Securities Lawyers Blog

Newbridge Securities Corporation Sanctioned By FINRA Over Sales Practices

January 7, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) in an acceptance, waiver, and consent action (AWC) sanctioned Newbridge Securities Corporation (Newbridge) concerning allegations that the firm violated a host of sales obligations to customers that resulted in unfair trading practices.

FINRA found that in ten transactions, Newbridge sold corporate bonds to customers and failed to sell such bonds at a price that was fair taking into consideration all relevant circumstances such as the market conditions for the bonds at the time of the transaction and the expense involved. FINRA also alleged in another 10 transactions for a customer the firm failed to use reasonable diligence to ascertain the best market price and failed to buy or sell in such market so that the price to its customer was as favorable as possible at the time of the transaction. Next, FINRA found a total of at least 50 instances where the firm failed to execute orders fully and promptly.

Further, FINRA alleged that Newbridge executed 32 short sale orders but failed to mark the orders as being sold short. As a result, FINRA found that on 13 occasions the firm effected short sales in an equity security for its own account without borrowing the security or having reasonable grounds to believe that the security could be borrowed so that it could be delivered on the date delivery is due. FINRA also found that the firm, on 63 occasions, provided written notification to customers that failed to disclose information or disclosed inaccurate information. The information that was inaccurate included the correct trade price, the correct execution price(s), the price was exclusive of any commission equivalent, failed to disclose or to accurately disclose the compensation amount(s) charged to the customer, and/or inaccurately disclosed the firm’s compensation type.

Aegis Capital Corp. Broker Malcom Segal Barred From Industry Over Allegations of Outside Business Activities

January 6, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently barred former Aegis Capital Corp. (Aegis) broker Malcom Segal (Segal) alleging that Segal may have engaged in unauthorized transfers of funds from customer accounts to an outside business activities (a/k/a “selling away”).

According to Segal’s BrokerCheck, Segal was registered with Cumberland Brokerage Corporation from 1989 until April 2011. Thereafter, Segal was a broker for Aegis until July 2014 where he was terminated on allegations of by the firm violations of the firm that Segal failed to cooperate with an internal investigation into a customer complaint he made unauthorized wire transfers from a customer’s account. Segal’s disclosures also reveal that he is listed as a partner of J & M Financial and President of National C.D. Sales.

Upon information and belief, it is in connection with National C.D. Sales that customer have filed complaints against Segal concerning. While details concerning Segal’s activities are still pending, the allegations against Cox are consistent with a “selling away” securities violation. Selling away occurs when a financial advisor solicits investments in companies or promissory notes that were not approved by the broker’s affiliated firm. In many cases the broker transfers funds or liquidates investments at his registered firm in order to make the investment in the outside business.

Virtus Investment Partners and Funds Negatively Effected by F-Squared Investments SEC Probe

January 5, 2015 | by Staff Attorney

According to the Wall Street Journal that Shares of mutual fund provider Virtus Investment Partners Inc. (Virtus Investment) tanked on news that the Securities and Exchange Commission (SEC) is closer to recommending charges against F-Squared Investments Inc., (F-Squared) a sub-adviser on the Virtus funds. F-Squared –builds mutual fund portfolios consisting of exchange traded funds (ETFs) for the Virtus mutual funds.

F-Squared received a Wells notice from the SEC which indicates an investigation and possible action by the commission against the company. According to WSJ, the SEC’s investigation revolves around whether F-Squared advertising of their quantitative stock strategies was truthful and whether they were tied to real money. The timeframe looks at the returns from April 2001 through September 2008.

While VRTS and the five Virtus Funds Premium AlphaSector (VAPAX), Allocator Premium AlphaSector (VAAAX), AlphaSector Rotation (PWBAX), Global Premium AlphaSector (VGPAX), Dynamic AlphaSector (EMNAX) are not subject to the SEC’s investigation the potential negative outcome for F-Squared is already negatively impact the mutual funds and therefore VRTS as well as clients flee these products.

Complaint Filed Against Joseph Hooper Relating to iPractice Group Investment Sales

January 3, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently filed a complaint against former Source Capital Group, Inc. (Source Capital) broker Joseph Hooper (Hooper) alleging that Hooper was serving as the Director of Investor Relations for a company called the iPractice Group, Inc. (iPractice) and that in such capacity, Hooper participated in the sale of iPractice stock and was compensated for that participation without notifying Source Capital of these activities. FINRA alleged that Hooper participated in 53 private securities transactions involving 41 investors or investor groups and a total of $3,400,648 worth of iPractice stock. In return, FINRA alleged that Hooper received $425,081 and more than 21,000 shares of iPractice stock as compensation for his activities.

This is not the first time our firm has written about supervisory and disclosure issues at Source Capital. Our firm has previously written concerning FINRA’s action against Source Capital concerning the agency’s findings that certain Source Capital brokers failed to adequately disclose material facts and made sales through misstatements in oil and gas partnership interests in Blue Ridge Securities (Blue Ridge) and Argyle Securities. (Argyle).

In FINRA’s recent action, when Hooper became associated with Source Capital in May 2012, he was also the Director of Investor Relations for iPractice, a medical technology company. FINRA alleged that Hooper remained the Director of Investor Relations for iPractice throughout the time he was associated with Source. iPractice raised funds for its operations by selling stock in the company through exempt private placement securities offerings. FINRA alleged that Hooper participated in the solicitation and sale of iPractice stock to investors. In addition, Hooper was listed by iPractice as a promoter on an amended Form D filed with the SEC on May 18, 2012.

Broker Spotlight: John J. Quintero Subject to Several Customer Complaints

January 2, 2015 | by Staff Attorney

The attorneys of the law offices of Gana Weinstein LLP are investigating a series of recently filed complaints against broker John Quintero (Quintero) who is currently a registered representative with Transamerica Financial Advisors. In January 2014, an investor filed a complaint alleging that Quintero misrepresented the premiums paid on a variable universal life insurance policy (VUL). Specifically, the customer claimed that Quintero stated that the premiums paid would be a tax differed investments and that further the sub-account investments were unsuitable.

VULs are complex insurance and investment products that investors must fully understand prior to investing. One feature of a VUL policy is that the investor can allocate a portion of his premium payments to a separate sub-account to invest and grow through mostly mutual fund investments. Monthly charges are assessed for the life insurance policy including a cost of insurance charge and administrative fees all of which are deducted from the policy’s cash value. The investor can suffer losses are receive gains based upon the performance of the sub-account investments. However, the VUL policy can terminate 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 and premiums involved in purchasing VULs, brokers must be careful to ensure that the recommendation to invest in VULs is suitable for the client. In some cases, investors do not realize the huge expense of these policies and have no way to continue to cover the premiums. When this happens the policy could lapse over time.

Arque Capital Sanctioned By FINRA Over GWG Renewable Secured Debentures Sales

January 1, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) in an acceptance, waiver, and consent action (AWC) sanctioned Arque Capital, Ltd. (Arque) concerning allegations that since 2011 Arque has acted as the managing broker-dealer for an alternative investment – GWG Renewable Secured Debentures (the Debentures) offered by GWG Holdings, Inc, In that capacity FINRA alleged that Arque was responsible for conducting due diligence into GWG and the Debentures, and reviewing all advertising pieces related to the Debentures. FINRA found that between March 2012, and November 2012, Arque distributed a GWG Debenture sales brochure that contained misleading statements.

Arque has been a registered broker-dealer since 2002, has its home office in Scottsdale, Arizona, and 23 branch offices located in various states. The firm has approximately 60 registered representatives. In recent months FINRA has brought numerous disciplinary actions against various firms, supervisors, and brokers concerning the improper sale of GWG Debentures including:

Center Street Securities Broker David Escarcega Investigated Over GWG Debenture Sales;

Ameritas Broker Jason Muskey Accused of Stealing Customer Funds

December 31, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently barred broker Jason Muskey for failing to respond to the regulator’s requests for information. FINRA’s investigation appears to have been prompted by Muskey’s termination from Ameritas Investment Corp. (Ameritas) after the firm alleged that he failed to respond to the firm’s request for information concerning an internal investigation concerning theft and forgery. Muskey was registered with Ameritas from June 2006, through June 2014. Muskey operated his business through Ameritas, upon information and belief, through a DBA called Muskey Financial Services.

Since the termination eight customers have filed customer complaints against Ameritas accusing the firm of failing to supervise Muskey’s activities and alleging that Muskey engaged in a Ponzi scheme that led to the theft of their funds.

As recently reported in the times-tribune Muskey was sued recently by his own mother, his wife’s uncle, an aunt, and two others alleging that he stole almost $400,000 in the scheme. Muskey allegedly used the money for his personal benefit and covered up the thefts for years by sending out fake quarterly financial statements that listed a set of phony investments. Many of Muskey’s victims are hard-working blue collar workers who had placed their money with Muskey for retirement.

Center Street Securities Broker Jason Lamb Sanctioned Over GWG Renewable Secured Debentures

December 30, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) in an acceptance, waiver, and consent action (AWC) and barring former Center Street Securities, Inc. (Center Street) broker Jason Lamb (Lamb) concerning allegations that between March 2012, to February 2013, Lamb was a registered principal and Chief Compliance Officer (CCO) at Center Street’s headquarters in Nashville, Tennessee. FINRA found that Lamb failed to adequately supervise certain sales of GWG Renewable Secured Debentures, an illiquid and high-risk alternative investment.

Center Street Securities is headquartered in Nashville, Tennessee, has been a FINRA member since 1991, has approximately 67 branch offices and approximately 84 registered representatives. This is not the first time that FINRA has brought regulatory action concerning the actions of Center Street representatives. See Center Street Securities Broker David Escarcega Investigated Over GWG Debenture Sales; FINRA Sanctions Michael Wurdinger and Anil Vazirani Over GWG Debenture Sales (FINRA sanctioned brokers associated with Center Street Securities, Inc.); FINRA Sanctions Center Street Securities Over Sales of GWG Renewable Secured Debentures Part I (Center Street fined by FINRA).

The notes at issue are part of offerings by GWG Holdings, Inc. (GWG) which purchases life insurance policies on the secondary market at a discount to their face value. GWG pays the policy premiums until the insured dies and GWG then collects the insurance benefit making a profit by collecting more on the payout at maturity than the payment of the premiums on the policy. The Debentures have varying maturity terms and interest rates ranging from six-month at an annual interest rate 4.75% to seven years at 9.50%. 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.

Oil and Gas Investments – Issuers Profit While Investors Take All the Risk

December 29, 2014 | by Staff Attorney

As recently reported in Reuters, oil and gas companies such as Reef Oil & Gas Partners, Black Diamond, and Discovery Resources & Development LLC have marketed themselves to investors as a way to get into the U.S. energy boom. These companies issue private placement partnership that will drill for oil and gas and pay investors the profits that will result. However, oil and gas private placements contain substantial risks that often outweigh any potential benefits including securities fraud, conflicts of interests, high transaction / sales costs, and investment risk. Due to these risks investors often lose money while issuers make handsome profits.

According to Reuters, of 34 deals Reef has issued since 1996, only 12 have paid out more cash to investors than they initially contributed. In addition, Reuters found that Reef sold an additional 31 smaller deals between 1996 and 2010 collecting $146 million for itself while paying out investors a paltry $55 million.

Under the terms of one Reef deal, investors raised $50 million and Reef immediately took $7.5 million for fees and broker commissions. After that, Reef received a monthly management fee of $41,667 from the fund. Reef also charged for drilling, operating, legal, and other expenses to the fund. Reef completely controlled these expenses and determined which other Reef entities would be hired to do work for the venture. In fact, no more than half of the money would be used to buy oil and gas land where there were reserves.

Illinois Secretary of State Brings Action to Ban James B. Markoski from Selling Securities in Illinois

December 27, 2014 | by Staff Attorney

On September 29, 2014, Jesse White, the Secretary of State for Illinois recently announced it set a hearing for November 6, 2014 to determine whether James B. Markoski should be banned from offering or selling securities in the State of Illinois.

According to the action, Mr. Markoski “has a storied history of securities fraud, having victimized at least eight customers during his employment at Merrill Lynch which resulted in millions in losses to his victims and for which Merrill Lynch paid restitution.” According to FINRA’s BrokerCheck, Mr. Markoski was registered with Merrill Lynch from 1971 – 1991 and at least 6 customer complaints were lodged against Mr. Markoski during that time.

After Mr. Markoski was terminated from Merrill Lynch, he moved to David A. Noyes & Company, where at least one additional complaint was filed against him, according to Illinois, . Mr. Markoski worked at David A. Noyes until June 2010 when he moved to Birkelback Investment Securities, Inc. Mr. Markoski currently works at Forest Securities Inc. In total, nine customer complaints have already been brought against Mr. Markoski and his employers and more are expected after Illinois’ regulatory action.