Broker Fraud

Sage Advisory Group Must Pay Over $1M for Two Securities Fraud Cases

Published on: June 1, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The United States District Court for the District of Massachusetts has ordered Sage Advisory Group and principal Benjamin Lee Grant (“Lee Grant”) to pay over $1M for two SEC fraud cases. The ruling comes after a federal jury found both of them liable.

In the first case, the regulator is accusing Lee Grant of using allegedly false and misleading statements to fraudulently persuade brokerage customers to move their assets to Sage, which was the firm he was starting in 2005. He purportedly told clients that the 2% wrap fee they would have to pay Sage for transaction, management, and advisory services would not cost as much in the long run as the 1% fee and trading commissions that his former employer, brokerage firm Wedbush Morgan Securities, charged them.

The SEC said that Lee Grant claimed it was First Wilshire Securities Management Inc. that was recommending that clients move their assets to Sage with him. Wilshire Securities Management was the investment adviser managing the assets of these clients at Wedbush. The regulator contends, however, that First Wilshire Securities never made such a recommendation.
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FINRA on BrokerCheck and Broker Compensation

Published on: May 30, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority has sent its proposed rule change regarding BrokerCheck links to the U.S. Securities and Exchange Commission. Per the new measure, a broker-dealer would have to make sure that a BrokerCheck link is made accessible on its home page. The firm would also have to make sure links to the FINRA database are visible on the profile pages of its brokers.

The Commission will have to approve the rule, which was modified after concerns were raised about the original version, which called for BrokerCheck links to also be included in posts on social media websites, including Twitter. A broker would also have had to provide direct links to his/her individual BrokerCheck profile pages.

The revised version doesn’t require providing the links on social media, and any links to BrokerCheck only must take people to the home page of the firm’s site and not an individual rep’s profile.

FINRA Gets Tough With Its Sanctions Against Brokers For Suitability Violations

Published on: May 15, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority has decided to take tougher actions against brokers who violate suitability standards. The regulator is recommending that the National Adjudicatory Council, which oversees disciplinary proceedings, raise its suggested suspensions for brokers who make unsuitable recommendations from one year to two years. FINRA wants brokers who commit fraud be potentially barred and offending firms face potential expulsion.

FINRA’s revisions to its Sanctions Guidelines are to go into effect right away. They exist to protect investors from brokers who don’t comply with the suitability rule. The rule states that brokers can sell products that are to their benefit as long as these products also are in alignment with helping investors meet their investment goals.

Despite the changes, InvestmentNews reports, there are those who think that FINRA’s proposed sanctions are insufficient and, also, that there may be negative consequences for investors. For example, defendants facing two-year suspensions might opt to fight cases against them rather than settle because of the tougher penalty.

FINRA Bars Wells Fargo Broker to NFL, NBA Players Over Failure to Disclose Nightclub Involvement

Published on: April 24, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority Inc. has barred broker Aaron Parthemer, a Wells Fargo (WFC) adviser, for taking part in a number of outside businesses and failing to disclose his involvement. FINRA has tight regulations that don’t allow brokers to take part in private securities transactions without notifying their firm and getting authorization. Parthemer, who used to be at Morgan Stanley Wealth Management (MS) until four years ago, has advised numerous NBA and NFL athletes.

According to the SRO, he falsely represented, in compliance questionnaires he filled out while with both firms, that he was not taking part in external business activities that warranted disclosure. He also gave FINRA false data when the regulator started to ask for more information about external business activities in 2012.

Parthemer allegedly did not disclose the part he played in running Club Play, which used to be a South Beach, Florida nightclub, as well as his involvement in a tequila marketing operation and an Internet branding startup. FINRA also contends that the broker made unapproved loans to clients in connection with the club and referred clients to invest in the start up.

Trader Blamed in 2010 Flash Crash is Arrested in London

Published on: April 22, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Almost five years after the 20-minute Flash Crash when the Dow Jones Industrial Average plunged nearly 600 points and then quickly rebounded, the U.S. Department of Justice has arrested trader Navinder Singh Sarao. He is accused of allegedly playing a major part in the brief turmoil because of his involvement in a number of market manipulating trades.

The crash, on May 6, 2010, caused certain stocks to trade at a penny before thousands of trades were cancelled and placed substantial downward pressure on shares of big companies. The Flash Crash generated a lot of worries about just how stable the U.S. stock markets were and triggered scrutiny into high frequency trading firms and electronic trading venues.

Now, following a joint probe with the Commodity Futures Trading Commission, the DOJ is putting a lot of blame for the crash on Sarao. He is accused of multiple counts of commodities manipulation, one count of wire fraud, and one count of spoofing. Sarao’s alleged manipulation took place over a number of years up, including up through this month.

Consumer Groups Accuse SEC of Not Protecting Retail Investors and Poorly Regulating Investment Advisers

Published on: March 13, 2015 | by Shepherd Smith Edwards & Kantas, LLP

A letter to the SEC from consumer groups claims that the agency is not meeting its obligation to make sure that retail investors are getting the protections they need. The Consumer Federation of America, Americans for Financial Reform, Fund Democracy, Consumer Action, Public Citizen, and AFL-CIO gave an outline of how they want the regulator to enhance financial adviser regulation, which they believe could be more robust.

They are calling on the Commission to execute “concrete steps” to up the standards bar for brokers when it comes to giving investment advice. For right now, brokers only have to recommend investments that in general are a fit for the clients’ investment goals and risk tolerance level, even as investment advisers must abide by a fiduciary obligation.

The letter from the groups also talks about improving financial adviser disclosure in regards to compensation and conflicts, reforming the sharing of revenue, placing limits to mandatory arbitration for disputes between investors and their financial representatives, strengthening regulations for high-risk financial products, and enhancing required disclosures from financial advisers to investors about financial products.

Texas-Based Broker-Dealer Faces SEC Charges Over Supervisory and Customer Protection Violations

Published on: March 6, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is charging H.D. Vest Investment Securities with violating customer protection rules. The regulator contends that the Texas-based broker-dealer did not adequately supervise registered representatives that are accused of misappropriating customer monies.

H.D. Vest will pay a penalty to settle the charges. It has consented to get an independent compliance consultant that will help the firm enhance its supervisory controls.

The SEC’s order, which institutes a settled administrative proceeding, said that the firm did not have proper procedures and policies to oversee the external business activities of representatives. This allowed some of them to use outside businesses to bilk the brokerage firm’s customers. Some even deposited or moved customer brokerage funds into these external business accounts.

PFS Investments, Ex-Broker Under Investigation for Securities Fraud that Bilked At Least Twenty Customers

Published on: January 30, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is accusing former broker Barkley Lundy, who worked with PFS Investments, of defrauding at least 20 customers. The self-regulatory organization claims that from at least 1/11 through 3/14, Lundy took these clients’ funds and placed the money in his own bank accounts. He also purportedly generated fake investments, issuing monthly payments to customers to conceal the securities fraud. FINRA says that Lundy violated FINRA Rule 2010 when he comingled customer monies.

The SRO said that Lundy kept a list of customers, setting up a payment schedule for them to receive monthly payments. PFS Investments was unaware of the payment schedule and the list. Lundy moved the money of a few of his customers from his account into their bank accounts and then moved the funds into their PFS accounts. He also worked it out so that these customers bought mutual fund shares that were customer-held. Lundy explained the fund movements as “dividend reinvestments.”

He gave one customer, per that client’s request, tax forms to track the monthly payments. FINRA, however, says that the documents were fabricated and contained falsified information. Meantime, Lundy made it appear as if PFS Investments not only provided the documents but also created them.

White House Looking At Whether Brokers Are Costing Workers Billions in Retirement Funds

Published on: January 27, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Bloomberg News is reporting that according to a memo drafted by President Obama’s Council of Economic Advisers Chair Jason Furman, the White House may be pushing for tighter oversight over brokers who deal with retirement accounts. Furman noted that research shows that excessive trading, increased commissions, and other broker practices may be costing investors up to $17 billion a year-and that even this estimate may be conservative. His memo said that investors might be losing up to 10% of their long-term savings because they receive conflicted investment advice.

This could lead to a Labor Department regulation that would establish a fiduciary obligation requiring these brokers to act in the best interests of their clients. Right now, brokers are merely obligated to make sure that they reasonably believe they are making the right recommendation to a client.

Such a fiduciary duty rule is one that Bank of America Corp (BAC), Morgan Stanley (MS), and other firms have lobbied against. They contend that this type of regulation would not only be more expensive but also it would leave smaller investors with fewer investment choices.

SEC Files Charges Against Former Broker-Dealer Owner Over Fraudulent Stock Sales

Published on: December 2, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is charging Vinay Kumar Nevatia with making fraudulent stock sales. According to the regulator, Kumar sold about $900,000 of stock in CSS Corp. Technologies Limited. The stock in the privately held data technology company supposedly belonged to him even though these were shares that he had already bought for other people a few years back.

The SEC claims Kumar conducted the sales via secret wire transfers, got the stock transfer agent to record the bogus transactions, and stole investors’ money to use as his own. He also purportedly gave the earlier share owners bogus updates about their investments even after he sold their stock off to others so that they would think that the shares still belonged to them.

Kumar is not registered with the Commission and he does not have a license to trade securities. He also is accused of using numerous aliases while residing in Palo Alto, Ca. The SEC is charging him with violating the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. It wants Kumar to pay a financial penalty and give back ill-gotten gains. The regulator is also looking to get permanent injunctions.