Suitability

Think Twice Before Investing in Equity Indexed Annuities

July 23, 2015 | by Staff Attorney

As long time readers of our blog know, this is not the first time we have alerted investors to the potential pitfalls to investing in equity indexed annuities. Recently, the Wall Street Journal ran an article concerning a probe being conducted by Sen. Elizabeth Warren (D., Mass.) regarding sales incentives for annuities products issued by insurance companies. The senator’s investigation comes on the heels of a speech given by Luis Aguilar, Commissioner to the Securities and Exchange Commission (SEC), before the North American Securities Administrators Association (“NASAA”), stating that the SEC is looking closely at sales practices with respect complex securities including equity-indexed annuities, leveraged and inverse-leveraged exchange traded funds, reverse convertibles, alternative mutual funds, exchange traded products, and structured notes.

According to news sources, the senator’s focus is on indexed annuities which have become widely known within the industry for granting perks to agents. Sen. Warren is said to have quoted from some of the marketing materials aimed at insurance agents describing sales incentives including “four days in the heart of California’s wine country at the prestigious Calistoga Ranch and Spa”; a trip to South Africa to visit Cape Town and Kruger National Park; and the ability to win “tour the Mediterranean on a private yacht, like royalty, celebrities, and the wealthy elite.” According to the report, Sen. Warren is concerned that earning perks may provide a greater incentive for making recommendations that acting in their clients’ best interest.

Equity indexed-annuities promise a return tied to a stock-market index while protecting against losses if the market falls. Sounds good right. Except there are serious limitations built into the products which make them both very expensive and limited to almost CD like returns. Accordingly, if the market has a blockbuster year, your equity-linked annuity will not perform in kind.

Gregory Bray and Matt Maberry Under Investigation By FINRA For Unsuitable Security Sales

July 22, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently sanctioned supervisor Gregory Bray (Bray) concerning allegations that Bray failed to adequately supervise the firm’s chief executive officer and compliance officer Matt Maberry (Maberry), who FINRA refers to by the initials “MM”, concerning sales of certain complex products and recommendations of Class A mutual fund shares. In September 1996, Bray became registered with Alton Securities Group, Inc. (Alton Securities) where the alleged misconduct took place.

FINRA alleged that Bray was responsible for supervising the sales activity of Maberry. Maberry was responsible for all other supervisory functions at the Alton Securities. FINRA found that Bray’s supervision of Maberry’s sales activity consisted of a daily review of a trade blotter reflecting trades made by Maberry to customers together with conversations with Maberry regarding trading activity.

FINRA found that Maberry recommended and sold certain complex products to his customers. For example, FINRA found that Maberry recommended and sold leveraged or inverse exchange traded funds and leveraged/inverse mutual funds. In addition, Maberry is alleged to have recommended and sold a steepener note designed to increase in value as the gap between short and long term interest rates increased. FINRA found that Maberry’s sales were unsuitable because he lacked a reasonable basis to recommend these products to his customers because he did not fully understand the potential risks associated with these securities.

Broker Dealer Financial Services Corp. Sanctioned Over Non-Traditional ETF Practices

July 9, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) entered into an agreement whereby the regulatory fined Broker Dealer Financial Services Corp. (BDFS) concerning allegations that between March 2009 and April 2012, BDFS failed to establish and maintain a supervisory system, including written procedures, that was reasonably designed to ensure that the firm’s sales of leveraged or inverse exchange-traded funds (Non-Traditional ETFs) complied with the securities laws.

BDFS is a FINRA member firm since 1979 and headquartered in West Des Moines, Iowa. The firm employs about 270 registered representatives located in more than 130 branch offices throughout the country.

According to FINRA, from March 2009 to April 2012, BDFS failed to implement a supervisory system, including written procedures, reasonably designed to ensure the suitability of Non-Traditional ETF sales. For instance, FINRA issued guidance that specifically dealt with issues related to the sales and supervision of Non-Traditional ETFs. FINRA’s guidance requires a firm to have a reasonable basis for believing that a product is suitable for any customer before recommending any purchase of that product. Part of having a reasonable basis for making the recommendation includes understanding the terms and features of the Non-Traditional ETFs being offered including how they are designed to perform, how they achieve that objective, and the impact that market volatility, the ETF’s use of leverage, and the customer’s intended holding period.

Broker Lawrence LaBine Accused of Selling Unsuitable Alternative Investments

July 6, 2015 | by Staff Attorney

Gana Weinstein LLP, a securities law firm, is investigating customer complaints against Lawrence Labine, a broker located in Scottsdale, Arizona. Gana Weinstein LLP’s investigation is on the heels of regulatory investigations into LaBine’s conduct.

On April 28, 2015, the Department of Enforcement of Financial Industry Regulatory Authority filed a complaint against Mr. Lawrence LaBine. According to the Complaint, from April 2009 through August 2009, LaBine sold senior debentures (Series D) issued by Domin-8, a company that developed software for real estate management companies. During that period, LaBine was registered with DeWaay Financial Network, a FINRA regulated broker-dealer. The Complaint alleges the LaBine made fraudulent misrepresentations and omissions of material fact to five customers in connection with the sale of the Series D senior debentures.

At the time of those sales, LaBine was receiving regular updates about Domin-8’s poor financial condition from senior management at Domin-8 and the company’s lead investment banker, and had arranged to receive compensation and other valuable consideration from the company – such as a seat on Domin-8’s board of directors – for meeting Series D fundraising targets he had arranged with the company. The information about Domin-8’s financial condition and LaBine’s personal incentive to sell Series D was material to the investors, yet LaBine failed to disclose that information to his customers according to the Complaint.

Broker Investigation: Advisor Mark Gardner

July 1, 2015 | by Staff Attorney

According to the BrokerCheck records kept by Financial Industry Regulatory Authority (FINRA) broker Mark Gardner (Gardner) has been the subject of at least nine customer complaints, one firm termination, and one regulatory action. Customers have filed complaints against Bell alleging a number of securities law violations including that the broker made unsuitable investments among other claims. Most of these claims involve recommendations in equities.

Gardner entered the securities industry in 1977. Since 2008, Gardner has been associated with Oppenheimer & Co. Inc. until November 2008. From December 2010 until July 2012, Gardner was associated with Lake Forest Securities LLC. Currently, Gardner is associated with J.H. Darbie & Co., Inc.

In the regulatory action that was brought against Gardner, FINRA alleged that on or about November 5, 2008, Gardner executed three equity securities purchase transactions to open an investment account on behalf of a corporation without that corporation’s knowledge. FINRA found that Gardner accepted the purchase orders from a person who did not have authorization to act on behalf of the corporation. In addition, FINRA found that Gardner failed to verify whether the individual who placed the purchase orders had been granted authorization by the corporation. The transactions in question totaled $2,203,020.

Gana LLP Investigates Investor Losses in American Eagle Energy Corp. (AMZG)

June 30, 2015 | by Staff Attorney

The law offices of Gana Weinstein LLP are currently investigating investors who have suffered losses in in now bankrupt oil and gas company, American Eagle Energy Corp. (Stock Symbols: AMZG) (American Eagle Energy). American Eagle Energy is a Colorado, Littleton-based company that buys and develops wells in the Williston Basin of North Dakota. American Eagle Energy filed for chapter 11 bankruptcy in May 2015.

Our offices continue to report on investment losses suffered by investors in various oil and gas investments that brokerage firms have increasingly recommended to retail investors in recent years. These investments include private placements, master limited partnerships (MLPs), leveraged ETFs, mutual funds, and even individual stocks.

Oil and gas related investments have been recommended by brokers under the assumption that oil & gas would continue to be sold at around $100 and increase steadily over time. However, last summer the price of oil & gas plummeted due to a strengthening dollar and increased global supply of oil and remains below $60 to this day. Some experts are saying that if production volume continues to be as high as it currently is and demand growth weak that the return to $100 a barrel is years away.

Broker Investigation: Kenneth McDonald’s Sale of Tenants-in-Common (TIC) Real Estate Investments

June 29, 2015 | by Staff Attorney

According to the BrokerCheck records kept by Financial Industry Regulatory Authority (FINRA) broker Kenneth McDonald (McDonald) has been the subject of at least three customer complaints and one regulatory action. Customers have filed complaints against McDonald alleging a number of securities law violations including that the broker made unsuitable investments, misrepresentations and false statements in connection with recommendations to invest in private placements such as tenants-in-common (TICs) interests.

McDonald was a registered representative with Crown Capital Securities, L.P. from June 2003 through February 2013. Thereafter, McDonald has been registered with Newport Coast Securities, Inc.

TIC investments have come under fire by many investors. Indeed, due to the failure of the TIC investment strategy as a whole across the securities industry, TIC investments have virtually disappeared as offered investments. According to InvestmentNews “At the height of the TIC market in 2006, 71 sponsors raised $3.65 billion in equity from TICs and DSTs…TICs now are all but extinct because of the fallout from the credit crisis.” In fact, TICs recommendations have been a major contributor to bankrupting brokerage firms. For example, 43 of the 92 broker-dealers that sold TICs sponsored by DBSI Inc., a company whose executives were later charged with running a Ponzi scheme, a staggering 47% of firms that sold DBSI are no longer in business.

Broker Spotlight: Ellwood Jones’ Investment Recommendations

June 26, 2015 | by Staff Attorney

According to the BrokerCheck records kept by Financial Industry Regulatory Authority (FINRA) broker Ellwood Jones (Jones) has been the subject of at least four customer complaints. Customers have filed complaints against Bell alleging a number of securities law violations including that the broker made unsuitable investments, misrepresentations and false statements, among other claims. Some of these claims involve recommendations in private placements such as hedge funds, insurance products, and direct participation programs (DPPs).

Since 1997 Jones was associated with NFP Advisor Services (NFP) until March 2011. According to Jones’ BrokerCheck records, Jones has a number of other disclosed outside businesses including Capital Region International, LLC, A.B.R.C., and Synergex International Corporation.

One customer complaint against Jones alleged damages of $10,000,000 resulting from negligence and misrepresentations concerning hedge funds. In another action, the customer alleged misrepresentations in relation to the customer’s participation in a welfare benefit plan. Finally, in a third customer complaint the customer alleged misrepresentations in connection with the sale of insurance and other financial transactions involving alternative investments and limited partnership interests.

FINRA Fines RBC $1.4 Million Over Unsuitable Reverse Convertibles

June 16, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) ordered RBC Capital Markets (RBC) to pay a $1 million fine and approximately $434,000 in restitution to customers for alleged supervisory failures resulting in sales of unsuitable reverse convertibles.

As a background, a reverse convertible is an interest-bearing note where repayment of the principal is tied to the performance of an underlying asset, such as a stock or basket of stocks. Investor risk of loss comes from changes in the value of the underlying asset. If the asset falls below a certain level at maturity or during the term of the reverse convertible the investor can suffer losses. In February 2010, FINRA issued a regulatory notice on reverse convertibles emphasizing the need for firms to perform a suitability analysis in connection with sales of reverse convertible because they are complex product.

FINRA and the SEC have both expressed alarm at the growing popularity of complex products. Complex securities include, but are not limited to equity-indexed annuities, leveraged and inverse-leveraged exchange traded funds, reverse convertibles, alternative mutual funds, exchange traded products, and structured notes. A 2012 SEC study on investor financial literacy found that retail investors, and particularly the elderly and minorities, lack basic financial literacy skills. Combining a general lack of financial literacy with an investment product landscape that increasingly focuses on ever more complex product offerings and investors are more reliant on their advisers than ever. Accordingly, retail investors do not always fully appreciate the risks involved with these.

First Allied Securities Broker Daniel Grieco Sanctioned Over Non-Traditional ETF Sales

June 15, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned broker Daniel Grieco (Grieco) concerning allegations that Grieco made recommendations of non-traditional exchange-traded funds (Non-Traditional ETFs) to various customers without having reasonable grounds to believe his recommendations were suitable.

Non-Traditional ETFs are behave drastically different and have different risk qualities from traditional ETFs. While traditional ETFs simply 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.

In addition, regular ETFs can be held for long term trading, but Non-Traditional ETFs are generally designed to be used only for short term trading. 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.