Securities Lawyers Blog

Broker Sanctioned Over Allegations of Unsuitable Variable Universal Life (VUL) Policies

September 6, 2014 | by Staff Attorney

shutterstock_50740552 The Financial Industry Regulatory Authority (FINRA) sanctioned broker David Herlicka (Herlicka) concerning allegations that from 2003 through 2011 Herlicka made unsuitable trade recommendations to seven customers in connection with the sales of Variable Universal Life (VULs). FINRA found that Herlicka also made misstatements and failed to adequately disclose information regarding VULs, including the fact that they have surrender fees. FINRA also alleged that Herlicka recorded false information regarding customer net worth and annual income on VUL applications for four of these customers and that he, in 2011, also effected an unauthorized trade of a VUL for a customer.

VUL are complex insurance and investment products that investors must fully understand the risks and benefits of prior to investing. One feature of a VUL policy is that the owner can allocate a portion of his premium payments to a separate sub-account that can be used to grow in value through investments. Monthly charges for the life insurance policy, including a cost of insurance charge and administrative fees, are deducted from the policy’s cash value. The cash value of the policy may increase or decrease based on the performance of the sub-account investments. In addition, the VUL policy terminates, 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 involved in purchasing VULs, brokers must be careful to ensure that the recommendation to invest in VULs is suitable for the client. For example, if a policy is too expensive for the client to continue to make premium contributions to the policy could lapse over time. This is precisely what FINRA alleges that Herlicka failed to consider in some recommendations to his clients.

optionsXpress, Inc. Sanctioned Over Allegations of Unlicensed Securities Sales

September 5, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned brokerage firm optionsXpress, Inc. (optionsXpress) concerning allegations that: 1) between March 2007, and March 2012, optionsXpress contracted with a third party service provider referred to as (GBT) to provide options trading coaching services to the firm’s options customers; 2) the firm approved marketing scripts that were used by GBT to sell the coaching program to optionsXpress customers that failed to present a fair and balanced description of the risks and potential benefits of the coaching program; and 3) between April 2011, and July 2011, the firm operated a retail forex business without having first received approval from FINRA to do so.

optionsXpress has been a FINRA firm since August 2000. The firm is primarily an online broker-dealer that specializes in providing customers an online platform to trade options.

FINRA found that under the terms of the firm’s Agreement with GBT coaches were prohibited from advising clients in live trading situations. The agreement provided that GBT coaches are vigorously trained on the absolute prohibition of making buy/sell recommendations to students. However, FINRA found that in implementing the coaching program, GBT’s coaches did not uniformly adhere to this prohibition and in certain instances coaches discussed live trades, specific transactions, or strategies that the customer was considering executing. Even though coaching sessions were prefaced with the disclaimer that coaches were not permitted to make buy, sell, or hold recommendations, FINRA determined that in certain sessions, the “coaching” surpassed mere discussions of specific securities transactions, and rose to the level of buy, sell, or hold recommendations.

NEXT Financial Group Sanctioned Over Failure to Adhere to Industry Rules

September 3, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned brokerage firm NEXT Financial Group, Inc. (NEXT Financial) concerning allegations that: 1) between March 17, 2009, and August 26, 2011, NEXT Financial failed to timely and accurately amend registered representatives’ Forms U4 and U5 to disclose customer complaints, judgments and liens; 2) from January 1, 2010, through August 26, 2011, NEXT Financial permitted its former general counsel to directly supervise registered persons without a principal registration; and 3) from March 17, 2009, through August 10, 2012, NEXT Financial failed to establish and maintain a supervisory system that was reasonably designed to prevent and detect unsuitable sales of structured products to retail customers.

NEXT Financial is a general securities broker-dealer located in Houston, Texas and a member of FINRA since 1999. The firm currently has approximately 900 registered persons and 590 registered branch locations.

FINRA Rules require that every application for registration (Form U4) filed with FINRA shall be kept current at all times by supplementary amendments. Supplementary amendments must be filed within 30 days after learning of facts or circumstances that would require an amendment. FINRA also requires that a notice of termination (Form U5) be filed with FINRA within 30 days after an individual’s association with a member firm is terminated and the form must be kept current at all times by supplementary amendments.

Great American Advisors Sanctioned Concerning Supervision of Variable Annuities

September 2, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned brokerage firm Great American Advisors, Inc. (Great American) concerning allegations that between December 2006, and December 2007, Great American failed to have an adequate supervisory system for the sale of variable annuities. FINRA alleged that two of the firm’s registered representatives recommended and effected 301 unsuitable variable annuity transactions involving 206 customers causing customers to pay $363,173 in unnecessary surrender fees and incur longer surrender periods.

Great American has been a registered firm with FINRA since 1994. From 1994 through August 2010, the Great American operated as a full service firm selling mutual funds and annuities, among other investment products. Since August 2010, the firm serves as a principal underwriter and distributor for annuity products and has 54 registered representatives.

As a background, a variable annuity is an investment and insurance product with significant risks and features the investor should be aware of before investing. Recently the Securities and Exchange Commission (SEC) released a publication entitled: Variable Annuities: What You Should Know. A variable annuity is a contract with an insurance company where the insurer agrees to make periodic payments to you based upon the chosen investments made in the annuity account. The investment options for a variable annuity are usually a selection of a group of mutual funds.

Blackbook Capital Sanctioned For Overcharging Clients

August 28, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned brokerage firm Blackbook Capital LLC (Blackbook) concerning allegations that: 1) between April 2010 and June 2011, Blackbook charged customers $60.50 on each purchase or sale transaction in addition to or in place of a designated commission; 2) between August 2010, and August 2011, Blackbook failed to search its records in response to requests by the Financial Crimes Enforcement Network of the Department of the U.S. Treasury (FinCEN) pursuant to the USA PATRIOT Act of 2001; 3) Blackbook failed to conduct an adequate independent Anti-Money Laundering (AML) test for calendar year 2010; and 4) between July 2009, and August 2011, Blackbook failed to preserve all of its business-related emails in a non-rewriteable, non-erasable format.

Blackbook has been a member of FINRA since March 2003. The firm has three offices with its main office located in New York City. Blackbook employs approximately 35 registered persons and engages in securities transactions for retail customers and investment banking transactions.

Under NASD Conduct Rule 2430 (Charges for Services Performed) charges for services performed, including miscellaneous services such as collection of moneys due for principal, dividends, or interest; exchange or transfer of securities; appraisals, safe-keeping or custody of securities, and other services, shall be reasonable and not unfairly discriminatory between customers. Under Exchange Act Rule 10b-10 (Confirmation of Transactions) broker-dealers are required to disclose specified information in writing to customers at or before the completion of a transaction. Finally, FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade) requires a member in the conduct of its business to observe high standards of commercial honor and just and equitable principles of trade.

Broker Spotlight – Mark Lisser Accused of Churning by at Least Three Customers

August 27, 2014 | by Staff Attorney

The law office of Gana Weinstein LLP is investigating a string of securities arbitration cases involving broker Mark Lisser (Lisser) which generally allege securities violations including churning, excessive use of margin, churning, unsuitable investments, and breach of fiduciary duty. All the cases have been filed before The Financial Industry Regulatory Authority (FINRA).

Lisser was registered with Prestige Financial Center, Inc. from February 2008, until November 2010. Thereafter, he was an associated person with Global Arena Capital Corp.

As a background “churning” occurs in a securities account when a dealer or broker, acting in his own interests and against those of his customer, induces transactions in the customer’s account that are excessive in size and frequency in light of the character of the account. In order to show that churning took place a claimant must demonstrate that the broker-dealer exercised control over the account and that the broker engaged in excessive trading considering the objectives and nature of the account.

Financial Advisor Sanctioned Over Allegations of Unsuitable Overconcentrations of Private Placements

August 26, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned and barred financial advisor Stephen Lard (Lard) concerning allegations that Lard recommended and sold various private-placement securities, that were speculative, high risk, and illiquid to customers three customers. FINRA alleged that Lard’s recommendations resulted in an unsuitable concentrated position for each investor of approximately 50% or greater. Such a concentration exposed each investor to a risk of loss that exceeded each investor’s risk tolerance and investment objectives. FINRA found that some of the investors did in fact suffer substantial losses and financial difficulty due to the illiquidity of the investments.

Lard entered the securities industry in 1994 and was associated with QA3 Financial Corp. (QA3) from 2000 until February 11, 2011. Thereafter, Lard was registered with Centaurus Financial, Inc.

FINRA found that between June 2007, and February 2008, one of Lard’s client’s executed suitability forms for her individual account. The forms reported an annual income of $80,000, a net worth excluding primary residence of $1,780,120, and a worth of all assets, including residence, minus all debts, of $1,852,120, and a liquid net worth of $650,000. The suitability form reflected “Moderate” as her risk exposure and “Income” as her investment objective.

Matthew Davis Barred Over Allegations of Conversion of Funds and Unauthorized Trading

August 25, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned and barred financial advisor Matthew Davis (Davis) concerning allegations that in connection with a FINRA investigation into allegations of misconduct in several customer accounts, FINRA staff scheduled Davis’ on-the-record (OTR) testimony and Davis failed to appear for the scheduled testimony and informed the agency that he would not appear at another time.

Davis was associated with Beneficial Investment Services, Inc. from November 2008, through April 2010. Thereafter, Davis was associated with OneAmerica Securities, Inc. (OneAmerica) from April 2010, through July 2013. He is not currently associated with a FINRA member.

FlNRA alleged that its staff requested that Davis appear and provide testimony on March 24, 2014, regarding allegations that Davis engaged in misconduct in several customer accounts. The allegations of misconduct included claims of conversion, misrepresentation of customer holdings and account value, forgery, discretionary unauthorized trading, attempts to settle a customer complaint without the firm’s knowledge, and unsuitable investment recommendations. Through Davis’ counsel, FINRA was informed that he would not appear for testimony.

IRS Brings Charges Against Barred Broker William Bucci

August 23, 2014 | by Staff Attorney

Back in Decmeber 2013, the law offices of Gana Weinstein LLP reported that “Former Ryan Beck and Oppenheimer Financial Advisor William Bucci Barred From the Financial Industry” where we reported that The Financial Industry Regulatory Authority (FINRA) barred Bucci for allegedly accepting 19 personal loans totaling $635,000 from nine customers in violation of FINRA rules. FINRA also alleged that Bucci willfully failed to amend his Form U4 to disclose material facts relating to two judgments that were entered against him. In addition to these claims, several customers filed complaints alleging that Bucci sold illegal promissory notes.

Recently, a combined investigation by the IRS and the FBI led to the filing of a federal complaint in the Eastern District Court of Pennsylvania against Bucci in connection with the foregoing activities. The complaint alleged that Bucci willfully made Individual Income Tax Return, Form 1040, for the calendar years 2007, 2008, 2009, and 2010 that falsely understated his income.

In addition, a second superseding indictment was filed against Bucci on July 22, 2014, by the United States Attorney’s Office for the Eastern District of Pennsylvania alleging that Bucci was running an investment fraud scheme that deceived investors into turning over more than $3.2 million. According to a press release issued by the office, Bucci told his victims he was starting a wine and high end olive oil import business to import the goods from Italy. The release stated that Bucci was a licensed stockbroker and a non-lawyer elector on the Pennsylvania Court of Judicial Discipline who never had an olive oil and wine business. The release also alleged that Bucci also solicited individuals to loan money for the purchase of real estate. According to the indictment, Bucci used the funds to supplement his income and to support his lifestyle as well as to make payments to earlier victims.

Brokerage Firm Safeguard Securities and Peter Mooney Sanctioned Over Numerous Supervisory Failures

August 22, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned brokerage firm Safeguard Securities, Inc. (Safeguard Securities) and broker Peter Mooney (Mooney) concerning allegations that during a FINRA examination of the firm Safeguard Securities provided certain outside business activity (OBA) forms to FINRA that had been backdated. FINRA found that Mooney, who signed the backdated forms, knew or should have known that the forms had been backdated. In addition, FINRA identified many supervisory and recordkeeping failures relating to: the review and retention of electronic communications; outside business activities; private securities transactions; the supervision of producing managers; and branch registration and fingerprinting of personnel.

FINRA found that Mooney was the firm’s principal and supervisor responsible for establishing and implementing supervisory procedures. FINRA alleged that Safeguard Securities, through Mooney, failed to establish and/or implement adequate supervisory procedures in numerous respects. First, it was alleged that the firm failed to establish and implement an adequate supervisory system for the review and retention of electronic communications relating to the business of the firm. For example, between July 14, 2008, and November 4, 2012, it was alleged that Safeguard Securities failed to maintain any record to evidence its review of electronic communications. Further, FINRA alleged that the firm failed to take any steps to monitor registered representatives who used e-mail addresses at domains other than the firm’s e-mail system.

In another instance of supervisory failure, FINRA alleged that during 2012, Mooney knew that a broker by the initials “WM” was engaging in private securities transactions for compensation. Notwithstanding the fact that the firm prohibited such activity, FINRA found that Mooney failed to take any steps to stop the broker’s participation in those transactions. Under NASD Rule 3040, a duty is imposed on member firms to supervise the transaction as if the transaction were executed on behalf of the member.