unsuitable investments

Gana LLP Investigation – Former RBC Capital Markets Broker Michael Zukowski

September 18, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned broker Michael Zukowski (Zukowski) concerning allegations that Zukowski recommended unsuitable transactions in inverse and inverse-leveraged Exchange Traded Funds (Non-Traditional ETFs) in the accounts of his customers.

Zukowski first became registered with FINRA as a securities representative in 1989. Thereafter, from July 2005 to November 2010, he was registered in that same capacity through RBC Capital Markets, LLC (RBC) where he worked in the firm’s Massachusetts office. On December 23, 2010, RBC filed a Termination Notice (Form U5) stating that Zukowski was permitted to resign for “failure to meet Firm expectations.”

On August l8, 2011, RBC filed a an amended disclosure stating that an Administrative Complaint filed by the Massachusetts Securities Division (MSD) stated that: “The Massachusetts Securities Division alleged Michael Zukowski made unsuitable recommendations to brokerage and advisory clients regarding the purchase and sale of leveraged, inverse and inverse-leveraged exchange traded funds.” Thereafter, on November 12, 2012, Zukowski entered into a Consent Order with the MSD concerning the allegations of unsuitable recommendations where Zukowski consented to sanctions including a Cease and Desist and a five year bar to act as a “broker-dealer agent, investment adviser, investment adviser representative and issuer-agent” in the State of Massachusetts. Finally, on November 16, 2012, RBC filed another amended Form U5 and disclosed a written complaint by two customers indicating that the “Clients allege material omissions and unsuitable advice regarding non-traditional ETFs, in period 2/2009 to 12/2009.”

Advisor Raymond Clark Suspended Over Allegations of Securities Related Misconduct

September 17, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned broker Raymond Clark (Clark) and imposed findings: (1) suspending the broker for three months and fined $6,000 for using his personal email account to communicate with a customer; (2) suspended for four months and fined $10,000 for making false statements to his firm; and (3) suspended for two months and fined $4,000 for failing to report a customer complaint to his firm. FINRA imposed the suspensions to run consecutively and suspended Clark for an additional three months in all supervisory capacities and ordered him to requalify by examination as a securities representative and securities principal.

According to Clark’s BrokerCheck, the broker was registered with Paulson Investment Company, Inc. from December 2008 through May 2009. From June 2007 through January 2009, Clark was registered with J.P. Turner & Company, L.L.C. From May 2009 until August 2010, Clark was registered with First Midwest Securities, Inc. Finally, from August 2010, through August 2014, Clark was registered with Dynasty Capital Partners, Inc. (Dynasty Capital). Clark’s background check also reveals two regulatory complaints and at least nine customer complaints. Only a relatively small percentage of brokers have any complaints on their records and fewer still have as many as Clark.

The complaints against Clark include claims of unauthorized trading, inappropriate use of margin, securities fraud, breach of fiduciary duty, unsuitable investments, churning, and misrepresentations.

Financial Advisor Sanctioned Over Allegations of Unsuitable Overconcentrations of Private Placements

August 26, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned and barred financial advisor Stephen Lard (Lard) concerning allegations that Lard recommended and sold various private-placement securities, that were speculative, high risk, and illiquid to customers three customers. FINRA alleged that Lard’s recommendations resulted in an unsuitable concentrated position for each investor of approximately 50% or greater. Such a concentration exposed each investor to a risk of loss that exceeded each investor’s risk tolerance and investment objectives. FINRA found that some of the investors did in fact suffer substantial losses and financial difficulty due to the illiquidity of the investments.

Lard entered the securities industry in 1994 and was associated with QA3 Financial Corp. (QA3) from 2000 until February 11, 2011. Thereafter, Lard was registered with Centaurus Financial, Inc.

FINRA found that between June 2007, and February 2008, one of Lard’s client’s executed suitability forms for her individual account. The forms reported an annual income of $80,000, a net worth excluding primary residence of $1,780,120, and a worth of all assets, including residence, minus all debts, of $1,852,120, and a liquid net worth of $650,000. The suitability form reflected “Moderate” as her risk exposure and “Income” as her investment objective.

Matthew Davis Barred Over Allegations of Conversion of Funds and Unauthorized Trading

August 25, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned and barred financial advisor Matthew Davis (Davis) concerning allegations that in connection with a FINRA investigation into allegations of misconduct in several customer accounts, FINRA staff scheduled Davis’ on-the-record (OTR) testimony and Davis failed to appear for the scheduled testimony and informed the agency that he would not appear at another time.

Davis was associated with Beneficial Investment Services, Inc. from November 2008, through April 2010. Thereafter, Davis was associated with OneAmerica Securities, Inc. (OneAmerica) from April 2010, through July 2013. He is not currently associated with a FINRA member.

FlNRA alleged that its staff requested that Davis appear and provide testimony on March 24, 2014, regarding allegations that Davis engaged in misconduct in several customer accounts. The allegations of misconduct included claims of conversion, misrepresentation of customer holdings and account value, forgery, discretionary unauthorized trading, attempts to settle a customer complaint without the firm’s knowledge, and unsuitable investment recommendations. Through Davis’ counsel, FINRA was informed that he would not appear for testimony.

Gana LLP Files Complaint on Behalf of a Family Against First Allied Securities and Centaurus Financial

August 14, 2014 | by Staff Attorney

The law offices of Gana Weinstein LLP recently filed a securities arbitration case on behalf of a family of four investors against First Allied Securities, Inc. (First Allied) and Centaurus Financial, Inc. (Centaurus) concerning allegations that their financial advisor Seyed Ahmad Hashemian (Hashemian) made unsuitable and inappropriate investment recommendations to claimants’ by recommending a near 100% concentration in illiquid, speculative, and high commission investments including variable annuities, equity-indexed annuities (EIAs), private placements, oil and gas ventures, non-traded real estate investment trusts (REITs), and Advanced Equities private placements.

Our law offices have represented over a dozen investors who alleged that they were sold the Advanced Equities private placements through the use of false and misleading advertising materials. In addition, to customer complaints both FINRA and the SEC have sanctioned Advanced Equities concerning the misleading nature of their sales practices. Customers have alleged that the products were misrepresented as “late stage equities” that were a mere 12-36 months from going public. The complaint also alleged that the investments were sold as providing “Higher near-term investment returns than the public equity markets” while providing “Greater short-term liquidity and lower risk profiles.” The complaint alleged that these representations were false and that First Allied failed to conduct even basic due diligence to verify the accuracy of these statements.

In the case of the recent complaint filed, claimants’ investments were alleged to have been made using money that was supposed to be used to replace the earnings the untimely passing of a family member. As a result, the complaint alleged that over a nearly nine year period where the broader market indexes have hit all-time highs, claimants have lost significant sums their investments. The claimants alleged that they have been deprived of the ability to generate reasonable returns by being trapped in illiquid and unsuitable investments.

Gana LLP Files Customer Complaint Against JHS Capital Concerning Broker Joe Alijaj

August 11, 2014 | by Staff Attorney

The law office of Gana Weinstein LLP recently filed a securities arbitration on behalf of an investor against JHS Capital Advisors, LLC f/k/a Pointe Capital, Inc. (JHS Capital) concerning allegations that the broker recommended unsuitable investments, churned the account, and ultimately depleted the claimant’s assets.

The claimant is sixty-one years old and spent the majority of his career running seed companies. The claimant alleged that he had little understanding of the stock and bond markets. The complaint alleged that Enver Rahman “Joe” Alijaj (Alijaj), a broker with JHS Capital, cold called claimant and aggressively pursued the opportunity to manage claimant’s money. The complaint alleged that prior to opening his account with JHS, claimant never maintained a brokerage account. The claimant alleged that he explained to Alijaj that he wanted to focus on preservation of his capital.

In reliance on Alijaj’s assurances, the claimant alleged that he provided the broker with a substantial portion of his net worth. Rather than comply with the claimant’s investment needs, the complaint alleged that Alijaj took advantage of the claimant’s inexperience by investing the funds in unreasonably volatile stocks and excessively traded (churned, a type of securities fraud) his account to generate excessive commissions. According to the complaint, within days of opening the account, Alijaj leveraged the account and actively traded speculative small cap stocks in unsuitable investments including A-Power Energy Generation Systems Ltd. (APWR), Silicon Motion Technology Corp (SIMO), and Yingli Green Energy Holdings Co. (YGE).

FINRA Files Complaint Against Newport Coast Securities, Five Brokers, and Two Supervisors Over Churned Accounts

August 4, 2014 | by Staff Attorney

The law offices of Gana Weinstein LLP are investigating claims of churning and failure to supervise in wake of the allegations made by The Financial Industry Regulatory Authority (FINRA) concerning allegations that from September 2008, through May 2013, Newport Coast Securities, Inc. (Newport Coast) and five of its registered representatives excessively traded and churned 24 customers’ accounts. In addition, FINRA alleged that the representatives’ direct supervisors, including Marc Arena (Arena) and Roman Tyler Luckey (Luckey) and the firm’s Compliance Department managers knew what was transpiring but took no meaningful steps to curtail the misconduct. To the contrary, FINRA found that managers, a supervisor, and the firm’s former President profited through overrides on these churned accounts.

The five brokers named in the complaint are Douglas Leone (Leone), Andre LaBarbera (LaBarbera), David Levy (Levy), Antonio Costanzo (Costanzo), and Donald Bartelt (Bartelt). FINRA alleged that the misconduct by the brokers was so extreme and egregious in nature that it should have quickly drawn scrutiny and been stopped. FINRA alleged that the brokers’ trading caused numerous “red flags” of misconduct including: (i) cost-to-equity ratios often over 100%; (ii) turnover rates often over 100; (iii) extraordinary amounts of in-and-out trading; (iv) customer accounts were highly margined and often concentrated in one security; (v) large numbers of transactions where the total commission/markup per trade exceeded 3% or 4%; (vi) there was a deceptive mix of riskless principal and agency trading in numerous accounts with higher cost trades generally exceeding $1,000 per trade were executed on a riskless principal basis whereas lower cost trades, typically involving sales of the same securities, were executed on an agency basis; (vii) inverse and/or leveraged Exchange Traded Funds (ETFs) and Exchange Traded Notes (ETNs) remained in accounts for multiple trading sessions; (viii) solicited trades were inaccurately characterized as unsolicited; and (ix) nearly all of the customer accounts exhibited large losses.

FINRA also alleged that after FINRA Enforcement issued Wells Notices, Levy and Costanzo attempted to dissuade some of their customers from cooperating with FINRA’s investigation. In one instance, Costanzo offered to compensate a customer for his losses but conditioned his offer on the customer’s signing a letter stating that he would not testify at a hearing. In another instance, FINRA found that Levy traveled to Logan, Iowa, to tell a customer that he would not receive any restitution if the broker wound up barred but promised the customer that he would assist in the preparation of a claim against Newport Coast if the customer signed a letter informing FINRA that the customer would not participate in a disciplinary hearing.

James Bracey Barred Over Allegations of Taking Loans from Customers

July 29, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) barred from the financial industry broker James Bracey (Bracey) concerning allegations that in or about February 2008, Bracey, received a $175,000 loan from a customer without notifying Multi-Financial, now known as Cetera Advisor Network LLC. FINRA alleged that on multiple occasions between 2009 and 2011, Bracey renegotiated the interest payments on the customer’s loan. FINRA also found that in December 2009, while associated with Multi-Financial, Bracey falsified a customer’s written wire transfer instructions in order to execute an unauthorized fund transfer from a customer’s brokerage account to that customer’s personal bank account outside of Multi-Financial. FINRA determined that Bracey caused the creation and maintenance of inaccurate books and records through the falsifying the customer’s wire transfer.

FINRA also alleged that between October 31, 2001 and April 30, 2012, Bracey failed to timely notify Multi-Financial, and later LPL Financial LLC, of two separate outside business activities. FINRA also found that in October 2004, after soliciting 17 investors to purchase securities away from Multi-Financial, Bracey failed to provide written notice to or firm approval to engage in private securities transactions in violation of NASD Rules 3040 and 2110. FINRA’s allegations are consistent with a “selling away” violation in which a broker solicits investors to invest in unapproved investments. Finally, FINRA found that between 2004 and 2012, Bracey willfully failed to timely disclose material information to Multi-Financial and LPL Financial in order to update his Form U4 concerning two liens and two creditor compromises.

In addition to the slew of violations alleged by FINRA, Bracey has been the subject of at least three customer complaints and terminated by three brokerage firms. The customer complaints against Bracey concern private placements (direct participation programs), equipment leasing investments, unsuitable investments, non-traded real estate investment trusts (REITs), and misrepresentations in the sale of securities.

Infinex Investments Fined Over Unsuitable Sale of Non-Traditional (Leveraged) ETFs

July 2, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has sanctioned Infinex Investments, Inc. (Infinex Investments) concerning allegations that from April 2009, through March 2011, Infinex Investments permitted 35 registered representatives who received minimal training on inverse and inverse-leveraged Exchange-Traded Funds (Non-Traditional ETFs) to sell them to customers. FINRA alleged that the firm and brokers failed to perform reasonable due diligence to understand the risks and features of the product necessary in order to recommend 229 customers approximately 835 transactions in these products. In addition, FINRA also found that some of the recommendations were also unsuitable on a customer specific basis. Finally, FINRA also found that Infincx Investments also failed to establish and maintain a supervisory system reasonably designed to achieve compliance with applicable FINRA rules relating to the sale of Non- Traditional ETFs.

Infinex Investments has been a FINRA firm since 1994, is a full service broker-dealer with its primary business being the retail sale of mutual funds and variable annuities. The firm employs approximately 400 registered representatives located in approximately 500 branches.

As a background, ETFs attempt to track a market index. ETFs can be either attempt to track the index or apply leverage in order to amplify the returns of an underlying stock position. A leveraged ETF with 300% leverage will attempt to return 3% if the underlying index returns 1%. Nontraditional ETFs can also be designed to return the inverse or the opposite of the return of the benchmark. Leveraged ETFs are generally used only for short term trading. The Securities Exchange Commission (SEC) has warned that most Non-Traditional ETFs reset daily and are designed to achieve their stated objectives on a daily basis. In addition to the risks of leverage the performance of Non-Traditional ETFs held over the long term can differ drastically from the underlying index or benchmark during the same period. FINRA has also acknowledged that leveraged ETFs are complex products that carry significant risks that are typically not suitable for retail investors.

Mislead into Investing in Tenants-in-Common (TIC) Property?

May 22, 2014 | by Staff Attorney

The sales of Tenants-in-Common (TIC) interests grew significantly during the early 2000s from approximately $150 million in 2001 to approximately $2 billion by 2004. The Financial Industry Regulatory Authority (FINRA) has noted that TICs are illiquid investments for which no secondary market exists and that subsequent sales of the property may occur at a discount to the value of the real property interest. FINRA has also warned that the risk that the fces and expenses charged by the TIC sponsor can outweigh the potential tax benefits associated with a Section 1031 Exchange. FINRA also instructed members that they have an obligation to comply with all applicable conduct rules when selling TICs by ensuring that promotional materials used are fair, accurate, and balanced.

According to FINRA former brokerage firm CapWest Securities, Inc., (CapWest) violated industry content standards in communications with the public. FINRA found that the communications: (1) were not fair and balanced and failed to provide a sound basis for evaluating TIC investments being promoted; (2) used exaggerated and or misleading statements; (3) used prohibited statements by projecting the results of the products being promoted; and (4) used customer testimonials without proper disclosures. FINRA also found that CapWest violated supervisory standards by failing to implement effective supervisory procedures. FINRA found that all of these violations and conduct were inconsistent with just and equitable principles of trade.

FINRA’s investigation involved CapWest’s promotion and sales of Section 1031 Exchanges and TIC investments that started being sold in the early 2000s. CapWest made public communications to promote tax-deferred exchanges of real property under Section 1031 of the Internal Revenue Code (IRC) as well as TIC investments. The IRC permits an investor to defer paying capital gains tax on the sale of real estate held for use for investment by exchanging the investment for “like-kind” property of equal or greater value.