Suitability

Gana LLP Brings Claim on Behalf of Client Against Rockwell Global Capital

January 8, 2015 | by Staff Attorney

The law offices of Gana Weinstein LLP recently filed a complaint on behalf of an investor against Rockwell Global Capital, LLC (Rockwell), accusing the firm of making unsuitable recommendations and failing to properly supervise one of its financial advisers. In or around July 2013, the client alleged that he received a cold call from Rockwell financial adviser, Patrick Lofaro. A cold call is when someone solicits and individual who was not anticipating such an interaction. Cold calling is a technique used by a salesperson to contact individuals who have not previously expressed an interest in the products or services that are being offered.

It was alleged that Mr. Lofaro aggressively pursued the client’s investment related business and that Mr. Lofaro convinced him that he could build a diversified portfolio with minimal risk to the client. In reliance upon Mr. Lofaro’s assurances, the Claimant alleged that he opened an account with Rockwell in or around August 2013. Over a seven-month period, the Claimant invested a substantial sum with Rockwell which represented close to 50% of his liquid net worth. The complaint alleges that Mr. Lofaro, rather than create a suitable portfolio, implemented a high-leverage, excessive trading strategy that generated a high amount of commissions without providing any material benefit to the Claimant.

According to the complaint, over the course of just over a year, Mr. Lofaro executed nearly one-hundred-forty (140) trades into and out of thirty-five (35) different stocks, including seventeen (17) small caps, two (2) initial public offerings (IPO’s), eight (8) penny stocks, and fifteen (15) different stocks that were more than twice as volatile as the S&P 500. The complaint alleges that Mr. Lofaro created a portfolio laden with risk while providing no material benefit to the Claimant. Mr. Lofaro’s investment strategy ultimately cost the Claimant an estimated $837,131, while Mr. Lofaro received over $261,080 in commissions.

Broker Spotlight: John J. Quintero Subject to Several Customer Complaints

January 2, 2015 | by Staff Attorney

The attorneys of the law offices of Gana Weinstein LLP are investigating a series of recently filed complaints against broker John Quintero (Quintero) who is currently a registered representative with Transamerica Financial Advisors. In January 2014, an investor filed a complaint alleging that Quintero misrepresented the premiums paid on a variable universal life insurance policy (VUL). Specifically, the customer claimed that Quintero stated that the premiums paid would be a tax differed investments and that further the sub-account investments were unsuitable.

VULs are complex insurance and investment products that investors must fully understand prior to investing. One feature of a VUL policy is that the investor can allocate a portion of his premium payments to a separate sub-account to invest and grow through mostly mutual fund investments. Monthly charges are assessed for the life insurance policy including a cost of insurance charge and administrative fees all of which are deducted from the policy’s cash value. The investor can suffer losses are receive gains based upon the performance of the sub-account investments. However, the VUL policy can terminate or lapses if at any time the net cash surrender value is insufficient to pay the monthly cost deductions. Upon termination of the policy, the remaining cash value becomes worthless.

Given the costs and premiums involved in purchasing VULs, brokers must be careful to ensure that the recommendation to invest in VULs is suitable for the client. In some cases, investors do not realize the huge expense of these policies and have no way to continue to cover the premiums. When this happens the policy could lapse over time.

Center Street Securities Broker Jason Lamb Sanctioned Over GWG Renewable Secured Debentures

December 30, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) in an acceptance, waiver, and consent action (AWC) and barring former Center Street Securities, Inc. (Center Street) broker Jason Lamb (Lamb) concerning allegations that between March 2012, to February 2013, Lamb was a registered principal and Chief Compliance Officer (CCO) at Center Street’s headquarters in Nashville, Tennessee. FINRA found that Lamb failed to adequately supervise certain sales of GWG Renewable Secured Debentures, an illiquid and high-risk alternative investment.

Center Street Securities is headquartered in Nashville, Tennessee, has been a FINRA member since 1991, has approximately 67 branch offices and approximately 84 registered representatives. This is not the first time that FINRA has brought regulatory action concerning the actions of Center Street representatives. See Center Street Securities Broker David Escarcega Investigated Over GWG Debenture Sales; FINRA Sanctions Michael Wurdinger and Anil Vazirani Over GWG Debenture Sales (FINRA sanctioned brokers associated with Center Street Securities, Inc.); FINRA Sanctions Center Street Securities Over Sales of GWG Renewable Secured Debentures Part I (Center Street fined by FINRA).

The notes at issue are part of offerings by GWG Holdings, Inc. (GWG) which purchases life insurance policies on the secondary market at a discount to their face value. GWG pays the policy premiums until the insured dies and GWG then collects the insurance benefit making a profit by collecting more on the payout at maturity than the payment of the premiums on the policy. The Debentures have varying maturity terms and interest rates ranging from six-month at an annual interest rate 4.75% to seven years at 9.50%. The prospectus for GWG stated that the investments were speculative and involve a high degree of risk, including the possibility of risk of loss of the entire investment. An investment in the GWG Debentures, as a private placement, is illiquid and investors will not have access to their principal prior to maturity.

FINRA Alleges SWS Financial Services Failed to Supervise Variable Annuity Transactions

December 19, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) filed a complaint against brokerage firm SWS Financial Services, Inc. (SWS Financial) over allegations that from September 2009, to May 2011, SWS Financial had inadequate supervisory systems procedures to supervise its variable annuity (VA) securities business. Specifically, FINRA alleged that SWS Financial: (1) failed to establish and maintain supervisory systems to supervise its VA securities business in violation of NASD and FINRA Rules; (2) failed to implement rules requiring a registered principal review and approval prior to transmission of a VA application to the issuing insurance company for processing and that a registered principal only approve VA transactions that he or she has determined that there is a reasonable basis to believe that the transaction is suitable for the customer; (3) failed to implement surveillance procedures to monitor a broker’s recommended exchanges of VAs to identify inappropriate exchanges; (4) failed to have policies and procedures to implement corrective measures to address inappropriate VA exchanges; and (5) failed to develop and document specific training policies or programs to ensure that principals supervisors who reviewed VA transactions had sufficient knowledge to monitor the transactions.

SWS Financial is a registered broker/dealer since 1986 and is headquartered in Dallas, Texas. The firm employs 313 registered personnel. From September 2009, to May 2011, SWS Financial derived the majority of its income from its business lines selling equities, mutual funds, variable life insurance or annuities, and municipal securities.

FINRA alleged that from September 2009, to May 2011, SWS Financial derived 16% to 20% of its total revenues from sales of VAs to customers. However, despite this fact, FINRA alleged that SWS Financial failed to establish and implement adequate supervisory systems for this aspect of its securities business. FINRA alleged that the firm’s brokers sold VAs both in branch offices where a registered branch manager was onsite as well as in offices where there was no onsite supervisor. FINRA alleged that the firms procedures required that VA transactions initiated by representatives in branch offices with a branch manager were reviewed and approved by the banch manager and then forwarded to SWS Financial’s home office for final review and approval employees at an affiliated insurance company, Southwest Insurance Agency (Insurance Agency).

Broker Spotlight – Mark Johanson’s Sale of Tenants-in-Common (TIC)

November 13, 2014 | by Staff Attorney

According to the Financial Industry Regulatory Authority’s BrokerCheck system, there have been four customer complaints filed against former Sigma Financial Corporation (Sigma) and current Charles Schwab broker, Mark Johanson (Johanson) stemming from unsuitable Tenants-in-Common (TIC) investments.

Sales of TICs exploded during the early 2000s from approximately $150 million in 2001 to approximately $2 billion by 2004. TICs are private placements that have no secondary trading market and are therefore illiquid investments. These products were promoted as appropriate section 1031 exchanges in which an investor obtains an undivided fractional interest in real property. In a typical TIC, the profits are generated mostly through the efforts of the sponsor and the management company that manages and leases the property. The sponsor typically structures the TIC investment with up-front fees and expenses charged to the TIC and negotiates the sale price and loan for the acquired property.

TIC investments entail significant risks. A TIC investor runs the risk of holding the property for a significant amount of time and that subsequent sales of the property may occur at a discount to the value of the real property interest. FINRA has also warned that the fees and expenses associated with TICs, including sponsor costs, can outweigh the any potential tax benefits associated with a Section 1031 Exchange. That is, the TIC product itself may be a defective product because its costs outweigh any potential investment value for a customer. FINRA also instructed members that they have an obligation to comply with all applicable conduct rules when selling TICs by ensuring that promotional materials used are fair, accurate, and balanced.

Why is UBS Still Selling the UBS Puerto Rico Bond Funds?

November 10, 2014 | by Staff Attorney

Albert Einstein once defined insanity as “doing the same thing over and over again and expecting different results.” While UBS does not challenge Einstein’s theories in physics it does challenge his thoughts on insanity. According to several news sources, including Financial Advisor Magazine and Reuters, UBS has told its brokers to continue selling its extremely speculative and risky UBS Puerto Rico bond funds to investors even after some investors have lost their entire investment and many others have suffered very substantial losses. Obviously, UBS believes a different result can be achieved with these recommendations. Let’s examine the facts and determine whether UBS has any grounds for such a belief.

Recently, investors have filed more than 500 complaints against UBS concerning the sales of the UBS Puerto Rico bond fund with more cases being filed daily. UBS’ sales tactics and recommendations to its customers to invest in 23 proprietary closed-end funds has come under fire and investors claim that the firm hid the substantial risks of the funds in order to generate sales and lucrative fees. On the surface the funds’ risks include is the excessive amount of leverage the funds employ. UBS leveraged up to 100% of the funds’ investments to raise additional cash, or the borrowing of a dollar for every dollar of capital invested in the funds. U.S. based funds by contrast are not allowed to take on such large leverage risk.

UBS has claimed that these funds have provided excellent returns and tax benefits to investors for decades. These claims appear to be the support for continuing to sell and recommend the bond funds to investors. However, investigations into UBS practices regarding the bond funds reveals that UBS’ decision to continue to sell the funds may come back to haunt the firm.

FINRA Sanctions Center Street Securities Over Sales of GWG Renewable Secured Debentures Part I

October 28, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned brokerage firm Center Street Securities, Inc. (Center Street) concerning allegations that: 1) between approximately March 2012, and August 2013 Center Street, through multiple brokers, made unsuitable recommendations to customers to purchase GWG Renewable Secured Debentures, an illiquid and high-risk private placement investment; 2) Center Street failed to maintain an adequate supervisory system and adequate written supervisory guidelines to reasonably supervise the sales of GWG debentures; 3) between approximately February 2012, and November 2012, Center Street also distributed an inaccurate GWG sales brochure to over 100 customers; and 4) certain Center Street customer account forms contained inaccurate information about customer net worth or other information, and thus the firm failed to maintain accurate books and records.

Center Street Securities is headquartered in Nashville, Tennessee, has been a FINRA member since 1991, has approximately 67 branch offices and approximately 84 registered representatives. This is not the first time that FINRA has brought regulatory action concerning the actions of Center Street representatives. See Center Street Securities Broker David Escarcega Investigated Over GWG Debenture Sales; FINRA Sanctions Michael Wurdinger and Anil Vazirani Over GWG Debenture Sales (FINRA sanctioned brokers associated with Center Street Securities, Inc.).

The notes are issued by GWG Holdings, Inc. (GWG) which purchases life insurance policies on the secondary market at a discount to the face value of the insurance policies. GWG pays the policy premiums until the insured dies and GWG then collects the insurance benefit making a profit, hopefully, by collecting more upon the maturity of the policies than the payment of the policy and servicing of the premiums. The Debentures have varying maturity terms and interest rates ranging from six-month at an annual interest rate 4.75% to seven years at 9.50%. The prospectus for GWG stated that the investments were speculative and involve a high degree of risk, including the possibility of risk of loss of the entire investment. An investment in the GWG Debentures, as a private placement, is illiquid and investors will not have access to their principal prior to maturity.

FINRA Fines Feltl & Company $1 Million Conerning the Firm’s Penny Stock Business

October 22, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has sanctioned brokerage firm Feltl & Company (Feltl) and fined the firm $1,000,000 concerning allegations that the firm, between January 2008, and February 2012. failed to comply with the suitability, disclosure, and record-keeping requirements for broker-dealers who engage in penny stock business. FINRA alleged that Feltl did not provide some customers with Securities and Exchange Commission (SEC) risk disclosure document two days prior to effecting a penny stock transaction in the customers’ accounts. failed to sufficiently supervise penny stock transactions for compliance with applicable rules and regulations, and failed to establish, maintain, and enforce written supervisory procedures for its penny stock business.

Feltl has eight branch offices located in Minnesota and Illinois, and approximately 113 registered representatives and has been a FINRA member since 1975.

The term “penny stock” generally refers to securities that trades below $5 per share, issued by a small company. Penny stocks often trade infrequently making it difficult to sell and price. Due to the size of the issuer, the market cap, the liquidity issues, and other reasons penny stocks are generally considered speculative investments. Consequently, the SEC requires broker-dealers effecting penny stock transactions to make a documented determination that the transactions are suitable for customers and obtain the customers’ written agreement to those transactions.

FINRA Files Complaint Against Former VSR and Berthel, Fisher Broker, Steven L. Stahler

October 1, 2014 | by Staff Attorney

On August 27, 2014, FINRA filed a complaint against Steven L. Stahler, formerly a registered representative with multiple broker dealers including Lowell & Company, Inc., Ausdal Financial Partners, Inc., Berthel, Fisher & Company Financial Services, Inc., VSR Financial Services, Inc., among others. On November 1, 2013, Lowell & Company terminated Mr. Stahler according to his form U5.

FINRA alleges that Mr. Stahler made unsuitable recommendations to customers in violation of FINRA Rule 2310 and 2110 and FINRA Rule 2010. Under FINRA Rule 2110 and 2310, all financial advisers and brokerage firms have a responsibility to deal fairly with their customers. All sales efforts are judged based upon the standards outlined in the FINRA Rules. Furthermore, all brokers must recommend the purchase, sale or exchange of securities that are reasonable given the customers investment objectives and risk tolerances.

According to the complaint, VSR Financial’s written supervisory procedures specify that no more than 40%-50% of a customer’s liquid net worth should be invested in alternative investments. VSR’s guidelines also required that new account forms used outline the customer’s percentage of the portfolio they would feel comfortable investing in high risk investments. FINRA alleges that from September 13, 2006 through October 24, 2006, Mr. Stahler recommended that a married couple, who had stated that no more than twenty percent of their portfolio be invested in aggressive/high risk investments, invested approximately $837,000 in twelve high risk investments at Mr. Stahler’s recommendation. These alternative investments included:

FINRA Suspends Financial Advisor Over Unsuitable Variable Universal Life (VUL) Sales Practices

September 25, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned broker James Moniz (Moniz) concerning allegations that while registered with Signator Investors, Inc. (Signator) Moniz made unsuitable recommendations to a married couple that they purchase a Variable Universal Life insurance policy (VUL) on the husband’s life and use the proceeds of a reverse mortgage to purchase a variable annuity and open a managed investment account. According to FINRA, after the insurance company questioned the VUL application, Moniz caused the application to be re-submitted with changed or added information without first informing the customers of his actions. FINRA found that Moniz also inaccurately represented the source of funds for the variable annuity and managed account.

VUL are complex dual part insurance and investment products that investors must fully understand the risks and benefits of prior to investing. One feature of a VUL policy is that the owner can allocate a portion of his premium payments to a separate sub-account that can be used to grow in value through investments. The other part of the investment is the life insurance policy where the policies monthly charges including a cost of insurance charge and administrative fees are deducted from the policy’s cash value. The cash value of the policy may increase or decrease based on the performance of the selected investments. However, customers must be careful in purchasing VULs because the policy terminates, or lapses, if at any time the net cash surrender value is insufficient to pay the monthly cost deductions. When the policy terminates the remaining cash value becomes worthless.

Given the costs involved in purchasing VULs, brokers must be careful to ensure that the recommendation to invest in VULs is suitable for the client. While an investor may be able to afford the initial purchase price of the policy it may be too expensive for the client to continue to make premium contributions over time causing the policy to lapse.