unsuitable investments

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.

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.

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.

Gana LLP Files Complaint Against H. Beck on Behalf of Client For Unsuitable Investment

April 4, 2014 | by Staff Attorney

The law offices of Gana Weinstein LLP recently filed a complaint against H. Beck, Inc., on behalf of a client accusing the investment advisory firm of making unsuitable recommendations and failing to properly supervise one of its representatives.

The Claimant in this case is a retired sixty-three year old from Hawaii, who sought to safely invest what was left of his retirement funds, after being hit hard in the down market of 2008. H. Beck, through one of its advisers, offered him high, risk-free returns, which the Hawaii native readily accepted. H. Beck, through one of its advisers, took nearly two-thirds of Claimant’s retirement savings and put them into the Inland American Real Estate Investment Trust (Inland) and the Lease Equipment Finance Fund 4 (LEAF).

LEAF is a limited partnership. Limited Partnerships are investment vehicles formed to acquire, operate, and sell assets for the benefit of the partners. Investors in Limited Partnerships, also known as limited partners, 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. They are illiquid assets with a relatively limited secondary market. Consequently, reliable pricing information is typically very difficult to obtain.

Three Rockwell Global Capital Brokers Accused of Securities Misconduct by Customers

April 3, 2014 | by Staff Attorney

Rockwell Global Capital LLC (Rockwell) brokers Robert E. Lee Jr. (Robert Lee), Douglas Guarino (Guarino), and Lawrence Lee (Lee) have been the subject of at least 29 combined customer complaints. All three brokers have been accused by clients of churning their accounts and making unsuitable investment recommendations.

Robert Lee first became registered in 1988. From March 2005, through November 2009, Robert Lee was registered through former FINRA member firm GunnAllen. Since November 2009, Robert Lee has been registered through Rockwell.

In August 2013, Robert Lee accepted a settlement with FINRA barring the broker from associating with any broker dealer. FINRA found that between September 25, 2008, and October 31, 2008, while Robert Lee was registered with GunnAllen, Robert Lee failed to follow a customer’s instructions regarding the purchase of three securities. FINRA also found that between September 2008, and at least December 2009, while Robert Lee was registered with two member firms, Robert Lee made material misrepresentations and omissions to a customer regarding the status of their investments. Specifically, FINRA found that Robert Lee misrepresented to the client that certain investments had earned $49,591 in dividends when in fact the investments did not exist and no dividends had been earned.

Edward Jones Sanctioned Over Unsuitable Nontraditional ETF Sales

March 21, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned Edward D. Jones & Co., L.P. (Edward Jones) concerning allegations that between January 2008 and July 2009, Edward Jones failed to establish and maintain a supervisory system that were reasonably designed to ensure that the sales of leveraged and inverse exchange traded funds (Nontraditional ETFs) complied with applicable securities laws. FINRA found that Edward Jones registered representatives recommended nontraditional ETFs to customers without first investigating those products sufficiently to understand the features and risks of the product and that consequently these recommendations were unsuitable.

Edward Jones a Missouri limited partnership and a full-service broker-dealer since 1939. The firm’s principal offices are located in St. Louis, Missouri and the firm has more than 15,000 registered representatives and more than 10,000 branch offices throughout the United States.

As a background, Non-Traditional ETFs are usually registered unit investment trusts or open-end investment companies and are considered to be novel investment products. While ETFs came be common place in the 1990s, the first nontraditional ETFs began trading in 2006. By 2009, over 100 Non-Traditional ETFs existed in the market place with total assets of approximately $22 billion. Since 2009, the number of nontraditional ETFs on the market has since increased to more than 250.

Thomas Oakes of Royal Securities Sanctioned Over Allegations of Unsuitable Investments

February 11, 2014 | by Staff Attorney

Broker Thomas C. Oakes (Oakes) has been suspended and fined by the Financial Industry Regulatory Authority (FINRA) concerning allegations from 2005 through May 2008, Oakes had engaged in unsuitable short term trading of low priced and/or speculative securities in the accounts of at least three customers causing substantial losses.

Oakes has been in the securities industry as a member of the FINRA since 1988. Since November 2003, Oakes has been a registered representative of Royal Securities Company (Royal). Oakes’ BrokerCheck disclosures reveal that at least 9 customer complaints have been filed against the broker. The customer complaints allege a variety of securities misconduct including securities fraud, unauthorized trading, unsuitable investments, churning, and breach of fiduciary duties.

According to FINRA, in 2005 or 2006, three customers opened new accounts at Royal with Oakes as their registered representative. Each of the customers New Account Form identified a primary investment objective of “Growth.” Royal defined a “Growth” investment objective as the goal of generating long-term capital growth through high quality equity investments consisting of large cap funds and a balanced portfolio of investment grade growth stocks with smaller positions in high grade corporate bonds. Growth investors should also be willing to assume more market risks than balance/conservative growth in return for yields that are expected to meet or slightly exceed the S&P 500 stock market index over the long run.

Former Merrill Lynch Broker David Zeng Barred From the Financial Industry

November 21, 2013 | by Staff Attorney

David G. Zeng (Zeng) was recently barred from the financial industry by The Financial Industry Regulatory Authority (FINRA) over allegations that the broker failed to respond to the regulator’s inquiries concerning at least a dozen customer disputes initiated against the broker. The customer complaints against Zeng include claims of misrepresentations, fraud, unsuitable investments, and unauthorized trading concerning stock investments.

It is also possible that Merrill Lynch, Pierce, Fenner & Smith Inc. (Merrill Lynch), Zeng’s employing firm during the majority of the customer complaints, failed to properly supervise Zeng’s securities activities. Under FINRA Rule 3010, a brokerage firm is obligated to properly monitor and supervise its employees. The rule states that “[e]ach member shall establish and maintain a system to supervise the activities of each registered representative…that is reasonably designed to achieve compliance with applicable securities laws and regulations…” Thus, brokerage firms are responsible for monitoring a broker’s investment recommendations to clients, outside business activities, and representations to investors.

Zeng became registered with FINRA in 2001 at Morgan Stanley Dean Witter Inc until June 2005. From June 2005 until May 2009, Zeng was associated with UBS Financial Services, Inc. Thereafter, from April 17, 2009, until December 20, 2011, Zeng was employed by Merrill Lynch and worked out of the firm’s Santa Fe, New Mexico office.