Securities Lawyers Blog

Cantella & Co. Accused of Overcharging Client Commissions

December 11, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA), in an acceptance, waiver, and consent action (AWC), sanctioned brokerage firm Cantella & Co., Inc. (Cantella) over allegations that from approximately January 2006, to September 2011, the firm charged customers excessive commissions on approximately 1,270 equity transactions and 99 options transactions. FINRA also found that Cantella also failed to establish, maintain, and enforce an adequate supervisory system for the review of commissions charged.

Cantella has been a member of FINRA since 1983, the firm’s principal office is located in Boston, MA, and currently employs approximately 210 registered representatives working out of the principal office and 136 branch offices.

NASD Conduct Rule 2440 provides that all brokerage firms shall buy or sell at a security at a price which is fair, taking into consideration all relevant circumstances. The NASD established a policy that a mark-up of five percent may be deemed unreasonable and this policy applies equally to commissions on agency trades, and to mark-ups or mark-downs on principal transactions. In addition to the commission percentage other factors to be considered in determining the fairness of commission charges include: (i) the type of security involved; (ii) the availability of the security; (iii) the price of the security; (iv) the size of the transaction; (v) whether disclosure of the transaction cost was made to the customer prior to the trade’s execution; (vi) pattern of mark-ups; and (vii) the nature of the member’s business.

LaSalle St. Securities Sanctioned Over Private Placements Part II

December 10, 2014 | by Staff Attorney

This article continues the examination of the findings by The Financial Industry Regulatory Authority (FINRA), in an acceptance, waiver, and consent action (AWC), concerning LaSalle St. Securities, LLC (LaSalle) private placement deficiencies. FINRA also found that LaSalle served as the placement agent for a 2009 private placement offering by Revitalight Operators, LLC. The private placement memorandum (PPM) stated investors would be entitled to a 9% “preferred return” on their outstanding investments prior but that this preferred return was not guaranteed and might never be paid. FINRA found that LaSalle was responsible for the PPM’s contents. The PPM contained a summary of financial projections which FINRA found contained assumptions that the total net return over six years would be $2.050 million and that investors’ capital contributions would be returned in the fiftieth month. The PPM stated that investors could receive a 27.13% annual return on investment. However, FINRA determined that the projected annual return were calculated using a flawed methodology.

Finally, FINRA alleged that member firms that using consolidated reports are communications with the public and must be clear, accurate, and not misleading. Firms should have systems in place to ensure that valuations provided regarding customer assets held at the firm are consistent with the firm’s official account statement distributed to the customer. The firm should also take reasonable steps to accurately reflect information regarding outside accounts and assets. If a firm is unable to adequately supervise the use of the reports then the firm must prohibit dissemination of the reports.

FINRA found that LaSalle had procedures in place governing consolidated reports. The procedures provided that the CCO or specifically designated principals, will review the consolidated reports to ensure adherence to all applicable rules. Despite the procedures, FINRA found that LaSalle had an inadequate system in place because the firm did not ensure that all representatives actually followed the proscribed procedures. FINRA determined that LaSalle’s training was limited to blast emails to brokers advising them that consolidated statements needed to be submitted to the home office for review as correspondence.

LaSalle St. Securities Fined Over Private Placement Sale Related Misconduct Part I

December 9, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA), in an acceptance, waiver, and consent action (AWC), sanctioned brokerage firm LaSalle St. Securities, LLC (LaSalle) over allegations that staff found certain deficiencies with respect to: 1) a private placement offering involving Seat Exchange Corporation where LaSalle failed to exercise adequate due diligence before allowing a broker to recommend the offering to four investors; 2) a private offering by Revitalight Operators, LLC, LaSalle distributed a private placement memorandum to potential investors that did not include material facts and used a flawed methodology for projecting return on investment; 3) an offering of Platinum Wealth Partners, Inc. (PWP) by one of its brokers the firm failed to supervise; and 4) the fact that LaSalle allowed its representatives to send consolidated reports to its customers but failed to adequately supervise those reports.

LaSalle has been registered with FINRA as a broker-dealer since 1976, has 232 registered representatives, 107 branch offices, and its principal place of business is in Chicago, Illinois. LaSalle has various business lines.

FINRA alleged that in April 2010, a broker with the initials “PL” sought the firm’s approval to recommend the purchase of shares in Seat Exchange Corporation, a Regulation D private placement to four customers. Seat Exchange had only one director, who also owned 21.5% of the company and the placement agent for offering was Chicago Investment Group (CIG). CIG was also an affiliated with Seat Exchange. According to FINRA, LaSalle had supervisory procedures requiring that all appropriate due diligence efforts on behalf of any private placement offering are undertaken and documented or that we obtain sufficient documentation from a third party that they have undertaken sufficient due diligence.

Why Your Broker Asking You to Sign A Comfort Letter is A Big Misconduct Red Flag

December 8, 2014 | by Staff Attorney

Your brokerage firm reviews customer accounts for misconduct and what does it find; bizarre and unreasonable trading activity. Maybe dozens of trades are being made every month or an account previously invested in plain vanilla mutual funds is now loaded up with speculative penny stocks and private placements. Whatever the cause, the firm has a system to monitor for unusual trading activity and sends the customer a letter. These letters go by many names including “happiness”, “comfort”, and more appropriately “Cover You’re A@!” (CYA).

A recent article by the Wall Street Journal explored how the purpose of these letters is to elicit an acknowledgment from the customer that they are satisfied with how the account is being handled in order to minimize future liability from a suit concerning the wrongful activity. To clarify, when a brokerage firm finds indications of possible misconduct their first action isn’t to stop the misconduct and help their client but to get the client to release the firm from liability.

Having reviewed dozens of these letters myself they are designed to be unreadable to the average investor and use industry jargon and legal lingo that is indecipherable to anyone but a securities attorney. These letters begin warmly enough by thanking you for your business and hoping that everything is well with you. Then the conversation becomes impersonal and maybe mentions that your investment choices have become more risky or aggressive recently. These sentences are code words for your investment objectives have completely changed from generating retirement income to you are now interested in potentially losing all your money with casino level risk. Maybe some information related to a “cost-to-equity ratio” or “turnover” is given. There is no explanation as to what these terms mean or why you should be concerned because they are just being provided for legal reasons that the customer should be unconcerned with.

Gana LLP Broker Investigation – Former Berthel Fisher Broker Robert Smith

December 5, 2014 | by Staff Attorney

The law offices of Gana Weinstein LLP are investigating a series of claims before The Financial Industry Regulatory Authority (FINRA) in relation to the conduct of financial advisor Robert Smith (Smith). Smith has been accused by at least 10 customers over his career concerning allegations that Smith overconcentrated the customer’s accounts in private placement securities including equipment leasing programs, oil & gas investments, and non-traded real estate investment trusts (Non-traded REITs).

Smith has been registered with several broker dealers over the years. Starting in 2000 Smith was registered with American General Securities (n/k/a SagePoint Financial, Inc.) until May 2006. Thereafter, Smith was associated with ProEquities, Inc. until June 2010. Finally, from June 2010, until June 2014, Smith was registered with Berthel, Fisher & Company Financial Services, Inc. (Berthel Fisher). Currently, Smith is not registered with any FINRA firm. Upon information and belief, from 2006 on Smith operated his securities business under a DBA called Proactive Retirement Investing.

The large number of complaints against Smith concerning the same or similar charges of misconduct is unusual in the brokerage industry. Most brokers go their entire careers without a single complaint. A small number have one or two complaints. But only a tiny percentage have more than two customer complaints. Here, at least 10 customers have made allegations against Smith all concerning difficult to value private placement securities.

FINRA Sanctions Essex Securities for Failing to Supervise Mutual Fund Switching

December 4, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA), in an acceptance, waiver, and consent action (AWC), sanctioned brokerage firm Essex Securities, LLC (Essex Securities) alleging that from February 2010, through March 2011, Essex Securities through one of its brokers violated industry rules by engaging in a pattern of unsuitable mutual fund switching, a form of churning, in the accounts of seven customers. Further, FINRA found that Essex Securities violated FINRA’ supervisory rules by failing to establish and maintain a supervisory system reasonably designed to prevent unsuitable mutual fund switching.

Essex has been a FINRA member broker-dealer since 1998, is headquartered in Topsfield, MA, and conducts a general securities business with approximately 50 brokers out of 26 branch offices.

FINRA alleged that an Essex Securities broker engaged in a pattern of unsuitable mutual fund switching in seven customer accounts by not having reasonable grounds for believing that such transactions were suitable for those customers due to the frequency of the transactions and the transaction costs incurred. Part of the suitability rule requires brokers to take into consideration the cost consequences of the transactions and ensure that there is a reasonable basis for the incurring of such costs. In this case, FINRA found that on at least 29 occasions, the broker recommended that customers sell mutual funds within only one to thirteen months after purchasing them. Essex Securities was found to have earned commissions of approximately $60,000 on these switch transactions and broker himself was paid approximately $54,000.

FINRA Sanctions Genworth Financial for Failing to Supervise Churning of Customer Accounts

December 3, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) in an acceptance, waiver, and consent action (AWC) sanctioned brokerage firm Genworth Financial Securities Corporation (Genworth) n/k/a Cetera Financial Specialists, LLC (Cetera) concerning allegations that from July 2009, through June 2012, the firm failed to establish a supervisory system and enforce written supervisory procedures designed to identify and prevent unsuitable excessive trading and the churning of customer funds.

FINRA alleged that although Genworth’s written supervisory procedures explicitly provided for the monthly review of an Active Account Report, no such report actually existed. Further, FINRA found that Genworth had no other systems in place that would monitor active accounts for excessive trading. According to FINRA, the firm’s failure to have systems in place and the failure to enforce written supervisory procedures allowed at least one registered representative to churn a customer’s account in violation of anti-fraud rules.

Churning is considered a type of securities fraud because the broker places his own interests ahead of his customer and induces transactions in the customer’s account that are excessive in size and frequency in order to generate commissions for himself. In order to show that churning took place an investor must demonstrate that the broker exercised control over the account, that the broker engaged in excessive trading considering the objectives and nature of the account, and that the broker acted with intent.

FINRA Sanctions Ameriprise Over Arbitration Discovery Abuse Part II

December 2, 2014 | by Staff Attorney

In the prior post we discussed the extremely difficult journey an investor may have to go through in order to obtain relevant discovery documents from the brokerage industry in FINRA arbitration. We also discussed how the system is stacked against the investor’s rights and provides incentives to firms to withhold documents. However, a recent FINRA enforcement order provides some hope that the regulatory watchdog will start taking these issues seriously.

In October 2014, FINRA sanctioned Ameriprise Financial Services, Inc. (Ameriprise) and its broker for altering documents and refusing to produce documents until the eve of hearing. FINRA’s action resulted from the discovery tactics employed by Ameriprise and its broker David Tysk (Tysk) in a FINRA arbitration.

In the Ameriprise case, the FINRA arbitrators found the firm’s conduct so egregious that it referred the matter to FINRA’s Member Regulation Department. The arbitration panel found that Ameriprise and Tysk produced documents in an arbitration proceeding without disclosing that Tysk had altered the documents after receiving a complaint letter from a customer. The altered documents were printouts of notes of Tysk’s contacts with the customer having the initials “GR.” Tysk was responsible for detailing his contact with customers in a computer system maintained by Ameriprise.

Is FINRA Ready to Get Serious About Arbitration Discovery Abuse? Part I

December 1, 2014 | by Staff Attorney

Many securities arbitration attorneys would agree that discovery abuse in FINRA arbitration is a problem under certain circumstances. A client has a seemingly great and compelling case. Then the brokerage firm produces its “discovery” but something doesn’t seem right. Documents recording decisions on key dates are missing, there are unexpected gaps in the email record, and in the worst cases your client has produced documents that the firm should have a copy of but for some reason does not. How often discovery abuse happens in FINRA arbitration is unknowable.

However, what is known is that system likely fosters discovery abuse. A recent Reuters article highlighted that arbitrators do indeed go easy on brokerage firm discovery abuse. Why does this happen? The first line of defense against discovery abuse is the arbitrators themselves. But most arbitrators simply expect the parties to comply with their discovery obligations without their input. Moreover, arbitrators loath ordering parties to produce documents against their will and prefer the parties to resolve their own disputes. While these goals are noble they also invite abuse.

So how does an investor ultimately get awarded discovery abuse sanctions if a brokerage firm fails to produce documents? First, the client must move to compel the documents and win the motion over the brokerage firm’s objections. Second, the firm must refuse to comply with the order. Usually the firm will interpret the scope of the order as not encompassing the discovery that was actually ordered or will otherwise declaw the order through claims of “privilege” or “confidentiality.” This leads to a second motion to compel and request for sanctions. Again the investor will have to argue the relevance of the initial request as if the panel never ruled that these documents had been ordered to be produced and the brokerage firm gets a second bite of the apple to throw out the discovery.

FINRA and SEC Release Guidance on Avoiding Penny Stock Schemes

November 30, 2014 | by Staff Attorney

Recently, FINRA and the SEC’s Office of Investor Education and Advocacy issued an alert to warn investors that some low-priced “penny” stocks are being aggressively promoted to engage in investment fraud schemes. In many cases the stocks of dormant shell companies, businesses with nominal business operations, are susceptible to market manipulation. To help prevent these types of fraud, the SEC suspended trading in 255 dormant shell companies in February 2014.

The typical investment scheme concerns pump-and-dump frauds in which a fraudster deliberately buys shares of a very low-priced, thinly traded stock and then spreads false or misleading information to promote and inflate the stock’s price. The fraudster then dumps his shares causing a massive sell off and leaving his victims with worthless shares of stock. Among the more common schemes is a fraudsters who uses a dormant shell company to buy its shares and then claim that the company has developed a “new” product that has caused the price to jump higher or the company will announce new management.

The SEC provided 5 tips to avoid becoming a victim of a penny stock scheme.