Suitability

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.

UBS Preliminarlily Settles Lehman Principal Prtoected Note Cases – Should You Hold Out?

September 14, 2013 | by Staff Attorney

On August 8, 2013, UBS agreed to pay $120,000,000 to settle claims related to the Lehman Principal Protected Note cases. According to Reuters, this is UBS’ second settlement in less than three weeks.

According to counsel, the $120,00,000 settlement represents a recovery of 13.4% of the total face value of the structured notes. The parties have stipulated to certify the case for the purpose of settlement. If the class action is approved it will resolve over $898 million in claims against UBS for the Lehman Securities sold by UBS from March 2007 through September 15, 2008 when Lehman filed for bankruptcy in the Southern District of New York.

The question for investors is whether they should take the settlement after approval by the court or reject the settlement and bring a claim individually against UBS. In an individual arbitration, the chances of getting more than a 13.4% recovery is fairly substantial. Many of the UBS Lehman Principal Protected Note cases that went to arbitration since 2009 have resulted in large awards for investors and many have settled before hearing.

Eric Foster Accused of Unauthorized Trading and Churning Customer Accounts

September 7, 2013 | by Staff Attorney

In April 2013, the Financial Industry Regulatory Authority (FINRA) requested that Eric Foster (Foster) provide information concerning possible securities laws violations. By July 2013, Foster failed to respond to FINRA’s requests and imposed a permanent bar from the securities industry.

The FINRA bar isn’t the first time Foster has been sanctioned by FINRA. In February 2012, Foster settled charges that he violated FINRA Rule 2110 by effecting unauthorized transactions in the account of a deceased customer. In so doing, Foster exercised discretion in the customer’s account without written authorization. The settlement resulted in a $12,471 fine and restitution and a three month suspension. In December 2011, Foster settled charges brought by Illinois Securities Department concerning allegations that he churned the account of a senior citizen earning large commissions for himself while reducing the equity in the account to zero

Foster was a registered representative of Halcyon Cabot Partners, Ltd. from July 2010 through June 2012. Previously, Foster was associated with Arjent Services, LLC from October 2010, until July 2010. Foster was also associated with Maxim Group LLC from October 2002 until October 2008.

Financial Advisors Have an Obligation to Provide Truthful Information When Selling Securities

September 6, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently barred broker Scottie Brent Chitwood (Chitwood) from the securities industry over allegations that he sold clients variable annuities by making false and misleading representations concerning the securities features. Chitwood was also accused of exercising discretionary authority in clients’ accounts. FINRA’s action reinforces the regulator’s rules that brokers have an obligation to disclose truthful and balanced information in the sale of securities products to investors.

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.

Variable annuities offer a range of investment options to invest in and the value of the investment will vary depending on the performance of the investment options selected. The investment options typically include mutual funds that invest in stocks and bonds. Variable annuities distribute periodic payments for the rest of the investor’s life (or any other person you designate). Most variable annuities encourage investors to remain invested for a period of years and discourage early termination through expensive surrender fees. The insurance company can charge investors in some cases up to 7% of the investment for early termination.

The Dangers of Low-Priced (Penny Stocks) Securities

September 3, 2013 | by Staff Attorney

A “penny stock” is defined by the Securities and Exchange Commission (SEC) as a security issued by a very small company, micro-cap or less than $100 million in market capitalization, and trades at less than $5 per share. Penny stocks generally are quoted over-the-counter, such as on the OTC Bulletin Board or OTC Link LLC. However, not all penny stocks trade over-the-counter and many trade on securities exchanges, including foreign securities exchanges. In addition, the definition of penny stock can also include private companies with no active trading market.

Penny stocks are inherently risky due to several contributing factors. First, penny stocks may trade infrequently, meaning that it may become difficult to liquidate penny stock holdings once acquired. Second, it may be difficult to find accurate quotes for certain penny stocks. Therefore, it may be difficult or even impossible to accurately price certain penny stocks. Due to these risks, penny stock investors may lose their whole investment. When penny stock investing is combined with margin borrowing the results can be catastrophic for the investor.

If the inherent risks of penny stocks were not great enough, penny stocks are often used and manipulated for fraudulent purposes. One common scheme is the “pump and dump” scheme. The idea behind a pump and dump scheme is to create unfounded hype for a penny stock the pumper already owns. As the pumper’s victims buy into the hype additional purchases drive up the price of the stock artificially. The pumper then sells his shares for a large profit while those the pumper recommended the penny stock to quickly lose their money as the stock’s value decreases precipitously.

What is Churning?

September 1, 2013 | by Staff Attorney

“Churning” is essentially 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.

Recently, the National Adjudicatory Council (“NAC”) provided a detailed description of the elements and factors evaluated in determining a claim of churning. The NAC affirmed a Financial Industry Regulatory Authority (FINRA) finding that Alan Jay Davidofsky (Davidofsky) engaged in unauthorized trading, excessive trading, and churning in a customer’s account. The panel barred Davidofsky from the financial industry for the unauthorized trading, imposed a separate bar for the excessive trading and churning, and ordered Davidofsky to pay a fine of $11,741 as disgorgement of the financial benefit earned through the misconduct.

As the NAC ruling explained, NASD Rule 2110 requires brokers to “observe high standards of commercial honor and just and equitable principles of trade.” NASD Rule 2310(a) provides that in recommending securities, a member shall have reasonable grounds for believing that the recommendation is suitable for such customer based upon the customer’s financial situation and needs. Included in this rule is the obligation of “quantitative suitability,” which focuses on whether the number of transactions within a given timeframe is suitable in light of the customer’s financial circumstances and investment objectives.

Broker-Dealers Settle with Massachusetts Securities Division Over the Alleged Improper Sales of Non-traded REITs

August 25, 2013 | by Staff Attorney

The Massachusetts Securities Division reached a settlement of $9.6 million with five independent broker dealers concerning allegations that the firms improperly sold non-traded real estate investments trusts (REITs) to hundreds of investors within the state. The firm’s fined include Ameriprise Financial Services Inc., Commonwealth Financial Network, Royal Alliance Associates, Inc. Securities America, Inc., and Lincoln Financial Advisors Corp. The Secretary of the Commonwealth of Massachusetts William Galvin announced that a part of the settlement would be used to distribute $6.1 million to investors as restitution.

A REIT is a security that invests in real estate directly either through properties or mortgages. REITs can be publicly traded on a national exchange or privately held. Private REITs are often referred to as non-traded REITs. Non-traded REITs have become increasingly popular as increased volatility in the stock market has led many investors to look for investment products that offer more stable returns. However, non-traded REITs may not be as safe and stable as advertised. Because non-traded REITs do not trade publicly the REIT itself determines its own asset values and only publishes updated valuations sporadically. Thus, a REITs volatility includes not only real estate market volatility but also management decisions and potentially leverage positions that investors may simply not be informed about.

Massachusetts alleged that the firms engaged in a “pattern of impropriety” selling these “popular but risky investments.” Massachusetts alleged significant and widespread problems with the firms’ compliance policies, practices, and procedures in the sale of non-traded REITs. In addition, Massachusetts alleged that the firms failed to only sell non-traded REITs to qualifying investors. Massachusetts allegations concerning each firm are as follows:

First Allied Securities Has Been Accused of Selling Advanced Equities Securities By Misleading Investors

August 23, 2013 | by Staff Attorney

The brokerage firm Advanced Equities, Inc. (Advanced Equities) specialized in so called late-stage private equity private placements. Advanced Equities had been particularly active in the clean-tech space. Through First Allied Securities, Inc. (First Allied), Advanced Equities private placements including Advanced Equities GreenTech Investments, LLC, AEI 2007 Venture Investments, LLC, AEI 2010 Cleantech Venture, LLC, and AEI Fisker Investments, LLC, were sold to hundreds of investors. Customers have alleged that First Allied misrepresented the Advanced Equities private placements to investors and failed to conduct adequate due diligence concerning the offerings.

In 2007, First Allied was acquired by Advanced Equities Financial Corp. (AEF) and became a sister corporation to Advanced Equities. At the time of the merger, Advanced Equities employed about 80 registered representatives while First Allied employed over 1,000 brokers. Utilizing First Allied’s customer and broker resources, AEI vastly expanded marketing of private placements to First Allied customers.

Sales materials developed for Advanced Equities and presented to investors touted the private placements as “late stage equities” or companies that were 12-36 months from going public through an initial public offering (IPO). The private placements were also represented as providing “higher near-term investment returns than the public equity markets” while possessing “greater short-term liquidity and lower risk profiles.”

Behringer Harvard REIT Fund Investor Losses Continue to Mount

August 22, 2013 | by Staff Attorney

Investors continue to suffer substantial losses from recommended investments in the Behringer Harvard REIT Funds. The Behringer Harvard REIT Funds including the Behringer Harvard Mid-Term Value Enhancement I, Behringer Harvard Short-Term Opportunity Fund I, and the Behringer Harvard REIT I and II (Behringer REITs) have sometimes been sold to investors as safe, stable, income producing real estate investment trusts. While the Behringer REITs were initially sold to investors for $10 per share, currently some of these REITs trade as low as approximately $2.00 on the secondary market. Worse still, some of the funds no longer pay a dividend or investors receive only a fraction of what their advisor initially told their clients they could expect the investment to yield.

The Behringer REITs are speculative securities, non-traded, and offered only through a Regulation D private placement. Unlike traditional registered mutual funds or publicly traded REITs that have a published daily Net Asset Value (NAV) and trade on a national stock exchange, the Behringer REITs raised money through private placement offerings and are illiquid securities. In recent years, increased volatility in stocks has led to an increasing number of advisor recommendations to invest in non-traded REITs as a way to invest in a stable income producing investment. Some non-traded REITs have even claimed to offer stable returns while the real estate market has undergone extreme volatility. Brokers are often motivated to sell non-traded REITs to clients due to the large commissions that can be earned in the selling the Behringer REITs.

Investors are now bringing claims against the brokerage firms that sold them the Behringer REITs alleging that their advisor failed to disclose important risks of the REITs. Some common risks that customers have alleged were not disclosed include failing to explain that Behringer REITs may not be liquidated for up to 8 to 12 years or more, that the redemption policy can be eliminated at any time, and that investor returns may not come from funds generated through operations but can include a return of investor capital.

Adorean Boleancu Fined and Barred By FINRA On Fraud Charges

August 21, 2013 | by Staff Attorney

On March 6, 2013, Adorean Boleancu reached a settlement with the Financial Industry Regulatory Authority (FINRA) concerning allegations that he converted at least $650,000 from a customer. By agreeing to the FINRA settlement Boleancu does not admit or deny any of the findings made against him but accepts a bar from associating with any broker dealer and to pay restitution in the amount of $650,000.

The complaint alleges that Boleancu converted at least $650,000 from an elderly widow while he was working at Wells Fargo Advisors, LLC (Wells Fargo). Boleancu worked for Wells Fargo from February 1, 2008 until his termination on December 6, 2011.

Boleancu allegedly was able to convert the money from the investor by issuing checks in her name without her authorization and issuing those checks to others including his own girlfriend. The checks were drawn from the investor’s two home equity lines of credit that were opened shortly after Boleancu became her adviser. In an attempt to keep his activities hidden, Boleancu allegedly made unauthorized payments through the investor’s checking account to pay interest accrued on the outstanding balances. In the end it is estimated that Boleancu converted approximately $650,000.