Fiduciary Duties

Why Wall Street Fights Against the Fiduciary Standard

October 30, 2014 | by Staff Attorney

In the wake of the financial crisis of 2008, the Dodd-Frank legislation authorized the Securities Exchange Commission (SEC) to pass a fiduciary duty rule that would apply to brokers, as opposed to only financial advisors. Most investors do not realize and are usually shocked to learn that there broker only has an obligation to recommend “suitable” investments, and not to work in their client’s best interests. Currently, the fiduciary duty rule only applies to financial advisors (and brokers under certain circumstances) – more commonly recognized by the public as advisors who charge a flat fee for their services as opposed to commissions.

The fact that the investing public has absolutely no clue how crucial the fiduciary duty is to protecting their retirement futures and holding Wall Street accountable for mishaps has prevented any serious public debate to combat the millions of dollars the industry has and will spend to kill this part of the law. True to form, recently the House of Representatives passed a budget that would prevent the SEC from imposing a fiduciary standard on brokers during the upcoming federal fiscal year beginning in October.

What’s the big deal you may ask? Why is the fiduciary standard important to me? Well there are many reasons but maybe one story will highlight how the brokerage industry is currently allowed to operate to put their interests ahead of their clients. As recently reported in Bloomberg and InvestmentNews, an undercover U.S. Labor Department economist exposed how brokerage firms sought out federal workers to roll over their 401(k)’s with the government to IRAs with the brokerage firm even though the result could increase the client’s annual costs by as much as 50 times!

Choosing the Right Securities Arbitration Attorney

September 29, 2014 | by Staff Attorney

When to Call a Securities Arbitration Attorney

Securities arbitration attorneys, sometimes referred to as investment attorneys, FINRA attorneys, or securities attorneys, should be contacted whenever an investor believes he or she has been a victim of broker misconduct. An investor may have cause to retain a securities fraud attorney to file a lawsuit or arbitration claim if his or her broker failed to create a suitable investment strategy. An investor may also want to contact an attorney case if a broker made false or misleading statements about a security or omitted negative information about the risk of a security in order to persuade the investor to invest.

An investor may also want to seek legal counsel the investor’s broker bought or sold securities without prior consent (unauthorized trading) or excessively traded securities for the purpose generating commissions (churning).

SEC Staff Issues Risk Alert on Alternative Investments Due Diligence

February 15, 2014 | by Staff Attorney

The Office of Compliance Inspections and Examinations (OCIE), in coordination with other Securities and Exchange Commission (SEC) staff released guidance and observations concerning investment advisers due diligence process for selecting alternative investments. The OCIE has observed that investment advisers are increasingly recommending alternative investments to their clients in lieu of other investment options. Investment advisers are fiduciaries and must act in their clients’ best interests. Since an investment adviser exercises discretion to purchase alternative investments on behalf of clients the adviser must determine whether the investments: (i) meet the clients’ investment objectives; and (ii) are consistent with the investment principles and strategies that were disclosed to the client by the manager to the adviser.

Alternative investments include a variety of non-traditional investments including hedge funds, private equity, venture capital, real estate, and funds of private funds. The commonality amongst alternative investments is that they employ unique investment strategies and assets that are not necessarily correlated to traditional stock and bond indexes.

The OCIE staff examined the due diligence process processes of advisers to pension plans and funds of private funds in order to evaluate how advisers performed due diligence, identify, disclose, and mitigate conflicts of interest, and evaluate complex investment strategies and fund structures. The OCIE noted indicators that led advisers to conduct additional due diligence analysis, request the manager to make appropriate changes, or to reject the manager or the alternative investment.

Fidelity In Lawsuit Over Its Employees’ 401(k) Plan

October 24, 2013 | by Staff Attorney

On March 19, 2013, a former employee of Fidelity Investments filed suit in the U.S. District Court in Boston, Massachusetts against her former employer alleging self-dealing with respect to the management of the FMR LLC Profit Sharing Plan, Fidelity’s 401(k) plan. In September, twenty-six additional current and former Fidelity employees joined a proposed class action lawsuit against Fidelity. The complaint captioned, Bilewicz v. Fidelity Investments, alleges that the FMR LLC Profit Sharing Plain offered expensive Fidelity mutual funds despite the availability of lower-fee mutual funds within Fidelity’s own investment offerings and the offerings of outside providers.

Fidelity’s 401(k) plan holds approximately $8.5 billion in assets for more than 50,000 of its employees. Fidelity generally makes annual profit sharing contributions to the plan in addition to matching up to 7% of its employees’ salary contributions.

The Employee Retirement Income Security Act (ERISA) creates a fiduciary duty for 401(k) plans, meaning Fidelity, and any other 401(k) plan provider, must act in the best interest of its employee investors. The complaint in this case alleges that Fidelity and some of its officers failed to uphold thier fiduciary duty with respect to selecting, evaluating, monitoring, and removing investment options from the Fidelity 401(k) Plan. The complaint alleges that Fidelity and certain officers selected high-fee Fidelity mutual fund products that financially benefited Fidelity instead of acting in the best interest of their employees.

FINRA Arbitration Panel Awards Investors $3.1 Million Against Citigroup Due to Failure to Supervise Selling Away Activities

September 18, 2013 | by Staff Attorney

A Financial Industry Regulatory Authority (FINRA) arbitration panel ruled that Citigroup Inc. (Citigroup) must pay $3.1 million to a Florida couple who alleged that their financial advisor, Scott King (King), solicited them to invest in real estate developments. The case was filed by Dr. Nasirdin Madhany and his wife, Zeenat Madhany, alleging negligent supervision, breach of fiduciary duty, fraud, and breach of contract. The panel’s decision represents an important win for consumers and refutation of common arguments employed by the industry to avoid responsibility for their employee’s wrongful conduct.

The case involved a typical, and all too common, “selling away” scenario. Selling away occurs where a broker sells securities to customers that are not approved by the brokerage firm. Selling away investments represent a substantial risk to the investing public because brokerage firms do not record the transactions on their books and records and do not supervise the activity to ensure that the investment is appropriate for the customer.

Brokerage firms usually defend selling away cases by arguing that they were not aware of the securities transactions and therefore cannot be found liable. Firms also argue that they do not know the broker’s customer because in many cases the investor does not have a brokerage account with the firm. Therefore, the firm argues that it cannot be responsible for investment losses occurring to investors they do not know and away from the firm.

Karl Hahn Ordered by FINRA to Pay An Investor $11 Million

August 28, 2013 | by Staff Attorney

Former Merrill, Lynch Pierce, Fenner & Smith, Inc. (Merrill Lynch), Deutsche Bank Securities (Deutsche Bank), Inc., and Oppenheimer & Co., Inc. (Oppenheimer), broker Karl Edward Hahn (Hahn) was ordered by the Financial Industry Regulatory Authority (FINRA) to pay former clients over $11 million for misconduct in April 2013. Hahn was accused of common law fraud, negligent misrepresentations, and breach of fiduciary duties.

Hahn worked at Merrill Lynch from 2004 until 2008, at Deutsche Bank from 2008 to mid-2009, and at Oppenheimer from 2009 to early 2011. Hahn allegedly recommended various unsuitable investments to customers including covered calls, a premium financed life insurance policy, and $2.3 million fraudulent real estate financing project “involving East Coast” properties. Hahn allegedly recommended the life insurance policy for the the large commissions he stood to earn. Hahn also allegedly pocketed the money that was supposedly going to finance the East Coast properties.

Other claims made against Hahn include churning of investment accounts. Churning is a type of financial fraud where the broker engages in excessive trading in a client’s account for the purpose of generating commission but does not provide the investor with suitable investment strategy.

FINRA Charged Commonwealth Capital Securities Corp. and Kimberly Springsteen-Abbott With Misusing Investor Funds

August 27, 2013 | by Staff Attorney

On May 3, 2013 the Financial Industry Regulatory Authority (FINRA) filed a complaint against Commonwealth Capital Securities Corp. (CCSC) and Kimberly Springsteen-Abbott, owner, chief executive, and head of compliance for CCSC, for misusing investor funds. CCSC employs about 22 registered representatives and sells private placements and direct investments. Since 1993, CCSC marketed and sold 13 different equipment leasing funds raising $240 million for various technology equipment leases. The technology leases were supposed to have durations of 12 to 36 months.

Instead, according to FINRA, from December 2008 until February 2012, Kimberley Springsteen-Abbot misused investor funds to pay for various personal credit card charges and other expenses totaling at least $334,798. Some of those personal expenses include a $1,971 family vacation in 2010, and a $12,414 board of directors meeting in Hawaii in 2010. In total, FINRA alleges that 2,272 credit card charges related to misuse of funds.

In addition, FINRA alleges that during the agency’s examination in 2011, Kimberley Springsteen-Abbot and CCSC falsified and backdated a memo accounting for tickets to Disney World. Kimberley Springsteen-Abbot’s and CCSC’s manipulations of the records caused the brokerage firm’s books and records to be inaccurate.

SEC Sanctions Colorado-Based Portfolio Manager for Forging Documents and Misleading Chief Compliance Officer

August 19, 2013 | by Staff Attorney

August 27, 2013 – The Securities and Exchange Commission sanctioned a former portfolio manager at a Boulder, Colo.-based investment adviser for forging documents and misleading the firm’s chief compliance officer to conceal his failure to report personal trades.

An SEC investigation found that Carl Johns of Louisville, Colo., failed to pre-clear or report several hundred securities trades in his personal accounts as required under the federal securities laws and the code of ethics at Boulder Investment Advisers (BIA). Johns concealed the trades in quarterly and annual trading reports that he submitted to BIA by altering brokerage statements and other documents that he attached to those reports. Johns later tried to conceal his misconduct by creating false documents that purported to be pre-trade approvals, and misled the firm’s chief compliance officer in her investigation into his improper trading.

To settle the SEC’s charges – which are the agency’s first under Rule 38a-1(c) of the Investment Company Act for misleading and obstructing a chief compliance officer (CCO) – Johns agreed to pay more than $350,000 and be barred from the securities industry for at least five years.