Securities Lawyers Blog

UBS Puerto Rico Fined $3.6 Million and to Pay $1.7 Million in Restitution to Customers of its Bond Funds

November 6, 2014 | by Staff Attorney

On October 9, 2014, Puerto Rico’s Office of the Commissioner of Financial Institutions (OCFI) has settled its claims with UBS Financial Services Incorporated of Puerto Rico (UBS Puerto Rico) over UBS’s sale of closed-end mutual funds in Puerto Rico. The OCFI conducted a routine examination from October 15, 2013 through June 27, 2014. The examination of UBS Puerto Rico was conducted to determine if the firm complied with the Puerto Rico Uniform Securities ACT Regulation No. 6078.

The OCFI interviewed a sample of clients and examined whether certain former and current UBS Puerto Rico brokers either (i) recommended that, or (ii) permitted certain clients to, use non-purpose loans through UBS Bank USA to purchase securities in UBS brokerage accounts during the 2011-2013 period in violation of the customers’ loan agreements and UBS Puerto Rico policies.

The OCFI determined that for some clients, such a practice was unsuitable based on the customers’ financial objectives, risk tolerance and needs, and that UBS Puerto Rico brokers may have induced clients through the misrepresentations or omissions of material facts.

SEC Approves Changes to Value of Non-Traded REITs on Account Statements

November 6, 2014 | by Staff Attorney

The Securities and Exchange Commission (SEC) approved a rule change proposed by the Financial Industry Regulatory Authority (FINRA) that will give investors greater insight into the costs of purchasing shares of non-traded real estate investment trusts (Non-Traded REITs).

As reported by InvestmentNews, the SEC approved FINRA’s proposal on October 10. The rule change would require broker-dealers to include a per-share estimated value for an unlisted direct participation program (DPP) or a REIT on customer statements in addition to other related disclosures. The current practice is to list the value of Non-Traded REITs at a per-share price of $10, or simply the purchase price of the investment.

As a background, a Non-Traded REIT is a security that invests in different types of real estate assets such as commercial real estate properties, residential mortgages of various types, or other specialty niche real estate markets such as strip malls, hotels, and other industries. REITs can be publicly traded and when they are, can be bought and sold on an exchange with similar liquidity to traditional assets like stocks and bonds. However, Non-traded REITs are sold only through broker-dealers and are illiquid, have no market, and can only be liquidated on terms dictated by the issuer, which may be changed at any time and without prior warning.

FINRA Declines Rule Requiring Brokerage Firms To Carry Insurance

November 5, 2014 | by Staff Attorney

According to a recent report, the Financial Industry Regulatory Authority (FINRA) has decided it cannot force firms to carry insurance for payment of awards granted by arbitration panels on behalf of investors who have lost money.

As a background, every investor who opens a brokerage account with an investment firm agrees to arbitrate their dispute before the FINRA. Even if an investor did not open an account with a brokerage firm the claim can still be arbitrated under the industries rules. FINRA is the investment industries self-regulatory organization for all brokerage firms operating in the United States, overseeing approximately 4,700 brokerage firms and 635,000 registered representatives. FINRA both enforces its own rules through regulatory actions and administers an arbitration forum for securities disputes.

Our firm has noticed a recent trend where small and even mid-sized firms fail to keep sufficient funds on hand to pay investors due to misconduct at the firm. These smaller firms sometimes fail to enact proper supervisory procedures and regulatory controls to prevent their brokers from engaging in wrongful conduct. Sometimes these firms simply do not have the resources to properly engage in the securities business lines they attempt to engage in. As a result investors are harmed and due to their small size, cannot be compensated. In 2012, brokerage firms failed to pay $50 million in awards to customers. In 2011, the number of unpaid awards totaled $51 million.

Brokerage Firms Halt Sales of American Realty Capital Related REITs

November 4, 2014 | by Staff Attorney

According to InvestmentNews, recently several brokerage firms including Securities America Inc., with 1,772 registered reps and advisers, and the four National Planning Holdings Inc. firms with 3,954 registered reps and advisers including INVEST Financial Corp., Investment Centers of America Inc., National Planning Corp., and SII Investments Inc., announced that they are temporarily suspending some or all of the non-traded real estate investment trust (Non-Traded REITs) sales sponsored or distributed by American Realty Capital and its affiliated companies.

These Non-Traded REITs include investments such as the Phillips Edison-ARC Grocery Center REIT II and Cole Capital Properties V. The decision to halt sales come as Nicholas Schorsch, ARC’s chairman, faces further investigation after it had been revealed that the traded REIT he controls, American Realty Capital Properties Inc., made a $23 million accounting error that resulted in the firing of its chief financial officer.

The firms halted the sales in order to conduct further due diligence on the Non-Traded REIT products. Suspending sales of these products will likely help protect the firms if it is later revealed that the irregularities are more widespread. Brokers have a duty to have a reasonable basis for recommending that Non-Traded REITs are suitable for investors. This means that the firm has investigated the product and believes that the information disclosed to investors has a factual basis. If a Non-Traded REIT, its parent company, or principals are under investigation for making material misstatements it would be difficult for the firm to later argue that it had a basis for believing that the information it provided to investors was accurate.

Ismail Elmas Admits to Stealing Over $1 Million From Investors

November 3, 2014 | by Staff Attorney

As we reported earlier, broker Ismail Elmas’ (Elmas) Financial Industry Regulatory Authority (FINRA) BrokerCheck records show that the representative was recently discharged from CUSO Financial Services, LP (CUSO Financial) concerning allegations that the broker “converted client funds for personal use as well as participated in an unauthorized outside business activity involving investments without the firm approval…”

Thereafter, investors have come forward to complain that Elmas allegedly engaged in unauthorized activity and other wrongful acts. Then in late October, Elmas pleaded guilty in federal court in Alexandria, to a count of wire fraud. Elmas admitted that he bilked at least 10 investors out of $1 million to $7 million dollars. According to news sources, Assistant U.S. Attorney Chad Golder said in court that Elmas, whose d/b/a business Apple Financial Services, an affiliate of Apple Federal Credit Union, preyed upon elderly and widowed investors and used a variety of methods to hide stolen funds. One of the more salient aspects of Elmas’ fraud is that unlike many schemers, Elmas was not promising large or sky-high returns or pushing clients into complicated financial products.

Our firm represents investors who are the victims of schemes, like Elmas’, to hold the brokerage firm responsible. The brokerage firms that employ Elmas are responsible for supervising his conduct. Elmas’ scheme presents a classic “selling away” securities violation scenario. In selling away cases, a financial advisor solicits investments in companies, promissory notes, or private placements that were not approved by the broker’s affiliated firm. In order to properly supervise their brokers each firm is required to establish and maintain a system to supervise the activities of each registered representative. When selling away activity occurs, it is often because the supervisory environment is deficient because the brokerage firm either fails to put in place a reasonable supervisory system or fails to actually implement that system and meet supervisory requirements.

Broker Stephen Campbell Sanctioned Over Churning Claim

October 31, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned broker Stephen Campbell (Campbell) concerning allegations that the broker engaged in churning in a client account. Campbell has been a broker since 1978. From November 12, 2004 through November 12, 2013, Campbell was registered with Oppenheimer & Co., Inc. (Oppenheimer).

Investment churning is trading activity characterized by purchasing and selling activity that is excessive and serves no practical purpose for the investor. Brokers engage in churning solely to generate commissions without regard for the client’s interests. In order to establish a churning claim the investor must show that the trading was first excessive and second that the broker had control over the investment strategy. Certain commonly used measures and ratios used to determine churning help evaluate a churning claim. These ratios look at how frequently the account is turned over plus whether or not the expenses incurred in the account made it unreasonable that the investor could reasonably profit from the activity.

In Campbell’s case, FINRA found that one of his customers was a 55 year old single mother who initially opened an account with Campbell in 2000. FINRA alleged that from January 2009, through September 2011, while exercising control over her accounts, Campbell excessively and unsuitable traded her accounts inconsistently with her investment objectives, financial situation and needs. FINRA determined that the trading activity resulted in an annualized turnover ratio of 15 and an annualized cost-to-equity ratio of 59% in her IRA account, and an annualized turnover ratio of 21 and an annualized cost-to-equity ratio of 120% in her individual account. During this period, FINRA determined that Campbell’s improper trading resulted in a collective loss of approximately $62,000, while generating total gross commissions of approximately $64,000.

Why Wall Street Fights Against the Fiduciary Standard

October 30, 2014 | by Staff Attorney

In the wake of the financial crisis of 2008, the Dodd-Frank legislation authorized the Securities Exchange Commission (SEC) to pass a fiduciary duty rule that would apply to brokers, as opposed to only financial advisors. Most investors do not realize and are usually shocked to learn that there broker only has an obligation to recommend “suitable” investments, and not to work in their client’s best interests. Currently, the fiduciary duty rule only applies to financial advisors (and brokers under certain circumstances) – more commonly recognized by the public as advisors who charge a flat fee for their services as opposed to commissions.

The fact that the investing public has absolutely no clue how crucial the fiduciary duty is to protecting their retirement futures and holding Wall Street accountable for mishaps has prevented any serious public debate to combat the millions of dollars the industry has and will spend to kill this part of the law. True to form, recently the House of Representatives passed a budget that would prevent the SEC from imposing a fiduciary standard on brokers during the upcoming federal fiscal year beginning in October.

What’s the big deal you may ask? Why is the fiduciary standard important to me? Well there are many reasons but maybe one story will highlight how the brokerage industry is currently allowed to operate to put their interests ahead of their clients. As recently reported in Bloomberg and InvestmentNews, an undercover U.S. Labor Department economist exposed how brokerage firms sought out federal workers to roll over their 401(k)’s with the government to IRAs with the brokerage firm even though the result could increase the client’s annual costs by as much as 50 times!

Regulator Finds that Center Street Securities Made Unsuitable Recommendations of GWG Renewable Secured Debentures Part II

October 29, 2014 | by Staff Attorney

This post continues our story on the allegations made by the Financial Industry Regulatory Authority (FINRA) against Center Street Securities, Inc. (Center Street). As previously reported, FINRA sanctioned the firm concerning a multitude of rule violations in the sales of GWG Renewable Secured Debentures, an illiquid and high-risk private placement investment.

FINRA found that in order to purchase the GWG Debentures, Center Street customers were required to complete an account application, GWG subscription forms, and a “Compliance Alternative Investment (Non-Reg D) Suitability.” FINRA found that the compliance form required brokers to obtain information about customers’ existing assets, the concentration of the alternative investment as percentage of net worth, the customer’s age, and the customer’s investment objectives. Once completed, FINRA alleged that these documents were submitted to Center Street’s compliance department for supervisory and suitability review.

FINRA found that these forms were the only items the firm relied upon in reviewing and assessing Debenture sales. FINRA determined that Center Street had three employees of in their compliance department who conducted supervisory and suitability review of all transactions recommended to customers. FINRA alleged that the primary employee responsible for conducting the review of GWG Debenture received no training from the firm regarding the unique characteristics and risks of the GWG Debentures. The employee was also unaware of the firm’s guidelines concerning concentration of alternative products as well as state specific suitability requirements.

FINRA Sanctions Center Street Securities Over Sales of GWG Renewable Secured Debentures Part I

October 28, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned brokerage firm Center Street Securities, Inc. (Center Street) concerning allegations that: 1) between approximately March 2012, and August 2013 Center Street, through multiple brokers, made unsuitable recommendations to customers to purchase GWG Renewable Secured Debentures, an illiquid and high-risk private placement investment; 2) Center Street failed to maintain an adequate supervisory system and adequate written supervisory guidelines to reasonably supervise the sales of GWG debentures; 3) between approximately February 2012, and November 2012, Center Street also distributed an inaccurate GWG sales brochure to over 100 customers; and 4) certain Center Street customer account forms contained inaccurate information about customer net worth or other information, and thus the firm failed to maintain accurate books and records.

Center Street Securities is headquartered in Nashville, Tennessee, has been a FINRA member since 1991, has approximately 67 branch offices and approximately 84 registered representatives. This is not the first time that FINRA has brought regulatory action concerning the actions of Center Street representatives. See Center Street Securities Broker David Escarcega Investigated Over GWG Debenture Sales; FINRA Sanctions Michael Wurdinger and Anil Vazirani Over GWG Debenture Sales (FINRA sanctioned brokers associated with Center Street Securities, Inc.).

The notes are issued by GWG Holdings, Inc. (GWG) which purchases life insurance policies on the secondary market at a discount to the face value of the insurance policies. GWG pays the policy premiums until the insured dies and GWG then collects the insurance benefit making a profit, hopefully, by collecting more upon the maturity of the policies than the payment of the policy and servicing of the premiums. The Debentures have varying maturity terms and interest rates ranging from six-month at an annual interest rate 4.75% to seven years at 9.50%. The prospectus for GWG stated that the investments were speculative and involve a high degree of risk, including the possibility of risk of loss of the entire investment. An investment in the GWG Debentures, as a private placement, is illiquid and investors will not have access to their principal prior to maturity.

FINRA Files Complaint Against Toni Chen Over Failure to Respond to Inquiries Relating to a Pyramid Scheme

October 27, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) brought a complaint against broker Toni Chen (Chen) concerning allegations that during the course of FINRA’s investigation into whether Chen was involved in a pyramid scheme that may also constitute “selling away” activities. Chen failed to respond to FINRA’s requests.

On October 18, 2013, the Securities and Exchange Commission (SEC) filed a Form U6 with FINRA regarding Chen’s activities disclosing the United States District Court for the Eastern District of New York had granted the SEC’s request for a temporary restraining order for an asset freeze and other emergency relief against Chen and other defendants. The SEC restraining order is in connection with an ongoing worldwide investment pyramid scheme targeting members of the Asian-American Community. Thereafter, FINRA commenced its own investigation into whether Chen while registered with a FINRA firm or had engaged in any violations of the securities laws. Until April 2012, Chen was registered with World Group Securities, Inc. Thereafter, and until August 2012, Chen was associated with Transamerica Financial Advisors, Inc. (Transamerica).

FINRA alleged that it made numerous requests seeking information and testimony from Chen. In spite of FINRA’s numerous requests, Chen failed to provide testimony and certain information requested by staff. Due to Chen’s failure to provide documents, FINRA brought the instant complaint.