Securities Lawyers Blog

FINRA Alleges Numerous Supervisory Failures at Sammons Securities Part II

December 26, 2014 | by Staff Attorney

This post continues our exploration of the Financial Industry Regulatory Authority’s (FINRA) acceptance, waiver, and consent action (AWC) that sanctioned brokerage firm Sammons Securities Company, LLC (Sammons) over allegations that Sammons failed to establish and maintain a system of supervision to comply with the securities laws.

FINRA member firms were required to conduct reviews of all outside business activities disclosed before to ensure that the disclosures complied FINRA standards. During FINRA’s investigation the regulator found that Sammons was unable to demonstrate that it had conducted a review. In addition, FINRA alleged that Sammons used a form to collect information from its brokers concerning their outside business activities but the form failed to request information sufficient to detect the occurrence of private securities transactions away from the firm.

Moreover, FINRA found that two Sammons brokers were operating registered investment advisors that held customer accounts at broker-dealers other than Sammons. FIRNA found that the representatives disclosed their advisory business as outside business activities to Sammons and those activities were approved. However, FINRA found that Sammons did not record or maintain the advisories securities transactions on the firm’s books and records, or supervise the correspondence of the business. As a result, FINRA found that the representatives’ participation in private securities transactions was unsupervised by the firm.

FINRA Sanctions Sammons Securities Company Over Host of Supervisory Failures Part I

December 25, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA), in an acceptance, waiver, and consent action (AWC), sanctioned brokerage firm Sammons Securities Company, LLC (Sammons) over allegations that Sammons failed to establish and maintain a system of supervision that is reasonably designed to achieve compliance with securities laws. From March 8, 2010, through October 8, 2012, FINRA alleged that certain supervisory deficiencies existed at Sammons including the firm’s supervision of registered representatives, the firm’s due diligence processes and procedures, and some of its implemented customer safe-guards.

Sammons has been a FINRA member since January 2002, employs a total of 516 registered representatives, and operates from 357 branch office locations. Sammons’ compliance functions are conducted in Ann Arbor, Michigan, where its main registered Office of Supervisory Jurisdiction (OSJ) is located.

FINRA found that Sammons’ supervisory and compliance functions were conducted by a company called BD OPS, LLC, (BD OPS), an entity under common ownership with Sammons. BD OPS performed all of the firm’s supervision and compliance and also provided supervisory and compliance services for another broker-dealer and its related investment advisor. As a result, FINRA found that the 35 supervisory personnel working for BD OPS were responsible for supervising a total of 1,274 registered representatives and 854 branch offices between the two broker-dealers.

Equipment Leasing Programs LEAF and ICON: Too Costly to Invest In

December 23, 2014 | by Staff Attorney

Our firm has written numerous times about investor losses in programs such as various equipment leasing programs like LEAF Equipment Leasing Income Funds I-IV and ICON Leasing Funds Eleven and Twelve. These direct participation programs, like their non-traded REIT and oil and gas cousins, all suffer from the same crippling flaw that dooms these investments to a high likelihood of failure from the get go. The costs and fees associated with all of these investments cause the security to be so costly that only unprecedented market boom conditions can lead to profitability. Market stagnation or decline makes any significant return a virtual impossibility.

Yet, investors are in no way compensated for these additional risks. These investments tout high yield like returns for risks far in excess of traditional high yield investments. In fact, the only reason brokers sell these products is because of the high sales commissions coupled with the lack of price transparency that allows these products to be displayed at inflated values for years on investor account statements.

In an equipment leasing program a sponsor sells limited partnership units then takes out substantial offering costs and fees and invests the remainder in a pool of equipment leases that are leveraged up with additional borrowing. Brokers market these products as a predictable income stream but in fact, and what nearly all brokers fail to mention, is that a substantial portion of investor distributions are actually a return of their original investment and not actually income generated from operations.

Securities America Broker James McLaughlin Sanctioned Over Churning Allegations

December 22, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently sanctioned Securities America, Inc. (Securities America) broker James McLaughlin (McLaughlin) alleging that between October 2010, through October 2012, McLaughlin: (i) engaged in excessive trading (churning) in four customers’ accounts; (ii) recommended unsuitable short-term trading of mutual funds in four customers’ accounts; (iii) engaged in unauthorized trading in three customers’ accounts and; (iv) exercised discretion in one customer’s account without having written authorization.

McLaughlin was registered as a broker from 1989 until October 2012. McLaughlin was registered with Securities America from October 2000, until October 2012. On October 29, 20l2, Securities America terminated McLaughlin’s registrations for violating firm policies and procedures relating to excessive trading.

FINRA alleged that McLaughlin excessively traded at least four customers’ accounts. By analyzing the number of trades, turnover rate, and cost-to-equity ratio for these accounts FINRA determined that across a two-year relevant period from October 2010, through October 2012 that the accounts were excessively traded. In one account 286 purchase and sale transactions occurred resulting in a turnover rate of 47.63 and a cost-to-equity ratio of 228.03%. In a second account 459 purchase and sale transactions occurred resulting in a turnover rate of 15.86 and a cost-to-equity ratio of 69.54%. In a third account FINRA alleged that McLaughlin executed 140 purchase and sale transactions resulting in a turnover rate of 6.79 and a cost-to-equity ratio of 32.74%. Finally, in fourth customer’s account FINRA found McLaughlin executed 111 purchase and sale transactions resulting in a turnover rate of 8.75 and a cost-to-equity ratio of 44.50%.

FINRA Alleges SWS Financial Services Failed to Supervise Variable Annuity Transactions

December 19, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) filed a complaint against brokerage firm SWS Financial Services, Inc. (SWS Financial) over allegations that from September 2009, to May 2011, SWS Financial had inadequate supervisory systems procedures to supervise its variable annuity (VA) securities business. Specifically, FINRA alleged that SWS Financial: (1) failed to establish and maintain supervisory systems to supervise its VA securities business in violation of NASD and FINRA Rules; (2) failed to implement rules requiring a registered principal review and approval prior to transmission of a VA application to the issuing insurance company for processing and that a registered principal only approve VA transactions that he or she has determined that there is a reasonable basis to believe that the transaction is suitable for the customer; (3) failed to implement surveillance procedures to monitor a broker’s recommended exchanges of VAs to identify inappropriate exchanges; (4) failed to have policies and procedures to implement corrective measures to address inappropriate VA exchanges; and (5) failed to develop and document specific training policies or programs to ensure that principals supervisors who reviewed VA transactions had sufficient knowledge to monitor the transactions.

SWS Financial is a registered broker/dealer since 1986 and is headquartered in Dallas, Texas. The firm employs 313 registered personnel. From September 2009, to May 2011, SWS Financial derived the majority of its income from its business lines selling equities, mutual funds, variable life insurance or annuities, and municipal securities.

FINRA alleged that from September 2009, to May 2011, SWS Financial derived 16% to 20% of its total revenues from sales of VAs to customers. However, despite this fact, FINRA alleged that SWS Financial failed to establish and implement adequate supervisory systems for this aspect of its securities business. FINRA alleged that the firm’s brokers sold VAs both in branch offices where a registered branch manager was onsite as well as in offices where there was no onsite supervisor. FINRA alleged that the firms procedures required that VA transactions initiated by representatives in branch offices with a branch manager were reviewed and approved by the banch manager and then forwarded to SWS Financial’s home office for final review and approval employees at an affiliated insurance company, Southwest Insurance Agency (Insurance Agency).

Atlas Energy Oil and Gas Investments: Risks Investors Should Know Part II

December 17, 2014 | by Staff Attorney

This article follows up on a recent article reported in Reuters concerning Atlas Energy LP’s private placement partnerships in oil and gas. Atlas Resources LLC, a subsidiary the energy group, has filed documents with the SEC for Atlas Resources Series 34-2014 LP stating that it seeks to raise as much as $300 million by Dec. 31 of 2014. The deal allows investors to participate in investments where advances in drilling technology have turned previously inaccessible reservoirs of oil into viable prospects. In addition, Atlas promises to invest up to $145 million of its own capital alongside investors.

In the last article we explored how the house seems more likely to win on these deals over investors. But beyond the inherent risks with speculating on oil and gas and unknown oil deposits most investors don’t realize the deals are often unfair to investors. In a normal speculative investment as the investment risk goes up the investor demands greater rewards to compensate for the additional risk. However, with oil and gas private placements the risks are sky high and the rewards simply don’t match up.

In order to counter this criticism, issuers say that the tax benefits of their deals where the investor can write off more than 90 percent of their initial outlay the year they make it helps defray the risk and increase the value proposition. First, the same tax advantage claims are often nominal compared to the principal risk of loss of the investment as seen by Puerto Rican investors in the UBS Bond Funds who have now seen their investments decline by 50% or more in some cases. Second, often times brokers sell oil and gas investments indiscriminately to the young and old who have lower incomes and cannot take advantage of the tax benefits.

Atlas Energy Oil and Gas Investments: A Risky Proposition Part I

December 16, 2014 | by Staff Attorney

As recently reported in Reuters, Atlas Energy LP has marketed itself to investors as a way to get into the U.S. energy boom. By contributing at least $25,000 in a private placement partnership that will drill for oil and gas in states such as Texas, Ohio, Oklahoma and Pennsylvania and share in revenues generated from the wells. Atlas Resources LLC, a subsidiary the energy group, has filed documents with the SEC for Atlas Resources Series 34-2014 LP stating that it seeks to raise as much as $300 million by Dec. 31 of 2014. The deal sounds good when pitched: participate in investments where advances in drilling technology have turned previously inaccessible reservoirs of fossil fuels into potentially viable prospects and to boot Atlas will invest up to $145 million of its own capital alongside investors. Through this method and similar deals, oil and gas projects have issued nearly 4,000 private placements since 2008 seeking to raise as much as $122 billion.

But before you take the plunge a review of the Atlas’s offering memorandum reveals some red flags and given Atlas’ past failure rate investors should think twice. First, up to $45 million of the money raised will be paid to Atlas affiliate Anthem Securities that will then be turned over to as commissions to broker-dealers who pitch the deal to investors. Up to $39 million more will be used to buy drilling leases from another affiliate. Think investors will get a fair price on the leases when Atlas controls both sides of the deal? More conflicts ahead as Atlas affiliated suppliers may also get up to $53 million for buying drilling and transport equipment. Next, an additional $8 million of Atlas’s investment is a 15 percent markup on estimated equipment costs. Finally, Atlas will pay itself nearly $52 million in various other fees and markups.

In sum, at least 40% of Atlas’s $145 million investment alongside mom and pop goes right back to the company. In addition, Atlas’ profits don’t stop there, when the venture starts generating revenue Atlas is entitled to 33% before accounting for those payments and markups. In the end, not much of a risk at all for Atlas.

LPL Financial Broker Jon Cox Under Investigation For Outside Business Activities

December 15, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently filed a complaint against LPL Financial LLC (LPL) broker Jon Cox (Cox) alleging that Cox may have engaged in unauthorized outside business activities, private securities transactions (a/k/a “selling away”), and/or unauthorized customer loans. According to Cox’s BrokerCheck, Cox was terminated in January 2014 by LPL on allegations of violations of the firm policy regarding outside business activities. Cox’s disclosures also reveal that he works for a DBA Investment and Retirement Services Group in Knoxville, TN. In addition he is a sales agent for Proton Power, Inc.

While details concerning Cox’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. Under the FINRA rules, a brokerage firm owes a duty to properly monitor and supervise its employees. In order to properly supervise their brokers each firm is required to establish and maintain a system to supervise the activities of each registered representative to achieve compliance with the securities laws. Selling away often occurs in environments where the brokerage firms either fails to put in place a reasonable supervisory system or fails to actually implement that system and meet supervisory requirements.

In selling away cases, investors are unaware that the advisor’s investment advice is not authorized and potentially illegal because the securities sold are often not registered with the SEC. Typically investors will not learn that the broker’s activities were wrongful until after the investment scheme is publicized or the broker simply shuts down shop and stops returning client calls.

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

December 14, 2014 | 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.

Global Brokerage Services Fined Over Misleading Account Statements

December 12, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA), in an acceptance, waiver, and consent action (AWC), sanctioned brokerage firm Global Brokerage Services, Inc. (Global) over allegations that from approximately February 2011, to August 2013, Global failed to establish and enforce a reasonable supervisory system regarding the use of consolidated reports by registered brokers with the firm. FINRA found that Global’s brokers provided consolidated reports to their customers that lacked required disclosures and/or contained misleading information. ln addition, FINRA alleged that one the brokers disseminated consolidated reports that included his own inaccurate and potentially misleading valuations for non-traded REITs and other illiquid investments.

Global has been a FINRA member since 1995, employs fourteen registered representatives, and its main office is in Hunt Valley, Maryland.

FINRA found that certain of Global’s brokers created consolidated reports using Morningstar or Excel for distribution to their customers. FINRA alleged that Global failed to have written supervisory procedures specific to consolidated reports. Instead, FINRA determined that consolidated reports at Global were treated as correspondence requiring only a sample (10%) be reviewed on a quarterly basis.