Articles Tagged with FINRA

shutterstock_164637593-300x199The investment lawyers of Gana Weinstein LLP are investigating regulatory action brought by the Financial Industry Regulatory Authority (FINRA) against Christopher Stephen Jorgensen (Jorgensen). Jorgensen allegedly refused to appear for on-the-record testimony requested by FINRA resulting in a ban from the securities industry.

In April 2017, Jorgensen was terminated from his position at Summit Brokerage Services after “the firm received a verbal complaint from a customer who alleged that [he] instructed her not to respond to a FINRA inquiry.”

In 2012, he was terminated from his position at Raymond James Financial Services “due to client complaint and settlement relating to unauthorized discretion.”

shutterstock_173849111On May 5, 2015, the brokerage firm Cape Securities, Inc. (“Cape”) was fined $125,000 by the Financial Industry Regulatory Authority (FINRA) for failing to supervise its personnel, in effect allowing its brokers to recommend unsuitable investments and churn customer accounts.

According to the Letter of Acceptance, Waiver and Consent (AWC), for a sixteen-month period, spanning October 2011 through February 2013, Cape’s supervisory system and written supervisory procedures, pertaining to the review of actively traded accounts, failed to adequately address and identify numerous items. According to FINRA, Cape’s supervisory policies and procedures failed to address (1) the process by which transactions are reviewed, (2) risks in customer accounts, and (3) methods by which Cape conducted its suitability analysis. According to the AWC, Cape never made use of clearing firm exception reports in their review of actively traded accounts and had no written supervisory procedures relating to the monitoring of complex trading strategies.

In addition, during the period of October 2011 through September 2012, registered representatives in Cape’s Manhattan branch conducted trades in several leveraged exchange traded funds (“ETFs”) and sold covered calls to customers. This trading activity caused customer accounts to have excessive turnover ratios, which indicates churning of customer accounts. According to FINRA, Cape did not inquire into the suitability of this trading activity despite all the indications of excessive trading and its awareness of the strategies being recommended.

shutterstock_95643673On April 27, 2015, the Financial Industry Regulatory Authority (FINRA) published a Letter of Acceptance, Waiver, and Consent (AWC), whereby Larry M. Phillips of The Phillips Group, in Woodland Hills, California, was sanctioned for his misconduct related to Phillips’ unlawful overcharging of several of his customers.

In December 2009, Phillips became registered as a general securities representative through Purshe Kaplan Sterling Investments (“PKS”). From January 2010 through August 2010, while registered with PKS, Phillips overcharged several customers by charging both markups and investment advisory fees. First, Phillips purchased securities, including Steepener CDs, Floating Rate Notes, Principal Protected Notes, and Municipal Securities for several of his investment advisory clients. Next, Phillips allocated the marked-up products to those same clients’ investment advisory accounts. In doing so, Phillips charged advisory fees on the very same securities for which he had already charged a markup. FINRA found that by assessing both markups and investment advisory fees, Phillips’ was in violation of FINRA Rule 2010 and MSRB G-17.

As a consequence of Phillips’ misconduct, FINRA fined Phillips $7,500, suspended him from the securities industry for 45 days, and ordered him to pay over $3,000 in restitution to the customers that he took advantage of. This is not the first time that Phillips has been sanctioned. For example, in April 2005, Phillips executed an AWC with NASD, where he agreed to a ten-day suspension and $20,000 fine for failing to adequately disclose material facts regarding investment products and strategies in written communications that he disseminated. Then again, in October 2006, Phillips was sanctioned—this time by the State of Illinois based on these same improper communications discovered by the NASD. Illinois sanctioned Phillips by prohibiting from serving as a principal in Illinois for a period of two years in addition to requiring him to pay a $1,000 fine.

shutterstock_103079882As long time readers of our blogs know senior abuse is an ongoing concern in the securities industry. See Massachusetts Fines LPL Financial Over Variable Annuity Sales Practices to Seniors; The NASAA Announces New Initiative to Focus on Senior Investor Abuse; The Problem of Senior Investor Abuse – A Securities Attorney’s Perspective.

Recently, a number of regulatory agencies have begun new initiatives against investment fraud targeted at seniors with the intent to provide resources to seniors and financial advisors. Regulators fear senior abuse in the investment sector will be a growing trend over the next couple of decades if not addressed soon.

According to a National Senior Investor Initiative report cited by the Financial Industry Regulatory Authority (FINRA), the Social Security Administration estimates that each day for the next 15 years, an average of 10,000 Americans will turn 65. According to the U.S. Census Bureau in 2011, more than 13 percent Americans, more than 41 million people, were 65 or older. By 2040, that number is expected to grow 79 million doubling the number that were alive in 2000.

shutterstock_120556300The law offices of Gana Weinstein LLP recently filed a complaint on behalf of an investor against Rockwell Global Capital, LLC (Rockwell), accusing the firm of making unsuitable recommendations and failing to properly supervise one of its financial advisers.  In or around July 2013, the client alleged that he received a cold call from Rockwell financial adviser, Patrick Lofaro. A cold call is when someone solicits and individual who was not anticipating such an interaction. Cold calling is a technique used by a salesperson to contact individuals who have not previously expressed an interest in the products or services that are being offered.

It was alleged that Mr. Lofaro aggressively pursued the client’s investment related business and that Mr. Lofaro convinced him that he could build a diversified portfolio with minimal risk to the client.  In reliance upon Mr. Lofaro’s assurances, the Claimant alleged that he opened an account with Rockwell in or around August 2013.  Over a seven-month period, the Claimant invested a substantial sum with Rockwell which represented close to 50% of his liquid net worth.  The complaint alleges that Mr. Lofaro, rather than create a suitable portfolio, implemented a high-leverage, excessive trading strategy that generated a high amount of commissions without providing any material benefit to the Claimant.

According to the complaint, over the course of just over a year, Mr. Lofaro executed nearly one-hundred-forty (140) trades into and out of thirty-five (35) different stocks, including seventeen (17) small caps, two (2) initial public offerings (IPO’s), eight (8) penny stocks, and fifteen (15) different stocks that were more than twice as volatile as the S&P 500.  The complaint alleges that Mr. Lofaro created a portfolio laden with risk while providing no material benefit to the Claimant. Mr. Lofaro’s investment strategy ultimately cost the Claimant an estimated $837,131, while Mr. Lofaro received over $261,080 in commissions.

shutterstock_38114566Many 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.

shutterstock_183525503Recently, 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.

shutterstock_183801500In a rare move of true consumer protection, the Securities and Exchange Commission (SEC) denied applications by fund managers BlackRock Inc. and Precidian Investments to offer nontransparent exchange-traded funds (ETFs) to investors by stating that such products were not in the public’s interest. The SEC stated that the proposals could inflict substantial costs on investors, disrupt orderly trading, and damage market confidence in trading of ETFs.

The fund managers have argued that opening up actively managed ETFs to full transparency would lead to front running, a strategy where other investors trade ahead to gain a benefit. As a result, the funds argue that their trading strategies are rendered obsolete by the market’s knowledge of them. Thus, the solution the industry devised was to deprive the investing public of disclosure of fund holdings.

However, the SEC said that daily transparency is necessary to keep the market prices of ETF shares at or close to the net asset value per share of the ETF. But as usual, the industry losses a battle but will eventually win the war. Others funds such as American Funds, T. Rowe Price Group Inc. and Eaton Vance Corp. all have applications pending for similar nontransparent ETFs where the SEC could rule on various alternative proposals. In addition, Precidian’s chief executive, Daniel J. McCabe, told InvestmentNews he believed the SEC’s objections can be worked though and that it will merely take longer to get approval because the funds are not standard.

shutterstock_175320083According 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.

shutterstock_108591On August 25, 2014, FINRA suspended Travis S. Shannon, of Santa Barbara, California, formerly of Morgan Stanley Smith Barney. According to FINRA, from July 2010 through June 2013, Mr. Shannon engaged in two outside business activities without first providing written notice to Morgan Stanley, in violation of FINRA Rule 2010, 3030, and 3270. 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.” All members are bound to maintain high standards and according to FINRA Mr. Shannon fell short of that standard.

FINRA Rule 3030 states that “No person associated…shall be employed by, or accept compensation from, any other person as a result of any business activity…outside the scope of his relationship with his employer firm, unless he has provided prompt written notice to the member.” This activity is known as selling away.  Mr. Shannon was employed as a financial advisor with Morgan Stanley from September 2008 through July 2013 when he was allowed to voluntarily resign from the firm due to FINRA’s regulatory action.  According to FINRA, Mr. Shannon participated in private sales of $1,885,000 worth of securities, including securities issued by his outside business activities. Mr. Shannon also failed to timely update his U4 registration form to timely report two bankruptcy filings.

In June 2010, Mr. Shannon first began to participate in the private sales of securities issued by TC, a company that bought and sold used computer network equipment. Mr. Shannon referred eight customers to this company including four Morgan Stanley customers. Those eight purchases totaled $775,000 in investments with commissions of $77,500 to Mr. Shannon.  In July 2010, Mr. Shannon co-founded AAI or Aerobat Aviation, Inc., a start-up company that was to design and produce unmanned aerial vehicles. In 2012 and 2013 Mr. Shannon participated in the private sale of $500,000 worth of Aerobat Aviation Inc. stock.