Securities Lawyers Blog

Sales of Non-Traded REITs Contributes to Increased Broker Dealer Revenues

May 21, 2014 | by Staff Attorney

Despite the broad market’s recent volatility, 2013 brought the twenty-five largest independent broker dealers double-digit revenue growth on average, according to an Investment News report. After a weak 2012, these independent broker dealers roared to a 13.2% year over year increase in revenue, recording $18.46 billion in 2013 according to this year’s Investment News survey.

The overall strength of the S&P 500, gaining 29.6% in 2013 was one contributing factor to the 2013 success of independent broker dealers. The other factor however, was a flood of commissions generated from record sales of alternative investment products, namely non-traded real estate investment trusts (REITs). As Eric Schwartz, chief executive of Cambridge Investment Research explained, “There were two reasons for last year’s results. The stock market was up 30%, and there was an unusually high percentage of dollars in alternatives and REITs being sold. Remember, a number of REITs had public listings, and clients reinvested back into other REITs.”

According to the Investment News survey, the top ten independent broker-dealers with the most growth from alternative investments include: (1) Independent Financial Group; (2) Triad Advisors; (3) Royal Alliance Associates; (4) National Planning Corp.; (5) First Allied Securities; (6) Lincoln Financial Network; (7) Cambridge Investment Research; (8) Commonwealth Financial Network; (9) Ameriprise Financial Services; 10) LPL Financial.

Wall Street Wants to Sell Private Equities to Average Joes

May 20, 2014 | by Staff Attorney

We now have the answer to what they will think up next. According to a New York Times article, one of Wall Street’s most exclusive investment products, sold to the wealthy, is moving toward the mainstream investor. Private equity funds. These vast pools of capital that buy and sell companies will become accessible to smaller investors if supports have their way under a plan being contemplated by the Nasdaq stock exchange.

The plan calls for a market where investors in private equity funds can sell their interests to individuals whose net worth falls short of the usual requirements for such investments. Today, private equity funds are limited by the Investment Company Act of 1940 limits their investors to “qualified purchasers,” or individuals with at least $5 million in investments.

Other rules that stand in the way of the sale of alternative investments to the masses include Regulations D. Under Regulation D, private placements can only be sold to “accredited investors.” Under Rule 501 an “accredited investor” is any person who has a net worth in excess of $1,000,000 — excluding residence — or has an annual income in excess of $200,000 in two most recent years.

LPL Financial Broker Reniero Francisco Accused of Misappropriating Millions in Client Funds

May 19, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently barred LPL Financial, LLC (LPL) broker Reniero Francisco (Francisco) concerning allegations that the broker failed to cooperate with FINRA’s investigation of Francisco’s involvement with Arista LLC, a registered Commodity Pool Operator (CPO) with its principal place of business in Newport Coast, California. An order was entered on December 3, 2013, requiring Francisco and other parties to pay more than $8.25 million in restitution for the losses of defrauded investors. FINRA requested information from Francisco and also scheduled him to testify but Francisco failed to respond to FINRA’s requests for information and documents and also failed to appear for testimony.

In December 2012, the U.S. Commodity Futures Trading Commission (CFTC) brought action against Arista and Arista’s principals, Abdul Sultan Walji (a/k/a Abdul Sultan Valji) of San Juan Capistrano, California, and Francisco alleging that they carried out a fraudulent scheme to misappropriate millions of investors’ money through commodity futures and options, making false statements to the CFTC, and filing false quarterly reports with the National Futures Association (NFA).

Shortly thereafter, Judge Paul A. Engelmayer of the U.S. District Court for the Southern District of New York entered a consent judgment and permanent injunction order against Arista, Walji, and Francisco. The order requires the defendants to pay more than $8.25 million in restitution for the investor losses. In addition, the order imposed civil monetary penalties of $6.45 million on Walji, $5.925 million on Francisco, and $1.54 million on Arista. The order also permanently bans defendants from trading activity and prohibits them from violating provisions of the Commodity Exchange Act (CEA) and a CFTC regulation.

FINRA Drops Bid to Regulate Investment Advisors – For Now

May 16, 2014 | by Staff Attorney

Most people do not realize that there is a big distinction between brokers and investment advisors. Many people think, they both recommend securities. While that is true, that is pretty much where the similarities end.

A broker is regulated by The Financial Industry Regulatory Authority (FINRA) a self-regulatory organization (SRO) as provided for under the Securities and Exchange Act of 1934. On the other hand investment advisors are regulated by the Securities and Exchange Commission as provided under the Investment Advisors Act of 1940 (IAA).

A broker is more akin to salesman. A broker’s obligation is to make sure that his or her recommendation is suitable and appropriate for the investor given the investors objectives and other information. However, an investment advisor is more like an appraiser of securities, his or her job is not only to make recommendations that are not only suitable but to continually monitor the investors account to ensure that the investor has a viable financial plan over time. Consequently, a broker is compensated on a transactional basis while an investment advisor is paid a percentage of the assets managed by the advisor.

Two MetLife Advisors Alleged to Have Wrongfully Exchanged Variable Annuities

May 14, 2014 | by Staff Attorney

On March 27, 2014, the Financial Industry Regulatory Authority (FINRA) filed a regulatory complaint against two former brokers from MetLife Securities, Inc., a unit of MetLife Inc. According to the complaint, Christopher Birli (Birli) and Patrick Chapin (Chapin), who both worked for MetLife in Williamsville, New York, until 2012, participated in a seven-year scheme to inflate commissions. According to the allegations, the advisors preyed on the employees of the State University of New York, having these retirement-plan participants switch $21 million in annuities. The specific allegations claim that from a period spanning from 2004 to 2011, Birli and Chapin encouraged forty-five of their customers to switch the MetLife variable annuities that they held in their respective accounts in exchange for new variable annuities held in individual retirements accounts, which were outside of the university plan that the State University of New York employees should have adhered to.

MetLife has certain policies in place. One such policy prohibits exchanging certain types of variable annuities. It has been alleged that the two MetLife advisors deceptively designed the deals for their customers in a manner explicitly intended to circumvent this policy. Birli and Chapin allegedly evaded detection by utilizing a three-step process. First, they advised their clients to sell their retirement plan annuities and take the cash. Next, the two advisors had their clients purchase a different security within the retirement plan, which they were required to hold for ninety days. Finally, Birli and Chapin instructed their clients to sell that security in order to buy a variable annuity through an individual retirement account.

Over the seven-year period, a total of $21 million was craftily shifted from the MetLife retirement plan product into the TIAA-CREF plan product, then subsequently placed into the MetLife retail annuities. All the while, Birli and Chapin allegedly reaped commissions of 7.15% for transferring the money into the retail annuities. If the two brokers had followed protocol and sought an exception with MetLife to allow the internal exchange of the retirement plan annuity product for a retail variable annuity, they would have only earned the standard 2% gross dealer concessions. The advisors’ alledged improprieties essentially netted them nearly four times the commissions that they were rightfully entitled to, generating hundreds of thousands of dollars for their own pockets. According to the filings, MetLife terminated Birli and Chapin in 2012. Neither individual presently works in the securities industry, according to filings.

How to Sell Restricted Stock Under Rule 144

May 13, 2014 | by Staff Attorney

There are many instances where an individual or corporation receives shares of stock by private placement, as opposed to purchasing the stock from the open market. Often times, the stock certificates received by private placement are stamped with a legend outlining applicable restrictions on the resale of that stock. This legend establishes the regulatory limitations surrounding the corporation or individual’s ability to resell the securities. This legend must be removed before one can legally effectuate the resale of the stock. Generally, the securities must either be registered with the Securities and Exchange Commission (SEC) or sold pursuant to an exemption from registration. Only after the securities are registered or are shown to be exempt, may a transfer agent remove the restrictive legend—and only upon the removal of the restrictive legend may the underlying securities sold.

In the United States, the resale exemption most often relied on is Rule 144 of the Unites States Securities Act of 1933. Rule 144 allows the resale of restricted stock to be sold to the public without a registration statement being filed if a number of conditions have been met. These conditions vary depending on (1) whether the issuing company is a reporting or non-reporting issuer; (2) whether the holder is arms-length, and thus considered a “Non-Affiliate”; or a director, officer or significant shareholder, and thus considered an “Affiliate”; and (3) the length of time the securities have been held.

Removing the restrictive legend involves extensive communications with the transfer agent of the issuer of the securities being held and the broker dealer where the stockholder seeks to deposit those securities. The certificate holder will need to provide a number of documents including, but not limited to, a seller’s representation letter, the original stock certificates, a medallion signature guarantee, a legal opinion letter, and in some cases, a Form 144 for the proposed transaction.

FINRA Approves Expanded Broker Background Checks and Disclosures

May 12, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) announced approval of amendments to FINRA’s supervision rule that would expand the obligations of brokerage firms to check the background of applicant brokers upon registration. The rule would encompass first-time applications as well as transfers between firms and require the brokerage firm to verify the accuracy and completeness of the information contained in an applicant’s Form U4. Under the new rule brokerage firms must adopt written procedures in their supervisory manuals that include searching public records in order to check the accuracy of the information. The amendments to the supervision rule will be submitted to the Securities and Exchange Commission for review and approval.

The U4 Form is the foundation of FINRA’s BrokerCheck system that helps investors find red flags that would indicate potential problems and signs of misconduct by their brokers. FINRA’s BrokerCheck come under fire recently by investor advocacy groups and federal lawmakers for its inaccuracies and lack of complete information.

In addition, FINRA will also search public financial records for all registered representatives and also search other publicly available information including criminal records of brokers. FINRA intends to conduct periodic reviews of public records to ensure that the organizations BrokerCheck database and information is accurate. Also under consideration is whether to add additional information to a broker’s publically available Central Registration Depository such as broker scores on securities exams.

FINRA Determines that Charles Schwab Cannot Bar Clients From Participating in Class Actions

May 9, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has determined that Charles Schwab & Co. (Charles Schwab) violated the self-regulatory organization’s rules by adding waiver languages to agreements that prohibited customers from participating in any class action cases against the firm. Schwab settled the claims and was fined of $500,000. The firm also agreed to tell all its customers that the requirement is no longer in effect.

In October 2011, Schwab made amendments to the customer account arbitration agreement of over 6.8 million investors after it settled a class action securities case accusing the brokerage firm of misleading thousands of customers about its YieldPlus money market fund. The YieldPlus fund sustained huge losses in 2008 and Schwab paid $235 million to resolve the allegations against the firm.

In the wake of Schwab settlement the firm amended its arbitration agreement to include a waiver provisions mandating that customers consent that any claims against the firm could only be arbitrated individually.

Securities Watchdog is Actually Asleep At the Wheel

May 8, 2014 | by Staff Attorney

People have joked that securities regulators are asleep at the wheel due to the number of frauds that go unpunished for so long. However, a recent Bloomberg BusinessWeek article exposed that the phrase is literally true in some cases.

Every dispute an investor has with their brokerage firm must be arbitrated through the Financial Industry Regulatory Authority (FINRA). FINRA hires and purportedly screens arbitrators who hear customer disputes with the industry. Due to the private nature of arbitration, the general public is often unaware how poorly equipped this system is at times to handle matters entrusted to it. While I have been satisfied with the quality of arbitrators in many cases, I have also had the unfortunate and all too common experiences complained of in the Bloomberg article.

According to the article, FINRA’s arbitration panels has a pool of 6,375 people who are often retired brokers, lawyers, or accountants. Arbitrators are paid about $400 a day when serving on a panel. FINRA provides arbitrators with 14 hours of instruction that can be completed online. Awards rendered by FINRA arbitrators are typically brief, and the decision often provides no reasoning and only a bare outline of the claim and no explanation of how the amount of the award was determined.

How Elderly Investors Can Protect Their Retirement Savings

May 6, 2014 | by Staff Attorney

Saving enough money for retirement is challenging enough. Unfortunately, senior investors now need to worry about trusting financial advisors and investment promoters in order to avoid losing their hard earned savings. There are steps and precautions seniors can take to help guard their investments.

First, fraudsters tend to target people who they can easily build a relationship of trust with. Thus, common frauds include affinity fraud through community groups, clubs, associations, and religious places of worship. Older people are also generally more trusting than the average person. The elderly are also more available to answer phone calls during the day.

Investors should always proceed with caution. Be wary of limited time offers or investments that you need to make a quick decision on. Also ask about the cost or commission for investing. If the commission is 10% that means that only 90% of your money will go to work for you and there may be considerable risks that need to be taken in order for the investment to earn a profit. Common frauds and scams also purport to offer a high rate of return or income rate.