Securities Lawyers Blog

FINRA Bars Broker David Lavine Concerning Allegations of Outside Business Activities

February 12, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned and barred broker David Lavine (Lavine) concerning allegations that Lavine engage in private securities transactions also known as “selling away.” FINRA Rule 8210 authorizes the regulator to require persons associated with a FINRA member to provide information with respect to any matter involved in the investigation.

In October 2014, FINRA alleged that it pursued an investigation into allegations that Lavine (i) exceeded the scope of an approved outside business activity and potentially engaged in an unapproved private securities transaction; and (ii) failed to timely disclose several reportable financial events. FINRA requested that Lavine provide documents and information on or before November 14, 2014. On December 2, 2014, FINRA stated that Lavine, through his counsel, requested an extension of time to respond but ultimately failed to provide the responsive documents and information and informed FINRA that he would not provide information at any time.

According to Lavine’s brokercheck his disclosed outside business activities include Angel Flight South Central and LAKAP, LLC. It is unclear at this time if FINRA’s investigation concerned Lavine’s participation in these enterprises.

FINRA and SEC Bring Action Against Timothy Dembski and Walter Grenda Over Fraudulent Sales in Prestige Wealth Management

February 11, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) have brought action (FINRA Here, SEC Here) against Timothy Dembski (Dembski) and Walter Grenda (Grenda) concerning allegations that they made false and misleading statements to their clients at Reliance Financial Group (Reliance) an investment advisory firm, in recommending and selling investments in a risky hedge fund called Prestige Wealth Management Fund, LP (Prestige Fund). Also mentioned as a manager of the fund was Scott Stephan (Stephan).

Dembski was a registered broker with FINRA starting in 1995. From October 2006 until March 2011, Dembski was registered with Wall Street Financial Group, Inc. (Wall Street). Thereafter, Dembski was registered with Mid Atlantic Capital Corporation (Mid Atlantic) until August 2013. In January 2011, Dembski co-founded and was the managing partner at Reliance Financial and also co-founded the Prestige Fund.

Grenda has been a registered broker with FINRA since 1981. From October 2006 until March 2011, Grenda was registered with Wall Street. Thereafter, Grenda was registered with Mid Atlantic until July 2013.

Gana LLP Investigation Spotlight: Source Capital Group and Donald Saccomano

February 10, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently brought a complaint against Source Capital Group, Inc. (Source Capital) broker Donald Saccomano (Saccomano) alleging misconduct in connection with suitability, false representation, and failure to supervise claims relating to Direct Participation Products, limited partnerships, and municipal debt securities. FINRA has not released detailed information concerning the pending complaint but this is only one of several recent actions FINRA has taken against Source Capital and its financial advisors in recent years.

As we recently reported, FINRA filed a complaint against former Source Capital broker Joseph Hooper (Hooper) alleging that Hooper was working for a company called the iPractice Group, Inc. (iPractice) in a capacity that included solicited and participating in the sale of iPractice stock to customers. In that complaint FINRA alleged that Hooper was compensated for his activities. FINRA alleged that Hooper participated in 53 private securities transactions involving 41 investors or investor groups and a total of $3,400,648 worth of iPractice stock. In return, FINRA alleged that Hooper received $425,081 and more than 21,000 shares of iPractice stock as compensation for his activities.

Previously, our firm wrote about supervisory and disclosure issues at Source Capital, including FINRA’s action against Source Capital and certain principals concerning the failure of the firm’s brokers to adequately disclose material facts and the transaction of sales through misstatements. The allegations in FINRA’s action concerned certain oil and gas partnership interests in Blue Ridge Securities (Blue Ridge) and Argyle Securities. (Argyle) offered by Source Capital.

WFG Investments Sanctioned Over Failure to Review Transactions for Suitability Part II

February 9, 2015 | by Staff Attorney

This article continues our prior post concerning The Financial Industry Regulatory Authority (FINRA) recent sanctions of brokerage firm WFG Investments, Inc. (WFG) alleging a host of supervisory failures from March 2007, through January 2014.

In one supervisory failure example involving suitability, FINRA found that between 2009, and 2013, a broker by the initials “MC” (1) traded with discretion in several of his customers’ accounts without their written authorization; and (2) also excessively traded in at least one of his customer’s accounts in light the customer’s investment objectives and risk tolerance. FINRA also alleged that many of the securities traded were also qualitatively unsuitable in light of the customers’ age, objectives, risk tolerance, and financial situation. In addition, several of the customer’s accounts were charged both commissions and management fees and this problem was not identified or corrected even after it was detected.

FINRA also alleged that MC used unapproved charts and provided consolidated statements to a customer without the firm’s knowledge or approval. Moreover, allegedly there were exception reports that highlighted the problem trading activity in several of these accounts that were simply not reviewed or not properly processed. In fact, FINRA found that one of the customers who complained about unsuitable activity in her accounts was not contacted by the firm until after she had complained despite the fact that her accounts had appeared on numerous exception reports. Similarly, FINRA found that broker SGD was also permitted by the WFG to engage in unsuitable trading in one of his customer’s accounts which included the recommendation and sale of numerous high risk equity and ETF purchases for a retired client with a conservative risk tolerance.

FINRA Sanctions WFG Investments $700,000 for Supervisory Failures Part I

February 6, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently sanctioned brokerage firm WFG Investments, Inc. (WFG) alleging a host of supervisory failures from March 2007, through January 2014. FINRA alleged that WFG failed to commit the necessary time, attention, and resources to critical regulatory obligations in supervising registered representatives including: (1) failure to conduct appropriate due diligence on a private placement offering that was sold by a broker away from the firm; (2) failure to supervise the private securities transactions of one of its brokers that were executed through the representative’s investment advisory firm; (3) failure to maintain a supervisory system to ensure customer transactions were suitable; (4) failure to enforce its written supervisory procedures regarding the sale of alternative investments; (5) failure to supervise statements made by one broker on his weekly radio broadcast; and (6) failure to timely report customer complaints and update the Forms U4 and U5 of its brokers.

WFG has been a FINRA member since 1988, conducts a general securities business, and is headquartered in Dallas, Texas. WFG currently has about 280 brokers operating out of 102 branch offices.

FINRA alleged that in 2007, a WFG broker by the initials “SGD” provided notice to the firm that he intended to sell a private placement offering FINRA called “ATMA” to his customers. ATMA was designed to offer an income stream to investors based revenues form automated teller machines (ATMs). In evaluating a selling agreement with SGD, FINRA alleged that WFG assigned its compliance officer known by the initials “TS” to conduct due diligence on ATMA. TS owned a 5% interest in ATMA and SGD was the 90% owner and the operator of ATMA, had no prior experience in structuring and offering private placement investments. FINRA found that the entity that was to provide the ATM machines to ATMA was engaged in fraudulent business practices and most of the ATMs were fictional. FINRA found that WFG declined to enter into a selling agreement with SGD, but permitted him SGD to sell interests in ATMA as private securities transactions.

Broker Spotlight: Shawn Burns of Salomon Whitney

February 5, 2015 | by Staff Attorney

The law offices of Gana Weinstein LLP are investigating a string of customer complaints against broker Shawn Burns (Burns) currently registered Salomon Whitney LLC (Salomon). According to The Financial Industry Regulatory Authority (FINRA) BrokerCheck system, the customer complaints primarily allege unauthorized trading, failure to execute, suitability, misrepresentation, fraud, churning, and breach of fiduciary duty.

Burns has been in the industry since 1999. In only 15 years Burns has been employed by 10 different firms. After leaving Westrock Advisors, Inc. in May 2007, Burns became registered with J.P Turner & Company, L.L.C. until June 2009. From June 2009, until July 2011, Burns was registered with First Midwest Securities, Inc. Thereafter, Burns was registered with Salomon until August 2012. Then Burns became associated with Cape Securities Inc. until April 2014 before again going back to Salomon where he is currently registered.

Burns has had 12 customer complaints filed against him during his career, one termination, and five judgments or liens. These statistics are troubling because so many customer complaints are rare. According to InvestmentNews, only about 12% of financial advisors have any type of disclosure event on their records. These disclosures do not necessarily have to include customer complaints but can include IRS tax liens, judgments, and even criminal matters. The number of brokers with multiple customer complaints is far smaller.

FINRA Brings Action Against Randor Research, William Scholander, and Talman Harris

February 4, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently brought a complaint against brokerage firm Randor Research & Trading Company (Randor) and registered representatives William Scholander (Scholander) and Talman Harris (Harris) alleging that between February 2011, through March 2013, Radnor displayed a pattern of disregard of its supervisory obligations concerning reporting, disclosure, and compliance responsibilities. FINRA alleged that this disregard included the firm’s failure to report customer complaints, failure to update a registered representative’s Form U4 and failure to ensure that material information was disclosed to customers, and to maintain and enforce adequate supervisory systems and written procedures.

Radnor has been a member of FINRA since 2004, is based in the Philadelphia area and had one branch office in New York. The firm has 17 registered persons working in the two branches. Scholander has been registered with 13 different firms since 1998. Harris has been registered with 16 different firms since 1998. Harris was the branch manager of the New York office during the period.

FINRA alleged that in late 2011, Radnor failed to report two customer complaints made against its brokers. One customer claimed that certain trades were unauthorized and made a demand for damages. According to FINRA, another potential customer claimed that a broker of the firm had participated in unethical or illegal behavior possibly market manipulation. Despite those claims, FINRA claimed that Radnor chose not to report the complaints as required by FINRA rules. FINRA also alleged that Radnor also chose not to report the unauthorized trade complaint on the Form U4 of Scholander and Scholander knowingly failed to ensure that his Form U4 was timely updated to reflect the complaint. As a result, FINRA alleged that both Radnor and Scholander willfully violated the FINRA rules.

Update On SEC F-Squared Investments Action – Fined $35 Million

February 3, 2015 | by Staff Attorney

The Securities and Exchange Commission (SEC) fined firm F-Squared Investments $35 million while admitting wrongdoing to settle charges that it defrauded investors through false performance advertising about its flagship product. As we previously reported, shares of mutual fund provider Virtus Investment Partners Inc. (Virtus Investment) tanked on news that the SEC was close to recommending charges against F-Squared a sub-adviser on the Virtus funds. F-Squared –builds mutual fund portfolios consisting of exchange traded funds (ETFs) for the Virtus mutual funds.

According to the SEC’s order, F-Squared, the largest marketer of index products using ETFs, the firm began receiving signals from a third-party data provider in September 2008 indicating when to buy or sell an investment. The SEC alleged that the signals were based on an algorithm and F-Squared used the signals to create a model portfolio of sector ETFs that could be rebalanced periodically as the signals changed. The new product “AlphaSector” launched the first index shortly thereafter. AlphaSector’s indexes became the firm’s largest revenue source.

The SEC alleged that the marketing of AlphaSector into the largest active ETF strategy in the market was based upon false information concerning F-Squared’s successful seven-year track record. According to the information provided, the marketing materials were supposed to be based on the actual performance of real investments for real clients. But in reality, the SEC found that the algorithm was not in existence during the seven years of the advertised performance success. Instead, the SEC found that F-Squared’s advertising was actually derived through backtesting to historical market data generating a hypothetical performance during a prior period.

Gana LLP Brings Claim on Behalf of its Client Against Fidelity Brokerage Services

February 2, 2015 | by Staff Attorney

Recently, the law office of Gana Weinstein LLP filed a claim (Complaint) on behalf of its client against Fidelity Brokerage Services (Fidelity) alleging that Fidelity was negligent when one of its registered representatives made an unsuitable recommendation to the client. The client purchased a stock in the company Lakeland Industries (Ticker Symbol: LAKE) believing that the stock was overvalued and initiated a short position to attempt to profit from the stock’s decline.

A short position allows an investor to sell an investment that the investor does not actually possess. Instead, the investor receives the cash proceeds from the sale and then is obligated, at a future date, to buy back the shares borrowed. If the value of the stock declines over time then the investor can buy back the stock at a cheaper price than what the investor sold the stock for, making a profit on the difference. Conversely, if the stock’s value increases the investor will have to buy back the stock at a higher value and would lose money.

From October 1, 2014, through October 10, 2014, the client sold short 10,100 shares of LAKE in his Fidelity account. Over the next few days the shares of LAKE increased causing margin calls in the client’s account. The client alleged that he had already added funds to his account to cover previous margin calls. The client wanted to hold the LAKE position and made it clear to Fidelity that he would continue to add funds to cover any margin calls to avoid having his LAKE position liquidated by Fidelity.

FINRA Bars Broker Michael Evangelista Over Real Estate Securities Sales

January 30, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently barred broker Michael Evangelista (Evangelista) concerning allegations that between 2006 and 2011, Evangelista referred approximately six of his firm customers to invest in real estate securities issued by ABC Corp. (ABC), an entity that purportedly invested in real estate in Pennsylvania and neighboring states. FINRA alleged that the customer investments totaled over $3 million while Evangelista received at least $50,000 in compensation in connection with these referrals. FINRA found that Evangelista did not disclose to his brokerage firms that these customers were purchasing securities away from the firm, a practice known as “selling away”, or that he was being compensated in connection with his referrals.

Evangelista entered the securities industry in 1993. From 1994 to December 2012, he was registered with the following FINRA firms: (1) Capital Analysts, Inc. until to December 2007; (2) Cambridge Investment Research, Inc. from January 2008 to May 2012; and (3) Comprehensive Asset Management and Servicing, Inc. (Comprehensive) from May 2012 to December 2012. Comprehensive filed a Form U5 on December 20, 2012, stating that Evangelista was terminated because he became the subject of a customer complaint.

FINRA alleged that starting in 2006, Evangelista participated in meetings with certain of his brokerage clients the president of ABC to have the clients invest with ABC. The investments were for the development of specific parcels of property. When client’s invested in ABC they acquired either promissory notes issued or limited partnership agreements. The promissory notes allegedly provided for a repayment of principal plus interest. Investments in the form of limited partnership agreements had clients receiving a percentage interest in the partnership that would yield a minimum return in the form of interest paid on a per annum basis and a return of principal.