Articles Tagged with structured products

shutterstock_168326705-199x300According to BrokerCheck records kept by The Financial Industry Regulatory Authority (FINRA) broker Katherine Nishnic (Nishnic), currently associated with Centaurus Financial, Inc. (Centaurus), has been subject to at least eight customer complaints during her career.  The majority of the customer complaints against Nishnic concern allegations relating to unsuitable recommendations in structured products. The law offices of Gana Weinstein LLP are currently representing investors, including Centaurus investors, who were surprised to find out that the “bonds” that were recommended by their advisors have almost completely stopped paying interest while plummeting in value.

What many investors in this situation did not realize was that they were not sold bonds at all but instead complex structured products that go by a variety of names including steepener notes, adjustable rate market notes, spread linked notes, or structured notes.  Regulators have already stated that it is improper to sell these investments as a fixed income substitute or to compare them to bonds in terms of producing a revenue stream.  However, in our firm’s experience it appears that many brokers have been selling structured products as bond alternatives.

Structured products range in risk from benign to extreme.  However, most structured products produce inferior risk/return profiles than ordinary debt or equity instruments because the brokerage firms that issue these products seek to profit from the spread between the payment to investors and the amount of money the brokerage firm can make from the issuance.  When dealing with complex structured products most investors will lack the ability to understand the merits of investments nor are they appropriate for investors seeking a fixed or reliable income and have a desire for preservation of capital.

Continue Reading

shutterstock_138129767-300x199The securities lawyers of Gana Weinstein LLP are investigating customer complaints filed with The Financial Industry Regulatory Authority’s (FINRA) against broker Margaret Lech-Loubet (Lech-Loubet).  According to BrokerCheck records Lech-Loubet has been in the securities industry for 25 years and has two customer complaints on her record.  Lech-Loubet is currently registered with UBS Financial Services, Inc. (UBS) out of the firm’s Beverly Hills, California office location.  The most recent customer complaints against Lech-Loubet alleges that Lech-Loubet concentrated the client in energy related structured products and master limited partnerships (MLPs).

The most recent complaint was filed in January 2017 and alleged that from June 2014 to November 2015 the investments were not suitable and were told the investments were safer than equities.  The customer is claiming $285,582 in damages.  The claim is currently pending.

Brokers have a responsibility treat investors fairly which includes obligations such as making only suitable investments for the client.  In order to make a suitable recommendation the broker must meet certain requirements.  First, there must be reasonable basis for the recommendation the product or security based upon the broker’s investigation and due diligence into the investment’s properties including its benefits, risks, tax consequences, and other relevant factors.  Second, the broker then must match the investment as being appropriate for the customer’s specific investment needs and objectives such as the client’s retirement status, long or short term goals, age, disability, income needs, or any other relevant factor.

shutterstock_52426963The securities fraud lawyers of Gana Weinstein LLP are investigating customer complaints against brokerage firms and advisors for selling them structured CDs – a class of structured products.  Brokerage firms and banks are selling record numbers of the so called “CDs” that are extraordinarily complex products that are nothing like CDs and contain substantial risks.

These CDs are usually market-linked or structured so that their performance depends on a basket of stocks or other assets instead of a flat interest rate like traditional CDs.  When they mature CD holders get their original money back plus a return based on the performance of certain assets or benchmarks.

Banks love these CDs because they are an inexpensive sources of funding that generate huge fees all the way down the chain. The issuer gets fees and the financial adviser gets paid more for selling a market-linked CD than a conventional CD or a mutual fund.  Typically, an adviser who sells the CD can get commissions of up to 3% of the CD’s value.

shutterstock_114128113The securities lawyers of Gana Weinstein LLP are investigating customer complaints filed with The Financial Industry Regulatory Authority’s (FINRA) against broker Michael Blueweiss (Blueweiss). According to BrokerCheck records there are at least 6 customer complaints against Blueweiss. The most recent customer complaint against Blueweiss filed in November 2014 alleges that Blueweiss concentrated the client in structured products, annuities failed to disclose surrender penalities, and churning. Another customer complaint filed in February 2011 alleged that unsuitable investments in UBS reversed convertibles linked to the common stock of Lehman Brothers.

Brokers have a responsibility treat investors fairly which includes obligations such as making only suitable investments for the client. In order to make a suitable recommendation the broker must meet certain requirements. First, there must be reasonable basis for the recommendation the product or security based upon the broker’s investigation and due diligence into the investment’s properties including its benefits, risks, tax consequences, and other relevant factors. Second, the broker then must match the investment as being appropriate for the customer’s specific investment needs and objectives such as the client’s retirement status, long or short term goals, age, disability, income needs, or any other relevant factor.

The number of customer complaints against Blueweiss is high relative to his peers. According to InvestmentNews, only about 12% of financial advisors have any type of disclosure event on their records. Brokers must publicly disclose certain types of reportable events on their CRD including but not limited to customer complaints. In addition to disclosing client disputes brokers must divulge IRS tax liens, judgments, and criminal matters. However, FINRA’s records are not always complete according to a Wall Street Journal story that checked with 26 state regulators and found that at least 38,400 brokers had regulatory or financial red flags such as a personal bankruptcy that showed up in state records but not on BrokerCheck. More disturbing is the fact that 19,000 out of those 38,400 brokers had spotless BrokerCheck records.

shutterstock_153667856The Financial Industry Regulatory Authority (FINRA) announced its approval of a rule in a press release to help brokerage firms protect seniors citizens and other vulnerable adults from financial exploitation. The heart of the proposal allows a firm to place a temporary hold on a disbursement of funds or securities and notify a customer’s trusted contact when the firm has a reasonable belief that the customer may be the subject of financial exploitation. According to FINRA, an average of 10,000 Americans will turn 65 every day for the next 15 years.

In our practice, often time accountants, attorneys, or children of elderly investors contact our firm when they suspect that there has been elder abuse or unfair trade practices in the handling of an elderly persons’ accounts. As 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; Senior Abuse in the Securities Industry A Major Ongoing Concern

In the past, regulators have expressed worry that brokers may be placing seniors in risky investments that chase yield such as inappropriate nontraditional investments like variable annuities, non-traded real estate investment trusts (Non-Traded REITs), structured products, and other alternative products. Regulators have warned brokers that the dangers of seniors’ chasing yield through alternative investments comes from the fact that they don’t have as much time as other clients for them to pay off. In addition, if these investments fail the result is a major loss of irreplaceable life savings.

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_176319713The Financial Industry Regulatory Authority (FINRA) entered into an agreement whereby the regulatory fined LPL Financial LLC (LPL) and fined it $10 million for broad supervisory failures in a number of key areas, including the sales of non-traditional exchange-traded funds (Non-Traditional ETFs), certain variable annuity contracts, non-traded real estate investment trusts (Non-Traded REITs) and other complex products, as well as its failure to monitor and report trades and deliver to customers more than 14 million trade confirmations. As part of the fine FINRA ordered LPL to pay approximately $1.7 million in restitution to customers who purchased non-traditional ETFs.

In a press release Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, stated that “LPL’s supervisory breakdowns resulted from a sustained failure to devote sufficient resources to compliance programs integral to numerous aspects of its business. With today’s action, FINRA reaffirms that there is little room in the industry for lax supervision and that it will not hesitate to order firms to review and correct substandard supervisory systems and controls, and pay restitution to affected customers.”

This action is only one of many regulatory actions that our firm has tracked concerning LPL and its brokers including the following:

shutterstock_173809013This post continues our prior report on the Financial Industry Regulatory Authority’s (FINRA) recently sanctions against Sigma Financial Corporation (Sigma Financial) alleging from April 25, 2011, through June 24, 2012, supervisory deficiencies existed at Sigma including the firm’s supervision of registered representatives, the firm’s suitability processes and procedures, some of the firm’s implemented procedures relating to customer information, and also branch office registration for trade execution.

FINRA found that Sigma Financial permitted its representatives to create and use consolidated statements with their customers that reflected the customers’ holdings of investments away from the firm. However, FINRA found that Sigma Financial did not adequately supervise its representatives’ creation and use of such statements in that the firm neither centrally tracked the number or identity of representatives who were using consolidated statements nor the customers who received such statements. Instead, FINRA found that Sigma Financial relied upon the representatives themselves to submit only the initial template of the consolidated statements they created and intended to use with their customers and the firm did not actually receive or review the statements shared with the customers.

Another supervisory deficiency noted by FINRA was that Sigma Financial had four preferred vendors through which brokers could establish and maintain websites. But use of these vendors, was not required and FINRA found that 134 representatives maintained non-preferred vendor websites, or approximately 20% of all websites. FINRA found that non- preferred vendors failed to notify Sigma Financial if registered representatives made any changes to their websites. In this way FINRA found that Sigma Financial did not conduct adequate supervision of those non-preferred vendor websites.

shutterstock_155045255The Financial Industry Regulatory Authority (FINRA) recently sanctioned Sigma Financial Corporation (Sigma Financial) alleging from April 25, 2011, through June 24, 2012, supervisory deficiencies existed at Sigma in specific areas of Sigma’s supervisory systems and procedures including the firm’s supervision of registered representatives, the firm’s suitability processes and procedures, some of the firm’s implemented procedures relating to customer information, and also concerning branch office registration for trade execution.

Sigma Financial has been a FINRA member since 1983, and currently has a total of 685 registered representatives operating from 436 branch office locations. Sigma conducts a general securities business.

FINRA found that Sigma Financial’s supervisory and compliance functions were conducted by B/D OPS, LLC (BD OPS) from a central location in Ann Arbor, Michigan. FINRA found that BD OPS also provided supervisory and compliance services for Sigma Financial’s affiliated investment advisor and another broker-dealer. As a result, FINRA determined that a mere 35 supervisory personnel working for BD OPS were responsible for supervising a total of 1,274 registered representatives and 854 branch offices. FINRA found that Sigma Financial’s reliance upon BD OPS to remotely conduct all of the supervisory and compliance functions for Sigma Financial’s independent contractors and branch offices was not reasonable.

shutterstock_177577832It is relatively easy to grasp the concept of excessive trading activity or “churning” in a brokerage account. Churning trading activity has no utility for the investor and is conducted solely to generate commissions for the broker. Churning involves both excessive purchases and sales of securities and the advisors control over the account. But regulators are also looking at another growing trend referred to as “reverse churning.” According to the Wall Street Journal (WSJ) the Securities and Exchange Commission (SEC) states that “reverse churning” is the practice of placing investors in advisory accounts that pay a fixed fee, such as 1-2% annually, but generate little or no activity to justify that fee. Regulators are watching for signs of “double-dipping” whereby advisers generate significant commissions in an investor’s brokerage account and then moves the client into an advisory account in order to collect additional fees.

As a background there are many standalone brokerage firms and investment advisor firms where the option does not exist for a client to be switched between types of accounts. However, there are also many dually registered firms which are both broker-dealers and investment advisers. These firms, and their financial advisors have tremendous influence over whether a customer establishes a brokerage or investment advisory account. In the WSJ, the SEC was quoted as saying that “This influence may create a risk that customers are placed in an inappropriate account type that increases revenue to the firm and may not provide a corresponding benefit to the customer.”

However, dumping a client account into an advisory account after the broker ceases trading is only one strategy that should be included in the category of “reverse churning.” There are many other creative ways that brokers can generate excessive commissions for themselves while providing no benefit to their clients. For example, if a broker recommends a tax deferred vehicle, such a as a variable annuity, in an IRA account there is no additional tax benefit for the client. While the recommendation would not result in excessive trading, the broker would earn a huge commission for an investment that cannot take advantage of one of its primary selling points.