Securities Lawyers Blog

Brokerage Firm Spotlight: Investor Claims of Churning Against Rockwell Global Capital

January 13, 2015 | by Staff Attorney

The law offices of Gana Weinstein LLP is investigating Rockwell Global Capital LLC (Rockwell) after having filed a complaint on behalf of an investor. We have posted on several previous occasions that brokers at Rockwell have been alleged by dozens of investors in recent years of churning client accounts. In Three Rockwell Global Capital Brokers Accused of Securities Misconduct by Customers we wrote about three brokers, Robert E. Lee Jr. (Robert Lee), Douglas Guarino (Guarino), and Lawrence Lee (Lee) that have been the subject of at least 29 combined customer complaints. All three brokers have been accused by clients of churning their accounts and making unsuitable investment recommendations.

Recently, an arbitration panel awarded a customer and ordered Rockwell to pay $119,000 in compensation together with costs and attorneys fees due to claims that included excessive trading.

What is “churning”? This type of securities misconduct includes investment trading activity that serves no reasonable purpose for the investor and is transacted in order for the broker to generate commissions. The elements that an arbitration panel will look at to establish a churning claim, a species of securities fraud, are excessive transactions of securities, broker control over the account, and intent to defraud the investor by obtaining unlawful commissions. A similar claim, excessive trading, under FINRA’s suitability rule involves just the first two elements.

Broker Spotlight: Calton & Associates Broker Kenneth Popek

January 11, 2015 | by Staff Attorney

Broker Kenneth Popek (Popek) has had four customer complaints filed against him over his career as a financial advisor. That many claims 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. In Popek’s case the broker has four customer complaints and one bankruptcy.

Popek was registered with Ameriprise Financial Services, Inc. from December 2006 until May 2008. Thereafter, Popek was registered and still is registered with Calton & Associates, Inc.

One of Popek’s complaints went to hearing where a panel awarded the customers $342,956 concerning allegations of suitability, misrepresentations, churning, and breach of fiduciary duty. According to the award the causes of action involved, in part, investments in General Motors, Lehman Brothers, and Washington Mutual stocks that all went bust.

Customers Complain Broker William Sheehan Sold Unsuitable TIC Investments

January 9, 2015 | by Staff Attorney

The law offices of Gana Weinstein LLP is investigating a series of complaints against broker William Sheehan (Sheehan). According to Sheehan’s BrokerCheck records the broker has been the subject of 7 investor complaints since 2010. That many claims against one broker is rare. According to InvestmentNews, only about 12% of financial advisors have any type of disclosure event on their records. Thus the number of brokers receiving eight complaints is exceedingly small.

The complaints concerning Sheehan’s activities at several brokerage firms. From July 2004, through October 2007, Sheehan was associated with Investors Capital Corp. (ICC) Next, from October 2007 until January 2010, Sheehan was a registered representative of Omni Brokerage, Inc. Thereafter, Sheehan went back to ICC until October 2012. Finally, Sheehan is currently registered with DFPG Investments, Inc.

Many of the complaints against Sheehan involve allegations investment recommendations into real estate securities and limited partnership interests in tenants-in-common (TICs). TIC investments have come under fire by the customers and even within the securities industry. 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, TIC recommendations have been a major contributor to bankrupting several brokerage firms. For example, InvestmentNews found that 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.

Former Cambridge Investment Broker Steven Walstad Suspended Over Unsuitable Investment Sales

January 9, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently suspended former Cambridge Investment Research, Inc. (Cambridge) broker Steven Walstad (Walstad) alleging that Walstad recommended and effected numerous unsuitable Class A share mutual fund purchases and sales involving six customer accounts. In addition, FINRA alleged that Walstad exercised discretion in one customer’s account without the customer’s prior written authorization.

Walstad first became registered with a FINRA firm in 1996 and was associated with Cambridge from April 18, 2008, through November 30, 2012. FINRA alleged that Walstad recommended and executed 78 purchases of Class A share mutual funds in six customer accounts without a reasonable basis to believe were suitable for the customers. All financial advisors, as part of their suitability obligations, must have a reasonable basis for the investments that they recommend to customers. The reason that FINRA found that Walstad’s trades were without a reasonable basis is that the customers were charged front-end sales loads in connection with the Class A share purchases but Walstad mistakenly believed that these front-end sales loads had been waived.

Purchase of Class A shares, as opposed to purchasing Class B or C shares, is advantageous to the customers only if they held the mutual funds on a long-term basis. However, FINRA found that these customers held the Class A shares for less than thirteen months and therefore Walstad lacked a reasonable basis to believe that his recommendations to purchase Class A shares were suitable for these six customers.

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.

Newbridge Securities Corporation Sanctioned By FINRA Over Sales Practices

January 7, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) in an acceptance, waiver, and consent action (AWC) sanctioned Newbridge Securities Corporation (Newbridge) concerning allegations that the firm violated a host of sales obligations to customers that resulted in unfair trading practices.

FINRA found that in ten transactions, Newbridge sold corporate bonds to customers and failed to sell such bonds at a price that was fair taking into consideration all relevant circumstances such as the market conditions for the bonds at the time of the transaction and the expense involved. FINRA also alleged in another 10 transactions for a customer the firm failed to use reasonable diligence to ascertain the best market price and failed to buy or sell in such market so that the price to its customer was as favorable as possible at the time of the transaction. Next, FINRA found a total of at least 50 instances where the firm failed to execute orders fully and promptly.

Further, FINRA alleged that Newbridge executed 32 short sale orders but failed to mark the orders as being sold short. As a result, FINRA found that on 13 occasions the firm effected short sales in an equity security for its own account without borrowing the security or having reasonable grounds to believe that the security could be borrowed so that it could be delivered on the date delivery is due. FINRA also found that the firm, on 63 occasions, provided written notification to customers that failed to disclose information or disclosed inaccurate information. The information that was inaccurate included the correct trade price, the correct execution price(s), the price was exclusive of any commission equivalent, failed to disclose or to accurately disclose the compensation amount(s) charged to the customer, and/or inaccurately disclosed the firm’s compensation type.

Aegis Capital Corp. Broker Malcom Segal Barred From Industry Over Allegations of Outside Business Activities

January 6, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently barred former Aegis Capital Corp. (Aegis) broker Malcom Segal (Segal) alleging that Segal may have engaged in unauthorized transfers of funds from customer accounts to an outside business activities (a/k/a “selling away”).

According to Segal’s BrokerCheck, Segal was registered with Cumberland Brokerage Corporation from 1989 until April 2011. Thereafter, Segal was a broker for Aegis until July 2014 where he was terminated on allegations of by the firm violations of the firm that Segal failed to cooperate with an internal investigation into a customer complaint he made unauthorized wire transfers from a customer’s account. Segal’s disclosures also reveal that he is listed as a partner of J & M Financial and President of National C.D. Sales.

Upon information and belief, it is in connection with National C.D. Sales that customer have filed complaints against Segal concerning. While details concerning Segal’s activities are still pending, the allegations against Cox are consistent with a “selling away” securities violation. Selling away occurs when a financial advisor solicits investments in companies or promissory notes that were not approved by the broker’s affiliated firm. In many cases the broker transfers funds or liquidates investments at his registered firm in order to make the investment in the outside business.

Virtus Investment Partners and Funds Negatively Effected by F-Squared Investments SEC Probe

January 5, 2015 | by Staff Attorney

According to the Wall Street Journal that Shares of mutual fund provider Virtus Investment Partners Inc. (Virtus Investment) tanked on news that the Securities and Exchange Commission (SEC) is closer to recommending charges against F-Squared Investments Inc., (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.

F-Squared received a Wells notice from the SEC which indicates an investigation and possible action by the commission against the company. According to WSJ, the SEC’s investigation revolves around whether F-Squared advertising of their quantitative stock strategies was truthful and whether they were tied to real money. The timeframe looks at the returns from April 2001 through September 2008.

While VRTS and the five Virtus Funds Premium AlphaSector (VAPAX), Allocator Premium AlphaSector (VAAAX), AlphaSector Rotation (PWBAX), Global Premium AlphaSector (VGPAX), Dynamic AlphaSector (EMNAX) are not subject to the SEC’s investigation the potential negative outcome for F-Squared is already negatively impact the mutual funds and therefore VRTS as well as clients flee these products.

Complaint Filed Against Joseph Hooper Relating to iPractice Group Investment Sales

January 3, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently filed a complaint against former Source Capital Group, Inc. (Source Capital) broker Joseph Hooper (Hooper) alleging that Hooper was serving as the Director of Investor Relations for a company called the iPractice Group, Inc. (iPractice) and that in such capacity, Hooper participated in the sale of iPractice stock and was compensated for that participation without notifying Source Capital of these 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.

This is not the first time our firm has written about supervisory and disclosure issues at Source Capital. Our firm has previously written concerning FINRA’s action against Source Capital concerning the agency’s findings that certain Source Capital brokers failed to adequately disclose material facts and made sales through misstatements in oil and gas partnership interests in Blue Ridge Securities (Blue Ridge) and Argyle Securities. (Argyle).

In FINRA’s recent action, when Hooper became associated with Source Capital in May 2012, he was also the Director of Investor Relations for iPractice, a medical technology company. FINRA alleged that Hooper remained the Director of Investor Relations for iPractice throughout the time he was associated with Source. iPractice raised funds for its operations by selling stock in the company through exempt private placement securities offerings. FINRA alleged that Hooper participated in the solicitation and sale of iPractice stock to investors. In addition, Hooper was listed by iPractice as a promoter on an amended Form D filed with the SEC on May 18, 2012.

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.