Securities Lawyers Blog

FINRA Sanctions Financial America Securities and John Rukenbrod Over Supervisory Failures

October 24, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned broker Financial America Securities, Inc. (Financial America) and John Rukenbrod (Rukenbrod) concerning allegations that between August 2009, and May 2011, the firm, acting through Rukenbrod, failed to adequately supervise the business being conducted out of one of the firm’s branch offices. FINRA found that the firm: 1) failed to conduct any inspection of the branch office; 2) failed to review any incoming or outgoing e-mails of the three registered representatives operating out of the branch; 3) failed to adequately supervise private securities transactions engaged in by two of the registered representatives; 4) failed to ensure that all electronic communications were captured and retained; 5) failed to create and maintain a written report of inspections of the branch as required; and 6) failed to ensure that the firm’s securities business was supervised by a licensed securities principal.

Financial America has been a FINRA firm since 1970, employs 31 registered representatives, has two branches, and engages in a general securities business. Rukenbrod entered the securities industry in 1966 and cofounded Financial America in 1970.

FINRA alleged that two of Financial America’s representatives initialed “PC” and “CM” engaged in a securities business primarily in the sale of private placement offerings and Rukenbrod was the firm’s designated supervisor. In April 2010, FINRA found that Rukenbrod attended an investor presentation at PC and CM’s branch for a private placement offering. Rukenbrod turned down the offering and stated that the firm would not participate in the offering until certain due diligence procedures were agreed upon.

FINRA Bars Broker Joseph Pappalardo Over Allegations of Sales of Coast-2-Coast Properties Securities to Customers

October 24, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) barred broker Joseph Pappalardo (Pappalardo) concerning allegations that between August 2008, and August 2012, Pappalardo, while associated with Financial Network Investment Corporation (n/k/a Cetera Advisor Network LLC), made fraudulent and misleading misrepresentations to a customer in the sale of private securities, converted customer funds for his personal use, engaged in private securities transactions (a/k/a “selling away”), failed to disclose several outside business activities, and failed to amend his U4.

Pappalardo joined Financial Network Investment Corporation in 2008 and was required to complete a several questionnaires including disclosures of outside business activities. In 2008, FINRA alleged that Pappalardo disclosed on the questionnaire that he had previously been involved with a real estate company he formed in 2003 called Coast-2-Coast Properties (C2C) that was in the business of buying, renovating, and selling houses but that the company was no longer in business. FINRA alleged that Pappalardo’s statement was false. In fact, FINRA found that Pappalardo was involved in several outside business activities that he failed to disclose to Cetera including ongoing involvement in C2C and its marketing arm Prosperity Financial Estate Planning and Insurance Services (Prosperity Financial).

Thereafter, FINRA found that Pappalardo solicited customers to invest in these businesses. In one instance, FINRA found that Pappalardo solicited the sale of a $100,000 investment in Prosperity Financial which Pappalardo converted for his personal use. In total, FINRA found that Pappalardo solicited C2C to at least 6 customers and purported to offer investors 12% interest returns on profits generated by the business. FINRA found that the investors did not actually own any portion of the real estate properties held by C2C but instead were to receive interest returns on profits from Pappalardo and the business. FINRA found that by engaging in the C2C private securities Pappalardo violated the FINRA rules.

FINRA Fines Feltl & Company $1 Million Conerning the Firm’s Penny Stock Business

October 22, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has sanctioned brokerage firm Feltl & Company (Feltl) and fined the firm $1,000,000 concerning allegations that the firm, between January 2008, and February 2012. failed to comply with the suitability, disclosure, and record-keeping requirements for broker-dealers who engage in penny stock business. FINRA alleged that Feltl did not provide some customers with Securities and Exchange Commission (SEC) risk disclosure document two days prior to effecting a penny stock transaction in the customers’ accounts. failed to sufficiently supervise penny stock transactions for compliance with applicable rules and regulations, and failed to establish, maintain, and enforce written supervisory procedures for its penny stock business.

Feltl has eight branch offices located in Minnesota and Illinois, and approximately 113 registered representatives and has been a FINRA member since 1975.

The term “penny stock” generally refers to securities that trades below $5 per share, issued by a small company. Penny stocks often trade infrequently making it difficult to sell and price. Due to the size of the issuer, the market cap, the liquidity issues, and other reasons penny stocks are generally considered speculative investments. Consequently, the SEC requires broker-dealers effecting penny stock transactions to make a documented determination that the transactions are suitable for customers and obtain the customers’ written agreement to those transactions.

Non-Traded REITs Sales Grow As Shown in Second Quarter 2014 Rankings

October 21, 2014 | by Staff Attorney

Since the financial crisis the non-traded real estate investment trust (REIT) market has been a financial boon for the brokerage industry. A REIT is a security that invests typically in real estate related assets. Generally, REITs can be publicly or privately held. While publicly held REITs can be sold on an exchange, are liquid, and have lower commissions and fees, non-traded REITs are sold are private, are speculative, illiquid, and often charge fees of over 10%. Nonetheless, non-traded REITs have become a darling product of the financial industry, mostly because of the fat fees brokers earn for recommending these speculative products.

Brokers selling these products sometimes claim that non-traded REITs offer stable returns compared to the volatile stock market. As the Financial Industry Regulatory Authority (FINRA) and the Securities Exchange Commission (SEC) have recently noted, these products may not be as safe and stabile as advertised.

InvestmentNews recently ranked non listed REITs by second quarter 2014 invested assets. As shown below, investment in these funds are substantial and continues to grow each quarter

Company	2Q invested assets ($M)	Original share price	Current share value	Original distribution rate	Current distribution rate	2Q14 FFO 2 payout ratio
Inland American Real Estate Trust	$10,128.5	$10	$6.94	6.20%	5.00%	75%
Corporate Property Associates 17 Global	$4,564.7	$10	$9.50	6.50%	6.50%	81%
Apple Hospitality	$3,960.0	$11	$10.10	8.00%	7.25%	83%
Industrial Income Trust	$3,747.6	$10	$10.40	6.00%	6.00%	100%
Tier REIT	$3,455.8	$10	$4.20	7.00%	0.00%	N/A
CNL Lifestyle Properties	$3,343.4	$10	$6.85	6.25%	4.25%	108%
Griffin-American Healthcare REIT II	$3,056.2	$10	$10.22	6.50%	6.65%	143%
Monogram Residential Trust	$2,879.1	$10	$10.03	7.00%	3.50%	189%
Cole Credit Property Trust IV	$2,833.0	$10	$10.00	6.25%	6.25%	145%
KBS Real Estate Investment Trust II	$2,714.1	$10	$10.29	6.50%	6.50%	98%
Cole Corporate Income Trust	$2,606.3	$10	$10.00	6.50%	6.50%	94%
Hines Real Estate Investment Trust	$2,422.1	$10	$6.40	6.00%	2.90%	88%
American Realty Capital Trust V	$2,233.5	$25	$25.00	6.60%	6.60%	86%
KBS Real Estate Investment Trust	$2,058.0	$10	$4.45	7.00%	0.00%	N/A
Landmark Apartment Trust	$1,889.4	$10	$8.15	6.00%	3.00%	38%
Phillips Edison – ARC Shopping Center	$1,846.9	$10	$10.00	6.50%	6.70%	129%
Steadfast Income REIT	$1,592.7	$10	$10.24	7.00%	7.00%	165%
Strategic Storage Trust	$731.5	$10	$10.79	7.00%	6.50%	120%
Signature Office	$676.4	$25	$25.00	6.00%	6.00%	83%
Lightstone Value Plus REIT	$643.2	$10	$11.80	7.00%	7.00%	69%

Many brokerage firms have come under fire for their non-traded REIT sales practices. For instance LPL Financial in particular has been accused by several regulators of failing to reign in their broker’s sales practices concerning alternative investments. On March 24, 2014, LPL Financial was fined $950,000 by the Financial Industry Regulatory Authority (FINRA) for failing to supervise its brokers’ marketing of nontraditional investments. LPL Financial was alleged to have deficient supervision in the sale of certain alternative investment products, including REITs, oil and gas partnerships, business development companies (BDC’s), hedge funds, and managed futures.

LPL Financial also paid a $500,000 fine to the Massachusetts Securities Division and was ordered to pay $4.8 million in restitution for supervisory and suitability related violations concerning non-traded REITs. In total six firms paid $11 million in restitution and fines related to REIT sales. The other firms including Ameriprise Financial Inc., Lincoln National, Commonwealth Financial Network, Royal Alliance Associates, and Securities America.

The attorneys at Gana Weinstein LLP are experienced in representing investors to recover their financial losses through the misrepresentation of non-traded REITs. Our consultations are free of charge and the firm is only compensated if you recover.

Top 10 Signs of Investment Fraud

October 20, 2014 | by Staff Attorney

Every year dozens of investors contact our firm seeking to recover losses due to sham or bogus investments. Only a fraction of those defrauded people were fortunate enough to working with a licensed broker who wasn’t being properly supervised by their brokerage firm and have recourse to avenues of redress. The other investors are often left with little to no recourse other than to spend additional sums of money on the off chance for recovery.

Recently, the Securities and Exchange Commission published its “10 Red Flags That an Unregistered Offering May Be a Scam” Most investors do not realize that each and every investment out there must be registered with the SEC or offered through a registration exemption to be legally sold to investors. Yet, billions of dollars are continually pumped into fraudulent and unregistered offerings. The SEC published these top 10 red flags that every investor should be on the look out for.

Claims of High Returns with Little or No Risk – A classic red flag that high returns are around the corner with little or no risk. Every investment carries some degree of risk, and if your advisor can’t point that out to you, then you need to find another broker.

FINRA Sanctions Huntleigh Securities Concerning Non-Traditional ETF Sales Practices

October 17, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has sanctioned brokerage firm Huntleigh Securities Corporation (Huntleigh) concerning allegations that the firm failed to establish and maintain a supervisory system regarding the sale of leveraged as well as inverse leveraged exchange traded funds (Non-Traditional ETFs) reasonably designed to achieve compliance with applicable securities laws.

Huntleigh is a FINRA member firm since 1977 and has headquarter offices in St. Louis, Missouri. Huntleigh engages in general securities business and employs approximately 53 registered representatives across its five branch offices.

Non-Traditional ETFs contain drastically different risk qualities from traditional ETFs. While traditional ETFs simply seek to mirror an index or benchmark, Non-Traditional ETFs use a combination of derivatives instruments and debt to multiply returns on underlining assets, often attempting to generate 2 to 3 times the return of the underlining asset class. Non-Traditional ETFs can also be used to return the inverse or the opposite result of the return of the benchmark.

Broker Edward Wendol Barred by FINRA Over Failure to Respond to Outside Business Activity Inquiries

October 16, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) barred broker Edward Wendol (Wendol) concerning allegations that during the course of FINRA’s investigation into whether Wendol was involved in undisclosed outside business and private securities transactions, also known as “selling away”, Wendol failed to respond to FINRA’s requests. On May 29, 2014, FINRA requested that Wendol provide documents and information. On June 16, 2014, Wendol informed FINRA that he would not provide the requested documents and information or appear and provide testimony. As a result, Wendol was barred from the securities industry.

Wendol first became registered with FINRA in 1993 with South Richmond Securities, Inc. From October 1993, through October 2009, Wendol was registered with seven different FINRA member firms. On December 5, 2011, Wendol registered with Sterling Enterprises Group, Inc. (Sterling). Thereafter, from September 2013, through July 2014, Wendol was associated with WTS Proprietary Trading Group LLC.

The allegations against Wendol are consistent with a “selling away” securities violation. In such a case, the broker sells private securities away from the firm because the investment is not approved by the broker’s affiliated firm. Under the FINRA rules, a brokerage firm owes a duty to properly monitor and supervise its employees. In fact, each brokerage firm is required to establish and maintain a system to supervise the activities of each registered representative that is reasonably designed to achieve compliance with the securities laws. Selling away often occurs when supervisory lapse conditions exist. Supervisory lapses include either the failure to put in place a reasonable supervisory system or a failure to implement their supervisory requirements. Many times there obvious “red flags” of misconduct that are overlooked or not properly followed up on.

Broker Thomas Sharp Sanctioned by FINRA Over Misleading Statements Concerning Non-Traded REITs

October 15, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned broker Thomas Sharp (Sharp) concerning allegations that Sharp violated NASD Rule 2210(d) by sending emails to potential investors in a non-exchange traded real estate investment trusts (Non-Traded REITs) that were not fair and balanced and failed to provide a sound basis for evaluating the facts. Sharp was associated with Ameriprise Financial Services, Inc. (Ameriprise) from 1987 through September 2013.

The Non-Traded REIT market has been a financial boon for the brokerage industry in recent years. A Non-Traded REIT is a security that invests mostly in real estate or property assets. While publicly traded REITs can be sold on an exchange, are liquid, and have lower commissions and fees, non-traded REITs are sold in the form of private placement offerings, are speculative, illiquid, and often charge fees of over 10%. Nonetheless, brokers have recommended these products to many investors, in part driven by the fat fees they can earn.

Brokers’ selling practices have come under scrutiny because sometimes brokers claim that Non-Traded REITs offer stable, safe returns compared to the volatile stock market. However, the stability is only a result of the fund setting its own price and illiquidity, not because the product is immune to market fluctuation.

Broker Lorene Fairbanks Alleged to Have Made Unauthorized Trades in Client Accounts

October 14, 2014 | by Staff Attorney

According to broker Lorene Fairbank’s (Fairbank) Financial Industry Regulatory Authority (FINRA) BrokerCheck records the representative was recently sanctioned concerning allegations that From August 2006, through February 2012, she effected approximately 57-69 discretionary transactions for seven firm customers without written authorization from the customers or approval from the firm. In addition, Fairbanks was alleged to have mismarked approximately 54-70 order tickets as being “unsolicited” orders when the trades were “solicited” causing the firm to maintain inaccurate books and records.

Fairbanks entered the securities industry in 1996. From August 2006, to March 2012, she was registered Merrill Lynch. Pierce, Fenner & Smith Incorporated (Merrill Lynch). In February 2012, Merrill Lynch terminated Fairbanks and disclosed in a filing that she was discharged for taking discretion in client accounts and mismarking client orders. Since June 2012, Fairbanks has been associated with Ameriprise Financial Services, Inc. In addition, at least five customer complaints have been filed against Fairbanks alleging unsuitable investments, unauthorized trading, and excessive trading (churning).

NASD Rule 2510 prohibits brokers from exercising any discretionary power in a customer’s account unless there is written authorization and the account has been accepted by the member. NASD Rule 3110 and FINRA Rule 4511 provide that members must preserve books and records. FINRA alleged that Fairbanks was not approved by her firm to exercise discretion in any customer accounts but nonetheless effected approximately 57-69 discretionary transactions for seven customers. Also, FINRA alleged that Fairbanks mismarked approximately 54-70 order tickets in the same customers’ accounts as “unsolicited” meaning that the customer asked the broker to make the trade, when the trades were solicited, meaning that the broker brought the investment to the client’s attention.

Center Street Securities Broker David Escarcega Investigated Over GWG Debenture Sales

October 13, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) brought a complaint against broker David Escarcega (Escarcega) concerning allegations that Escarcega recommended unsuitable investments in Renewable Secured Debentures of GWG, Inc. (GWG Debentures). Escarcega is not the first Center Street Securities, Inc. (Center Street) broker that has been investigated by FINRA in connection with their GWG sales or the supervision of such sales. As we have reported FINRA recently sanctioned Michael Wurdinger (Wurdinger) concerning allegations that from approximately February 2012, to February 2013, Wurdinger failed to adequately supervise sales of GWG Debentures. In a related but separate action concerning Center Street’s supervision of the sale of the GWG debentures, Anil Vazirani (Vazirani) was found to not be appropriately registered with the firm but nonetheless solicited sales of the debentures through communications with prospective customers, discussed the details of the debentures features as an investment, recommended the purchase of the product, and assisted seven customers to complete documents in order to purchase the GWG Debentures.

As a background, GWG Holdings, Inc. purchases life insurance policies on the secondary market at a discount to the face value of the insurance policies. GWG then 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. According to FINRA, the company has a limited operating history and has yet to be profitable. 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.

In Escarcega’s case, FINRA alleged that Between March 2012, and January 2013, Escarcega violated the antifraud provisions of the federal securities laws as well as numerous FINRA and NASD rules while selling more than $1.8 million of GWG Debentures to his customers. According to FINRA, Escarcega made false and misleading oral and written statements to seven customers in connection with their purchases of the GWG Debentures. FINRA found that Escarcega falsely told the customers that the Debentures were safe, low-risk, liquid, or guaranteed. For example, on one form, FINRA found that Escarcega described the GWG Debentures as having “a guaranteed interest payment” and providing a “guaranteed rate of return.”