Securities Lawyers Blog

JP Turner Sanctioned By FINRA Over Non-Traditional ETF Sales and Mutual Fund Switches

March 20, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) ordered J.P. Turner & Company, L.L.C. (JP Turner) to pay $707,559 in restitution to 84 customers for sales of unsuitable leveraged and inverse exchange-traded funds (Non-Traditional ETFs) and for excessive mutual fund switches. The current fine and is just one of several sanctions that regulators have brought against JP Turner brokers concerning the firms sales and supervisory practices.

Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, was quoted in the settlement stating that “Securities firms and their registered reps must understand the complex products they are selling and the risks inherent to the products, and be able to determine if they are suitable for investors before recommending them to retail customers.”

As a background, Non-Traditional ETFs are novel products that have grown significantly in popularity since 2006. By 2009, over 100 Non-Traditional ETFs existed in the market place with total assets of approximately $22 billion. A leveraged ETF seeks to deliver two or three times an index or benchmark return the ETF tracks. Non-Traditional ETFs can also be “inverse” or “short” meaning that the investment returns the opposite of the performance the index or benchmark. While both ETFs and Non-Traditional ETFs track indexes, Non-Traditional ETFs contain significant risks that are not associated with traditional ETFs. Non-Traditional ETFs have additional risks of daily reset, use of leverage, and compounding.

Gana LLP Seeks Relief for Victim of Stanford Ponzi Scheme Against Clearing Broker, Pershing, LLC

March 19, 2014 | by Staff Attorney

Over the last several years, we have seen the collapse of frauds and the capture of fraudsters, who have perpetuated a mind-numbing blow to the market and its participants. When we talk about Ponzi Schemes, the first name that springs to mind is, of course, Bernard Madoff. However, two years later authorities honed in on R. Allen Stanford (Stanford) and his fraudulent empire, which may have more far-reaching consequences than people think.

While the ponzi scheme developed and operated by Stanford fleeced investors of “only” eight billion dollars, it was perhaps far more damaging than the Madoff scheme. Why? Because the Stanford case pertains to everybody—not just to Stanford investors, not just the government, and not just the upper echelon of wealthy individuals. The Stanford scheme exploited one of the oldest, safest, and most universally understood financial instruments on the market—the Certificate of Deposit (CDs).

The ultimate reality of the Stanford Financial Group was that it was a Ponzi scheme. Essentially, Stanford and his co-conspirators used the Stanford Financial Group and the promise of high-return CD’s to lure investor money into different Stanford companies, where the funds were then pooled together and used for undisclosed and impermissible purposes. Federal authorities ultimately discovered Stanford’s multi-billion dollar scheme, putting an end to Stanford Financial Group and charging Stanford, civilly and criminally, with multiple counts of fraud. In March 2012, Stanford was convicted on 13 of 14 counts by a federal jury following a six-week trial and approximately three days of deliberation. It was ultimately revealed that the Stanford Financial Group was “selling” CD’s, marketed as low-risk, high return investments, but in reality, were paying distributions with subsequent investments–the prototypical pyramid scheme.

Former LPL Financial Broker Brian Brunhaver Accused of Fraud in the Sale of Non-Traded REITs

March 18, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has brought a complaint against financial advisor Brian H. Brunhaver (Brunhaver) formerly of LPL Financial, LLC (LPL) concerning allegations Brunhaver used an unauthorized e-mail account for communications related to his securities business and committed securities fraud in making oral and written misrepresentations to customers regarding a non-traded REIT.

Brunhaver entered the securities industry in 1994. From May 1995, until June 2011, he was registered through LPL. On or about June 2, 2011, LPL filed a Uniform Termination Notice (Form U5) for Brunhaver disclosing that he had been discharged on May 3, 2011. From August 2011, until December 2011, Brunhaver was registered through Pacific West Securities, Inc. On or about February 25, 2013, LPL filed an Amended Form U5 disclosing the receipt of a Statement of Claim where certain customers of Brunhaver alleged that he had recommended unsuitable investments in REITs and had made misrepresentations to them while employed by LPL.

In addition, Brunhaver’s BrokerCheck discloses that the broker has at least nine customer complaints filed against him. The majority of the complaints involve allegations that Brunhaver made unsuitable recommendations and material misrepresentations in the sale of non-traded REITs including Inland American REIT, among others. LPL has been sanctioned by regulatory authorities for failing to supervise its broker’s sales of non-traded REITs

Are Your Investments Appropriate for You?

March 17, 2014 | by Staff Attorney

Most investors know that their financial advisor cannot misrepresent the risks and rewards of investments. However, many investors do not realize that all brokers have an obligation to deal fairly with investors by only recommending suitable investments or investment strategies. All sales efforts are judged by the ethical standards of Financial Industry Regulatory Authority (FINRA) that sets industry wide investment standards. The “suitability rule” contains three primary obligations: reasonable-basis, customer-specific, and quantitative suitability.

Reasonable-basis suitability means that the broker must believe, based on appropriate research and due diligence, that the product or strategy being recommended is suitable for at least some investors. Thus, FINRA recognizes that there are some investment products and strategies that are so risky and likely to fail that they would be inappropriate for all investors. Other investments may contain risks characteristics that are only appropriate for a very small group of investors or for specialized purposes.

Customer-specific suitability requires the broker to believe that the recommended investment strategy is suitable for that particular customer. The advisor must take into consideration the customer’s risk tolerance, investment objectives, age, financial circumstances, other investment holdings, experience, and other information provided to the broker.

John Towers of VSR Financial Sanctioned Over Unsuitable Sale of Alternative Investments and Private Placement Securities

March 15, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned financial advisor John H. Towers (Towers) of VSR Financial Services, Inc. (VSR) concerning allegations of unsuitable sales of over $6,000,000 in alternative investments including oil and gas interests, real estate investment trusts (REITs), and other speculative private placement investments to an investor. FINRA’s determinations in this matter is significant because some in financial industry take the position that wealthy customers are automatically sophisticated and therefore fair game to recommend positions in speculative private placement securities. The theory goes that if you have a lot of money then it is ok for you to lose some of it speculating in alternative investments.

Towers entered the securities industry in 1970. From 2002 until December 2013, Towers was associated with VSR. According to Towers’ BrokerCheck at least 14 customers have filed complaints against Towers. The vast majority of those complaints involve claims concerning the improper sale of various private placement securities.

FINRA alleged that in September 2005, Towers recommended that a married couple invest $25,000 in APC 2005-B, a high risk private placement. Over the next five years, FINRA found that Towers continually recommended that the couple make an additional eighty-eight investments in private placements and REITs totaling approximately $6,259,400 and representing approximately 72% of their investments purchased at VSR. FINRA alleged that the private placements and REITS were all described in the offering documents as high risk investments. FINRA also found that the couple had stated a moderate risk tolerance on their new account forms and specified that no more than 10% of their accounts were to be invested in high risk products.

JP Turner Supervisor Sanctioned Over Failure to Supervise Mutual Fund Switches

March 13, 2014 | by Staff Attorney

As we have reported, claims of churning, excessive trading, and failure to supervise have plagued J.P. Turner & Company, L.L.C. (JP Turner) brokers, among other misconduct. Recently, the Financial Industry Regulatory Authority (FINRA) imposed sanctions against Herman Mannings (Mannings), a JP Turner supervisor, concerning allegations that from February 2009, through October 2011, Mannings failed to reasonably supervise the activities of a registered representative to prevent unsuitable mutual fund switching.

On August 20, 2002, Mannings became registered with JP Turner. On February 10, 2003, Mannings was registered as a General Securities Principal at JP Turner. FINRA’s supervisory rule provides that each brokerage firm must establish, maintain, and enforce written procedures to supervise the types of business it engages in. Supervision of registered representatives, registered principals, and other associated persons must be reasonably designed to achieve compliance with applicable securities laws and regulations.

FINRA found that from February 2009, through October 2011, Mannings was an Area Vice President for JP Turner and his responsibilities included the supervision of at least 30 branch offices and as many as 60 representatives. According to FINRA, a registered representative referred to as only by the initials “LG” was one of the representatives that Mannings supervised. FINRA found that LG effected approximately 335 unsuitable mutual fund switches in the accounts of 54 customers without having reasonable grounds for believing that such transactions were suitable for those customers.

Silver Oak Securities Fined Over Non-Traditional ETF Sales

March 12, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned brokerage firm Silver Oak Securities, Inc. (Silver Oak) concerning allegations from January 2009, to December 2010, Silver Oak failed to establish and maintain a supervisory system reasonably designed to achieve compliance with applicable securities laws regarding the sale of leveraged and inverse Exchange-Traded Funds (Non-Traditional ETFs). Silver Oak has been a FINRA member since 2007 and is in Jackson, Tennessee, and employs 122 registered individuals at 28 branch offices.

Non-Traditional ETFs have grown significantly in popularity since 2006. By 2009, over 100 Non-Traditional ETFs had been issued with total assets under management of approximately $22 billion. A leveraged ETF seeks to deliver two or three times an index or benchmark return the ETF tracks. Non-Traditional ETFs can also be “inverse” or “short” returning the opposite of the performance the index or benchmark. Non-Traditional ETFs contain significant risks that are not found in traditional ETFs. Non-Traditional ETFs have risks associated with a daily reset, use of leverage, and compounding.

In addition, the performance of Non-Traditional ETFs over long periods of time tend to differ significantly from the performance of the underlying index or benchmark the fund tracks. For example, between December 2008, and April 2009, the Dow Jones U.S. Oil & Gas Index gained two percent while a leveraged ETF that tracked the index’s daily return fell six percent. Another related leveraged ETF seeking to deliver twice the inverse of the index’s daily return fell by 26 percent. These risks, among others, prompted FINRA to issue a Notice to Members clarifying brokerage firm obligations when selling Non-Traditional ETFs to customers.

FINRA Bars Gary Chackman Over Allegations of Unsuitable Non-Traded REIT Sales

March 11, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) imposed a permanent bar against Gary J. Chackman (Chackman) concerning allegations that he recommended unsuitable transactions in the accounts of at least eight LPL Financial, Inc. (LPL) customers by over-concentrating the customers’ assets in real estate investment trusts (REITs). Additionally, FINRA found that Chackman falsified LPL documents to evade the firm’s supervision by submitting dozens of “alternative investment purchase” forms that misrepresented customers’ liquid net worth. FINRA found that by submitting falsified documents Chackman increased his customers’ accounts’ concentration in REITs and other alternative investments beyond the firm’s maximum allocation limits.

From December 2001, through March 2012, Chackman was registered through LPL. On March 2012, LPL filed a Uniform Termination Notice for (Form U5) stating that Chackman was terminated for violating firm policies and procedures regarding the sale of alternative investments. From March 2, 2012 through April 3, 2013, Chackman was registered through Summit Brokerage Services, Inc. (Summit). In April 2013, Summit filed a Form U5 terminating Chackman stating that the broker was operating a business out of an unregistered location. According to Chackman’s BrokerCheck there have been at least five customer complaints filed against the broker. Many of the complaints involve allegations of unsuitable REITs

According to FINRA, from July 2009 to February 2012, Chackman recommended REITs and other alternative investments to at least eight of his LPL customers. FINRA found that Chackman purchased the REITs at periodic intervals in each of their accounts. For example, in one customer’s account Chackman made seven purchases of a particular REIT, each for $75,000 over six months. After twelve months, FINRA found that 35% of the customer’s assets and more than 25% of her liquid net worth were invested in REITs and other alternative investments. In order to evade LPL’s limitation on the concentration of alternative investments in customers’ accounts, FINRA found that Chackman misidentified his customers’ purported liquid net worth on LPL forms. FINRA found that over sixteen months and on seventeen alternative investment purchase forms Chackman tripled the customer’s purported liquid net worth.

Why Corporations Should Hire Small Law Firms

March 10, 2014 | by Staff Attorney

Corporations that once regularly hired large law firms for their litigation needs are now sending more work to smaller, less expensive firms for even the most complex legal work.

According to the Wall Street Journal, over the past three years, smaller law firms have nearly doubled their share of big-ticket litigation, to 41% from 22%, of the work that generates more than $1 million in legal bills, according to a new analysis released recently.

According to CounselLink, a division of LexisNexis, firms with over 750 attorneys have reduced their market ground in this area by approximately 6%.

Sterne Agee Financial Services Fined Over Failing to Supervise Excessive Trading or “Churning” Activity

March 7, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) fined SAL Financial Services, Inc. dba Sterne Agee Financial Services, Inc. (Sterne Agee) concerning allegations that Sterne Agee failed to implement reasonable supervisory procedures to detect and prevent excessive trading activity, otherwise known as churning, in client accounts.

Sterne Agee has been a FINRA member since 1986 and the firm’s main office is located in Birmingham, Alabama. Sterne Agee has 137 branch office locations and employs 304 registered representatives.

FINRA alleged that from August 2009, through November 2010, Sterne Agee failed to establish and maintain a supervisory system and enforce written supervisory procedures reasonably designed to identify and prevent unsuitable excessive trading and churning in customer accounts. Specifically, FINRA found that Sterne Agee relied solely on a single exception report with inadequate parameters to identify active accounts with patterns of unsuitable and excessive trading. FINRA alleged that Sterne Agee had access to its clearing firm’s additional exception reports but that Sterne Agee failed to use those reports. Consequently, FINRA concluded that Sterne Agee failed to identify at least thirty-nine accounts where thirty of the instances came from the Ft. Lauderdale, Florida office.