Failure to Supervise

Broker Investigation: Independent Financial Group Supervisor Michael DiGaetano

November 23, 2016 | by Staff Attorney

Our investment attorneys are investigating customer complaints filed with The Financial Industry Regulatory Authority (FINRA) against Michael DiGaetano (DiGaetano) currently associated with Independent Financial Group, LLC (Independent Financial) alleging unsuitable investments, misrepresentations, fraud, negligence, breach of contract, and breach of fiduciary duty among other claims. According to brokercheck records DiGaetano has been subject to three customer complaints and one regulatory sanction.

In May 2012 FINRA sanctioned DiGaetano alleging that as a supervisor he failed in responsibilities by not taking reasonable action to prevent another broker from committing securities fraud. (FINRA No. 2009019209202) As part of the claim, FINRA alleged that DiGaetano failed to even contact customers who were subject to fraudulent mutual fund switches and never questioned the broker involved even though the trades were marked as unsolicited.

Brokers in the financial industry have the fundamental responsibility to treat investors fairly. This obligation includes making only suitable investments for their client. The suitable analysis has certain requirements that must be met before the recommendation is made. First, there must be reasonable basis for the recommendation for the investment based upon the broker’s and the firm’s investigation and due diligence. Common due diligence looks into the investment’s properties including its benefits, risks, tax consequences, the issuer, the likelihood of success or failure of the investment, and other relevant factors. Second, if there is a reasonable basis to recommend the product to investors the broker then must match the investment as being appropriate for the customer’s specific investment needs and objectives. These factors include the client’s age, investment experience, retirement status, long or short term goals, tax status, or any other relevant factor.

FINRA Bars Christopher Burtraw Over Borrowing Client Funds

May 23, 2016 | by Staff Attorney

The investment lawyers of Gana Weinstein LLP are investigating the regulatory action brought by the Financial Industry Regulatory Authority (FINRA) against Christopher Burtraw (Burtraw) working out of Lakewood, Colorado alleging that the broker borrowed client funds. The providing of loans or selling of notes and other investments outside of a brokerage firm constitutes impermissible private securities transactions – a practice known in the industry as “selling away”. According to the FINRA regulatory action (FINRA No. 20150472061-01) Burtraw consented sanctions in the form of a permanent bar because he failed to provide documents and information requested by FINRA during the course their investigation into allegations that he borrowed funds from multiple customers.

At this time it unclear the nature and scope of Burtraw’s outside business activities and private securities transactions. However, according to Burtraw’s public records his outside business activities includes Pacific Life Prestige Wealth Management Group. Often times, brokers sell promissory notes and other investments through side businesses as accountants, lawyers, or insurance agents to clients of those side practices.

Burtraw entered the securities industry in 2003. From September 2004 until November 2009, Burtraw was associated with LPL Financial Corporation. From November 2009 until November 2014, Burtraw was associated with Purshe Kaplan Sterling Investments. Finally, from November 2014 until October 2015, Burtraw was associated with J.P. Turner & Company, L.L.C. (JP Turner).

Broker Investigation: Gerald “Jerry” Tagge Promissory Note Sales

March 21, 2016 | by Staff Attorney

The investment lawyers of Gana Weinstein LLP are investigating a customer complaint brought before the Financial Industry Regulatory Authority (FINRA) against Gerald “Jerry” Tagge (Tagge) working out of Omaha, Nebraska alleging the sale of $125,000 in promissory notes. The providing of loans or selling of notes and other investments outside of a brokerage firm constitutes impermissible private securities transactions – a practice known in the industry as “selling away”. In addition to the promissory note complaint there have been two other customer complaints against Tagge.

At this time it unclear the nature and scope of Tagge’s outside business activities and private securities transactions. However, according to Ingros’ public records his outside business activities include the d/b/a he operates out of Tagge Rutherford Financial Group, an insurance business, and real estate related business. Often times, brokers sell promissory notes and other investments through side businesses as accountants, lawyers, or insurance agents to clients of those side practices.

Tagge entered the securities industry in 1991. Since August 2006 Tagge has been associated with Cetera Advisors LLC.

FINRA Bars Broker Tracy Wengert Over Trading Customer Accounts Outside His Brokerage Firm

November 20, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) brought and enforcement action against broker Tracy Wengert (Wengert) (FINRA No. 2015044289201) resulting in a bar from the securities industry alleging that Wengert failed to provide FINRA staff with information and documents requested. The failure to provide those documents and information to FINRA resulted in an automatic bar from the industry. FINRA’s document requests related to the regulators investigation into claims in February 2015, FINRA enforcement began investigating allegations of misconduct by Wengert in that he opened brokerage accounts outside of the Transamerica Financial Advisors, Inc. (Transamerica) on behalf of customers and placed unsuitable trades in these accounts.

FINRA’s investigation appears to stem from Wengert’s termination from Transamerica in January 2015. At that time Transamerica filed a Form U5 termination notice with FINRA stating in part that the firm discharged Wengert under circumstances where there was allegations that Wengert was alleged to have managed a client account on a discretionary basis without approval or oversight through the firm.

Wengert entered the securities industry in 1999. From April 2002 until January 2012, Wengert was associated with World Group Securities, Inc. Thereafter, from January 2012 until February 2015, Wengert was associated as a registered representative with Transamerica.

Customers File Complaints Against Interactive Brokers for Flawed Margin Liquidations

November 6, 2015 | by Staff Attorney

The law offices of Gana Weinstein LLP are tracking a number of cases that have been filed against brokerage firm Interactive Brokers LLC (Interactive Brokers). These cases generally allege that due to market events affecting the customer’s accounts Interactive Brokers executed forced margin calls selling the customer’s securities. However, according to the customers Interactive Brokers did not provide investors fair pricing for the securities during the liquidations violating the “National Best Bid/Best Offer,” rule that is required in processing auto liquidations. By failing to offer fair prices for the stocks these customer their accounts were subject to additional margin calls, which results in a death spiral situation where the forced selling causes additional investment losses that causes more selling.

In one case that went to an arbitration hearing (FINRA No. 12-02766) the Claimant asserted claims of breach of contract; promissory estoppel; violation of state securities statutes; claims under common law; and vicarious liability. The Claimant alleged that Interactive Brokers’ flawed, inefficient and fraudulent margin auto-liquidation system caused auto-liquidation of the customers’ portfolios at prices inferior to the National Best Bid/Best Offer. The panel awarded the Claimant $175,000 for auto-liquidations that occurred on January 12, 2011, plus $57,200 in interest, $285,000 for auto-liquidations that occurred on August 5, 2011, and $77,000 in interest, and $72,418 for expert witness fees and other costs involved in the arbitration.

Trading on margin is a practice where the investor borrows funds from the brokerage firm and agrees to keep a maintenance margin balance or a minimum account balance. If the account value falls below the maintenance margin or the brokerage firm believes the securities are at risk at falling below that balance the firm can require investors to either deposit additional funds to bring the account back into balance or make a margin call that sells stocks in order to raise capital to pay down the loan.

Hedge Fund Canarsie Capital Losses 99.7% of Client’s Money Leading to SEC Investigation

October 10, 2015 | by Staff Attorney

According to news sources, the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) are investigating how the hedge fund Canarsie Capital lost nearly all of the $60 million capital in just three weeks of trading. The fund was run by Owen Li (Li), and Ken deRegt (deRegt). Canarsie Capital was named for the Brooklyn neighborhood where Li grew up and was launched in January 2013 and had offices in midtown Manhattan, New York. Li previously worked for Raj Rajaratnam’s (Rajaratnam) Galleon Group. Rajaratnam is currently serving an 11 year sentence following his May 2011 conviction on nine counts of securities fraud and five counts of conspiracy. The claims against him relate to $63.8 million in illicit profit from 2003 to 2009 by trading in stocks such as eBay Inc, Goldman Sachs Group Inc and Google Inc. Li cofounded the Canarsie Capital with his former Stanford University roommate, Eric deRegt and Eric’s father who ran Morgan Stanley’s fixed-income business.

According to filings the minimum investment accepted from an outside investor in the fund was $1 million. At its peak, Canarsie Capital had managed around $98 million in assets and had some well-known contributors. Goldman Sachs was the fund’s prime broker and clears and settles trades for the hedge fund starting in the fall of 2014. The Goldman Sachs switch came after the fund was dropped in March 2014, by Morgan Stanley’s prime brokerage over concerns with the fund’s risk practices.

On January 20, 2015, Li, wrote an apology letter to investors telling them that he “engaged in a series of aggressive transactions” during the first three weeks of 2015 that resulted in losing all but $200,000 of the fund’s capital, a 99.7% loss. According to the letter, Li engaged in aggressive trading in an attempt to recuperate prior losses the fund suffered in the fund in December 2014. At this time it’s unclear what the trading strategy was that Li engaged in January of this year. The only details in the letter concerning the securities themselves are that they included “options with strike prices pegged to the broader market increasing in value” and “some direct positions.”

FINRA Bars Former Merrill Lynch Broker Michael Highfill Over Outside Business Activities

September 28, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) brought and enforcement action against broker Michael Highfill (Highfill) (FINRA No. 2015045652501) resulting in a bar from the securities industry alleging that Highfill failed to provide FINRA staff with information and documents requested. The failure to provide those documents and information to FINRA resulted in an automatic bar from the industry. FINRA’s document requests related to the regulators investigation into claims the Highfill solicited and accepted a loan from an elderly customer and that he also failed to disclose an outside business activity to his member firm.

FINRA’s investigation appears to stem from Highfill’s termination from Merrill Lynch, Pierce, Fenner & Smith Incorporated (Merrill Lynch) in May 2015. At that time Merrill Lynch filed a Form U5 termination notice with FINRA stating in part that the firm discharged Highfill under circumstances where there was allegations that Highfill solicited a loan from a client and failed to disclose outside business activities. It is unclear the nature of the outside business activities from publicly available information at this time.

Highfill entered the securities industry in 1999. From August 2005 until August 2008, Highfill was associated with Morgan Stanley & Co. Incorporated. Thereafter, from July, 2008, until May 2015, Highfill was associated as a registered representative with Merrill Lynch out of the firm’s Ridgeland, Mississippi office.

Cape Securities, Inc. Fined $125,000 for Failure to Supervise

September 18, 2015 | by Staff Attorney

On May 5, 2015, the brokerage firm Cape Securities, Inc. (“Cape”) was fined $125,000 by the Financial Industry Regulatory Authority (FINRA) for failing to supervise its personnel, in effect allowing its brokers to recommend unsuitable investments and churn customer accounts.

According to the Letter of Acceptance, Waiver and Consent (AWC), for a sixteen-month period, spanning October 2011 through February 2013, Cape’s supervisory system and written supervisory procedures, pertaining to the review of actively traded accounts, failed to adequately address and identify numerous items. According to FINRA, Cape’s supervisory policies and procedures failed to address (1) the process by which transactions are reviewed, (2) risks in customer accounts, and (3) methods by which Cape conducted its suitability analysis. According to the AWC, Cape never made use of clearing firm exception reports in their review of actively traded accounts and had no written supervisory procedures relating to the monitoring of complex trading strategies.

In addition, during the period of October 2011 through September 2012, registered representatives in Cape’s Manhattan branch conducted trades in several leveraged exchange traded funds (“ETFs”) and sold covered calls to customers. This trading activity caused customer accounts to have excessive turnover ratios, which indicates churning of customer accounts. According to FINRA, Cape did not inquire into the suitability of this trading activity despite all the indications of excessive trading and its awareness of the strategies being recommended.

BestVest Investments Sanctioned Over Non-Traditional ETF Sales

September 15, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned (Case No. 2014038906201) brokerage firm BestVest Investments, Ltd. (BestVest) concerning allegations that from January 2012, through August 2014, BestVest failed to establish and maintain a supervisory system reasonably designed to monitor transactions in leveraged, inverse, and inverse leveraged exchange traded funds (Non-Traditional ETFs).

As a background, Non-Traditional ETFs behave drastically different and have different risk qualities from traditional ETFs. While traditional ETFs seek to mirror an index or benchmark, Non-Traditional ETFs use a combination of derivatives instruments and debt to multiply returns on underlining assets, often attempting to generate 2 to 3 times the return of the underlining asset class. Non-Traditional ETFs are also used to earn the inverse result of the return of the benchmark.

However, the risks of holding Non-Traditional ETFs go beyond merely multiplying the return on the index. Instead, Non-Traditional ETFs are generally designed to be used only for short term trading as opposed to traditional ETFs. The use of leverage employed by these funds causes their long-term values to be dramatically different than the underlying benchmark over long periods of time. For example, between December 1, 2008, and April 30, 2009, the Dow Jones U.S. Oil & Gas Index gained two percent while the ProShares Ultra Oil and Gas, a fund seeking to deliver twice the index’s daily return fell six percent. In another example, the ProShares UltraShort Oil and Gas, seeks to deliver twice the inverse of the index’s daily return fell by 26 percent over the same period.

FINRA Bars Former LPL Financial Broker Thomas Caniford From the Industry

September 4, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) barred former LPL Financial LLC (LPL) broker Thomas Caniford (Caniford) after the broker failed to respond to a letter from the regulator requesting information. While BrokerCheck records kept by FINRA do not disclose the nature of the regulatory inquiry, in February 2015, Caniford was terminated by LPL for cause stating that the broker was terminated for 1) having custody and control of client funds in a bank account in violation of firm policy; and 2) failure to provide bank records requested by the firm.

In addition, Caniford has been the subject of at least two customer complaints and four financial liens all tax related. The customer complaints against Caniford allege a number of securities law violations including that the broker made investments in products not approved by LPL, also referred to as “selling away”, and direct theft and misappropriation of funds.

Caniford entered the securities industry in 1982. From March 2004, until March 2008, Caniford was associated with M Holdings Securities, Inc. Thereafter, from March 2008, until his termination in March 2015, Caniford was associated with LPL.