Suitability

FINRA Arbitration Panel Awards BBVA Securities’ Investors $1.2 Million

November 8, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) Arbitration Panel has awarded damages to investors in the amount of $1.2 million in compensatory damages and cost of fees associated with the arbitration. The alleged claim was asserted against BBVA Securities of Puerto Rico, Inc. (BBVA Securities) and employees of the brokerage firm.

BBVA Securities is a brokerage firm in San Juan, Puerto Rico.

The Claimants asserted breach of fiduciary duty, unsuitable investments, churning and excessive trading, failure to supervise and gross negligence. These causes of actions related to allegedly unsuitable naked option trading strategy combined with the use of margin which caused losses in the investor’s accounts.

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.

Broker Sanctioned Over Unsuitable Sales of Private Placement Securities

October 28, 2013 | by Staff Attorney

All brokers and broker-dealers have an obligation to ensure that their investment or investment strategy recommendation is suitable for the customer. All sales efforts must be reasonable and appropriate for the investor based upon the investor’s risk tolerance, investment objectives, age, financial circumstances, other investment holdings, experience, and other facts or information disclosed by the investor.

With respect to the sale of private placements, regulators have found significant problems in the due diligence and sales efforts of some brokerage firms when selling private placements to investors. These problems include fraud, misrepresentations and omissions in sales materials and offering documents, conflicts of interest, and suitability abuses.

In order for a brokerage firm to meet its due diligence obligation, the brokerage firm must make reasonable efforts to gather and analyze information both about the private placement and the customer the security is being sold to. Private Placements are considered “alternative investments” and are inherently speculative. Consequently, a broker must also ensure that an investment recommendation in a private placement is suitable for the particular customer. The broker must ensure that the client can withstand the risk taken and not imperil the client’s account by concentrating their assets in speculative investments.

Sunset Financial Services Fined By FINRA Over Nontraditional (Leveraged) ETF Sales

October 16, 2013 | by Staff Attorney

Between March 16, 2009, and September 21, 2012, FINRA alleged that Sunset Financial Services, Inc., (Sunset) failed to establish and maintain a supervisory system regarding the sale of leveraged or inverse exchange-traded funds, otherwise known as nontraditional ETFs, that was reasonably designed to comply with NASD Conduct Rule 3010.

Sunset has its principal offices in Kansas City, Missouri and is wholly-owned by Kansas City Life Insurance Company, Inc., an insurance company. Sunset has approximately 302 branch offices, 504 registered individuals and 197 non-registered individuals associated with the firm.

FINRA alleged that Sunset’s written supervisory procedures did not address the selling of nontraditional ETFs in any fashion. A leveraged ETF employs financial debt in order to amplify the returns of an underlying stock position. Leveraged ETFs are generally available for most indexes like the S&P 500 and Nasdaq 100. For example, a leveraged ETF with 300% leverage will return 3% if the underlying index returns 1%. Nontraditional ETFs can also be designed to return the inverse of the benchmark.

FINRA Fines Brokerage Firm Over Misleading Variable Annuities Disclosures and Failure to Supervise

October 12, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) fined brokerage firm Financial West Investment Group, Inc. d/b/a Financial West Group (Financial West Group) over allegations between March 2009 and May 2010, the firm did not provide accurate variable annuity disclosures to customers concerning certain fees and charges. FINRA also alleged that Financial West Group failed to have an adequate written supervisory procedure to ensure that customers received accurate disclosures about these fees and charges. Finally, FINRA alleged that Financial West Group did not adequately enforce its policies for reviewing emails. In resolving these allegations Financial West Group paid a $35,000 fine.

Financial West Group’s main offices are in Westlake Village, California. The firm has approximately 116 registered branch offices and employs 290 registered brokers.

FINRA alleged that between March 2009, and May 2010, the Financial West Group used forms called variable annuity disclosure and investment form, request to switch investments form, and the product comparison worksheet to inform customers of various features of deferred variable annuities. The forms included information concerning the potential surrender period and surrender charge, potential tax penalty if customers sell or redeem deferred variable annuities before reaching the age of 59 1/2, mortality and expense fees, the potential charges for and features of riders, the investment options, death benefits, payment options, and risks disclosures. However, according to FINRA, Financial West Group did not provide accurate disclosures to customers in 28 out of 93 (30%) of the variable annuity transactions and exchanges reviewed by the regulator.

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.

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:

VSR Financial Services, Inc. and Donald J. Beary Fined Over Alternative Investment Sales

September 23, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA), VSR Financial Services, Inc. (“VSR”), and Donald J. Beary (“Beary”) have reached a settlement concerning charges brought by the securities regulator that VSR violated customer concentration guidelines and otherwise failed to reasonably supervise its brokers in the sales of alternative investments. The settlement led to VSR paying a $550,000 fine and Beary being suspended from associating with a FINRA firm for 45 days and a $10,000 fine.

VSR is based in Overland Park, Kansas, has 211 branch offices, and employs approximately 460 registered personnel. Beary is a co-founder of VSR and is its executive vice-president, chairman of the board, and direct participation principal.

According to FINRA, from 2005 until 2010 VSR and Beary failed to adequately implement the firm’s supervisory procedures concerning concentration limits in customer accounts for alternative investments. The settlement details that VSR’s supervisory failures regarding concentration limits occurred because the firm used inaccurate statements reflecting the customer’s true concentration in alternative investments and because the firm used inaccurate risk ratings of products to increase allowable concentration levels.

Massachusetts Securities Regulator Subpoenaed 15 Brokerage Firms Over Products Sold to Senior Investors

September 21, 2013 | by Staff Attorney

In July 2013, William Galvin, the Massachusetts (MA) Secretary of the Commonwealth, began an investigation into “the marketing of complicated financial investments to older people.” In the process of the investigation, Galvin subpoenaed fifteen different brokerage firms in order to obtain information on investments that were sold to senior citizens in Massachusetts. The investigation sought to uncover the way the firms have sold “high-risk, esoteric products to seniors” as well as information on the firms’ compliance, supervision and training.

The firms that were included in the investigation were Morgan Stanley, LPL Financial, Merrill Lynch, UBS AG, Bank of America Corp., Fidelity Investments, Wells Fargo and Co., Charles Schwab Corp., and TD Ameritrade along with other firms. Galvin has stated that the investigation was not an indication of any wrongdoing on behalf of the brokerage firms. The purpose of the investigation was to get more information on brokers’ business practices in offering products to seniors and unsophisticated investors. Regulators have shown concern about “opaque products” advertised to unsophisticated investors looking for higher returns than what most interest rates have to offer. Brokers often pitch these types of products because they will usually get a higher commission rate than by selling other lower risk products such as mutual funds.

This recent investigation is a result of past inappropriate Real Estate Investment Trust (REIT) sales to seniors. Last year, the SEC probed the probe improper sale of REITs to seniors that led to five broker-dealers settling. The settlement for the improper REIT sales included $975,000 in fines and $8.6 million in restitution to the customers.