securities attorney

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 The firm also agreed to tell all its customers that the requirement is no longer in effect.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.

The Risks of Investing In Variable Annuities

May 5, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has barred broker Mark R. Talley (Talley) formerly of Fifth Third Securities, Inc. concerning allegations of misrepresenting the properties of a variable annuity product to a customer. Our firm has received complaints concerning variable annuities from a number of clients complaining that their broker failed to explain the risks of these complex products.

A variable annuity is an investment and insurance product with significant risks and features the investor should be aware of before investing. Recently the Securities and Exchange Commission (SEC) released a publication entitled: Variable Annuities: What You Should Know. The SEC encouraged investors considering a purchase of a variable annuity to “ask your insurance agent, broker, financial planner, or other financial professional lots of questions about whether a variable annuity is right for you.”

A variable annuity is a contract with an insurance company where the insurer agrees to make periodic payments to you. The investor chooses investments to be made in the annuity and the value of the variable annuity will vary depending on the performance of the investment options chosen. The investment options for a variable annuity are usually mutual funds.

William Coolidge of Stifel Nicolaus Barred by FINRA Over Unauthorized Trading Activity

April 30, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has barred financial advisor William B. Coolidge (Coolidge) of Stifel, Nicolaus & Company, Incorporated (Stifel Nicolaus) concerning allegations that Coolidge effected trades in the accounts of three customers without obtaining prior written authorization from the customers and without the accounts being discretionary accounts. In addition, FINRA alleged that Coolidge implemented a trading strategy and made unsuitable recommendations to five customers to switch from mutual funds and Unit Investment Trusts (UIT) to other mutual funds or UITs after holding the investments for a short time period.

Discretionary trading without written authorization is a form of unauthorized trading. Unless an investor has given the broker discretion to make trades in the account, a broker is obligated to first discuss all trades with the investor before executing them. FINRA Rules prohibit a broker from making discretionary trades in a customer’s non-discretionary account. The SEC has found that unauthorized trading is a type of securities fraud due to its fraudulent nature.

FINRA alleged that from April 2008, through April 2012, Coolidge effected approximately 233 trades in the accounts of three customers without obtaining prior written authorization from the customers. One of the customers was 86 years old. FINRA alleged that the customer’s investment objectives were growth and income, her estimated net worth was approximately $240,000, and her annual income was under $25,000. FINRA found that from April 2008 through June 2012, Coolidge implemented a trading strategy in the customer’s IRA account on forty-six occasions and in her individual account on fifty-two occasions where he switched from mutual funds and UITs to other mutual funds or UITs after holding the investments for a short time period. FINRA determined that Coolidge’s recommendations were not suitable and that the customer incurred a total loss of $43,692 and paid $52,316 in commissions.

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.

Colorado Financial Service Fined By FINRA Over Private Placement Supervisory Failures

April 28, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently fined Colorado Financial Service Corporation (Colorado Financial) concerning allegations that the firm violated NASD Rule 3010, and FINRA Rule 2010, among other violations, by failing to establish, maintain, and enforce supervisory procedures reasonably designed to ensure compliance with the securities rules pertaining to the supervision of electronic communications and due diligence review of new private placement offerings.

Colorado Financial is based in Centennial and became a FINRA member in 2000. Currently, there are approximately 82 persons registered with Colorado Financial in thirty six branches. The firm’s primary lines of business include investment banking, private placements, mutual funds, and variable life insurance or annuities.

FINRA alleged that Colorado Financial did not establish, maintain, and enforce adequate procedures to supervise and review electronic communications for the period of February 2009 to September 2012. According to FINRA, Colorado Financial only manually reviewed between .1% and 1.5% out of approximately 325,900 archived e-mails during the period of January 2012 to September 2012. FINRA found that Colorado Financial’s written supervisory procedures relating to electronic communications did not indicate who at the firm was responsible for the supervisory review, how the review would be conducted and documented, or establish protocols for escalating regulatory issues in e-mails.

Pennsylvania Regulator Investigates Securities America and Landenburg Thalmann Non-Traded REIT Sales

April 17, 2014 | by Staff Attorney

The Pennsylvania Department of Banking and Securities requested that Securities America Inc. (Securities America) provide information concerning customer purchases of non-traded real estate investment trust (REIT) securities by Pennsylvania residents since 2007. This information was provided by an annual report of Ladenburg Thalmann & Co. Inc. (Ladenburg Thalmann), the company that owns Securities America as well as two other independent broker-dealers. According to Ladenburg Thalmann the company is unable to determine whether and the extent that the Pennsylvania Department of Banking and Securities may seek to discipline Securities America

A REIT is a corporation or trust that owns income-producing real estate properties. 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. Publicly traded REITs can be sold on an exchange and have the same liquidity as most stocks and bonds. However, non-traded REITs are sold only through broker-dealers and are illiquid. REITs are typically long term investments and investors should be prepared to hold onto non-traded REITs for up to 7 to 10 years and even longer under some circumstances.

The non-traded REIT industry sales doubled last year to $20 billion, from 2012. Increased volatility in the stock market during the financial crisis led investment advisors to increasingly recommend REITs as a purported stable investment during unstable times. However, the stability of non-traded REITs only exists because brokerage firms and issuers have control over the value how the value of the security is listed on an investor’s account statements and not because the security will actually sell at that value. The risks of non-traded REITs are significant and FINRA has issued an Investor Alert warning investors of some of the potential risks.

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.