Articles Posted in Broker-Dealers

Despite Reports of Customer Satisfaction, Consumer Reports Uncovers Questionable Sales Practices at Certain Financial Firms

Published on: January 7, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to Consumer Reports, many of online readers are “very satisfied” with the services rendered by almost all 13 major brokerage firms in the US. 7,327 online subscribers took part in the survey to respond to questions about their own experiences between October 2010 and October 2011. Customer service, website advice, phone service, and financial advice were among the criteria evaluated.

USAA Brokerage Services was at the head of the list after having received the highest scores for customer satisfaction. Scottrade Inc. and Vanguard Brokerage Services tied for second. The other financial firms, ranking in the order that follows, are Charles Schwab, TD Ameritrade, Etrade, Fidelity Brokerage Services, WellsTrade (Wells Fargo), Merrill Edge/Bank of America, and Morgan Stanley Smith Barney LLC. The last three financial firms scored under the 80-point mark, which means that clients gave them an overall ranking of “fairly well satisfied” (but not “very satisfied”).

Also according to Consumer Reports, active investors can breathe a sigh of relief about the quality of support and service they are likely to receive at these large US brokerage firms. Several of the broker-dealers are even likely to offer investors free, basic investment plans. (That said, Consumer Reports warned that investors need to be aware that there are limitations to these kinds of plans in order to maximize any benefits.)

Despites such positive investor feedback, Consumer Reports says that its staff members, who acted as undercover researchers when they visited financial firms in New York and Washington, discovered that some broker-dealers continued to engage in questionable sales practices. For example:

• One staffer was shown a chart demonstrating a portfolio’s performance. However, the potential impact of key fees was not highlighted.
• Another staffer was guided toward a complex annuity product even though the financial adviser didn’t know a lot about her.
• One “empty nester” was directed toward a set of funds without being given any other options.
• Another tester, age 60, was advised to put half of his funds in cash and bonds even though he intended to retire in a year and had about a million dollars in investible assets, as well as a significant pension.

As an investor, you should be able to rely on the brokerage firm you work with for sound, customized advice that fits your specific investment needs. Unfortunately, this isn’t always the case and every year, there are those that will suffer unnecessary financial losses because they were told to place their funds in investments that were inappropriate for them or were never designed to meet their financial goals, or they were given insufficient information about the degree of risk involved (which they could never have afforded in the first place.)

Consumer Reports: Should brokerage clients be as content as they are?, Consumer Reports, January 5, 2012
Where to put your money, Consumer Reports, February 2012

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Former Brookstreet Securities Broker Who Promoted Subprime Mortgages Commits Suicide, Institutional Investor Securities Blog, January 7, 2012
Securities and Exchange Commission Charges Investment Adviser with Committing Securities Fraud on Linked In, Stockbroker Fraud Blog, January 6, 2012
Texas Securities Fraud: SEC Charges Life Partners Holdings Inc. in Life Settlement Scam, Stockbroker Fraud Blog, January 4, 2012 Continue Reading ›

Broker-Dealer Pacific West Securities Closes Shop

Published on: September 17, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Broker-dealer Pacific West Securities is going out of business next year. The independent broker-dealer, which has about 290 affiliated advisers and reps, decided to close its doors because staying in operation is costing too much and margins are too thin.

The broker-dealer made $46 million in commission and fees in 2010 and its gross revenue for this year is expected to be $54 million. Pacific West has struck a deal with Cetera Financial Group over the transfer of many of its representatives and advisers to the latter’s subsidiary, Multi-Financial Securities Corp. The Financial Industry Regulatory Authority, however, must still approve this arrangement.

Unfortunately, dozens of independent brokers that are thinly capitalized have had to close shop or be put up for sale in the last few years. Many took huge hits in the wake of securities fraud lawsuits related to the sale of Provident Royalties LLC preferred stock, Medical Capital Holdings Inc. notes, and DBSI Inc. real estate deals. Although Pacific West didn’t sell any of these financial instruments, it has had to contend with Securities arbitration claims, including losses of nearly $1 million in FINRA arbitration awards over the last 24 months.

Investment News reported not too long ago that at least 2,500 reps have been displaced because of broker-dealers that shut down their operations. It became clear trouble was starting to brew in the industry in 2010, when Jesup & Lamont Securities Corp. and GunnAllen Financial Inc., which both have hundreds of reps, shut their doors after violating SEC rules dealing with capital. By the end of last year, there were 142 less broker-dealers than in 2009.

In February, QA3 Financial Corp. followed their lead. The broker-dealer, which worked with about 400 reps, couldn’t deal with securities lawsuits costs over the sale of allegedly fraudulent private placements.

The following month, Investors Capital Holdings Inc.’s owner Theodore E. “Ted” Charles submitted an SEC filing giving notice that he was going to sell his stake in the broker-dealer. More brokerage firms have since shuttered. FINRA says that if the broker-dealer you are working announces that it is going out of business, you should contact its offices right away to find out about next steps for you.

Our stockbroker fraud law firm represents clients that suffered losses because of broker misconduct and other formers of broker-fraud. Please contact our securities fraud lawyers and ask for your free consultation today.

B-D with 290 reps to shutter, Investment News, December 6, 2011
Broker-Dealer Pacific West to Close Its Doors, Adviser One, December 6, 2011
If a Brokerage Firm Closes Its Doors, FINRA

More Blog Posts:
Broker-Dealers are Making Reverse Convertible Sales That are Harming Investors, Says SEC, Stockbroker Fraud Blog, July 28, 2011
Holding Brokers to Investment Adviser Accountability Standards is a Bad Idea, Say Some Wall Street Executives, Stockbroker Fraud Blog, July 16, 2011
Tribune Bondholders Can Sue Shareholders for Over $8.2B, Institutional Investor Securities Blog, April 30, 2011 Continue Reading ›

Broker-Dealers are Making Reverse Convertible Sales That are Harming Investors, Says SEC

Published on: July 28, 2011 | by Shepherd Smith Edwards & Kantas, LLP

According to the Securities and Exchange Commission, the sales practices that broker-dealers engage in when structured securities are hurting investors. The SEC released this recent finding in a report this week. Structured securities products are derivatives whose value is determined from baskets of indexes, other securities, options, debt issuances, commodities, and foreign securities.

The SEC reached its conclusion after conducting a sweep examination of 11 broker-dealers. The Commission says that the financial firms may have guided clients toward complex products even though they were unsuitable for these investors. In certain instances, they also appear to have:

• Charged too high of prices • Failed to adequately reveal all risks involved
• Traded at prices that were not to the benefit of retail investors • Committed possible supervisory deficiencies

At the heart of the SEC sweep examination were reverse convertible notes, which is a security that has an embedded put option. RCN are considered among the riskiest structured products. According to the SEC report, there were clients who purchased RCN’ even though these financial products not in line with their investor profiles or stated goals. Many of these RCN investors sustained significant financial losses.

The SEC report is recommending that broker-dealers:
• Implement procedures and controls to detect and stop structured securities-related abuses • Reveal material facts about the structured product notes when offering them to investors • Make sure that supervisors and registered representatives undergo specialized training before they sell structured securities
• Properly list structured securities products on client statements
It was just recently that the Financial Industry Regulatory Authority Inc. warned investors to exercise caution when evaluating whether to buy complex investment products.

Our securities fraud lawyers represent investors that have suffered financial losses because they were encouraged to purchase financial instruments that were inappropriate for them.

SEC blasts B-Ds over sales of reverse convertibles, Investment News, July 27, 2011
Staff Summary Report on Issues Identified in Examinations of Certain Structured Securities Products Sold to Retail Investors, SEC, July 27, 2011 (PDF)

More Blog Posts:
RBC Wealth Management Unit Ferris Baker Watts to Pay Investors Restitution Over Reverse Convertible Notes Allegations, Says FINRA, Stockbroker Fraud Blog, October 23, 2010
Increase of Structured Notes with Derivatives Sales Seduces Retirees, Reports Bloomberg, Stockbroker Fraud Blog, September 25, 2010
FINRA Fines H & R Block Financial Advisors (Now Ameriprise Advisor Services) over Sales of Reverse Convertible Notes (RCN), Stockbroker Fraud Blog, February 17, 2010 Continue Reading ›

Holding Brokers to Investment Adviser Accountability Standards is a Bad Idea, Say Some Wall Street Executives

Published on: July 16, 2011 | by Shepherd Smith Edwards & Kantas, LLP

At the Securities Industry and Financial Markets Association conference on Wednesday, brokerage executives cautioned against imposing the standards of accountability for investment advisers on brokers. Rather than extending the Investment Advisers Act of 1940 to broker-dealers, this year’s SIMFA chair John Taft said that it would be better to create a new standard. Taft is also the head of Royal Bank of Canada’s US brokerage.

Right now, brokers and investment advisers are upheld to separate standards-even though many investors don’t realize that the two belong to different groups. As fiduciaries, investment advisers must prioritize their clients’ interests above that of their own or that of their financial firm. It wasn’t until 2008’s financial crisis when investors lost money on financial instruments that were lucrative for brokers that the call for a higher standard for these representatives grew louder.

At a conference panel, he said that imposing investment adviser accountability standards would not only be bad for the industry, potentially preventing some sales such as IPOs, but also he that this could harm investors.

Will brokers get their way on this? According to Shepherd Smith Edwards & Kantas LTD LLP Founder and Stockbroker Fraud Lawyer William Shepherd, the answer is, likely, yes:
“Decades ago, the difference between a ‘stock broker’ and ‘investment advisor’ was that stock brokers simply charged commissions to execute trades. At the time, there was also no online trading so investors could not do-it-themselves. In fact, May 1, 1975 (unaffectionately called “May Day”) was the first day stock commissions became negotiable. As commissions eventually eroded to just a few dollars per trade, stock brokerage firms migrated to higher charges on hidden-fee products, options, high volume trading, etc.

More recently, ‘stock brokers’ have dropped that moniker and simply become ‘investment advisors’ (whether called ‘financial consultants’, or whatever). Now that Wall Street’s agents have actually become investment advisors, and should be subject to the Investment Advisor Act of 1940, they instead want to escape the law, which has for 70 years been successful in regulating investment advisors. Why? Simply because they do not want to be responsible to their clients for cheating them.”

Related Web Resources:
Brokers say adviser standards could harm markets, Reuters, July 13, 2011
Is Wall Street Ready for Mayday 2?, The New York Times, April 28, 1985
Securities Industry and Financial Markets Association

More Blog Posts:
Do Brokers Owe a Fiduciary Duty to Clients?, Stockbroker Fraud Blog, January 27, 2011
Most Investors Want Fiduciary Standard for Investment Advisers and Broker-Dealers, Say Trade Groups to SEC, Stockbroker Fraud Blog, October 12, 2010
House and Senate Negotiators Can’t Seem to Agree on Fiduciary Standard in Financial Regulatory Reform Bill, Stockbroker Fraud Blog, June 17, 2010 Continue Reading ›

Securities Fraud Lawsuit Seeks to Recover $49M From 96 Independent Broker-Dealers Liable Over Sales of Tenant-In-Common Exchanges

Published on: December 15, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The trustee for the DBSI Inc. bankruptcy is suing 96 independent broker-dealers for securities fraud related to suspect tenant-in-common exchanges that were sold to investors. James Zazzali is seeking about $49 million in commissions earned.

In his securities fraud complaint, Zazzali, who is a retired Supreme Court of New Jersey justice, claims that DBSI’s TIC deals were part of a $600 million Ponzi scam. The lawsuit contends that the following companies made the most commissions from selling DBSI:

• Berthel Fisher & Company Financial Services Inc.
• QA3 Financial Corp.
• DeWaay Financial Network LLC,
• The Private Consulting Group • Questar Capital Corp.

22 of the broker-dealers named as defendants are no longer in business. Zazzali contends that the commissions were fraudulent transfers by DBSI and that due to the Ponzi nature of the enterprise, old investors benefited from funds put in by new investors. The trustee believes that the broker-dealers should return investor payments and commissions, which should be distributed to DBSI creditors.

The Securities and Exchange Commission has not filed securities fraud charges against DBSI. Other private placement issuers, such as Provident Royalties and Medical Capital Holdings, were charged by the regulator last year. Provident Royalties’ receiver sued over 40 broker-dealers this year in an effort to obtain claw-back in principal and commissions from firms that sold private placements.

TICs are a form of real estate ownership involving two or more parties with fractional interests in a property. DBSI Inc. was one of the biggest distributors and creators of the product until it defaulted on investor payments and filed for Chapter 11 bankruptcy protection in November 2008. Before then, independent broker-dealers actively sold DBSI TICs. The financial product grew in popularity in 2002 after the Internal Revenue Service issued a ruling that let investors defer capital gains on commercial real estate transaction involving property exchanges.

Related Web Resources:
Sour real estate deals land B-Ds in hot water, Investment News, December 12, 2010
Something in common: Firms that sold TICs from DBSI, Investment News, December 15, 2010
Iowa brokerages included in lawsuit, DesMoines Register, December 14, 2010
Institutional Investors Securities Blog
Continue Reading ›

The “New” SEC is Acting Just Like The “Old” SEC by Protecting the Securities Industry from Responsibility for its Actions

Published on: December 9, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has announced a proposal to temporarily extend a rule that facilitates certain proprietary trading by entities that are registered as both broker-dealers and investment advisers. The proposed extension would move Rule 206(3)-3T’s expiration date by two years, from December 31, 2010 to December 31, 2012. It would also would allow the SEC to complete a study mandated under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Rule 206(3)-3T gives dually registered firms another way to satisfy consent and disclosure requirements that they would otherwise only be able to meet on a transaction-by-transaction basis. Having just the one option would limit the availability that non-discretionary advisory clients would have to certain securities.

The extension would give the SEC the time that it needs to study the regulatory issues related to dual registrants’ principal trading. Dodd-Frank is requiring the SEC to look at any divergent regulations between investment advisers and brokers and use rulemaking to fix gaps so as to better protect investors. The agency has until January 21, 2011 to notify Congress of its findings.

Dodd-Frank’s Section 913 has generated a lot of debate because it could allow for most broker-dealers to be considered fiduciaries under the 1940 Investment Advisers Act. Right now, brokers don’t have to meet the fiduciary standard that investment advisers must satisfy even though both offer similar services. However, instead of holding brokers to the statutory fiduciary standard, the SEC might end up obligating them to fulfill various consent and disclosure requirements at the start of a retail relationship.

Shepherd Smith Edwards & Kantas LTD LLP Founder and Securities Fraud Attorney William Shepherd thinks that it is time to hold brokers responsible to a fiduciary standard: “The only educational requirement to become a licensed securities broker is four months of on-the-job training and the passing of a half-day test. Yet, on average, securities brokers at major firms are paid more than doctors, lawyers and other professionals who must often attain seven or eight years of higher education. Many clients entrust securities brokers with their life savings, retirement assets, and their financial life blood. Why shouldn’t these brokers and the firms required to supervise them be held responsible if the investors are ripped-off? Financial advisers perform the same function but have a fiduciary duty to investors, simply meaning they must put the client’s interest first when advising them. Why should securities brokers be held to a different standard and not be allowed to lull investors into trusting them, while selling their victims the highest commission products that they can find without regard to the client’s best interest? In fact, most state laws currently hold that when a broker is recommending securities to an unsophisticated investor, the broker has a fiduciary duty to that client. What the SEC is trying to do is to pass a rule that makes brokerage firms LESS RESPONSIBLE than they are at present. These endless tactics perpetrated by securities regulators, at the behest of Wall Street, and are yet another type of bail-out move by the Securities Cartel that controls this nation.”

Related Web Resources:
Read the Proposed Rule (PDF)

1940 Investment Advisers Act

Institutional Investor Securities Blog
Continue Reading ›

Most Investors Want Fiduciary Standard for Investment Advisers and Broker-Dealers, Say Trade Groups to SEC

Published on: October 12, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The North American Securities Administrators Association, the Consumer Federation of America, the Investment Adviser Association, the Financial Planning Association, AARP, and the National Association of Personal Financial Advisors have sent a letter to Securities and Exchange Commission Chairman Mary Schapiro asking that the agency examine a recent national survey that shows that the majority of investors don’t know the differences between investment advisers, brokers, and financial planners. ORC/Infogroup conducted the survey for the trade groups.

1,319 investors were polled. Per the survey, investors appear to “overwhelmingly believe” that representatives who provide investment advice should disclose conflicts of interest and act in clients’ best interests. Many of them are wrong in their belief that investment advisers, broker-dealers, and insurance agents are currently held to a fiduciary standard.

Among the Survey’s Other Findings:
• More than three out of five investors are under the wrong impression that there is no difference between an investment adviser and a stockbroker.

• About 1/3rd of investors are not clear about the role that stockbrokers play or what services that they offer.

The group told Schapiro that per the survey’s findings, a common standard should apply to investment advice that is given, regardless of whether the recommendation is made by an investment adviser or a broker-dealer. They say that the “principles-based fiduciary duty that applies under the [1940 Investment] Advisers Act” should be the standard. Per the survey, many investors feel that a fiduciary standard should also apply to insurance agents that sell investments.

Related Web Resources:
Investment Adviser Association

SEC Chairman Mary L. Schapiro

North American Securities Administrators Association

The Consumer Federation of America

Financial Planning Association

AARP

National Association of Personal Financial Advisor

ORC/Infogroup
Continue Reading ›

Broker-Dealers Press Clients to Settle Arbitration Claims, Says Illinois Securities Regulator

Published on: October 11, 2010 | by Shepherd Smith Edwards & Kantas, LLP

According to Illinois securities regulator Tanya Solov, brokerage firms are driving investors with securities arbitration claims against them to settle their cases. Solov says that they are doing this by barraging investors with discovery information requests. Solov was quoted at the yearly North American Securities Administrators Association Inc. meeting.

Solov said that broker-dealers’ discovery practices end up making the FINRA arbitration process more costly for investors. Such tactics, says Solov, are compelling investors to settle their securities cases rather than go into litigation. She also noted that while broker-dealers keep pressing investors into coming up with discovery material, many investment firms, when faced with a discovery request by an investor, have been known not to provide the information.

William Shepherd, a securities fraud attorney and the founder of Shepherd Smith Edwards & Kantas LTD LLP, represents many clients with securities cases against brokerage firms. He noted the challenges his investment fraud firm has had when trying to obtain discovery information for his clients: “Our firm responds in kind, fighting hard for discovery from the firms as well. We have invested in the latest technology to be able to process millions of documents and search these for clues. We do not let abusive requests thwart our goal and we protect our clients from such abuses. We refuse to be bullied by large financial firms who think they can run over investors and their attorneys. These firms now know we are ready, willing and able to fight them and most have abandoned such tactics against us.”

Securities Class Action Against Morgan Stanley by Xerox and Kodak Retirees Dismissed by Appeals Court

Published on: July 20, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Second Circuit Court of Appeals in New York has upheld a lower court’s ruling to dismiss that the securities class action filed by Eastman Kodak Co. and Xerox Corp. against Morgan Stanley. The plaintiffs, retirees from both companies, are accusing the broker-dealer of advising them that if they retired early their investments would be enough to support them during retirement. They also claim that the investment bank persuaded them to open accounts that cost them the bulk of their wealth. According to the plaintiffs’ attorney, the retirees gave up job security and employment rights after they were told that if they retired early they could avail of a 10% withdrawal rate from their individual retirement accounts.

However, upon retiring, the retirees that invested lump-sum retirement benefits with Morgan Stanley experienced “disastrous” value declines. Also, they had invested with two Morgan Stanley broker, Michael Kazacos and David Isabella, that were later barred from the securities industry. Last year the broker-dealer settled FINRA charges over the two men’s activities by paying over $7.2 million.

The appeals court says that because of the 1998 Securities Litigation Uniform Standards Act, the plaintiffs are precluded from pursuing class state law claims, including misrepresentation claims. While the statute lets plaintiffs file lawsuits in state court to get around 1995 Private Securities Litigation Reform Act’s securities fraud pleading requirements, federal preemption of class actions claiming “misrepresentations in connection with the purchase or sale of a covered security” are allowed. The three-judge panel also said that because the retirees waited too long to file their securities fraud lawsuit, they cannot raise other federal securities law claims.

Related Web Resources:
Xerox, Kodak retirees lose Morgan Stanley appeal, Reuters, June 29, 2010
Morgan Stanley to Pay More than $7 Million to Resolve FINRA Charges Relating to Misconduct in Early Retirement Investment Promotion, FINRA, March 25, 2009
1998 Securities Litigation Uniform Standards Act, The Library of Congress Continue Reading ›

FINRA Suspends License of Dallas Broker-Dealer Linked to Failed Medical Capital Notes

Published on: June 18, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Dallas-based securities firm Cullum & Burks Securities Inc. has had its license suspended by the Financial Industry Regulatory Authority Inc. The broker-dealer, which had 1,300 client accounts, 100 affiliated reps, and $150 million in assets, reportedly failed to files its mandatory, quarterly Focus report.

Last November, FINRA said the Texas broker-dealer had violated its net capital requirement because it didn’t have enough capital to stay in business. It was then that Cullum & Burkes raised more capital.

The securities firm was one of three broker-dealers listed as sellers of Medical Provider Funding Corp. V, which is a series of private placements that were created by Medical Capital. Other sellers on the list included Securities America Inc. and First Montauk Securities Corp., which is now defunct.

A Reg D filing with the SEC in 2007 reported that the offering was for $400 million. Medical Capital raised about $2.2 billion in investor funds. Now, over half of the investors’ money has been lost.

Cullum & Burks Securities Inc. is the subject of a class action lawsuit filed over the Medical Capital notes sale. The complaint contends that the notes should have been registered with the Securities and Exchange Commission. However, the securities firm denies that it engaged in broker-misconduct in relation to the sale and sees itself as a victim of any wrongdoing committed by Medical Capital. In 2009, the SEC charged Medical Capital Holdings Inc. with securities fraud related to private placement sales.

Related Web Resources:

Another broker-dealer down: Dallas B-D capsized by MedCap, Investment News, June 16, 2010
FINRA
Continue Reading ›