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Newbridge Securities Corporation Sanctioned By FINRA Over Sales Practices

January 7, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) in an acceptance, waiver, and consent action (AWC) sanctioned Newbridge Securities Corporation (Newbridge) concerning allegations that the firm violated a host of sales obligations to customers that resulted in unfair trading practices.

FINRA found that in ten transactions, Newbridge sold corporate bonds to customers and failed to sell such bonds at a price that was fair taking into consideration all relevant circumstances such as the market conditions for the bonds at the time of the transaction and the expense involved. FINRA also alleged in another 10 transactions for a customer the firm failed to use reasonable diligence to ascertain the best market price and failed to buy or sell in such market so that the price to its customer was as favorable as possible at the time of the transaction. Next, FINRA found a total of at least 50 instances where the firm failed to execute orders fully and promptly.

Further, FINRA alleged that Newbridge executed 32 short sale orders but failed to mark the orders as being sold short. As a result, FINRA found that on 13 occasions the firm effected short sales in an equity security for its own account without borrowing the security or having reasonable grounds to believe that the security could be borrowed so that it could be delivered on the date delivery is due. FINRA also found that the firm, on 63 occasions, provided written notification to customers that failed to disclose information or disclosed inaccurate information. The information that was inaccurate included the correct trade price, the correct execution price(s), the price was exclusive of any commission equivalent, failed to disclose or to accurately disclose the compensation amount(s) charged to the customer, and/or inaccurately disclosed the firm’s compensation type.

Complaint Filed Against Joseph Hooper Relating to iPractice Group Investment Sales

January 3, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently filed a complaint against former Source Capital Group, Inc. (Source Capital) broker Joseph Hooper (Hooper) alleging that Hooper was serving as the Director of Investor Relations for a company called the iPractice Group, Inc. (iPractice) and that in such capacity, Hooper participated in the sale of iPractice stock and was compensated for that participation without notifying Source Capital of these activities. FINRA alleged that Hooper participated in 53 private securities transactions involving 41 investors or investor groups and a total of $3,400,648 worth of iPractice stock. In return, FINRA alleged that Hooper received $425,081 and more than 21,000 shares of iPractice stock as compensation for his activities.

This is not the first time our firm has written about supervisory and disclosure issues at Source Capital. Our firm has previously written concerning FINRA’s action against Source Capital concerning the agency’s findings that certain Source Capital brokers failed to adequately disclose material facts and made sales through misstatements in oil and gas partnership interests in Blue Ridge Securities (Blue Ridge) and Argyle Securities. (Argyle).

In FINRA’s recent action, when Hooper became associated with Source Capital in May 2012, he was also the Director of Investor Relations for iPractice, a medical technology company. FINRA alleged that Hooper remained the Director of Investor Relations for iPractice throughout the time he was associated with Source. iPractice raised funds for its operations by selling stock in the company through exempt private placement securities offerings. FINRA alleged that Hooper participated in the solicitation and sale of iPractice stock to investors. In addition, Hooper was listed by iPractice as a promoter on an amended Form D filed with the SEC on May 18, 2012.

Broker Spotlight: John J. Quintero Subject to Several Customer Complaints

January 2, 2015 | by Staff Attorney

The attorneys of the law offices of Gana Weinstein LLP are investigating a series of recently filed complaints against broker John Quintero (Quintero) who is currently a registered representative with Transamerica Financial Advisors. In January 2014, an investor filed a complaint alleging that Quintero misrepresented the premiums paid on a variable universal life insurance policy (VUL). Specifically, the customer claimed that Quintero stated that the premiums paid would be a tax differed investments and that further the sub-account investments were unsuitable.

VULs are complex insurance and investment products that investors must fully understand prior to investing. One feature of a VUL policy is that the investor can allocate a portion of his premium payments to a separate sub-account to invest and grow through mostly mutual fund investments. Monthly charges are assessed for the life insurance policy including a cost of insurance charge and administrative fees all of which are deducted from the policy’s cash value. The investor can suffer losses are receive gains based upon the performance of the sub-account investments. However, the VUL policy can terminate or lapses if at any time the net cash surrender value is insufficient to pay the monthly cost deductions. Upon termination of the policy, the remaining cash value becomes worthless.

Given the costs and premiums involved in purchasing VULs, brokers must be careful to ensure that the recommendation to invest in VULs is suitable for the client. In some cases, investors do not realize the huge expense of these policies and have no way to continue to cover the premiums. When this happens the policy could lapse over time.

Arque Capital Sanctioned By FINRA Over GWG Renewable Secured Debentures Sales

January 1, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) in an acceptance, waiver, and consent action (AWC) sanctioned Arque Capital, Ltd. (Arque) concerning allegations that since 2011 Arque has acted as the managing broker-dealer for an alternative investment – GWG Renewable Secured Debentures (the Debentures) offered by GWG Holdings, Inc, In that capacity FINRA alleged that Arque was responsible for conducting due diligence into GWG and the Debentures, and reviewing all advertising pieces related to the Debentures. FINRA found that between March 2012, and November 2012, Arque distributed a GWG Debenture sales brochure that contained misleading statements.

Arque has been a registered broker-dealer since 2002, has its home office in Scottsdale, Arizona, and 23 branch offices located in various states. The firm has approximately 60 registered representatives. In recent months FINRA has brought numerous disciplinary actions against various firms, supervisors, and brokers concerning the improper sale of GWG Debentures including:

Center Street Securities Broker David Escarcega Investigated Over GWG Debenture Sales;

Center Street Securities Broker Jason Lamb Sanctioned Over GWG Renewable Secured Debentures

December 30, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) in an acceptance, waiver, and consent action (AWC) and barring former Center Street Securities, Inc. (Center Street) broker Jason Lamb (Lamb) concerning allegations that between March 2012, to February 2013, Lamb was a registered principal and Chief Compliance Officer (CCO) at Center Street’s headquarters in Nashville, Tennessee. FINRA found that Lamb failed to adequately supervise certain sales of GWG Renewable Secured Debentures, an illiquid and high-risk alternative investment.

Center Street Securities is headquartered in Nashville, Tennessee, has been a FINRA member since 1991, has approximately 67 branch offices and approximately 84 registered representatives. This is not the first time that FINRA has brought regulatory action concerning the actions of Center Street representatives. See Center Street Securities Broker David Escarcega Investigated Over GWG Debenture Sales; FINRA Sanctions Michael Wurdinger and Anil Vazirani Over GWG Debenture Sales (FINRA sanctioned brokers associated with Center Street Securities, Inc.); FINRA Sanctions Center Street Securities Over Sales of GWG Renewable Secured Debentures Part I (Center Street fined by FINRA).

The notes at issue are part of offerings by GWG Holdings, Inc. (GWG) which purchases life insurance policies on the secondary market at a discount to their face value. GWG pays the policy premiums until the insured dies and GWG then collects the insurance benefit making a profit by collecting more on the payout at maturity than the payment of the premiums on the policy. The Debentures have varying maturity terms and interest rates ranging from six-month at an annual interest rate 4.75% to seven years at 9.50%. 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.

Oil and Gas Investments – Issuers Profit While Investors Take All the Risk

December 29, 2014 | by Staff Attorney

As recently reported in Reuters, oil and gas companies such as Reef Oil & Gas Partners, Black Diamond, and Discovery Resources & Development LLC have marketed themselves to investors as a way to get into the U.S. energy boom. These companies issue private placement partnership that will drill for oil and gas and pay investors the profits that will result. However, oil and gas private placements contain substantial risks that often outweigh any potential benefits including securities fraud, conflicts of interests, high transaction / sales costs, and investment risk. Due to these risks investors often lose money while issuers make handsome profits.

According to Reuters, of 34 deals Reef has issued since 1996, only 12 have paid out more cash to investors than they initially contributed. In addition, Reuters found that Reef sold an additional 31 smaller deals between 1996 and 2010 collecting $146 million for itself while paying out investors a paltry $55 million.

Under the terms of one Reef deal, investors raised $50 million and Reef immediately took $7.5 million for fees and broker commissions. After that, Reef received a monthly management fee of $41,667 from the fund. Reef also charged for drilling, operating, legal, and other expenses to the fund. Reef completely controlled these expenses and determined which other Reef entities would be hired to do work for the venture. In fact, no more than half of the money would be used to buy oil and gas land where there were reserves.

FINRA Alleges Numerous Supervisory Failures at Sammons Securities Part II

December 26, 2014 | by Staff Attorney

This post continues our exploration of the Financial Industry Regulatory Authority’s (FINRA) acceptance, waiver, and consent action (AWC) that sanctioned brokerage firm Sammons Securities Company, LLC (Sammons) over allegations that Sammons failed to establish and maintain a system of supervision to comply with the securities laws.

FINRA member firms were required to conduct reviews of all outside business activities disclosed before to ensure that the disclosures complied FINRA standards. During FINRA’s investigation the regulator found that Sammons was unable to demonstrate that it had conducted a review. In addition, FINRA alleged that Sammons used a form to collect information from its brokers concerning their outside business activities but the form failed to request information sufficient to detect the occurrence of private securities transactions away from the firm.

Moreover, FINRA found that two Sammons brokers were operating registered investment advisors that held customer accounts at broker-dealers other than Sammons. FIRNA found that the representatives disclosed their advisory business as outside business activities to Sammons and those activities were approved. However, FINRA found that Sammons did not record or maintain the advisories securities transactions on the firm’s books and records, or supervise the correspondence of the business. As a result, FINRA found that the representatives’ participation in private securities transactions was unsupervised by the firm.

FINRA Sanctions Sammons Securities Company Over Host of Supervisory Failures Part I

December 25, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA), in an acceptance, waiver, and consent action (AWC), sanctioned brokerage firm Sammons Securities Company, LLC (Sammons) over allegations that Sammons failed to establish and maintain a system of supervision that is reasonably designed to achieve compliance with securities laws. From March 8, 2010, through October 8, 2012, FINRA alleged that certain supervisory deficiencies existed at Sammons including the firm’s supervision of registered representatives, the firm’s due diligence processes and procedures, and some of its implemented customer safe-guards.

Sammons has been a FINRA member since January 2002, employs a total of 516 registered representatives, and operates from 357 branch office locations. Sammons’ compliance functions are conducted in Ann Arbor, Michigan, where its main registered Office of Supervisory Jurisdiction (OSJ) is located.

FINRA found that Sammons’ supervisory and compliance functions were conducted by a company called BD OPS, LLC, (BD OPS), an entity under common ownership with Sammons. BD OPS performed all of the firm’s supervision and compliance and also provided supervisory and compliance services for another broker-dealer and its related investment advisor. As a result, FINRA found that the 35 supervisory personnel working for BD OPS were responsible for supervising a total of 1,274 registered representatives and 854 branch offices between the two broker-dealers.

Equipment Leasing Programs LEAF and ICON: Too Costly to Invest In

December 23, 2014 | by Staff Attorney

Our firm has written numerous times about investor losses in programs such as various equipment leasing programs like LEAF Equipment Leasing Income Funds I-IV and ICON Leasing Funds Eleven and Twelve. These direct participation programs, like their non-traded REIT and oil and gas cousins, all suffer from the same crippling flaw that dooms these investments to a high likelihood of failure from the get go. The costs and fees associated with all of these investments cause the security to be so costly that only unprecedented market boom conditions can lead to profitability. Market stagnation or decline makes any significant return a virtual impossibility.

Yet, investors are in no way compensated for these additional risks. These investments tout high yield like returns for risks far in excess of traditional high yield investments. In fact, the only reason brokers sell these products is because of the high sales commissions coupled with the lack of price transparency that allows these products to be displayed at inflated values for years on investor account statements.

In an equipment leasing program a sponsor sells limited partnership units then takes out substantial offering costs and fees and invests the remainder in a pool of equipment leases that are leveraged up with additional borrowing. Brokers market these products as a predictable income stream but in fact, and what nearly all brokers fail to mention, is that a substantial portion of investor distributions are actually a return of their original investment and not actually income generated from operations.

Securities America Broker James McLaughlin Sanctioned Over Churning Allegations

December 22, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently sanctioned Securities America, Inc. (Securities America) broker James McLaughlin (McLaughlin) alleging that between October 2010, through October 2012, McLaughlin: (i) engaged in excessive trading (churning) in four customers’ accounts; (ii) recommended unsuitable short-term trading of mutual funds in four customers’ accounts; (iii) engaged in unauthorized trading in three customers’ accounts and; (iv) exercised discretion in one customer’s account without having written authorization.

McLaughlin was registered as a broker from 1989 until October 2012. McLaughlin was registered with Securities America from October 2000, until October 2012. On October 29, 20l2, Securities America terminated McLaughlin’s registrations for violating firm policies and procedures relating to excessive trading.

FINRA alleged that McLaughlin excessively traded at least four customers’ accounts. By analyzing the number of trades, turnover rate, and cost-to-equity ratio for these accounts FINRA determined that across a two-year relevant period from October 2010, through October 2012 that the accounts were excessively traded. In one account 286 purchase and sale transactions occurred resulting in a turnover rate of 47.63 and a cost-to-equity ratio of 228.03%. In a second account 459 purchase and sale transactions occurred resulting in a turnover rate of 15.86 and a cost-to-equity ratio of 69.54%. In a third account FINRA alleged that McLaughlin executed 140 purchase and sale transactions resulting in a turnover rate of 6.79 and a cost-to-equity ratio of 32.74%. Finally, in fourth customer’s account FINRA found McLaughlin executed 111 purchase and sale transactions resulting in a turnover rate of 8.75 and a cost-to-equity ratio of 44.50%.