Securities Lawyers Blog

Carolina Financial Fined by FINRA Over Private Placement Due Diligence

June 26, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently sanctioned brokerage firm Carolina Financial Securities, LLC (Carolina Financial) concerning allegations that the firm failed to conduct proper due diligence on private placements sold by the firm.

Carolina Financial has been FINRA member since 1997 and operates out of Brevard, North Carolina. The firm has 12 registered representatives and derives generates revenues through the sale of private placements. The firm has two other prior disciplinary actions including a FINRA action in July 2010, concerning allegations that Carolina Financial failed to ensure that an escrow account was established for a contingent offering.

NASD Rule 3010 requires brokerage firms to establish, maintain, and enforce a supervisory system reasonably designed to comply with the securities laws and the FINRA rules. As part of a brokerage firm’s responsibility includes conducting due diligence on its securities products in order for the firm to understand the risks of these products and to have a reasonable basis to believe these products are suitable for at least some customers. FINRA stated in its complaint that due diligence is especially important for alternative investments such as private placement offerings under Regulation D where there is no registration of the securities with the SEC.

Unsuitable IRA Investments On the Rise – Part III

June 25, 2014 | by Staff Attorney

This article continues our prior posts concerning a recent report by Bloomberg that noted the rise in rollovers from 401(k) plans into IRA accounts. The article pointed to concerns by regulatory agencies and investors concerning the suitability of the investment choices being recommended by brokers soliciting rollovers.

In another example, a mechanical engineer for Hewlett-Packard in Puerto Rico, rolled over $150,000 from a 401(k) to an IRA with UBS. His broker Luis Roberto Fernandez Diaz, recommended Puerto Rico municipal bond funds that contained a 3 percent upfront sales fee and 1 percent annual expenses. Fernandez’s brokercheck lists 17 customer disputes from 2009 through 2014. As we have reported on multiple occasions, our firm represents investors in claims against UBS concerning the firm’s practices in overconcentrating many of their client’s assets in these speculative highly leveraged bond funds. Those articles can be found here, here, and here.

In the case of an IRA, it makes little sense for a financial adviser to recommend investing in municipal bonds because the bonds main advantage is tax avoidance which already is a benefit of investing in an IRA. The investor interviewed by Bloomberg, says that the bonds plunged in value because of the deteriorating finances of Puerto Rico and are only worth $90,000.

Beware of Brokerage Firms Soliciting 401(k) Rollovers – Part II

June 24, 2014 | by Staff Attorney

This article picks up on our prior post concerning a recent report by Bloomberg concerning allegations that brokerage firms have used unscrupulous tactics in rolling over employee 401(k) plans into IRA accounts.

The article highlighted how Kathleen Tarr (Tarr) and Richard McCollam (McCollam) with Royal Alliance Associates gained access to AT&T Inc. employees. Tarr was also associated with SII Investment, Inc., from July 2010 until November 2012. McCollam began marketing to AT&T employees with 401(k) rollovers and lump-sum pension payments. The telecommunications company has 246,000 workers and ranks among the best 15 percent of U.S. plans in terms of fees, charging expenses as low as .01 percent. At AT&T employees can take a pension monthly payment or a lump sum payment.

According to the article the employees looked to Tarr as 401(k) expert and visited their homes and offices in order to advise them on their retirement plans. Bloomberg found that Tarr encouraged hundreds of departing AT&T employees to roll over their retirement savings into risky high-commission investments that the SEC and FINRA have warned customers against investing substantial unsuitable sums into.

Brokerage Firms Profit Off of 401(k) Rollovers at Investors’ Expense

June 23, 2014 | by Staff Attorney

A recent article by Bloomberg highlighted a disturbing trend whereby brokers of independent brokerage firms have been able to make substantial profits while providing allegedly unsuitable investment advice and potentially tanking the retirement savings of potentially hundreds and maybe thousands of blue collar workers. These brokerage firms have been able to tap into large corporations with thousands of employees with 401(k) plans and convince them to rollover their accounts to their firm into IRAs. Once there, the brokers recommend unsuitable investments in an already tax-deffered account such as municipal bond funds and variable annuities. Some of the investments are extremely speculative and carry huge commissions and fees. In the end the brokers make hundreds of thousands in commissions while the investor is left with a depleted retirement account.

How the practice works is that brokers form connections with large employers in order to pitch their investment services to employees. Because the employer allows the broker to use their offices and facilities to pitch their investment services, employees often mistakenly believe that the company endorses or has otherwise evaluated the broker. In fact, these companies often have little to no relationship with the broker or a defined screening process.

According to Bloomberg, employees shifted $321 billion from 401(k)-style plans to individual retirement accounts in 2012. As a result, IRAs account assets are up to $6.5 trillion, more than the $5.9 trillion contained in 401(k)-style accounts. However, the shifts have been used by some Wall Street firms to profit at their client’s expense. IRAs often charge higher fees than 401(k) plans which provides brokers an incentive to promote rollovers.

Adam Gana Publishes Article on the Problems with Securities Laws in New York

June 23, 2014 | by Staff Attorney

The Fordham Journal of Corporate and Financial Law will be publishing an article written by Adam Gana and Michael Villacres. The article is entitled Blue Skies for America in the Securities Industry… Except for New York: New York’s Martin Act and the Private Right of Action. The article addresses the origins and legislative history of New York’s securities regulations and compares the regulations to that of other states. The article then explores the disadvantages to New York’s retail investing public. Finally and most importantly, the article recommends changes to the law that will truly help protect investors in the state of New York.

The article will appear in the summer 2014 edition of the Fordham Journal.

The Failure to Protect the Public From Securities Fraud – Part II

June 20, 2014 | by Staff Attorney

As discussed in Part I, the primary defense to preventing securities fraud is has been to “bar” the person from the industry and to instruct the criminal to stop committing fraud. Despite the evidence that the slap on wrist approach has been ineffective, some lawmakers continue to think barring individuals and educating the public is the best way to stop securities fraud.

Yet, according to Futures Magazine, during the hearing Sens. Susan Collins (R-ME) and Bill Nelson (D-FL) stressed the importance of “consumer education” to prevent future scams. If only we could convince senior citizens to spend their golden years reading CFTC and SEC news releases and memorize the names of hundreds of barred fraudsters each year maybe we can turn the tide in this fight – right. Great game plan. At least Sen. Claire McCaskill (D-MO) understood the disservice the education alone approach would provide the investing public by stating that “The first line of defense is not consumer education,” but rather “putting the crooks in prison.”

The hearing also featured testimony of a former fraudster, Karl Spicer. Spicer was convicted for ripping off investors in a metals scam. Spicer’s testimony also clearly stated that it is government agencies failure to instill fear into fraudsters that has resulted in no progress in investor protection. Without real world consequences, criminals merely go from scam to scam and will unapologetically continue to swindle. Spicer stated that “With all due respect to the civil authorities, the people that I have encountered…don’t really respect the civil authority bans.” In fact, “The gentleman I was with had a CFTC ban, he cooperated; he had a ban and he still went about doing business the very next day.”

The Failure to Protect the Public From Securities Fraud – Part I

June 19, 2014 | by Staff Attorney

If someone broke into your home and stole hundreds of thousands of dollars of your possessions you expect that person to go to jail. But what if the consequence was merely to pay a fine and a court ordered bar from breaking into homes. Would you be alright with that outcome? Could such an approach really stop or even deter criminals? Could you imagine lawmakers arguing with you that the key to preventing more burglaries is to inform homeowners about locking their doors and windows and installing alarms – but not jail. If such an approach sounds silly then why have we accepted this approach to securities fraud.

The primary defense to preventing securities fraud is simply to “bar” the person from the securities industry and to instruct him or her to stop committing fraud. For many recidivist fraudsters, being barred from the industry is merely part of the career plan. Often times being barred from the industry merely frees the fraudster from the shackles of having to conceal their fraud within the confines of industry supervision. After being barred fraudsters are often in a perfect position to continue stealing from investors. Think about it – they have been industry trained, have spent years learning their craft, and have established many contacts and industry connections that they can now utilize for their post-industry frauds.

Yet regulators and lawmakers seemingly fail to grasp the very simple principal that those who commit securities fraud need to go to jail – period. Recently, the Senate presented findings of the Senate Special Committee on Aging concerning investigations gold investment scams targeting Florida seniors. The hearing clearly exposed how securities regulators, in this case the Commodity Futures Trading Commission (CFTC), has no ability to prevent securities fraud and protect the investing public.

Wells Fargo Advisors Awarded Limited Recovery On Broker Promissory Note

June 18, 2014 | by Staff Attorney

Recently, a Financial Industry Regulatory Authority (FINRA) arbitration panel rendered a decision concerning Wells Fargo Advisors, LLC’s (Wells Fargo) claims against its former broker Steven Grundstedt (Grundstedt) for breach of three promissory notes. FINRA Arbitration Case No. 11-02245. The FINRA arbitration panel held that Grundstedt was entitled to an offset against the outstanding balance of the first promissory note dated July 30, 2008 because Wells Fargo, then Wachovia at the time, breached an implied contract and/or the covenant of good faith and fair dealing in the contracts Grundstedt signed, causing him substantial economic damage.

Wells Fargo claimed that Grundstedt failed to repay three separate forgivable promissory notes. Note 1 was in the principal amount of $320,000 and constituted a “transitional bonus” Grundstedt was rewarded with for moving his book of business from his former employer, Citigroup. Like the other notes in the litigation, the principal portion of Note 1 could be received in a lump sum or could be taken in monthly installments. In either case, the monthly re-payment of principal and interest was to be offset by the forgiveness of an equivalent amount conditioned upon Grundstedt’s continued employment with Wachovia’s.

According to the order, at the time Grundstedt accepted employment with Wachovia, he signed multiple agreements. One of these agreements promised Grundstedt that he would receive “support” from Wachovia including “re-assignment of accounts, walk-ins, prospective customer leads…” among other forms of company support. The panel found that Wachovia initially lived up to its promises but that the situation changed after Wachovia was acquired by Wells Fargo. In the fall of 2009, Wells Fargo consolidated operations, closed branches, and changed payouts and various other things designed with the intent to make the overall business more efficient and profitable.

Ameriprise Slammed With $1.17 Million Decision Concerning Tenants-in-Common (TIC) Investments

June 17, 2014 | by Staff Attorney

A Financial Industry Regulatory Authority (FINRA) arbitration panel recently ordered Ameriprise Financial Services Inc. (Ameriprise) to pay two elderly California investors $1.17 for recommending the investments in Tenants-in-Common (TIC), real estate related investments that eventually failed.

Brokerage firms, such as Ameriprise, having increasingly turned to alternative investment products such as TICs in recent years. The sales of TIC interests grew from approximately $150 million in 2001 to approximately $2 billion by 2004. FINRA has warned brokerage firms to put investors on notice of the risks of these illiquid investment for which no secondary market exists. In addition, subsequent sales of TIC property may occur at a discount to the value of the real property interest causing the investor substantial losses. FINRA has also warned that the fces and expenses charged by the TIC sponsor can outweigh the potential tax benefits associated with the IRS Section 1031 Exchange. FINRA requires that all member brokerage firms have an obligation to comply with all applicable conduct rules when selling TICs. These rules include the obligation to conduct proper due diligence and to ensure that promotional materials used are fair, accurate, and balanced.

In a recent InvestmentNews article, it was reported that in May, a FINRA arbitration panel in San Francisco ruled that Ameriprise had inappropriately advised two retired schoolteachers to invest a total of $1.03 million into three TICs in office complexes and hotels in early 2008. One of the TICs has subsequently failed and the two others have suffered declines in value. According to the investors, the couple lost most of their life savings. The couple invested in TICs known as ARI-Onyx Office Plaza Tenant In Common; Moody Springhill Suites Pittsburgh Tenant in Common; and Moody Marriott TownePlace Suites Portland Scarborough Tenant in Common.

Morgan Stanley Fined $5,000,000 For Failure To Supervise Sales of IPO’s

June 16, 2014 | by Staff Attorney

On May 6, 2014, the Financial Industry Regulatory Authority (FINRA) announced that it had fined Morgan Stanley Smith Barney LLC $5,000,000 for failure to properly supervise the solicitation of retail clients to invest in initial public offerings (IPOs). According to FINRA, Morgan Stanley sold shares to its retail customers in eighty-three different IPO’s between February 16, 2012 and May 1, 2013, with insufficient procedures and employee education. Some of the more commonly sold IPOs included Facebook and Yelp among other Internet favorites.

When broker dealers sell IPOs, there is a process in place for soliciting customer interest. Prior to the effective date of the registration statement, firms may only obtain an “indication of interest” from customers. An “indication of interest” is not a purchase. In order for an “indication of interest” to result in a purchase the investor must reconfirm their interest after the IPO registration statement becomes effective. Broker dealers may also solicit what is known as “conditional offers to buy.” This differs from an “indication of interest” in that the investor does not have to reconfirm. It may bind the customer after the registration statement becomes effective if the investor simply takes no action to revoke the conditional offer before the brokerage firm accepts it. According to FINRA, Morgan Stanley Smith Barney failed to institute adequate procedures and properly train its employees to ensure that its staff clearly differentiated an “indication of interest” from a “conditional offer” in their solicitation of potential investors.

Morgan Stanley Smith Barney actually adopted a policy related to the solicitation of IPO’s. In adopting this policy back on February 16, 2012, however, the firm used the terms “indication of interest” and “conditional offer” interchangeably, which implicitly disregarded the need for customer reconfirmation prior to trade execution. According to FINRA, Morgan Stanley never provided its sales teams and financial advisers any education or materials explaining the differences in terminology. As a consequence there was a strong possibility that neither the Morgan Stanley staff nor its customers properly understood the type of order that was being solicited. In addition, FINRA found that Morgan Stanley’s inadequate policies failed to comply with the federal securities laws and other FINRA rules.