Securities Lawyers Blog

Berthel Fisher fined $775,000 by FINRA for Failing to Supervise the sale of Alternative Investments

April 9, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) fined broker-dealer, Berthel Fisher & Co. Financial Services and its affiliate, Securities Management & Research, Inc., a combined $775,000. FINRA alleged supervisory deficiencies, including Berthel Fisher’s failure to supervise the sale of alternative investments. FINRA also found that Berthel Fisher’s failure to supervise extended to non-traditional exchange traded funds (ETFs).

FINRA found that from January 2008 to February 2012, Berthel Fisher had inadequate supervisory systems and lacked proper written supervisory procedures with regards to the sales of these alternative investments, namely non-traded real estate investment trusts (REITs), managed futures, oil and gas programs, equipment leasing programs, and business development companies. In its report, FINRA also alleged that some investors were sold these products at a level of concentration that exceeded their respective investment objectives, making the sales and recommendations unsuitable. FINRA also claims that Berthel Fisher failed to train its employees on individual state suitability standards.

FINRA also found that from April 2009 to April 2012, Berthel Fisher did not have a reasonable basis for the sale of leveraged and inverse ETF’s. Before a registered firm may allow its registered representatives to recommend such products to its customers, it must conduct adequate research and review. Through its investigation, FINRA learned that Berthel Fisher representatives recommended approximately $49 million in these nontraditional ETF’s. Leveraged and inverse ETF’s expose holders to amplified movements that tend to deviate from their related benchmarks over extended periods of time. These products are often focused on short-term investment returns and subject to extreme movements during volatile markets, with the potential for significant loss of principal. According to FINRA, Berthel sold these products to conservative, buy-and-hold investors, sales that FINRA ultimately deemed unsuitable.

Barclays Capital Fined $3.75 Million Regarding Record Retention Failures

April 8, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) fined Barclays Capital Inc. (Barclays) $3.75 million for systemic failures relating to the failure to preserve electronic records, emails, and instant messages in the manner required for a period of at least 10 years. The retention of electronic correspondence and records is critical for the proper supervision of brokerage activities. Without a proper record retention system, brokerage firms are essentially blind to certain types of securities misconduct.

Federal securities laws and FINRA rules require that business electronic records must be kept in non-rewritable, non-erasable format — also referred to as “Write-Once, Read-Many” or “WORM” format — to prevent alteration. The Securities and Exchange Commission (SEC) has stated that a firm’s books and records are the primary means of monitoring compliance with the securities laws.

FINRA found that from at least 2002 to 2012, Barclays failed to preserve many of its required electronic books and records—including order and trade ticket data, trade confirmations, blotters, and account records in WORM format. FINRA found that Barclays retention failures were widespread and included all of the firm’s business areas. Thus, FINRA alleged that Barclays was unable to determine whether all of its electronic books and records were maintained in an unaltered condition.

Gana LLP Files Churning Case Against RBC and Morgan Stanley on Behalf of Client

April 7, 2014 | by Staff Attorney

The law offices of Gana Weinstein LLP recently filed a complaint against RBC Capital Markets, LLC (RBC) and Morgan Stanley Smith Barney, LLC (Morgan Stanley) accusing their registered representative Bruce Weinstein (Weinstein) of churning (excessive trading) and making unsuitable recommendations. In addition, the complaint alleged that the brokerage firms failed to properly supervise Weinstein’s activities.

The claimant alleged that he is the owner of a small business who had very little investment experience with stocks, bonds, or any other investment products. In addition, the claimant has no other financial or investment training and is generally unsophisticated in financial matters. The complaint also alleged that Weinstein knew that the claimant was providing the broker with approximately 100% of his liquid assets. The claimant alleged that even though he did not tell the broker that he desired to speculate with 100% of his liquid assets, Weinstein incorrectly marked claimant’s investment objective as speculation. Claimant alleged that the broker also incorrectly selected his investment experience in options, stocks, and bonds as being 20 years. In fact, the claimant had no options trading experience.

According to the complaint, Weinstein immediately began executing a highly leveraged and excessive trading investment strategy in claimant’s account. The claimant alleged that Weinstein’s trading was made without authorization or prior notice to the client. The claimant alleged that the broker’s trading generated exorbitant commissions for himself while providing no material benefit to his client. For example, in the May 2011, the claimant alleged that his account lost 44.8% of its value in a single month. During this month, it was alleged that the broker excessively day traded options such as Apple causing losses of $23,228 in Apple options or nearly 21% of the claimant’s entire liquid net worth.

SEC Issues Largest Monetary Sanction for Rule 105 Short Selling Violations Ever

April 6, 2014 | by Staff Attorney

On March 5, 2014, the Securities and Exchange Commission (SEC) announced the largest monetary sanction for Rule 105 short selling violations. A Long Island-based proprietary trading firm, Worldwide Capital, and its owner, Jeffrey W. Lynn, agreed to pay $7.2 million to settle the charges against them.

According to the SEC, Rule 105 prohibits short selling of an equity security during a restricted period – generally five business days before a public offering – and the subsequent purchase of that same security through the offering. The rule applies, to all equity trades, regardless of the trader’s intent. The rule is designed to promote offering prices that are set naturally by market driven supply and demand.

According to the SEC’s order instituting settled administrative proceedings, Mr. Lynn created Worldwide Capital for the purpose of investing and trading in a strategy focused primarily on new shares of public issuers coming to market through secondary offerings. Mr. Lynn had traders execute trades on his behalf, seeking allocations of additional shares soon to be publicly offered, usually at a discount to the market price. He and his traders would then sell those shares short in advance of the public offerings. Lynn and Worldwide Capital improperly profited from the difference between the price paid to acquire the offered shares, and the market price on the date of the offering.

The Supreme Court May Limit Securities Fraud Suits

April 5, 2014 | by Staff Attorney

The Supreme Court on Wednesday, MArch 5, 2014, seemed poised to impose new limits on securities fraud suits – making it harder for investors to group together to bring claims that they were misled when they bought or sold securities.

Organizations facing fraud class actions prefer to have the case certified as late in the litigation as possible because once a class is certified, the damages can be so enormous that most companies settle. “Once you get the class certified, the case is over,” Justice Antonin Scalia said on Wednesday.

Several justices, including Justice Anthony Kennedy, suggested that this phenomenon could be partly addressed through a proposal by two law professors that argued plaintiffs should be required to show at an early stage “whether the alleged fraud affected market price.”

Gana LLP Files Complaint Against H. Beck on Behalf of Client For Unsuitable Investment

April 4, 2014 | by Staff Attorney

The law offices of Gana Weinstein LLP recently filed a complaint against H. Beck, Inc., on behalf of a client accusing the investment advisory firm of making unsuitable recommendations and failing to properly supervise one of its representatives.

The Claimant in this case is a retired sixty-three year old from Hawaii, who sought to safely invest what was left of his retirement funds, after being hit hard in the down market of 2008. H. Beck, through one of its advisers, offered him high, risk-free returns, which the Hawaii native readily accepted. H. Beck, through one of its advisers, took nearly two-thirds of Claimant’s retirement savings and put them into the Inland American Real Estate Investment Trust (Inland) and the Lease Equipment Finance Fund 4 (LEAF).

LEAF is a limited partnership. Limited Partnerships are investment vehicles formed to acquire, operate, and sell assets for the benefit of the partners. Investors in Limited Partnerships, also known as limited partners, are entitled to receive distributions of operating cash flow as well as distributions from the sale or financing of assets as outlined in the partnership’s limited partnership agreement. Unlike stocks and bonds, Limited Partnerships are not listed on an exchange. They are illiquid assets with a relatively limited secondary market. Consequently, reliable pricing information is typically very difficult to obtain.

Three Rockwell Global Capital Brokers Accused of Securities Misconduct by Customers

April 3, 2014 | by Staff Attorney

Rockwell Global Capital LLC (Rockwell) brokers Robert E. Lee Jr. (Robert Lee), Douglas Guarino (Guarino), and Lawrence Lee (Lee) have been the subject of at least 29 combined customer complaints. All three brokers have been accused by clients of churning their accounts and making unsuitable investment recommendations.

Robert Lee first became registered in 1988. From March 2005, through November 2009, Robert Lee was registered through former FINRA member firm GunnAllen. Since November 2009, Robert Lee has been registered through Rockwell.

In August 2013, Robert Lee accepted a settlement with FINRA barring the broker from associating with any broker dealer. FINRA found that between September 25, 2008, and October 31, 2008, while Robert Lee was registered with GunnAllen, Robert Lee failed to follow a customer’s instructions regarding the purchase of three securities. FINRA also found that between September 2008, and at least December 2009, while Robert Lee was registered with two member firms, Robert Lee made material misrepresentations and omissions to a customer regarding the status of their investments. Specifically, FINRA found that Robert Lee misrepresented to the client that certain investments had earned $49,591 in dividends when in fact the investments did not exist and no dividends had been earned.

Former Newport Securities and Securities America Broker fined by FINRA for Selling Away

April 2, 2014 | by Staff Attorney

On December 11, 2013, the Financial Industry Regulatory Authority (FINRA) sanctioned broker Michael T. Ryan. Mr. Ryan was registered with FINRA brokerage firms from 1992 until November 1, 2013, including an eight-year stint with Securities America, Inc. (Securities America) and two years with Newport Coast Securities.

The basis for the underlying action brought against Mr. Ryan by FINRA, involved Ryan’s failure to accurately notify Securities America of his outside business activities. FINRA alleged that during a period spanning early 2009 through mid 2011, Ryan began working with an individual known as ZE, while Ryan was registered with Securities America. FINRA has alleged that Ryan began receiving compensation from and was an officer and board member of entities controlled by ZE, namely Kensington Leasing, Ltd, (Kensington) and a private entity known as WM were in direct violation of NASD Rule 3030 and FINRA Rule 3270. Throughout this time, FINRA alleged that Ryan did not submit proper notifications nor did he update the requisite information, in violation of NASD Rule 3030 and FINRA Rules 3270 and 2010.

Ryan also allegedly recommended that Securities America customers purchase restricted stock of two companies, Lenco Mobile, Inc. and Casablanca Mining Ltd. from ZE controlled entities. Ryan never notified Securities America of these private transactions in violation of NASD Rule 3040, which prohibits registered representatives from participating “in any manner in a private securities transaction,” unless the registered representative first notifies his or her member firm in writing.

Bill Tatro and Mary Helen Caprice Mallett Accused of Selling Unsuitable Private Placements Securities Part II

April 1, 2014 | by Staff Attorney

This post continues our investigation into the recent bar of broker William (Bill) Tatro by the Financial Industry Regulatory Authority (FINRA) and his relationship with Mary Helen Caprice Mallett (Mallett), Tatro’s wife, colleague, and business partner.

Mallett has also had a large number of customer complaints initiated against her. Mallett’s BrokerCheck reveals that she was associated with First Allied at roughly the same time as Tatro. Thereafter, from September 2010 until May 2011, Mallett was associated with Morgan Stanley Smith Barney (Morgan Stanley). From 2011 until June 2013, Mallett was associated with Independent Financial Group, LLC. Mallett is also associated or is involved in Biltmore Wealth Advisors, LLC, Capital Financial Management, Ltd, South Race Street, LLC, Red Rock, LLC, Mango Lizard LLC, and EZ Plan LLC.

In April 2011, Morgan Stanley filed a Form U5 taking the position that Mallett “engaged in outside business activities without prior written approval of [Morgan Stanley] and facilitated clients’ relationships with an outside investment manager”, believed to be Tatro, “who was not approved by or affiliated with [Morgan Stanley].” According to a lawsuit Morgan Stanley filed against Mallett she told Morgan Stanley that she and Tatro had used the same investment strategy over the previous nine years, presumably while associated with First Allied, and that she had bought Tatro’s book of business. However, Morgan Stanley charged that Mallett had falsely told them Tatro was no longer servicing his former clients.

Allen Olander of Centaurus Financial Sanctioned Over Variable Annuity Sales

March 31, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned broker Allen B. Olander (Olander) of Centaurus Financial, Inc. (Centaurus) concerning allegations that Olander failed to disclose an IRS lien on his Form U4, borrowed money from a customer, and made unsuitable recommendations in the sale and exchange of variable annuities. This is the second Centaurus broker that we have recently reported has been sanctioned.

Olander first became registered as an registered broker in 1993. Olander holds a Series 6 license that allows him to sell only open end mutual funds and variable annuities. From October 2007, to July 2011, Olander was associated with Centaurus. Olander’s BrokerCheck discloses that customers have filed at least 12 complaints against Olander concerning his conduct in handling their accounts. Many of the complaints involve the suitability or failure to disclose certain risks and features of variable annuities.

FINRA found that in May 2011, Olander received a lien by the Internal Revenue Service (IRS) in the amount of $42,465. According to FINRA, Olander failed to amend his Form U4 to disclose the lien. Disclosure of tax liens is important for investors because it lets the public know that the broker has had financial difficulties managing their own affairs and may be tempted to recommend products and services that are overly expensive in order to satisfy debts.