Securities Lawyers Blog

FINRA Sanctions Huntleigh Securities Concerning Non-Traditional ETF Sales Practices

October 17, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has sanctioned brokerage firm Huntleigh Securities Corporation (Huntleigh) concerning allegations that the firm failed to establish and maintain a supervisory system regarding the sale of leveraged as well as inverse leveraged exchange traded funds (Non-Traditional ETFs) reasonably designed to achieve compliance with applicable securities laws.

Huntleigh is a FINRA member firm since 1977 and has headquarter offices in St. Louis, Missouri. Huntleigh engages in general securities business and employs approximately 53 registered representatives across its five branch offices.

Non-Traditional ETFs contain drastically 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 can also be used to return the inverse or the opposite result of the return of the benchmark.

Broker Edward Wendol Barred by FINRA Over Failure to Respond to Outside Business Activity Inquiries

October 16, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) barred broker Edward Wendol (Wendol) concerning allegations that during the course of FINRA’s investigation into whether Wendol was involved in undisclosed outside business and private securities transactions, also known as “selling away”, Wendol failed to respond to FINRA’s requests. On May 29, 2014, FINRA requested that Wendol provide documents and information. On June 16, 2014, Wendol informed FINRA that he would not provide the requested documents and information or appear and provide testimony. As a result, Wendol was barred from the securities industry.

Wendol first became registered with FINRA in 1993 with South Richmond Securities, Inc. From October 1993, through October 2009, Wendol was registered with seven different FINRA member firms. On December 5, 2011, Wendol registered with Sterling Enterprises Group, Inc. (Sterling). Thereafter, from September 2013, through July 2014, Wendol was associated with WTS Proprietary Trading Group LLC.

The allegations against Wendol are consistent with a “selling away” securities violation. In such a case, the broker sells private securities away from the firm because the investment is 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 fact, each brokerage firm is required to establish and maintain a system to supervise the activities of each registered representative that is reasonably designed to achieve compliance with the securities laws. Selling away often occurs when supervisory lapse conditions exist. Supervisory lapses include either the failure to put in place a reasonable supervisory system or a failure to implement their supervisory requirements. Many times there obvious “red flags” of misconduct that are overlooked or not properly followed up on.

Broker Thomas Sharp Sanctioned by FINRA Over Misleading Statements Concerning Non-Traded REITs

October 15, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned broker Thomas Sharp (Sharp) concerning allegations that Sharp violated NASD Rule 2210(d) by sending emails to potential investors in a non-exchange traded real estate investment trusts (Non-Traded REITs) that were not fair and balanced and failed to provide a sound basis for evaluating the facts. Sharp was associated with Ameriprise Financial Services, Inc. (Ameriprise) from 1987 through September 2013.

The Non-Traded REIT market has been a financial boon for the brokerage industry in recent years. A Non-Traded REIT is a security that invests mostly in real estate or property assets. While publicly traded REITs can be sold on an exchange, are liquid, and have lower commissions and fees, non-traded REITs are sold in the form of private placement offerings, are speculative, illiquid, and often charge fees of over 10%. Nonetheless, brokers have recommended these products to many investors, in part driven by the fat fees they can earn.

Brokers’ selling practices have come under scrutiny because sometimes brokers claim that Non-Traded REITs offer stable, safe returns compared to the volatile stock market. However, the stability is only a result of the fund setting its own price and illiquidity, not because the product is immune to market fluctuation.

Broker Lorene Fairbanks Alleged to Have Made Unauthorized Trades in Client Accounts

October 14, 2014 | by Staff Attorney

According to broker Lorene Fairbank’s (Fairbank) Financial Industry Regulatory Authority (FINRA) BrokerCheck records the representative was recently sanctioned concerning allegations that From August 2006, through February 2012, she effected approximately 57-69 discretionary transactions for seven firm customers without written authorization from the customers or approval from the firm. In addition, Fairbanks was alleged to have mismarked approximately 54-70 order tickets as being “unsolicited” orders when the trades were “solicited” causing the firm to maintain inaccurate books and records.

Fairbanks entered the securities industry in 1996. From August 2006, to March 2012, she was registered Merrill Lynch. Pierce, Fenner & Smith Incorporated (Merrill Lynch). In February 2012, Merrill Lynch terminated Fairbanks and disclosed in a filing that she was discharged for taking discretion in client accounts and mismarking client orders. Since June 2012, Fairbanks has been associated with Ameriprise Financial Services, Inc. In addition, at least five customer complaints have been filed against Fairbanks alleging unsuitable investments, unauthorized trading, 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. NASD Rule 3110 and FINRA Rule 4511 provide that members must preserve books and records. FINRA alleged that Fairbanks was not approved by her firm to exercise discretion in any customer accounts but nonetheless effected approximately 57-69 discretionary transactions for seven customers. Also, FINRA alleged that Fairbanks mismarked approximately 54-70 order tickets in the same customers’ accounts as “unsolicited” meaning that the customer asked the broker to make the trade, when the trades were solicited, meaning that the broker brought the investment to the client’s attention.

Center Street Securities Broker David Escarcega Investigated Over GWG Debenture Sales

October 13, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) brought a complaint against broker David Escarcega (Escarcega) concerning allegations that Escarcega recommended unsuitable investments in Renewable Secured Debentures of GWG, Inc. (GWG Debentures). Escarcega is not the first Center Street Securities, Inc. (Center Street) broker that has been investigated by FINRA in connection with their GWG sales or the supervision of such sales. As we have reported FINRA recently sanctioned Michael Wurdinger (Wurdinger) concerning allegations that from approximately February 2012, to February 2013, Wurdinger failed to adequately supervise sales of GWG Debentures. In a related but separate action concerning Center Street’s supervision of the sale of the GWG debentures, Anil Vazirani (Vazirani) was found to not be appropriately registered with the firm but nonetheless solicited sales of the debentures through communications with prospective customers, discussed the details of the debentures features as an investment, recommended the purchase of the product, and assisted seven customers to complete documents in order to purchase the GWG Debentures.

As a background, GWG Holdings, Inc. purchases life insurance policies on the secondary market at a discount to the face value of the insurance policies. GWG then pays the policy premiums until the insured dies and GWG then collects the insurance benefit making a profit, hopefully, by collecting more upon the maturity of the policies than the payment of the policy and servicing of the premiums. According to FINRA, the company has a limited operating history and has yet to be profitable. 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.

In Escarcega’s case, FINRA alleged that Between March 2012, and January 2013, Escarcega violated the antifraud provisions of the federal securities laws as well as numerous FINRA and NASD rules while selling more than $1.8 million of GWG Debentures to his customers. According to FINRA, Escarcega made false and misleading oral and written statements to seven customers in connection with their purchases of the GWG Debentures. FINRA found that Escarcega falsely told the customers that the Debentures were safe, low-risk, liquid, or guaranteed. For example, on one form, FINRA found that Escarcega described the GWG Debentures as having “a guaranteed interest payment” and providing a “guaranteed rate of return.”

Adam Gana Discusses New Rules Governing Civil Litigation in New York

October 10, 2014 | by Staff Attorney

The Daily Bulletin recently published an article about new rules governing civil litigation in New York. According to Charisma Troiano, the author of the article in 2013 the Office of Court Administration issued a letter supporting proposed changes to the New York Civil Procedure Legal Rules Section 2106. The new rule allows affirmations obtained outside of the United States, Puerto Rico and the Virgin Islands to hold the same evidentiary weight as a sworn affidavit within the United States. Adam Gana supported the new rule.

The article can be found here.

Dennis Karasik Barred by FINRA Over Diversified Energy Group Sales

October 10, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) permanently barred broker Dennis Karasik (Karasik) concerning allegations that from December 2010, to March 2012, Karasik participated in private securities transactions, otherwise known as “selling away” without providing prior written notice to the two firms with which he was associated. Specifically, FINRA alleged that Karasik participated in the sale of bonds issued by Diversified Energy Group, Inc. (DEG), an energy company, and that the company paid him finder’s fees from on the sales made.

Karasik was employed by a number of brokerage firms from 1986 through February 2013. During the times relevant to FINRA’s allegations Karasik was registered with Multi-Financial Securities Corp. (Multi-Financial) until December 2011, and with H. Beck, Inc. (H. Beck) until February 2013. Karasik maintained an office in Parkton, Maryland. Karasik was terminated by H. Beck for the conduct alleged by FINRA. According to Karasik’s BrokerCheck, he has had six customer complaints filed against him and also has two tax liens. Karasik was also a partner of Carrio, Karasik, & Associates (CKA).

DEG is a Florida energy company that develops oil and gas reserves in the United States. It has raised funds through private placement offerings of corporate bonds to accredited investors. FINRA alleged that between January 2010, and March 2012, Karasik and his partner in CKA participated in the sale of more than $3.2 million of DEG bonds to at least 25 investors. According to FINRA, Karasik was compensated for his role in these sales through the payment of a finder’s fee.

The NASAA Announces New Initiative to Focus on Senior Investor Abuse

October 9, 2014 | by Staff Attorney

As we have reported previously, financial abuse of seniors is a significant problem in the United States. In our firm’s representation of clients, seniors comprise the vast majority of clients that seek our firm’s assistance as securities attorneys.

Recently the North American Securities Administrators Association (NASAA) announced the formation of a new Board committee to address a wide range of challenges confronting senior investors. The announcement came on the heels of the agencies disclosure that at least a third of its members’ enforcement actions by state securities regulators since 2008 have involved senior victims among states that track victims by age. Of the 10,526 enforcement actions initiated between 2008 and 2013, 3,548 involved victims age 62 and older. Further, the NASAA stated that this amount is a conservative estimate since it does not include cases from states that do not report the age of victims and many senior victims simply do not come forward.

As long-time readers of this blog post know, we have frequently wrote the issue of scams and fraud targeting the elderly. See How Elderly Investors Can Protect Their Retirement Savings and The Problem of Senior Investor Abuse – A Securities Attorney’s Perspective.

Former First Allied Broker Herbert Kaye Suspended for Unauthorized Trading

October 8, 2014 | by Staff Attorney

On September 15, 2015 FINRA suspended former First Allied broker, Herbert Leonard Kaye, for four months and fined him $25,000 which includes the disgorgement of $11,000 in commissions. According to FINRA, Mr. Kaye entered over 2,000 discretionary trades in the account of a customer between June 2010 and April 2013 without the customer’s prior written authorization, in violation of FINRA Rule 2010 and 2510(b). FINRA Rule 2010 states that “A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.”

In June 2010, Mr. Kaye’s customer realized a significant loss on the unsolicited sale of equities that she had inherited from her deceased husband. Following that sale the customer requested that Kaye recommend investments and investment strategies that would limit her exposure to large market fluctuations. The customer, who’s information was not disclosed, gave Mr. Kaye verbal authority to use his discretion to enter trades in her account without contacting her.

According to FINRA, Mr. Kaye did not obtain written authority to trade in her account. Moreover, First Allied’s written policies and procedures prevented discretionary trading except in limited circumstances. Nonetheless, between June 2010 and April 2013, Mr. Kaye executed over 2,000 discretionary trades generating over $173,000 in commissions.

An Examination of LPL Financial’s Recent Regulatory Woes

October 7, 2014 | by Staff Attorney

LPL Financial, LLC (LPL) is one of the largest independent brokerage firms in the United States employing approximately 13,840 registered reps and advisers. However, the firm’s growth has come with a host of regulatory actions focusing on the firm’s alleged supervisory failures.

Recently, InvestmentNews reported that the firm was hit with a $2 million fine, and ordered to pay $820,000 in restitution, for failing to maintain adequate books and records documenting variable annuity exchanges. The mounting firm fines have led to flat second quarter earnings at LPL. The firm has stated that the company is instituting enhanced procedures with a view to ensuring that surrender charges incurred in connection with variable annuity exchange transactions are accurately reflected in the firm’s books and records as well as in any disclosures given to clients. The firm is also purportedly taking steps to make sure that its advisers are adequately documenting the basis for their variable annuity recommendations.

LPL has been on the radar of FINRA and several state regulators that have focused on the firm’s supervisory and other record systems as well as examining sales of investment products, including non-traded real estate investment trusts (REITs). In February 2013, LPL settled with the Commonwealth of Massachusetts to pay at least $2 million in restitution and $500,000 in fines concerning the firm’s non-traded REIT practices. In addition, in the last year, FINRA has fined LPL Financial $7.5 million for significant e-mail system failures. Moreover, we have reported on numerous LPL registered representatives who have been fined over the past year for a variety of misconduct ranging from misappropriation of funds, sales of alternative investments, selling away activities, and private placements.