Securities Lawyers Blog

Senior Abuse in the Securities Industry A Major Ongoing Concern

June 23, 2015 | by Staff Attorney

As long time readers of our blogs know senior abuse is an ongoing concern in the securities industry. See Massachusetts Fines LPL Financial Over Variable Annuity Sales Practices to Seniors; The NASAA Announces New Initiative to Focus on Senior Investor Abuse; The Problem of Senior Investor Abuse – A Securities Attorney’s Perspective.

Recently, a number of regulatory agencies have begun new initiatives against investment fraud targeted at seniors with the intent to provide resources to seniors and financial advisors. Regulators fear senior abuse in the investment sector will be a growing trend over the next couple of decades if not addressed soon.

According to a National Senior Investor Initiative report cited by the Financial Industry Regulatory Authority (FINRA), the Social Security Administration estimates that each day for the next 15 years, an average of 10,000 Americans will turn 65. According to the U.S. Census Bureau in 2011, more than 13 percent Americans, more than 41 million people, were 65 or older. By 2040, that number is expected to grow 79 million doubling the number that were alive in 2000.

LPL Financial Broker David Hackney Accused by Regulator of Churning Customer Accounts

June 22, 2015 | by Staff Attorney

According to the BrokerCheck records kept by Financial Industry Regulatory Authority (FINRA) broker David Hackney (Hackney) has recently been permanently barred by the agency for failing to respond to requests for documents and information. In addition, the broker has been under investigation by the Illinois Securities Department concerning allegations that Hackney churned – a type of securities fraud – at least three accounts.

Hackney entered the securities industry in 1993. From March 2006 until February 2014, Hackney was associated with LPL Financial LLC (LPL). In February 2014, LPL discharged Hackney alleging that the broker conducted discretionary, otherwise known as unauthorized trades, in customers’ accounts that were excessive.

Investment churning is trading activity characterized by the purchasing and selling of securities including stocks, bonds, mutual funds, and options 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.

JHS Capital Advisors Broker Mark Weindling Barred Over Forging Signatures in Deceased Customer’s Account

June 19, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently barred broker Mark Weindling (Weindling) concerning allegations that Weindling failed to respond to the regulator’s requests to provide information and documents concerning the an investigation into claims that Weindling effected transactions within the account of a deceased customer.

Weindling entered the securities industry in 1982. From October 2007 until April 2012, Weindling was associated with Paulson Investment Company, Inc. Thereafter, in April 2012, Weindling became registered with JHS Capital Advisors, LLC (JHS). On May 16, 2014, JHS filed a Form U5 that terminated Weindling’s registration with JHS.

On the form, JHS reported that Weindling effected transactions within the account of a deceased customer and that he was aware of journal requests containing the forged signature of the deceased customer. Thereafter, FINRA sought to investigate JHS’s statements by sending Weindling requests for information. On January 27, 2015, FINRA sent a letter to Weindling’s counsel requesting that Weindling provide documents and information. Despite, multiple requests for information, Weindling acknowledged receipt of FINRA’s requests but confirmed that he did not intend to provide the requested documents and information.

FINRA Alleges National Securities Corporation Misled Customers On Fees

June 18, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) entered into an agreement whereby the regulatory fined National Securities Corporation (NSC) while alleging that in 2013, NSC acted as the exclusive placement agent for two private placements of its parent company, National Holdings Corporation (National Holdings). The FINRA rules require that offerings of unregistered securities issued by a control entity of a member firm disclose to investors the selling compensation to be paid to the member in connection with the offering. FINRA found that while NSC generally disclosed to investors that it would receive compensation in connection with the sale of both private placements the firm failed to disclose in writing to investors the amount of selling compensation it would receive.

NSC has been registered with FINRA as a since 1947 and engages in a number of businesses, including retail brokerage, investment banking, and investment advisory. NSC has 760 registered representatives in 140 branch offices. Our law offices have been tracking a number of regulatory and customer complaints involving NSC and its brokers including:

National Securities Broker Vito Balsamo Under FINRA Investigation Over V.W. Industries Sales

Broker Michael Gates Alleged to Have Made Unauthorized Trades in Client Accounts

June 17, 2015 | by Staff Attorney

According to broker Michael Gates (Gates) Financial Industry Regulatory Authority (FINRA) BrokerCheck records the representative was recently sanctioned concerning allegations that from January 2011, through October 2011, he effected approximately 22 discretionary transactions for two firm customers without written authorization from the customers or approval from the firm.

Gates first entered the securities industry in September 1997. Thereafter, in April 2004, Gates became registered with Wells Fargo Advisors, LLC (Wells Fargo). In March 2012, Wells Fargo terminated Gates alleging that the broker may have entered mutual fund sales without authorization of his clients. After termination of his registration with Wells Fargo, Gates became registered with Morgan Stanley where he is currently registered. In addition, at least two customers have filed complaints against Gates alleging unsuitable investments, 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. FINRA alleged that Gates was not approved by his firm to exercise discretion in the customers accounts but nonetheless effected 22 discretionary transactions for two customers.

FINRA Fines RBC $1.4 Million Over Unsuitable Reverse Convertibles

June 16, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) ordered RBC Capital Markets (RBC) to pay a $1 million fine and approximately $434,000 in restitution to customers for alleged supervisory failures resulting in sales of unsuitable reverse convertibles.

As a background, a reverse convertible is an interest-bearing note where repayment of the principal is tied to the performance of an underlying asset, such as a stock or basket of stocks. Investor risk of loss comes from changes in the value of the underlying asset. If the asset falls below a certain level at maturity or during the term of the reverse convertible the investor can suffer losses. In February 2010, FINRA issued a regulatory notice on reverse convertibles emphasizing the need for firms to perform a suitability analysis in connection with sales of reverse convertible because they are complex product.

FINRA and the SEC have both expressed alarm at the growing popularity of complex products. Complex securities include, but are not limited to equity-indexed annuities, leveraged and inverse-leveraged exchange traded funds, reverse convertibles, alternative mutual funds, exchange traded products, and structured notes. A 2012 SEC study on investor financial literacy found that retail investors, and particularly the elderly and minorities, lack basic financial literacy skills. Combining a general lack of financial literacy with an investment product landscape that increasingly focuses on ever more complex product offerings and investors are more reliant on their advisers than ever. Accordingly, retail investors do not always fully appreciate the risks involved with these.

First Allied Securities Broker Daniel Grieco Sanctioned Over Non-Traditional ETF Sales

June 15, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned broker Daniel Grieco (Grieco) concerning allegations that Grieco made recommendations of non-traditional exchange-traded funds (Non-Traditional ETFs) to various customers without having reasonable grounds to believe his recommendations were suitable.

Non-Traditional ETFs are behave drastically different and have 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 are also used to earn the inverse result of the return of the benchmark.

In addition, regular ETFs can be held for long term trading, but Non-Traditional ETFs are generally designed to be used only for short term trading. The use of leverage employed by these funds causes their long-term values to be dramatically different than the underlying benchmark over long periods of time. For example, between December 1, 2008, and April 30, 2009, the Dow Jones U.S. Oil & Gas Index gained two percent while the ProShares Ultra Oil and Gas, a fund seeking to deliver twice the index’s daily return fell six percent. In another example, the ProShares UltraShort Oil and Gas, seeks to deliver twice the inverse of the index’s daily return fell by 26 percent over the same period.

LPL Financial Fined $11.7 Million Over Securities Practices

June 15, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) entered into an agreement whereby the regulatory fined LPL Financial LLC (LPL) and fined it $10 million for broad supervisory failures in a number of key areas, including the sales of non-traditional exchange-traded funds (Non-Traditional ETFs), certain variable annuity contracts, non-traded real estate investment trusts (Non-Traded REITs) and other complex products, as well as its failure to monitor and report trades and deliver to customers more than 14 million trade confirmations. As part of the fine FINRA ordered LPL to pay approximately $1.7 million in restitution to customers who purchased non-traditional ETFs.

In a press release Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, stated that “LPL’s supervisory breakdowns resulted from a sustained failure to devote sufficient resources to compliance programs integral to numerous aspects of its business. With today’s action, FINRA reaffirms that there is little room in the industry for lax supervision and that it will not hesitate to order firms to review and correct substandard supervisory systems and controls, and pay restitution to affected customers.”

This action is only one of many regulatory actions that our firm has tracked concerning LPL and its brokers including the following:

Broker Adamson Wright Alleged to Mismarked Options Trades

June 10, 2015 | by Staff Attorney

According to broker Adamson Wright’s (Wright) Financial Industry Regulatory Authority (FINRA) BrokerCheck records the representative was recently sanctioned concerning allegations that from May 2010 through February 2011, he effected approximately 249 mismarked order tickets as being “unsolicited” orders when the trades were “solicited” causing the firm to maintain inaccurate books and records.

Respondent Wright entered the securities industry in 1995 with UBS Financial Services Inc. until January 2010. In January 2010, Wright became registered with Ameriprise Financial Services, Inc. (Ameriprise) and then was terminated from Ameriprise in June 2011. In July 2011, Wright became registered with InterCarolina Financial Services Inc.

In addition, at least five customer complaints have been filed against Wright alleging unsuitable investments and unauthorized discretionary trading. These complaints include allegations involving unsuitable options trading. Two clients alleged an unsuitable purchase of China Agritech (CAGC). The number of complaints made by investors against Wright is relatively large by industry standards. According to InvestmentNews, only about 12% of financial advisors have any type of disclosure event on their records. Far fewer brokers have multiple customer complaints approaching the number of complaints made against Wright. Brokers must disclose different types of events, not necessarily all of which are customer complaints. These disclosures can include IRS tax liens, judgments, and even criminal matters.

The Worst Performing Funds of Q1 2015

June 10, 2015 | by Staff Attorney

Gana Weinstein LLP has recently reviewed the worst performing Mutual Funds of 2014. The question is whether these funds will continue to perform badly and if there are systemic issues with these funds or whether the performance is merely an aberration.

Regularly the best way to achieve great returns is not by picking the best securities but by avoiding the bad securities.

Warren Buffet once said: “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.