Securities Lawyers Blog

FINRA Sanctions Essex Securities for Failing to Supervise Mutual Fund Switching

December 4, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA), in an acceptance, waiver, and consent action (AWC), sanctioned brokerage firm Essex Securities, LLC (Essex Securities) alleging that from February 2010, through March 2011, Essex Securities through one of its brokers violated industry rules by engaging in a pattern of unsuitable mutual fund switching, a form of churning, in the accounts of seven customers. Further, FINRA found that Essex Securities violated FINRA’ supervisory rules by failing to establish and maintain a supervisory system reasonably designed to prevent unsuitable mutual fund switching.

Essex has been a FINRA member broker-dealer since 1998, is headquartered in Topsfield, MA, and conducts a general securities business with approximately 50 brokers out of 26 branch offices.

FINRA alleged that an Essex Securities broker engaged in a pattern of unsuitable mutual fund switching in seven customer accounts by not having reasonable grounds for believing that such transactions were suitable for those customers due to the frequency of the transactions and the transaction costs incurred. Part of the suitability rule requires brokers to take into consideration the cost consequences of the transactions and ensure that there is a reasonable basis for the incurring of such costs. In this case, FINRA found that on at least 29 occasions, the broker recommended that customers sell mutual funds within only one to thirteen months after purchasing them. Essex Securities was found to have earned commissions of approximately $60,000 on these switch transactions and broker himself was paid approximately $54,000.

FINRA Sanctions Genworth Financial for Failing to Supervise Churning of Customer Accounts

December 3, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) in an acceptance, waiver, and consent action (AWC) sanctioned brokerage firm Genworth Financial Securities Corporation (Genworth) n/k/a Cetera Financial Specialists, LLC (Cetera) concerning allegations that from July 2009, through June 2012, the firm failed to establish a supervisory system and enforce written supervisory procedures designed to identify and prevent unsuitable excessive trading and the churning of customer funds.

FINRA alleged that although Genworth’s written supervisory procedures explicitly provided for the monthly review of an Active Account Report, no such report actually existed. Further, FINRA found that Genworth had no other systems in place that would monitor active accounts for excessive trading. According to FINRA, the firm’s failure to have systems in place and the failure to enforce written supervisory procedures allowed at least one registered representative to churn a customer’s account in violation of anti-fraud rules.

Churning is considered a type of securities fraud because the broker places his own interests ahead of his customer and induces transactions in the customer’s account that are excessive in size and frequency in order to generate commissions for himself. In order to show that churning took place an investor must demonstrate that the broker exercised control over the account, that the broker engaged in excessive trading considering the objectives and nature of the account, and that the broker acted with intent.

FINRA Sanctions Ameriprise Over Arbitration Discovery Abuse Part II

December 2, 2014 | by Staff Attorney

In the prior post we discussed the extremely difficult journey an investor may have to go through in order to obtain relevant discovery documents from the brokerage industry in FINRA arbitration. We also discussed how the system is stacked against the investor’s rights and provides incentives to firms to withhold documents. However, a recent FINRA enforcement order provides some hope that the regulatory watchdog will start taking these issues seriously.

In October 2014, FINRA sanctioned Ameriprise Financial Services, Inc. (Ameriprise) and its broker for altering documents and refusing to produce documents until the eve of hearing. FINRA’s action resulted from the discovery tactics employed by Ameriprise and its broker David Tysk (Tysk) in a FINRA arbitration.

In the Ameriprise case, the FINRA arbitrators found the firm’s conduct so egregious that it referred the matter to FINRA’s Member Regulation Department. The arbitration panel found that Ameriprise and Tysk produced documents in an arbitration proceeding without disclosing that Tysk had altered the documents after receiving a complaint letter from a customer. The altered documents were printouts of notes of Tysk’s contacts with the customer having the initials “GR.” Tysk was responsible for detailing his contact with customers in a computer system maintained by Ameriprise.

Is FINRA Ready to Get Serious About Arbitration Discovery Abuse? Part I

December 1, 2014 | by Staff Attorney

Many securities arbitration attorneys would agree that discovery abuse in FINRA arbitration is a problem under certain circumstances. A client has a seemingly great and compelling case. Then the brokerage firm produces its “discovery” but something doesn’t seem right. Documents recording decisions on key dates are missing, there are unexpected gaps in the email record, and in the worst cases your client has produced documents that the firm should have a copy of but for some reason does not. How often discovery abuse happens in FINRA arbitration is unknowable.

However, what is known is that system likely fosters discovery abuse. A recent Reuters article highlighted that arbitrators do indeed go easy on brokerage firm discovery abuse. Why does this happen? The first line of defense against discovery abuse is the arbitrators themselves. But most arbitrators simply expect the parties to comply with their discovery obligations without their input. Moreover, arbitrators loath ordering parties to produce documents against their will and prefer the parties to resolve their own disputes. While these goals are noble they also invite abuse.

So how does an investor ultimately get awarded discovery abuse sanctions if a brokerage firm fails to produce documents? First, the client must move to compel the documents and win the motion over the brokerage firm’s objections. Second, the firm must refuse to comply with the order. Usually the firm will interpret the scope of the order as not encompassing the discovery that was actually ordered or will otherwise declaw the order through claims of “privilege” or “confidentiality.” This leads to a second motion to compel and request for sanctions. Again the investor will have to argue the relevance of the initial request as if the panel never ruled that these documents had been ordered to be produced and the brokerage firm gets a second bite of the apple to throw out the discovery.

FINRA and SEC Release Guidance on Avoiding Penny Stock Schemes

November 30, 2014 | by Staff Attorney

Recently, FINRA and the SEC’s Office of Investor Education and Advocacy issued an alert to warn investors that some low-priced “penny” stocks are being aggressively promoted to engage in investment fraud schemes. In many cases the stocks of dormant shell companies, businesses with nominal business operations, are susceptible to market manipulation. To help prevent these types of fraud, the SEC suspended trading in 255 dormant shell companies in February 2014.

The typical investment scheme concerns pump-and-dump frauds in which a fraudster deliberately buys shares of a very low-priced, thinly traded stock and then spreads false or misleading information to promote and inflate the stock’s price. The fraudster then dumps his shares causing a massive sell off and leaving his victims with worthless shares of stock. Among the more common schemes is a fraudsters who uses a dormant shell company to buy its shares and then claim that the company has developed a “new” product that has caused the price to jump higher or the company will announce new management.

The SEC provided 5 tips to avoid becoming a victim of a penny stock scheme.

Gana LLP Investigates Richard Martin Formerly of G.F. Investment Services, LLC

November 26, 2014 | by Staff Attorney

Gana Weinstein LLP, a nationally renowned securities and investment arbitration firm, is investigating Richard Martin, and his from firm G.F. Investment Services, LLC for making unsuitable investments to their customers. According FINRA’s BrokerCheck, Mr. Martin has 8 customer complaints served against him and/or his former firms concerning his activities. According to FINRA, four of the eight complaints have been settled. The first settled complaint was filed in 2006. The customer sued Global Strategic Investment, LLC, Mr. Martin’s employing firm at the time. The case settled less than one mouth after filing. The customer alleged that Mr. Martin and Global Strategic Investments failed to disclose mark-ups on bond purchases.

In 2009, another of Mr. Martin’s customers brought a case against Global Strategic Investments for alleging claims of unsuitable investments, churning, and negligence. That case settled for $8,000. In 2011, another customer of Mr. Martin brought a claim against his firm, GF Investment Services. The complaint alleged that her account was unsuitable and the case settled for $40,000. Another claim was brought against G.F. Investment Services and Latam Investment. The claim again was for the sale of unsuitable investments. The case settled for $127,500 before arbitration was commenced.

Three additional claims were brought by customers and closed with no action. Currently, there is one claim pending against G.F. Investment Services by Mr. Martin’s customer. The claim is for $500,000 in damages. The customer alleged unsuitable investments in relation to short sales and risky ETFs.

Gana LLP Investigates JP Morgan in Connection with Allegations against Benjamin Maleche

November 25, 2014 | by Staff Attorney

Gana Weinstein LLP is investigating JPMorgan Securities (“JP Morgan”) in connection with the supervision of Benjamin Doyle Maleche and allegations of “selling away.”

“Selling away” occurs when a securities broker or broker-dealer buys, solicits, or sells securities that were not approved by the broker’s affiliated firm or recorded on the firm’s books and records. Selling away is prohibited under the rules of the Financial Industry Regulatory Authority (FINRA), particularly FINRA Rule 3040, as well as other securities laws.

On August 27, 2014, Maleche entered into a letter of Acceptance, Waiver and Consent (“AWC”) with FINRA, wherein he consented to a nine (9) month suspension from all securities related activity and agreed to pay a $5,000 fine to FINRA. According to the AWC, Benjamin Maleche entered the securities industry in July 2008 with a FlNRA member firm as a registered representative and investment adviser representative (“IAR”). In April 2010, Maleche became licensed as a general securities representative (“GSR”) with Chase Investment Services Corp. (BD No. 25574), which later merged with JP Morgan Securities, Inc.

Broker Eric Johnson Terminated for Allegedly Stealing Over $1,000,000 From Investors

November 24, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) in an acceptance, waiver, and consent action (AWC) barred broker Eric Johnson (Johnson) concerning allegations that Johnson misappropriated more than $1,000,000 from at least six firm customers’ brokerage accounts. FINRA also alleged that Johnson falsified the signatures of two firm employees and notarized seals on firm documents. Finally, Johnson failed to provide documents, information, and on-the-record testimony during FINRA’s investigation of this matter.

Johnson first became registered with FINRA in 1991. In March 1999, Johnson became registered with RedRidge Securities, Inc. (RedRidge). Johnson operates out of his DBA business called HD Brent & Company (HD Brent). RedRidge terminated Johnson’s registration on September 24, 2014, in connection with the firm’s investigation concerning the alleged theft of customer funds. RedRidge may have only become aware of the misappropriation of funds when the Federal Bureau of Investigation (FBI) contacted the firm concerning their investigation of Johnson.

FINRA alleged that from approximately December 2006, through September 2014, Johnson misappropriated more than $1,000,000 in customer funds. FINRA determined that Johnson made at least 60 wire transfers from at least six firm customers’ brokerage accounts to his own personal bank accounts. The wire transfers required the signature of a firm principal and the signature and seal of the firm’s notary public that FINRA alleged Johnson falsified in order to effectuate the transfers. Given that Johnson’s activities took place over the course of eight years it is astonishing that RedRidge did not supervise and detect Johnson’s activities sooner.

Massachusetts Fines LPL Financial Over Variable Annuity Sales Practices to Seniors

November 23, 2014 | by Staff Attorney

According to InvestmentNews, LPL Financial, LLC (LPL Financial) was recently fined by Massachusetts securities regulators fined for sales practices concerning variable annuities and agreed to reimburse senior citizens $541,000 for surrender charges they paid when they switched variable annuities. LPL Financial and its brokers have been on the defensive from securities regulators many times in recent years concerning a variety of alleged sales practice and supervisory short comings as shown below.

Do Increased Investor Risks Lurk Behind the SEC’s Revisiting of the Accredited Investor Definition Part II

November 21, 2014 | by Staff Attorney

This article continues to opine on an InvestmentNews article, describing the Securities and Exchange Commission’s (SEC) revisiting the accredited investor standard that determines who is eligible to invest in private placements. It is the opinion of this securities attorney who has represented hundreds of cases involving investors in private placement offerings that some of the IAC’s proposals are severely flawed and will only enrich the industry at investor’s expense. While proposals to increase standards through sophistication tests and limiting the amount of private placement investments to a certain percentage of net worth are constructive, it is clear that some will attempt to use the review to water down the current requirements. Below are some of the reasons why proposals to abandon the income and net worth approach and instead use a definition that takes into account an individual’s education, professional credentials, and investment experience will be a disaster for investors.

First, many private placements such as equipment leasing and non-traded real estate investment trusts (Non-Traded REITs) already skirt these rules and offer non-traded investments to those with income of $70,000 and net worth of $250,000. If you want to see what the world would be like without the $1,000,000 constraint on private placements, it’s already here and it’s not pretty.

Non-Traded REITs are a $20 billion a year industry that basically ballooned overnight. These non-traded investments act like private placements and charge anywhere from 7-15% of investor capital in the form of commissions and selling fees. In addition, there is little evidence to support that these investments will largely be profitable for investors. In fact, because non-traded REITs offer products with very limited income and net worth thresholds brokers have loaded up clients accounts to such an extent that the NASAA has proposed universal concentration limits to curb these abusive practices. But as bad as many of these products are, many other private placements that would be allowed to be sold to investors under some of the IAC proposals are far worse.