stockbroker fraud lawyer William Shepherd said: “The goal is to lower the duties of Wall Street. The term “fiduciary duty” was defined by courts centuries ago. Since passage of the Investment Advisor’s Act of 1940 – 71 years ago – no special definition of the “fiduciary duty” of financial advisors has been necessary. Current law does not exempt stockbrokers from a fiduciary duty when the circumstances arise in which the broker has assumed the role of a fiduciary. Example: ‘I will take care of you and properly invest your money for you.’ What is being currently proposed is nothing more than a “safe harbor” for brokerage firms to disclose their conflicts, etc. Is it time to occupy Wall Street?”

Our securities fraud attorneys are committed to helping our institutional investor clients recoup their losses from negligent broker-dealers and investment advisers.

Disclosure of Services, Conflicts and Duties, FINRA, October 2010

Study on Investment Advisers and Broker-Dealers, SEC (PDF)

More Blog Posts:

Don’t Create Uniform Fiduciary Standard for Broker-Dealers and Investment Advisers, Say Some Republicans to the SEC, Institutional Investor Securities Blog, October 7, 2011

SEC’s Proposal on Implementing Whistleblower Rule Draws Mixed Reactions, Institutional Investor Securities Blog, January 3, 2011

Advisory Performance Fee Rule Limit Adjusted by the SEC, Stockbroker Fraud Blog, July 30, 2011

November 23, 2011

Wells Investment Securities Agrees to $300,000 Fine by FINRA for Alleged Use of Misleading Marketing Materials for REIT Offerings

To settle FINRA accusations that it used misleading marketing materials when selling Wells Timberland REIT, Inc., Wells Investment Securities, Inc. has agreed to pay a $300,000 fine, as well as to an entry of the findings. However, it is not denying or admitting to the securities charges.

FINRA claims that as the wholesaler and dealer-manager of the non-traded Real Estate Investment Trust’s public offering, Wells approved, reviewed, and distributed 116 sales and marketing materials that included statements that were misleading, exaggerated, or unwarranted.The SRO contends that not only did most of the REIT’s sales literature and advertisements neglect to disclose the meaning of Wells Timberland's non-REIT status, but also it implied that Wells Timberland qualified as an REIT during a time when it didn’t. (Although its initial offering prospectus reported that it planned to qualify as an REIT for the tax year finishing up at the end of 2006, it did not qualify until the one ending on December 31, 2009.) Also, FINRA believes that Wells Timberland’s communications about portfolio diversification, redemptions, and distributions included misleading statements and that the financial firm lacked supervisory procedures for making sure the proprietary data and sensitive customer information were properly protected with working encryption technology.

While non-traded REITs are usually illiquid for approximately 8 years or longer, certain tax ramifications can be avoided if specific IRS requirements are met. FINRA says that the Wells ads failed to ensure that investors clearly understood that an investment that is not yet an REIT couldn’t offer them those tax benefits.

Last month, FINRA put out an alert notifying investors about the risks of public non-traded REITs. Non-exchange traded real estate investment trusts are not traded on a national securities exchange. Early redemption is usually limited and fees related to their sale can be high, which can erode one’s overall return. Risks involved include:

• No guarantee on distributions, which can exceed operating cash flow.
• REIT status and distributions that come with tax consequences
• Illiquidity and valuation complexities
• Early redemption that is limited and likely costly
• Fees that can grow
• Unspecified properties
• Limited diversification
• Real Estate risk

FINRA wants investors considering non-traded REITs to:

• Watch out for sales literature or pitches giving you simple reasons for why you should invest.
• Find out how much the seller is getting in commissions and fees.
• Know how investing in this type of REIT will help you meet your goals.
• Carefully study the accompanying prospectus and its supplements.

Finra Fines Wells Investment Securities For Alleged Misleading Marketing Materials, The Wall Street Journal, November 22, 2011

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

More Blog Posts:
Chase Investment Services Corporation Ordered by FINRA to Pay Back $1.9M for Unsuitable Sales of Floating-Rate Loan Funds and UITs, Institutional Investor Securities Blog, November 19, 2011

Morgan Stanley Faces $1M FINRA Fine for Excessive Markups and Markdowns on Corporate and Municipal Bond Transactions, Institutional Investor Securities Blog, September 17, 2011

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

Continue reading "Wells Investment Securities Agrees to $300,000 Fine by FINRA for Alleged Use of Misleading Marketing Materials for REIT Offerings " »

November 19, 2011

Chase Investment Services Corporation Ordered by FINRA to Pay Back $1.9M for Unsuitable Sales of Floating-Rate Loan Funds and UITs.

FINRA says that Chase Investment Services Corporation will pay back investors for losses sustained from the unsuitable recommendation made that they buy floating rate loan funds and unit investment trusts. In addition to paying back clients $1.9M, Chase must also pay a $1.7M fine.

According to FINRA, brokers with Chase recommended these financial instruments to clients even though the investments were not suitable for them—either because they had hardly any investment experience or only wanted to take conservative risks. The SRO also says that the Chase brokers had no reasonable grounds to think the financial products would be a right fit for these investors.

FINRA believes that Chase failed to properly train its brokers or give them guidance about the suitability of floating-rate loan funds and UITs, as well as the risks involved. For example, there were UITs that contained a significant portion of assets in closed-end funds with high-yield or junk bonds. Yet, despite the risks involved, brokers from Chase made about 260 recommendations that were not suitable for clients who had little (if any) investment experience or were averse to high-risk investments. These investors ended up losing about $1.4 million.

Also subject to substantial credit risk and illiquidity were the floating-rate loan funds. Despite the fact that concentrated positions in the fund were unsuitable for specific clients, FINRA says that Chase brokers still recommended these to clients who wanted low risk, very liquid investments or preferred to preserve principal. Because of these allegedly unsuitable recommendations, investors lost almost $500K.

FINRA says that WaMu, Investments Inc., also recommended that customers by floating-rate loan funds, even though these were not appropriate for the investors. The financial firm, which had merged with Chase in 2009, is also accused of not properly training or supervising its employees that sold the investments.

More About UITs
Unit investment trusts involve diversified securities baskets that may contain high-yield bonds. While junk bonds can make greater returns for investors than investment-grade bonds, they also come with a high degree of risk.

More About Floating-Rate Loan Funds
These mutual funds are invested in short-term bank loans for companies with a below investment grade crediting rating. What investors earn will fluctuate depending on what interest rates the banks happen to be charging on the loans.

In the wake of the allegations against Chase, FINRA Executive Vice President and Chief of Enforcement Brad Bennett said that it was key that financial firms provide the proper guidance and training to brokers about product sales while supervising sales practices.

JPMorgan unit fined $1.7M over investment sales, Bloomberg Business Week/AP, November 15, 2011

FINRA Orders Chase to Reimburse Customers $1.9 Million for Unsuitable Sales of UITs and Floating-Rate Loan Funds, FINRA, November 15, 2011

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Morgan Stanley Faces $1M FINRA Fine for Excessive Markups and Markdowns on Corporate and Municipal Bond Transactions, Institutional Investor Securities Blog, September 17, 2011

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

Bank of America Merrill Lynch to Settle UIT Sales-Related FINRA Charges for $2.5 Million, Stockbroker Fraud Blog, August 22, 2010

Continue reading "Chase Investment Services Corporation Ordered by FINRA to Pay Back $1.9M for Unsuitable Sales of Floating-Rate Loan Funds and UITs. " »

September 17, 2011

Morgan Stanley Faces $1M FINRA Fine for Excessive Markups and Markdowns on Corporate and Municipal Bond Transactions

The Financial Industry Regulatory Authority has fined Morgan Stanley Smith Barney LLC and Morgan Stanley & Co. Inc. $1 million for charging excessive markdowns and markups to corporate and municipal bond transactions clients. The SRO has also ordered that the financial firm pay $371,000 plus interest in restitution to these investors. By agreeing to settle, Morgan Stanley has not denied or admitted to the securities charges.

According to FINRA, the markdowns and markups that Morgan Stanley charged ranged from under 5% to 13.8%. Considering how much it costs to execute transactions, market conditions, and the services valued, these charge were too much.

The SRO also determined that the financial firm had an inadequate supervisory system for overseeing markups and markdowns of corporate and municipal bonds. Morgan Stanley must now modify its written supervisory procedures dealing with markups and markdowns involving fixed income transactions.

FINRA Market Regulation Executive Vice President Thomas Gira has said that Morgan Stanley violated fair pricing standards. He noted is important for financial firms that sell and purchase securities to make sure that clients are given reasonable and fair prices whether/not a markdown or markup exceeds or is lower than 5%.

A Markup is what is charged above market value. It is usually charged on principal transactions involving NASDAQ and other OTC equity securities. Markups on principal transactions usually factor in the type of security, its availability, price, order size, disclosure before the transaction is effected, the type of business involved, and the general markups pattern at a firm.

A markup on an equities security that is over 5% is seldom considered reasonable or fair. Regulators have rules in place for how much registered representatives can charge customers for services rendered. Not only do the charges have to be reasonable, but also they must be fair and not show particular preferences to any clients.

The 5% policy also applies to agency transactions. Commissions for such transactions also must be “fair and reasonable.” Commissions that go above that must be justified and are often closely examined by regulators.
While most securities professionals are committed to doing their jobs fairly and ethically, there are those determined to take advantage of the system to defraud investors. There are also honest mistakes that can occur that also can result in investor losses.

Financial firms and their representatives are responsible for protecting investors and their money from unnecessary losses resulting from securities fraud or other negligence.

Morgan Stanley Fined $1M Over Muni-Bond Markups, Bloomberg, November 10, 2011

FINRA Fines Morgan Stanley $1 Million and Orders Restitution of $371,000 for Excessive Markups and Markdowns, FINRA, November 10, 2011

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Whistleblower Claims SEC is Illegally Destroying Records of Closed Enforcement Cases, Institutional Investor Securities Blog, August 31, 2011

Ex-Bank of America Employee Pleads Guilty to Mortgage Fraud Scam Using Stolen Identities to Buy Homes Not For Sale, Institutional Investor Securities Blog, August 30, 2011

Securities Lawsuits Expected to Reach Record High in ’11, Says Advisen Ltd. Report, Institutional Investor Securities Blog, April 23, 2011

**This blog has been backdated.

Continue reading "Morgan Stanley Faces $1M FINRA Fine for Excessive Markups and Markdowns on Corporate and Municipal Bond Transactions" »

July 16, 2011

Wedbush Ordered By FINRA Panel To Pay $3.5M to Trader Over Withheld Compensation

A Financial Industry Regulator Authority Panel has ordered WedBush Securities Inc. to pay one of its traders over $3.5 million for refusing to properly compensate him. According to claimant Stephen Kelleher, he worked for the financial firm for years without consistently getting the incentive-base compensation that he was promised as a municipal sales trader. Kelleher started working for Wedbush in 2007 until right before the arbitration ruling was made.

Kelleher claims that Wedbush withheld nearly $5 million from him. While he regularly received his base salary, the bulk of his income, which was incentive-based compensation, was unevenly distributed and issued to him in May 2008, October 2009, and April 2010. Even then Kelleher contends that he did not receive everything he was owed.

In his FINRA arbitration claim, Kelleher alleged violation and failure to pay per labor laws, breach of contract, unfair business practices, and fraud. He sought over $6.1 million, including $4.17 million in compensation owed, close to $878,000 in interest, and penalties of $1 million and $2,100 over labor code violations. He also sought damages for civil code law violations, as well as punitive damages.

During the FINRA hearing, witnesses testified that it was Wedbush president and founder Edward W. Wedbush who made decisions about paying and withholding incentive compensation. Another Wedbush employee said that there were two years when he too didn’t get the incentive-based compensation that he was owed. The FINRA panel blamed Wedbush’s “corporate management structure” that required that Edward Wedbush, as majority shareholder, approve bonus pay at his discretion.

In addition to the $3.5 million, the FINRA panel also told Wedbush it has to give Kelleher the vested option to purchase 3,750 Wedbush shares at $20/share and another $375 shares at $26/share. Wedbush also must pay the Claimant for the $200 part of the FINRA filing fee that is non-refundable.

Wedbush intends to appeal the securities arbitration ruling.

Related Web Resources:
Wedbush ordered to pay $3.5M for ‘morally reprehensible failure', Investment News, July 11, 2011

FINRA Orders Wedbush to pay trader $3.5 million, OnWallStreet, July 1, 2011

More Blog Posts:
FINRA Panel Orders Merrill Lynch Professional Clearing Corporation to Pay $64M Over Losses Sustained by Rosen Capital Institutional LP and Rosen Capital Partners LP, Institutional Investors Securities Blog, July 14, 2011

Raymond James Must Pay $925,000 Over Auction-Rate Securities Dispute, Institutional Investors Securities Blog, September 1, 2010

Fisher Investments Inc. Ordered to Pay Retired Investor $376,075 Over Breach of Fiduciary Duty, Stockbroker Fraud Blog, July 8, 2011

Continue reading "Wedbush Ordered By FINRA Panel To Pay $3.5M to Trader Over Withheld Compensation" »

July 14, 2011

FINRA Panel Orders Merrill Lynch Professional Clearing Corporation to Pay $64M Over Losses Sustained by Rosen Capital Institutional LP and Rosen Capital Partners LP

Merrill Lynch Professional Clearing Corporation must pay hedge funds Rosen Capital Partners LP and Rosen Capital Institutional LP $63,665,202.00 in compensatory damages plus interest (9% from October 7, 2008). A Financial Industry Regulatory Authority arbitration panel issued the order which found the respondent liable.

In their statement of claim, made by the claimants in 2009, the hedge funds accused Merrill Lynch of reach of contract, fraud, breach of the duty of good faith and fair dealing (the New York Uniform Commercial Code), and negligence related to the allegedly unexpected margin calls that caused the claimants to sustain financial losses.

Rosen Capital Partners and Rosen Capital Institutional had originally sought at least $90 million in compensatory damages, as well as punitive damages and other costs. Meantime, Merrill Lynch had sough to have the entire matter dismissed and that it be awarded all costs incurred from the suit and other relief as deemed appropriate.

Institutional Investment Fraud
Our securities fraud attorneys represent corporations, banks, partnerships, financial firms, retirement plans, large trusts, charitable organizations, municipalities, private foundations, school districts, and high net worth individuals. We seek to obtain the financial losses of our clients that were caused by securities fraud and other illegal activities committed by financial firms and their representatives, brokers, and advisers.

Shepherd Smith Edwards & Kantas LTD LLP represents investors in the US and abroad. Contact our institutional investment fraud law firm today.

Read the details of the FINRA dispute resolution, Wall Street Journal (PDF)

New York Uniform Commercial Code, Justia

Merrill Lynch Professional Clearing Hit With $64 Million FINRA Arbitration Award, Forbes, July 6, 2011

More Blog Posts:
Raymond James Must Pay $925,000 Over Auction-Rate Securities Dispute, Institutional Investor Securities Blog, September 1, 2010

Fisher Investments Inc. Ordered to Pay Retired Investor $376,075 Over Breach of Fiduciary Duty, Stockbroker Fraud Blog, July 8, 2011

$750,000 Arbitration Award Against Stone & Youngberg LLC Confirmed by District Court, Stockbroker Fraud Blog, June 30, 2011

May 27, 2011

Court Refuses McGinn Smith & Co. Owners's Request that It Stay the FINRA Disciplinary Proceedings Until The Related SEC Civil Action Against Them Ends

A district court has denied the bids of Timothy McGinn and David Smith that the Financial Industry Regulatory Authority disciplinary proceedings against them be stayed until after the conclusion of the Securities and Exchange Commission's related civil action. Judge Colleen Kollar-Kotelly of the U.S. District Court for the District of Columbia said the court doesn’t have jurisdiction over this stay request. While noting that the judicial review of this type of FINRA proceeding is vested in the federal courts of appeal, the district court said that it did not believe that transfer, rather than dismissal, was “in the interest of justice” because the plaintiffs were not likely to succeed on their claim’s merit and had not shown that they would be irreparably harmed because of the FINRA proceedings.

McGinn and Smith are part owners of McGinn Smith & Co, Inc., as well as stockbrokers. Last year, FINRA’s Department of Enforcement submitted a complaint accusing them and their firm of taking part in four fraudulent securities offerings between September 2003 and November 2006. FINRA asked the SEC to look into the matter because it believed that the plaintiffs had violated securities law.

The SEC began its own formal probe and went on to sue the plaintiffs and their securities firm for securities fraud and other violations. A receiver was appointed by the federal court to seize control of McGinn Smith & Co. and its assets.

While a FINRA officer did stay proceedings against the financial firm, it refused to do so against the two men, who then filed their case requesting that the court stay the FINRA proceedings until the SEC case has concluded. The plaintiffs believe that the SRO violated their constitutional rights when it acted as a proxy for the SEC.

Court Declines to Stay FINRA Proceeding Pending Conclusion of Related SEC Action, BNA Securities Law Daily, May 17, 2011

SEC seeks shutdown of McGinn and Smith venture, TimesUnion.com, November 4, 2010

More Blog Posts:

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

Goldman Sachs & Co. Clearing Unit Must Pay Unsecured Creditors of Bayou Hedge Funds $20.5M FINRA Arbitration Award, Says District Court, Institutional Investor Securities Blog, December 14, 2011

Wells Fargo Advisors LLC Agrees to $1 Million FINRA Fine for Securities Charges Related to Mutual Fund Prospectus Delivery, Stockbroker Fraud Blog, May 12, 2011

Continue reading "Court Refuses McGinn Smith & Co. Owners's Request that It Stay the FINRA Disciplinary Proceedings Until The Related SEC Civil Action Against Them Ends" »

April 12, 2011

UBS Financial Services Fined $2.5M and Ordered to Pay $8.25M Over Lehman Brothers-Issued 100% Principal-Protection Notes

The Financial Industry Regulatory Authority is fining UBS Financial Services, Inc. $2.5 million and ordering it to pay $8.25 million in restitution for allegedly misleading investors about the "principal protection" feature of 100% Principal-Protection Notes. Lehman Brothers Holdings Inc. issued the PPNs Holdings Inc. before it filed for bankruptcy in 2008.

FINRA contends that even as the credit crisis was getting worse, between March and June 2008 UBS advertised and described the notes as investments that were principal-protected while failing to make sure clients knew that they PPNs were unsecured obligations of Lehman and that the principal protection feature was subject to issuer credit risk. UBS also allegedly failed to:

• Properly notify its financial advisers of the impact the widening of credit default swaps was having on Lehman’s financial strength
• Sufficiently analyze how appropriate the Lehman-issued PPNs were for certain clients
• Set up a proper supervisory system for the sale of the Lehman-issued PPNs
• Provide proper training or appropriate written supervisory procedures and policies
• Provide adequate suitability procedures for determining who should invest

FINRA also says that UBS developed and used advertising collateral about the PPNs that misled certain clients, such as the suggestion that a return of principal was certain as long as clients held the product until it matured. FINRA claims that the reason that some UBS financial advisers gave incorrect information to customers was because they themselves didn’t fully understand the product.

FINRA says that because UBS’s suitability procedures were inadequate and certain PPN’s lacked risk profile requirements, the product was sold to investors who were not willing or shouldn’t have been allowed to take on the risks involved. More often than not it was these investors who were likely to depend on the Lehman PPNs’ "100% principal protection" feature that were “risk averse.”

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

Related Web Resources:
FINRA Fines UBS Financial Services $2.5 Million; Orders UBS to Pay Restitution of $8.25 Million for Omissions That Effectively Misled Investors in Sales of Lehman-Issued 100% Principal-Protection Notes, FINRA, April 11, 2011

UBS to shell out $10.75M to settle Lehman-related row, Investment News, April 11, 2011

More Blog Posts:
UBS to Pay $2.2M to CNA Financial Head for Lehman Brothers Structured Product Losses, Stockbroker Fraud Blog, January 4, 2011

UBS Must Pay Couple $530,000 for Lehman Brothers-Backed Structured Notes, Institutional Investors Securities Blog, November 5, 2010

Lehman Brothers’ “Structured Products” Investigated by Stockbroker Fraud Law Firm Shepherd Smith Edwards & Kantas LTD LLP, Stockbroker Fraud Blog, September 30, 2008

Continue reading "UBS Financial Services Fined $2.5M and Ordered to Pay $8.25M Over Lehman Brothers-Issued 100% Principal-Protection Notes" »

March 26, 2011

FINRA Wants Amerivet Securities Inc.’s Lawsuit Seeking to Inspect the SRO's Records Dismissed

The Financial Industry Regulatory Authority wants the District of Columbia Court of Appeals to reverse the D.C. Superior Court's decision to not dismiss Amerivet Securities Inc.’s lawsuit against the SRO. The broker-dealer wants to inspect FINRA’s records and books.

Amerivet Securities filed its complaint in August 2009 under the Delaware General Corporation Law’s Section 220, which lets a shareholder examine a company’s records and books for “any proper purpose.” The broker-dealer says it needs to inspect FINRA's books and documents in order to expose the corporate wrongdoing related to the SRO's 2008 investment losses and and allegedly inflated executive pay practices.

When our securities fraud attorneys covered this case more than a year ago, we noted that Amerivet had accused FINRA of failing to supervise and regulate a number of its larger member firms, including Lehman Brothers, Merrill Lynch, Bernard L. Madoff Investment Securities Inc., Bear Stearns and Co, and Stanford Financial Group. The broker-dealer also claimed that FINRA recklessly pursued high-risk investment strategies that were not appropriate for preserving capital. (Read our previous Stockbroker Fraud Blog post to find out more.) Last month, Judge John Mott ruled in favor of Amerivet and noted that pursuant to Section 220, the broker-dealer had asserted a proper purpose for wanting to make its inspection.

In its motion to dismiss, FINRA argued that it should get complete immunity from legal challenge. Also, FINRA said that because the Amerivet can’t maintain a derivative lawsuit against the SRO, the broker-dealer lacks a proper purpose to inspect the books it wants to see. When the court decided not to dismiss the case, however, it noted that although FINRA is immune from private lawsuits asking for damages related to regulator activity, this complaint isn’t looking for recovery. Rather, it wants to be able to examine FINRA’s records.

Related Web Resources:
Amerivet Wins Round In Amerivet V. FINRA, Daily Markets, March 5, 2011

Delaware General Corporation Law

Brokerage Firm Amerivet Securities Inc. Sues FINRA for Alleged Misconduct, Stockbroker Fraud Blog, August 26, 2009

Read the 2009 Complaint

December 14, 2010

Goldman Sachs & Co. Clearing Unit Must Pay Unsecured Creditors of Bayou Hedge Funds $20.5M FINRA Arbitration Award, Says District Court

A district court has rejected Goldman Sachs & Co.’s (GS ) challenge to a $20.5 million securities fraud award for unsecured creditors of the failed Bayou hedge funds. The unsecured creditors are blaming the investment bank of failing to look at certain red flags and, as a result, facilitating the massive scam. The U.S. District Court for the Southern District of New York said it was sustaining the award issued by the Financial Industry Regulatory Authority arbitration panel.

The court said that contrary to Goldman’s argument, the FINRA panel “did not ‘manifestly disregard the law’ when reaching its conclusion. Also, the court noted that the panel had found that Goldman Sachs Execution and Clearing unit was not innocent of wrongdoing in that it failed to take part in a “diligent investigation” that could have uncovered the fraud.

The Bayou Hedge Funds group collapsed in 2005. According to regulators, investors lost over $450 million as a result of the false performance data and audit opinions that were issued. The Securities and Exchange Commission and the Justice Department sued the group’s founders, Daniel Marino and Samuel Israel III over the investors’ financial losses and the firm’s collapse. Both men have pleaded guilty to criminal charges and are behind bars.

The court not only disagreed with the Goldman Sachs clearing unit that the panel was not in manifest disregard of the law, but also, it found that as Goldman’s client agreements with the Bayou funds provided it with “broad discretion” over the use of securities and money in the funds’ accounts, it was not unusual for a “reasonable arbitrator” to find that Goldman’s rights in relation to the accounts provided it with “sufficient dominion and control to create transferee liability.”

Related Web Resources:
Goldman Sachs Execution & Clearing L.P. v. Official Unsecured Creditors' Committee of Bayou Group LLC, FINRA Dispute Resolution (PDF)

Court Rebuffs Goldman ChallengeTo $20.5M Bayou Arbitration Award, BNA, December 9, 2010

Goldman Sachs, Stockbroker Fraud Blog

Continue reading "Goldman Sachs & Co. Clearing Unit Must Pay Unsecured Creditors of Bayou Hedge Funds $20.5M FINRA Arbitration Award, Says District Court" »

September 22, 2010

Illegal High Frequency Trading: Trillium Brokerage Services LLC and 11 individuals agree to settle FINRA Charges for $2.27M

The Financial Industry Regulatory Authority says that it is fining and censuring Trillium Brokerages LLC and 11 individuals $2.27 million for their involvement in an illegal high frequency trading strategy and supervisory failures. It is the first enforcement action to target this type of improper trading behavior.

FINRA claims that through the traders, Trillium entered a number of layered, non-bona fide market moving orders in more than 46,000 instances to purposely make it appear that there was substantial selling and buying in NASDAQ and NYSE Arca stocks. Because of the high frequency trading, others in the industry submitted orders to execute against those that the Trillium traders had placed. However, after the Trillium traders submitted their orders they would immediately cancel them.

FINRA Market Regulation Executive Vice President Thomas Gira says that Trillium purposely and “improperly baited unsuspecting market participants” into making trades at illegitimate prices and to the advantage of Trillium’s traders. Gira says that FINRA will continue to “aggressively pursue disciplinary action” against those involve in illegal high frequency trading activity that undermines legitimate trades, abusive momentum ignition strategies, and other illegal conduct.

Regarding the FINRA fines, the New York-based broker-dealer has agreed to pay $1 million for using a trading technique involving the placement of a number of nonauthentic orders to make it falsely appear as if there was market activity for specific NASDAQ and NYSE Arca stocks. Trillium also must disgorge $173,000 in illegal profits.

Nine Trillium traders, the brokerage company’s chief compliance officer, and its trading director have agreed to pay a total of $805,500. They have been told to disgorge $292,000. The individuals are temporarily suspended from the securities industry or as principals.

The SEC also is looking into high frequency trading- and “quote stuffing,” which involves the placement and then immediate cancellation of bulk stock orders. The SEC wants to see whether such practices have allowed for improper or fraudulent conduct.

Related Web Resources:
FINRA Investigating Whether Broker-Dealers Providing Adequate Risk Controls to High-Frequency Traders, Institutionalinvestorsecuritiesblog.com, September 19, 2010

FINRA Sanctions Trillium Brokerage Services, LLC, Director of Trading, Chief Compliance Officer, and Nine Traders $2.26 Million for Illicit Equities Trading Strategy, FINRA, September 13, 2010

Trillium Fined by Finra for Illegal Trading Strategy, BusinessWeek, September 13, 2010

Continue reading "Illegal High Frequency Trading: Trillium Brokerage Services LLC and 11 individuals agree to settle FINRA Charges for $2.27M" »

September 19, 2010

FINRA Investigating Whether Broker-Dealers Providing Adequate Risk Controls to High-Frequency Traders

A Financial Industry Regulatory Authority says the SRO is investigating whether broker-dealers failed to put adequate risk-management controls in place for high-frequency traders with access to an exchange or alternative trading system. The probe comes following the flash crash last May that involved the stock markets dropping almost 1,000 points in a matter of minutes before rebounding just as quickly. While lawmakers said that high-frequency trading was to blame, the Commodity Futures Trading Commission and Securities and Exchange Commission disagree.

FINRA says that Chief Executive Officer Richard Ketchum’s concern is whether brokers had full comprehension of how the traders were using algorithms and whether the latter understood the possible consequences during times of serious volatility. Ketchum vowed that if serious cases of brokers failing to “even try to exercise their obligations to run checks on the firms” prior to giving them access are uncovered, then enforcement actions will be taken.

Meantime, the Securities and Exchange Commission is considering a pending rule proposal on unfiltered or naked access arrangements that would allow high-frequency traders to completely bypass risk management controls set up by broker-dealers.

High-Frequency Trading
High-frequency trading depends on computer algorithms (rather than human action) to execute transactions at super fast speed. High-frequency traders are usually institutional investors, such as pension funds or mutual funds. Through broker-dealers, these traders are able to gain direct electronic access to an exchange or ATS. According to recent data, high-frequency trading now makes up over 70% of market volume.

Related Web Resources:
High Frequency Trading and the Roiling Markets, Newsweek, June 1, 2010

High-frequency traders in the cross hairs after stock market's wild day, LA TImes, May 6, 2010


Continue reading "FINRA Investigating Whether Broker-Dealers Providing Adequate Risk Controls to High-Frequency Traders " »

September 1, 2010

Raymond James Must Pay $925,000 Over Auction-Rate Securities Dispute

A Financial Industry Regulatory Authority panel says that Raymond James and financial advisor Larry Milton must pay Sherese and Rex Glendenning $925,000 over an auction-rate securities dispute. This is the third time this summer that Raymond James Financial Inc. (NYSE: RFJ) subsidiaries have been involved in an ARS dispute that was decided in FINRA arbitration. Since July 1, independent broker-dealer Raymond James Financial Services Inc. and brokerage firm Raymond James & Associates have been ordered to repurchase $3.5 million in ARS from clients.

The Glendennings set up their account with Raymond James in January 2008 before the market meltdown. Milton placed the couple’s $1.4 million in an ARS that contained sewer revenue bonds while failing to tell them about the risk involved.

The couple contends that Milton’s behavior wrongly gave them the impression that their investment was highly liquid and could be easily sold. However, Raymond James turned down their request to buy the ARS back at full value.

According to the Glendennings’ securities fraud attorney, the timing of the purchase was key to winning the award. The securities that they bought came up for auction for the first time thirty five days after they made the purchase. The auction failed and the couple were never able “ to go to auction.”

At the time of the ARS market crash in February 2008, Raymond James Financial clients held $1.9 billion in auction rate debt—now down to $600 million. To date, none of the securities regulators have sued the firm over ARS sales. Other financial firms, including Oppenheimer & Co. Inc. and Charles Schwab & Co. haven’t been as lucky.

Related Web Resources:
Raymond James pays more auction rate claims, Investment News, August 26, 2010

FINRA rules against Raymond James in auction rate securities case, Tampa Bay Business Journal, August 26, 2010

Stockbroker-Fraud Blog

Continue reading "Raymond James Must Pay $925,000 Over Auction-Rate Securities Dispute" »

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