FINRA

The Dangers of Oil and Gas Private Placements

April 29, 2014 | by Staff Attorney

The Securities and Exchange Commission (SEC) has found private securities offerings of oil and gas ventures pose a substantial danger and risk for investor fraud. An SEC Investor Alert listed some common red flag sales pitches often made to investors including: (1) Sales pitches referring to the high price of oil and gas; (2) “Can’t miss” wells or “guaranteed” returns; (3) Promises of high returns with little risk; (4) Sales pressure to purchase quickly; and (5) Sales pitches touting new technology to get higher production out of low-producing wells.

The Financial Industry Regulatory Authority (FINRA) has also clamped down on inappropriate sales of oil and gas ventures. Recently, FINRA fined broker Jeffrey Alexander (Alexander) concerning allegations that he recommended the purchase of interests in Amazon 13-30, an oil and gas program offered by Amazon Exploration that raised funds for the drilling of a well in Nebraska. FINRA found that the recommendations made by Alexander to three investors without a reasonable basis for believing the investment to be suitable for any investors.

In August 2012, FINRA alleged that the brokerage firm Shoreline Pacific entered into an agreement with Amazon Exploration where the firm would offer and sell up to 30 partnership units in Amazon 13-30. Shoreline Pacific was to receive a “success fee” of 20% of the funds it raised, as well as five Amazon 13-30 units if the firm was able raise $1 million for the venture. FINRA alleged that Alexander worked in Shoreline’s Colorado Springs office and was the primary point of contact between the firm and Amazon Exploration and primarily responsible for finding investors for the Amazon 13-30 private placement.

LPL Financial Fined by FINRA for Failing to Supervise Sales of Alternative Investments

April 25, 2014 | by Staff Attorney

On March 24, 2014, LPL Financial LLC, the fourth largest broker dealer, measured by number of salespersons, was fined $950,000 by the Financial Industry Regulatory Authority (FINRA) for failing to supervise the way that its brokers marketed and sold nontraditional investments. The fine is one of many that have recently been imposed on LPL and other “independent broker-dealers,” firms that provide products, marketing, and regulatory services to independent brokers who are not their full-time employees.

LPL Financial was alleged to have deficient supervision as it related to the sales of alternative investment products, including non-traded real estate investment trusts (REITs), oil and gas partnerships, business development companies (BDC’s), hedge funds, managed futures, and other illiquid pass through investments. FINRA found that from January 1, 2008, to July 1, 2012, LPL failed to adequately supervise the sales of theses alternative investments that violated concentration limits.

Investors often rely on professional advisors like LPL Financial, which help them to diversify their portfolio while minimizing risk. LPL, like many states, has limits in place, on the portion of a client’s portfolio that can be concentrated in these riskier, alternative investments. According to FINRA, however, LPL failed to ensure adherence to these limits. FINRA explained that between 2008 and 2012, LPL utilized a manual process that relied on outdated data to conduct suitability reviews. FINRA further stated that once LPL transitioned to a new automated review system, its database was built with faulty programming.

FINRA Fines Triad Advisors and Securities America for Failure to Supervise Issuance of Consolidated Reports

April 24, 2014 | by Staff Attorney

On March 12, 2014, the Financial Industry Regulatory Authority (FINRA) announced that it sanctioned and fined Triad Advisors and Securities America, $650,000 and $625,000, respectively, for failing to supervise the use of consolidated reporting systems, after brokers from the firms inaccurately represented the value of some customer holdings, often inflating their overall worth.

Triad Advisors and Securities America, both registered broker dealers, had internal systems designed to generate consolidated reports—documents intended to combine most, if not all, of a customer’s financial holdings, regardless of where those assets or accounts are held. These reports do not replace account statements, but rather supplement the more traditional document. These two broker dealers, however, maintained consolidated report systems that allowed their respective brokers and representatives to manually create, rather than automatically generate, consolidated reports. In doing so, representatives from Triad and Securities America were able to customize the reports by manually inputting the data, entering asset values for accounts held away from the firm before providing the reports to customers.

According to FINRA, over the last few years, both firms regularly permitted their advisors to use these highly customizable reporting software systems, but in doing so, failed to maintain the proper supervisions. The lack of supervision, says FINRA, led to clients inadvertently, or in some cases intentionally, receiving inaccurate and misleading account information.

Investors in LEAF Limited Partnerships May Have A Investment Claim

April 22, 2014 | by Staff Attorney

Some investment advisors have touted alternative investments as safe, stable, high return products. The truth is, these products are often laden with risks that are not disclosed and discussed with clients. In addition, alternative investments are simply unsuitable for many investors needs. The sale of these products often generates commissions of between 7-10% of the investment amount. Thus, there are unscrupulous advisors who have used misleading sales pitches designed to lure investors into putting their hard earned money into these extremely risky and unsuitable investment.

Some alternative investments are sold as private placements in limited partnership vehicles. These limited partnerships are formed to acquire, operate, and sell assets for the benefit of the partners. Investors in limited partnerships are entitled to receive distributions of operating cash flow as well as distributions from the sale or financing of assets as outlined in the partnership’s limited partnership agreement. Unlike stocks and bonds, limited partnerships are not listed on an exchange and are therefore illiquid and reliable pricing information is typically very difficult to obtain.

There is a line of limited partnerships held under LEAF Asset Management, LLC—a limited liability company that acts as general partner for a handful of limited partnership equipment leasing fund investment programs. LEAF Asset Management, LLC is a wholly-owned subsidiary of Resource America, Inc., a company that specializes in developing investment funds for outside investors and providing asset management services either by contract or by acting as the manager or general partner of its own sponsored investment funds.

Centaurus Financial Sanctioned Over Allegations of Supervisory Failures

April 10, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned Centaurus Financial, Inc., (Centaurus) concerning allegations that Centaurus failed to supervise the business activities of five representative in the dissemination of communications concerning the risks of certain private placements. FINRA fined the firm $25,000

Centaurus became a FINRA member firm in 1993 and is headquartered in Anaheim California. The firm has 367 branch offices and approximately 585 registered individuals. The firm operates as a privately held independent broker-dealer and engages in various securities businesses including corporate and municipal debt, mutual funds, direct investments, and private placements.

FINRA alleged that at various times during from February 2009, through January 2010, five Centaurus registered representatives functioned as wholesalers for an unaffiliated investment management firm. FINRA alleged that Centaurus written supervisory procedures did not address the supervision of wholesaling activities and Centaurus did not supervise the wholesaling activities of the five representatives in violation of NASD Rule 3010. FINRA found that the five representatives did not use their Centaurus e-mails for wholesaling activities and instead used the investment management firm’s email address to send communications.

Berthel Fisher fined $775,000 by FINRA for Failing to Supervise the sale of Alternative Investments

April 9, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) fined broker-dealer, Berthel Fisher & Co. Financial Services and its affiliate, Securities Management & Research, Inc., a combined $775,000. FINRA alleged supervisory deficiencies, including Berthel Fisher’s failure to supervise the sale of alternative investments. FINRA also found that Berthel Fisher’s failure to supervise extended to non-traditional exchange traded funds (ETFs).

FINRA found that from January 2008 to February 2012, Berthel Fisher had inadequate supervisory systems and lacked proper written supervisory procedures with regards to the sales of these alternative investments, namely non-traded real estate investment trusts (REITs), managed futures, oil and gas programs, equipment leasing programs, and business development companies. In its report, FINRA also alleged that some investors were sold these products at a level of concentration that exceeded their respective investment objectives, making the sales and recommendations unsuitable. FINRA also claims that Berthel Fisher failed to train its employees on individual state suitability standards.

FINRA also found that from April 2009 to April 2012, Berthel Fisher did not have a reasonable basis for the sale of leveraged and inverse ETF’s. Before a registered firm may allow its registered representatives to recommend such products to its customers, it must conduct adequate research and review. Through its investigation, FINRA learned that Berthel Fisher representatives recommended approximately $49 million in these nontraditional ETF’s. Leveraged and inverse ETF’s expose holders to amplified movements that tend to deviate from their related benchmarks over extended periods of time. These products are often focused on short-term investment returns and subject to extreme movements during volatile markets, with the potential for significant loss of principal. According to FINRA, Berthel sold these products to conservative, buy-and-hold investors, sales that FINRA ultimately deemed unsuitable.

Former Newport Securities and Securities America Broker fined by FINRA for Selling Away

April 2, 2014 | by Staff Attorney

On December 11, 2013, the Financial Industry Regulatory Authority (FINRA) sanctioned broker Michael T. Ryan. Mr. Ryan was registered with FINRA brokerage firms from 1992 until November 1, 2013, including an eight-year stint with Securities America, Inc. (Securities America) and two years with Newport Coast Securities.

The basis for the underlying action brought against Mr. Ryan by FINRA, involved Ryan’s failure to accurately notify Securities America of his outside business activities. FINRA alleged that during a period spanning early 2009 through mid 2011, Ryan began working with an individual known as ZE, while Ryan was registered with Securities America. FINRA has alleged that Ryan began receiving compensation from and was an officer and board member of entities controlled by ZE, namely Kensington Leasing, Ltd, (Kensington) and a private entity known as WM were in direct violation of NASD Rule 3030 and FINRA Rule 3270. Throughout this time, FINRA alleged that Ryan did not submit proper notifications nor did he update the requisite information, in violation of NASD Rule 3030 and FINRA Rules 3270 and 2010.

Ryan also allegedly recommended that Securities America customers purchase restricted stock of two companies, Lenco Mobile, Inc. and Casablanca Mining Ltd. from ZE controlled entities. Ryan never notified Securities America of these private transactions in violation of NASD Rule 3040, which prohibits registered representatives from participating “in any manner in a private securities transaction,” unless the registered representative first notifies his or her member firm in writing.

Hantz Financial Services Sanctioned Over Non-Traded REIT Due Diligence Failures

March 27, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned and fined Hantz Financial Services, Inc. (Hantz Financial) $75,000 concerning allegations that between April 2004, until April 2011, Hantz Financial violated FINRA rules by failing to properly enforce its written supervisory procedures for conducting due diligence with respect to a non-exchange traded real estate investment trust (REIT) and by failing to establish and maintain a supervisory system reasonably designed for conducting ongoing due diligence of REITs.

Hantz Financial has been a member of FINRA since 1999 and is headquartered in Southfield, Michigan. The firm employees 276 registered representatives and conducts a general securities business.

A REIT is a corporation or trust that owns income-producing real estate. REITs pool the capital of numerous investors to purchase a portfolio of properties that may include office building, shopping centers, hotels, and apartment buildings that the average investor would not otherwise be able to purchase individually. Shares of non-traded REITs do not trade on a national securities exchange and are generally illiquid for periods of eight years or more. The risks of non-traded REITs are significant and FINRA has issued an Investor Alert warning investors of some of the potential risks.

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.

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.