Securities Fraud

FINRA Files Regulatory Action Against Beverly Hills Broker Bambi Holzer

October 31, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) filed a civil enforcement action on October 18, 2013 against Bambi Holzer, a formerly registered broker and investment advisor in Beverly Hills, California. FINRA alleged in its complaint that between February and March 2008, Holzer, then a broker at Wedbush Securities, Inc. in Los Angeles, made unsuitable recommendations to seven of her clients to purchase speculative and illiquid investments issued by Provident Shale Royalties 8, LLC. The complaint further alleged that after investing in Provident 8, Holzer’s clients’ accounts were overly concentrated in the highly risky private placement. FINRA highlighted that one of the seven victims of Holzer’s alleged misconduct was an 86 year-old widow who is now deceased. This particular investor’s objectives were income and preservation of principal, meaning the risky and illiquid Provident 8 was blatantly outside the scope of her investment objectives.

In connection with these unsuitable recommendations, Holzer is accused of either knowingly or negligently submitting false net worth information regarding six of the seven customers. Additionally, FINRA alleged that between April 2010 and August 2012, Holzer willfully failed to disclose an arbitration award and judgment and a pending regulatory action on her Form U4, a required regulatory filing. Holzer is also accused of providing false testimony during on-the-record interviews conducted by FINRA.

Early in 2008, Wedbush Securities entered into an agreement with Provident 8 that allowed the investment firm to sell Provident 8’s privately issued securities. Holzer subsequently began recommending Provident 8 to her customers and received a 100 percent commission for those clients that invested. Based on allegations that Provident had commingled assets and investor funds, the Securities and Exchange Commission obtained a Temporary Restraining Order against Provident Royalties, LLC in July 2009. Provident ultimately filed for Chapter 11 bankruptcy and Holzer’s customers’ investments in Provident 8 became worthless.

FINRA Files Amended Complaint Against John Carris Investment LLC for Stock Manipulation and Unsuitable Offerings

October 10, 2013 | by Staff Attorney

On September 30, 2013, FINRA filed an amended complaint against John Carris Investments LLC (JCI), its founder George Carris and others. In the complaint, FINRA alleges JCI engaged in: stock manipulation, unsuitable self-offerings of securities, operating a securities business without sufficient net capital, use of firm funds to pay the expenses of principal officers at JCI, providing false tax documents, and failing to pay payroll taxes.

JCI is a Wall Street Investment Bank and wholly-owned subsidiary of Invictus Capital, Inc. (Invictus). In 2009, Carris formed JCI. Carris has served as JCI’s CEO, President, and Managing Director of Investment Banking since its inception. Shortly after forming JCI, Carris formed Invictus and transferred complete ownership of JCI to Invictus.

FINRA alleges that from May 1, 2010 through September 30, 2010, JCI’s head trader Jason Barter engaged in manipulative trading of Fibrocell Science, Inc. (Fibrocell), a biotechnology company specializing in skin and tissue rejuvenation. During that period, JCI acted as a placement agent for Fibrocell and sold shares of Fibrocell through unregistered PIPE deals. A PIPE deal is a private investment in public equity, which companies pursue when capital markets cannot provide financing and traditional alternatives do not exist for that issuer.

FINRA Suspends Broker Anthony Mediate for 60 Days Over Allegations of Excessive Trading (Churning) and Unauthorized Trading

October 9, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) suspended broker Anthony Mediate (Mediate) for 60 days concerning allegations of excessive trading (churning) and unauthorized trading. “Churning” is excessive investment trading activity that serves little useful purpose or is inconsistent with the investor’s objectives and is conducted solely to generate commissions for the broker. Churning is also a type of securities fraud.

FINRA alleged that Mediate violated NASD Rules 2110 and 2310. NASD Rule 2310(a) provides that when recommending the purchase, sale, or exchange of any security a broker “shall have reasonable grounds for believing that the recommendation is suitable for such customer…” A broker’s recommendations must “be consistent with his customer’s best interests.” NASD IM-2310-2(a)(1) also require that the broker must “’have reasonable grounds to believe that the number of recommended transactions within a particular period is not excessive.” NASD IM-2310-2(b)(2) prohibits brokers from excessively trading in customer accounts.

An excessive trading violation occurs when: 1) a broker has control over the account and the trading in the account, and 2) the level of activity in that account is inconsistent with the customer’s objectives and financial situation. Where an intent to defraud or reckless disregard for the customer’s interests is present the activity is also churning.

FINRA Bars Broker Over Allegations of Churning (Excessive Trading) and Unauthorized Trading in Customer Accounts

October 7, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has barred Chad David Kelly (Kelly) concerning allegations of churning (excessive trading) and unauthorized trading. “Churning” is excessive investment trading activity that serves little useful purpose or is inconsistent with the investor’s objectives and is conducted solely to generate commissions for the broker. Churning is also a type of securities fraud.

FINRA alleged that Kelly willfully violated Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act of 1934”), Rule 10b-5, and violated FINRA Rules 2020, and 2010, NASD Rules 2120, 2110, 2310, and IM-2310(a) and (b).

According to FINRA, excessive trading violation occurs when: 1) a broker has control over the account and the trading in the account, and 2) the level of activity in that account is inconsistent with the customer’s objectives and financial situation. Where an intent to defraud or reckless disregard for the customer’s interests is present the activity is also churning. Section 10(b) of the Exchange Act of 1934 prohibits the use of “any manipulative or deceptive act or practice” in connection with the purchase or sale of a security and Rule 10b-5 prohibits “any device, scheme, or artifice to defraud.” NASD Rule 2310(a) provides that when recommending the purchase, sale, or exchange of any security a broker “shall have reasonable grounds for believing that the recommendation is suitable for such customer…” A broker’s recommendations must “be consistent with his customer’s best interests.” NASD IM-2310-2(a)(1) also require that the broker must “’have reasonable grounds to believe that the number of recommended transactions within a particular period is not excessive.” NASD IM-2310-2(b)(2) prohibits brokers from excessively trading in customer accounts.

Former Waddell & Reed and Merrill Lynch Stockbroker Fined and Suspended for Misconduct

October 6, 2013 | by Staff Attorney

FINRA has fined Maryland financial adviser and investment counselor Jill Meredith Carr $10,000 and suspended her for two years from the securities industry. According to the letter of acceptance, waiver and consent (“AWC”) submitted by Ms. Carr, she entered the securities industry in 2007 with Merrill Lynch until her termination for “failure to meet performance standards” in 2008. She then worked for Waddell & Reed, Inc until her termination in July 2012 when she was terminated for forging customer signatures. Brokers and investment advisers the forge customer signatures constitute a form of securities fraud.

According to the AWC, from December 2011 through June 2012, Carr forged signatures of at least 15 Waddell & Reed customers on at least 24 forms. Carr also altered information on other account forms after the forms were signed by the customers. Specifically, in connection with firm-required suitability updates, Carr forged the signatures of at least six customers on at least 12 update forms without their knowledge, consent, or authorization. In addition, she forged at least five additional signatures, allegedly as an accommodation to those customers. By forging the signatures, FINRA found that Carr violated FINRA Rule 2010. Finra Rule 2010 states that “A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.”

Pursuant to FINRA Rules, brokerage firms rely on customers’ stated objectives and profiles to determine whether the investment objectives and the broker recommendations are consistent. It is important that investors and their brokers fully understand these objectives. It is imperative that these objectives be properly stated. Here, FINRA’s fine and suspension reflects the importance of these documents.

Retired Auto Executive Sues UBS for $30 Million for Investment Fraud Related to Puerto Rican Bonds

October 3, 2013 | by Staff Attorney

On October 1, 2013, Victor Gómez, Jr. a retired auto executive filed an action against UBS for investment fraud related to Puerto Rican bonds. According to the Caribbean News, this is the first of many legal actions expected to be filed in FINRA against UBS Financial Services, Inc. Mr. Gómez and his family are seeking $30 million in restitution for their investment losses, attorneys’ fees, punitive damages, and other costs. Gómez and his family claim that UBS designed an unsuitable investment strategy, never properly disclosed the risks, and implemented an “illicit and fraudulent scheme perpetrated to generate exorbitant profits… in utter disregard of the best interests of claimants, public interest and applicable laws and regulations.”

According to the Caribbean News, the statement of claim names: “UBS Financial Services Inc.; UBS Bank USA; UBS financial consultants and investment executives José M. Ramirez and Carlos Freire Borges; UBS senior officer Doel García; UBS Puerto Rico CEO Carlos Ubiñas; and other unidentified UBS officials.”

According to sources, the funds at issue were:

Larry Dearman and Others charged by the SEC for Fraud

September 30, 2013 | by Staff Attorney

The Securities and Exchange Commission filed a complaint against Larry J. Dearman (Dearman), Sr. Marya Gray (Gray), Bartnet Wireless Internet Inc., The Property Shoppe, Inc., and Quench Buds Holding Company LLC. Dearman and Gray allegedly created an illegal scheme that fraudulently raised at least $4.7 million from thirty (30) of Deaman’s advisory clients. Dearman promised the clients that their money would be invested into lucrative investments. However, according to the SEC, Dearman and Gray squandered the funds by gambling, paying for personal expenses, and making payments to other businesses controlled by Gray.

Dearman is currently not registered as a broker with FINRA; however Dearman was registered with various brokerage firms from 2005 until 2012. From April 2002 until February 2005 Dearman was registered with the firm AXA Advisors, LLC. Upon leaving AXA Advisors, Dearman joined Brecek & Young Advisors, Inc. until January 2009. From January 2009 until February 2010 Dearman joined Securities America, Inc. Finally, Dearman was a broker with Cambridge Legacy Securities LLC from February 2010 until May 2012.

The SEC Complaint explains between December 2008 and August 2012 Dearman raised $1.7 million through the sale of promissory notes for Bartnet, a wireless internet service, whose majority shareholder was Gray. In addition, Dearman raised $2 million for a second Gray-controlled company, the Property Shoppe. Finally, in 2012 Dearman recommended his clients invest in Quench Buds, four convenient stores owned by Gray. Instead of investing the capital raised, Dearman and Gray allegedly allocated the funds to personal gambling expenses and payments to investors in the ponzi scheme.

How To Guide: Tips on Avoiding Investment Scams

September 28, 2013 | by Staff Attorney

You read about investment scams, but you never think it can happen to someone like you.

We have all read about the Bernie Madoffs and Allen Stanfords of the world. Unsuspecting investors duped into some of the largest ponzi schemes in the world. You think to yourself that it can never happen to you or anyone you know – that you are too smart. You may be right, but a lot of victims are smart and sophisticated investors. The lure of safe investments with high returns is appealing to everyone. Don’t get caught chasing returns in investments you do not understand.

High Yield and No Risk

Darrell Frazier Accused of Selling Variable Annuities by Misleading Customers

September 28, 2013 | by Staff Attorney

Darrell G. Frazier (Frazier) was recently barred from the securities industry by the Financial Industry Regulatory Authority (FINRA) over allegations that Frazier made fraudulent statements in the sales of variable annuities. Frazier is also alleged to have made unsuitable variable annuity sale recommendations to customers.

Frazier first became registered with a FINRA member firm in March 1988. Frazier was registered with Park Avenue Securities LLC from July 2002 through June 2010. From August 2010 through May 2011, Frazier was associated with MML Investors Services, LLC.

FINRA alleged that from 2004 to at least 2009, Frazier made materially false and misleading statements in connection with recommending customers purchase variable annuity products issued by Guardian Insurance & Annuity Company, Inc. A variable annuity is a contract where an insurance company agrees to make periodic payments to an investor either immediately or at some future date. The purchase of a variable annuity contract either involves a single purchase payment or a series of purchase payments.

FINRA Publishes Fraud Susceptibility in the United States Study

September 25, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently released a report detailing the American public’s susceptibility to financial fraud. The Financial Fraud Research Center estimated that fraud costs the American people over $50 billion a year without including the cost of efforts to prevent and prosecute fraud.

The report entitled, Financial Fraud and Fraud Susceptibility in the United States made two summary claims. The first claim is that ever present fraud solicitations coupled with the inability of people to recognize the signs of fraud place a large number of Americans at risk, especially older Americans. Second, policy maker’s inability to obtain an accurate measure of financial fraud frustrates our understanding of its prevalence and our ability to prevent fraud.

The study highlighted that many Americans cannot identify classic “red flags” of fraud. For instance, the study cited that many Americans lack an understanding of what a reasonable rate of return on a investment would be. The study found that over 4 in 10 people participating in the study found promises of a annual return of 110% or a “fully guaranteed” investment appealing. Participants found such promises appealing even though returns of over 100% are highly improbable and virtually no investment is guaranteed. This lack of understanding leaves many Americans susceptible to fraudulent sales pitches. The study also found that older Americans, age 65 and older, are more likely to be targeted by fraudsters and 34% more likely to lose money than people in their forties.