Securities Lawyers Blog

Stifel Nicolaus Broker Robert Head Terminated and Barred for Unauthorized Trading

November 14, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) in an acceptance, waiver, and consent action (AWC) and barring former Stifel, Nicolaus & Company, Inc. (Stifel Nicolaus) broker Robert Head (Head) concerning allegations that between August 2013, and October 2013, Head exercised discretion, aka unauthorized trading, in the account of a customer without obtaining the customer’s prior written consent in violation of NASD Conduct Rule 2510(b) and FINRA Rule 2010. In addition, FINRA alleged that Head recommended transactions to the same customer between January 2010, and October 2013, that were qualitatively and quantitatively unsuitable for the customer.

From August 2008, until January 2014, Head was registered with Stifel Nicolaus. Since that time, Head has not been registered with any brokerage firm. In December 2013, Head was discharged from Stifel Nicolaus for alleged violation of the firm’s policy regarding exercising discretion in a client’s account without written authorization.

According to FINRA, Head managed a Stifel Nicolaus trust account for a customer from August 2008, until October 2013. The customer was retired with an original account application listing investment objectives of “Growth and Income” and “Speculation / Active Trading / Complex Strategies.” FINRA found that in November 2009, the account’s investment objective was changed to identify only ”Speculation / Active Trading / Complex Strategies.” FINRA found that the customer never gave Head written authorization to exercise his own discretion for her account.

Broker Spotlight – Mark Johanson’s Sale of Tenants-in-Common (TIC)

November 13, 2014 | by Staff Attorney

According to the Financial Industry Regulatory Authority’s BrokerCheck system, there have been four customer complaints filed against former Sigma Financial Corporation (Sigma) and current Charles Schwab broker, Mark Johanson (Johanson) stemming from unsuitable Tenants-in-Common (TIC) investments.

Sales of TICs exploded during the early 2000s from approximately $150 million in 2001 to approximately $2 billion by 2004. TICs are private placements that have no secondary trading market and are therefore illiquid investments. These products were promoted as appropriate section 1031 exchanges in which an investor obtains an undivided fractional interest in real property. In a typical TIC, the profits are generated mostly through the efforts of the sponsor and the management company that manages and leases the property. The sponsor typically structures the TIC investment with up-front fees and expenses charged to the TIC and negotiates the sale price and loan for the acquired property.

TIC investments entail significant risks. A TIC investor runs the risk of holding the property for a significant amount of time and that subsequent sales of the property may occur at a discount to the value of the real property interest. FINRA has also warned that the fees and expenses associated with TICs, including sponsor costs, can outweigh the any potential tax benefits associated with a Section 1031 Exchange. That is, the TIC product itself may be a defective product because its costs outweigh any potential investment value for a customer. FINRA also instructed members that they have an obligation to comply with all applicable conduct rules when selling TICs by ensuring that promotional materials used are fair, accurate, and balanced.

Gana LLP Investigates Investor Claims of Churning at Global Arena Capital and Whitewood Group

November 12, 2014 | by Staff Attorney

The law office of Gana Weinstein LLP is investigating a string of securities arbitration cases involving brokers associated or formerly associated with Global Arena Capital Corp (Global Arena) and Whitewood Group, Inc (Whitewood Group). Two such brokers include Mark Lisser (Lisser) and Benjamin Brown Jr. (Brown).

FINRA recently brought an action against Brown alleging that between October 19, 2012, and December 10, 2012, while registered with Whitewood Group, Brown effected 30 transactions while exercising discretion without written authorization in a customer’s account. From August 2011, until November 2011, Brown was associated with Global Arena. Thereafter, from February 2012, through May 2013, Brown was registered with Whitewood Group. Finally, from May 2013 until December 2013, Brown was associated with Salomon Whitney LLC. Brown has had two customer complaints filed against him, both alleged churning and unsuitable investments.

In FINRA’s action against Brown, it is against the industry’s rules for a registered representative to exercise any discretionary power in a customer’s account unless such customer has given prior written authorization and the account has been accepted by the member in writing. FINRA found that between October 19, 2012, and December 10, 2012, Brown effected 30 option transactions while exercising discretion in one customer’s account without the customer’s prior written authorization to exercise discretion to engage in discretionary trading.

Gana LLP Files Claim On Behalf of Customer Against Legend Securities for Churning and Unauthorized Trading

November 11, 2014 | by Staff Attorney

Gana Weinstein LLP recently filed a claim against Legend Securities, Inc. (Legend) on behalf of a customer with the Financial Industry Regulatory Authority (“FINRA”) alleging that Legend and Legend broker, Michael Guilfoyle, recommended unsuitable investments while churning his account and executing unauthorized trades in violation of FINRA rules and other applicable law.

In 2013, the customer received a cold call from Guilfoyle soliciting his business. Guilfoyle assured the client that he would only invest according to his investment objectives. In reliance upon Guilfoyle’s assurances, the client transferred his money to Legend. In early 2014, Guilfoyle and Legend also coaxed the client into investing his wife’s money, which she inherited from her parents. Soon after the client transferred the funds to Legend, Guilfoyle allegedly leveraged over concentrated the portfolio and began to churning the account. “Churning” is the Wall St. vernacular when there is unnecessarily high or excessive trading activity in an investor’s account, simply for the purpose of generating commissions for the broker. This is a violation of Securities and Exchange Commission (“SEC”) and FINRA rules.

More egregiously, Guilfoyle failed to contact the client concerning the trades being made in his account and acted without any prior authorization. Guilfoyle allegedly day-traded different stock positions earning fees for himself while providing no benefit to the client. For example, Guilfoyle concentrated the client’s account in speculative small cap stocks, such as Voxeljet AG (Voxeljet) that had only recently gone public. At the time, analysts warned that Voxeljet was a highly volatile stock, not suited for investors looking for long-term growth. Guilfoyle’s misconduct ultimately cost client nearly his and wife’s entire account value.

Why is UBS Still Selling the UBS Puerto Rico Bond Funds?

November 10, 2014 | by Staff Attorney

Albert Einstein once defined insanity as “doing the same thing over and over again and expecting different results.” While UBS does not challenge Einstein’s theories in physics it does challenge his thoughts on insanity. According to several news sources, including Financial Advisor Magazine and Reuters, UBS has told its brokers to continue selling its extremely speculative and risky UBS Puerto Rico bond funds to investors even after some investors have lost their entire investment and many others have suffered very substantial losses. Obviously, UBS believes a different result can be achieved with these recommendations. Let’s examine the facts and determine whether UBS has any grounds for such a belief.

Recently, investors have filed more than 500 complaints against UBS concerning the sales of the UBS Puerto Rico bond fund with more cases being filed daily. UBS’ sales tactics and recommendations to its customers to invest in 23 proprietary closed-end funds has come under fire and investors claim that the firm hid the substantial risks of the funds in order to generate sales and lucrative fees. On the surface the funds’ risks include is the excessive amount of leverage the funds employ. UBS leveraged up to 100% of the funds’ investments to raise additional cash, or the borrowing of a dollar for every dollar of capital invested in the funds. U.S. based funds by contrast are not allowed to take on such large leverage risk.

UBS has claimed that these funds have provided excellent returns and tax benefits to investors for decades. These claims appear to be the support for continuing to sell and recommend the bond funds to investors. However, investigations into UBS practices regarding the bond funds reveals that UBS’ decision to continue to sell the funds may come back to haunt the firm.

UBS Puerto Rico Fined $3.6 Million and to Pay $1.7 Million in Restitution to Customers of its Bond Funds

November 6, 2014 | by Staff Attorney

On October 9, 2014, Puerto Rico’s Office of the Commissioner of Financial Institutions (OCFI) has settled its claims with UBS Financial Services Incorporated of Puerto Rico (UBS Puerto Rico) over UBS’s sale of closed-end mutual funds in Puerto Rico. The OCFI conducted a routine examination from October 15, 2013 through June 27, 2014. The examination of UBS Puerto Rico was conducted to determine if the firm complied with the Puerto Rico Uniform Securities ACT Regulation No. 6078.

The OCFI interviewed a sample of clients and examined whether certain former and current UBS Puerto Rico brokers either (i) recommended that, or (ii) permitted certain clients to, use non-purpose loans through UBS Bank USA to purchase securities in UBS brokerage accounts during the 2011-2013 period in violation of the customers’ loan agreements and UBS Puerto Rico policies.

The OCFI determined that for some clients, such a practice was unsuitable based on the customers’ financial objectives, risk tolerance and needs, and that UBS Puerto Rico brokers may have induced clients through the misrepresentations or omissions of material facts.

SEC Approves Changes to Value of Non-Traded REITs on Account Statements

November 6, 2014 | by Staff Attorney

The Securities and Exchange Commission (SEC) approved a rule change proposed by the Financial Industry Regulatory Authority (FINRA) that will give investors greater insight into the costs of purchasing shares of non-traded real estate investment trusts (Non-Traded REITs).

As reported by InvestmentNews, the SEC approved FINRA’s proposal on October 10. The rule change would require broker-dealers to include a per-share estimated value for an unlisted direct participation program (DPP) or a REIT on customer statements in addition to other related disclosures. The current practice is to list the value of Non-Traded REITs at a per-share price of $10, or simply the purchase price of the investment.

As a background, a Non-Traded REIT is a security that invests in different types of real estate assets such as commercial real estate properties, residential mortgages of various types, or other specialty niche real estate markets such as strip malls, hotels, and other industries. REITs can be publicly traded and when they are, can be bought and sold on an exchange with similar liquidity to traditional assets like stocks and bonds. However, Non-traded REITs are sold only through broker-dealers and are illiquid, have no market, and can only be liquidated on terms dictated by the issuer, which may be changed at any time and without prior warning.

FINRA Declines Rule Requiring Brokerage Firms To Carry Insurance

November 5, 2014 | by Staff Attorney

According to a recent report, the Financial Industry Regulatory Authority (FINRA) has decided it cannot force firms to carry insurance for payment of awards granted by arbitration panels on behalf of investors who have lost money.

As a background, every investor who opens a brokerage account with an investment firm agrees to arbitrate their dispute before the FINRA. Even if an investor did not open an account with a brokerage firm the claim can still be arbitrated under the industries rules. FINRA is the investment industries self-regulatory organization for all brokerage firms operating in the United States, overseeing approximately 4,700 brokerage firms and 635,000 registered representatives. FINRA both enforces its own rules through regulatory actions and administers an arbitration forum for securities disputes.

Our firm has noticed a recent trend where small and even mid-sized firms fail to keep sufficient funds on hand to pay investors due to misconduct at the firm. These smaller firms sometimes fail to enact proper supervisory procedures and regulatory controls to prevent their brokers from engaging in wrongful conduct. Sometimes these firms simply do not have the resources to properly engage in the securities business lines they attempt to engage in. As a result investors are harmed and due to their small size, cannot be compensated. In 2012, brokerage firms failed to pay $50 million in awards to customers. In 2011, the number of unpaid awards totaled $51 million.

Brokerage Firms Halt Sales of American Realty Capital Related REITs

November 4, 2014 | by Staff Attorney

According to InvestmentNews, recently several brokerage firms including Securities America Inc., with 1,772 registered reps and advisers, and the four National Planning Holdings Inc. firms with 3,954 registered reps and advisers including INVEST Financial Corp., Investment Centers of America Inc., National Planning Corp., and SII Investments Inc., announced that they are temporarily suspending some or all of the non-traded real estate investment trust (Non-Traded REITs) sales sponsored or distributed by American Realty Capital and its affiliated companies.

These Non-Traded REITs include investments such as the Phillips Edison-ARC Grocery Center REIT II and Cole Capital Properties V. The decision to halt sales come as Nicholas Schorsch, ARC’s chairman, faces further investigation after it had been revealed that the traded REIT he controls, American Realty Capital Properties Inc., made a $23 million accounting error that resulted in the firing of its chief financial officer.

The firms halted the sales in order to conduct further due diligence on the Non-Traded REIT products. Suspending sales of these products will likely help protect the firms if it is later revealed that the irregularities are more widespread. Brokers have a duty to have a reasonable basis for recommending that Non-Traded REITs are suitable for investors. This means that the firm has investigated the product and believes that the information disclosed to investors has a factual basis. If a Non-Traded REIT, its parent company, or principals are under investigation for making material misstatements it would be difficult for the firm to later argue that it had a basis for believing that the information it provided to investors was accurate.

Ismail Elmas Admits to Stealing Over $1 Million From Investors

November 3, 2014 | by Staff Attorney

As we reported earlier, broker Ismail Elmas’ (Elmas) Financial Industry Regulatory Authority (FINRA) BrokerCheck records show that the representative was recently discharged from CUSO Financial Services, LP (CUSO Financial) concerning allegations that the broker “converted client funds for personal use as well as participated in an unauthorized outside business activity involving investments without the firm approval…”

Thereafter, investors have come forward to complain that Elmas allegedly engaged in unauthorized activity and other wrongful acts. Then in late October, Elmas pleaded guilty in federal court in Alexandria, to a count of wire fraud. Elmas admitted that he bilked at least 10 investors out of $1 million to $7 million dollars. According to news sources, Assistant U.S. Attorney Chad Golder said in court that Elmas, whose d/b/a business Apple Financial Services, an affiliate of Apple Federal Credit Union, preyed upon elderly and widowed investors and used a variety of methods to hide stolen funds. One of the more salient aspects of Elmas’ fraud is that unlike many schemers, Elmas was not promising large or sky-high returns or pushing clients into complicated financial products.

Our firm represents investors who are the victims of schemes, like Elmas’, to hold the brokerage firm responsible. The brokerage firms that employ Elmas are responsible for supervising his conduct. Elmas’ scheme presents a classic “selling away” securities violation scenario. In selling away cases, a financial advisor solicits investments in companies, promissory notes, or private placements that were not approved by the broker’s affiliated firm. 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. When selling away activity occurs, it is often because the supervisory environment is deficient because the brokerage firm either fails to put in place a reasonable supervisory system or fails to actually implement that system and meet supervisory requirements.