Broker Fraud

North American Securities Administrators Association Releases 2013 List of Top Threats to Investors

Published on: October 22, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The North American Securities Administrators Association has issued its yearly list of the top investor threats. The list is compiled through a poll of its member state securities administrators. With the enactment of Jumpstart Our Business Startups Act, which takes away the advertising restrictions when it comes to soliciting securities and other investments, now more than ever investors should be cautious.

The List:
Private Offerings (especially fraudulent private placement offerings, also known as Reg D/Rule 506 offerings): These are limited investment offers that are very liquid, poorly regulated, and have very little transparency. They are risky and might not be suitable for individual investors. Now, with the JOBS Act, these private placement offerings can be promoted to the general public, which means ads for them may be placed on billboards, social media, and other platforms even though not everyone who sees them is qualified to invest.

REITs: Real estate investment scams may involve new development projects or buying, or beleaguered properties. Non-traded real estate investment trusts that are owned by banks or waiting for foreclosure or short-sale can be problematic for customers, as can investment funds purportedly tied to interest in real property that has no equity and is very leveraged.

Ponzi Scams and High-Yield Investments: High-yield typically translates to greater risk. This type of investment program and Ponzi scams promise great returns and low risk while justifying why the opportunity is so great. Financial fraudsters will typically tout bogus credentials or belong to a certain organization or group and early investors get a return as they market to new investors. Such financial scams eventually collapse.

Affinity Fraud: This type of financial fraud targets members of a particular organization or group. Often, the fraudster is trusted because of the shared affiliation (ie. age demographic, membership, alma mater, ethnicity, religion, etc.)

Self-Directed IRAs Used to Cover up Fraud: Self-directed individual retirement accounts, which are typically safe investments, can be used to conceal a financial scam. Fraudsters may claim that the custodian of an account has more obligations than actual to investors, causing the latter to wrongly believe that their investments are protected from loss and/or legitimate.

High Risk Oil and Gas Drilling Programs: Energy investments that for some investors are becoming a preference over traditional bonds, stock, and mutual funds. They are very risky and really only appropriate for investors that can take huge losses. Unfortunately, some promoters will hide these risks and pressure customers to invest.

Proxy Trading Accounts: This can involve allowing individuals who say that they are experienced traders to manage or set up a trading account for you. It is not recommended for investors to let unlicensed persons have access to your brokerage account information or set up an account for you. Anyone who manages such an account for an investor should be properly registered and have a clean record.

Digital Currency: Virtual money such as PP Coin, Bitcoin, and others. Such coinage isn’t backed by tangible assets, not subject to a lot of regulation, and not government issued. Digital currencies’ value can be very volatile.

NASAA’s Top Investor Threats, North American Securities Administrators Association
Securities and Exchange Commission

Financial Industry Regulatory Authority

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SEC Looking to Simplify Disclosure Rules to Minimize “Information Overload” for Investors, Stockbroker Fraud Blog, October 16, 2013

Puerto Rican Bond Crisis Places Oppenheimer Funds at Risk, Institutional Investor Securities Blog, October 15, 2013
Detroit Becomes Largest US City to File Bankruptcy Protection, Institutional Investor Securities Blog, July 18, 2013 Continue Reading ›

FINRA Suspends and Fines GlobaLink Securities Principal

Published on: September 19, 2013 | by Shepherd Smith Edwards & Kantas, LLP

FINRA is fining GlobaLink Securities Registered Principal Junhua Michael Liao $20,000. According to the SRO’s findings, through Liao, the firm executed an agreement to sell and market a Regulation D offering comprised of promissory notes for a medical receivables financing company. The financial firm then is said to have sold over $1.2 million of the notes to certain customers, resulting in about $56,700 in commissions.

FINRA also said that during the period in question, it was Liao’s job as the compliance officer for the firm to makes sure that GlobaLink Securities set up, kept up, and enforced a supervisory system and written supervisory procedures designed to ensure compliance with regulations and laws and rules that were applicable. The agency said that while the financial firm did keep up written supervisory procedures regarding private placement sales, the WSPs were not sufficient and lacked specific details about how the firm was to perform due diligence, handle transactions, ensure that a Regulation D product was appropriate for investors, and document GlobaLink’s actions and decisions pertaining to the transactions.

FINRA said that because of the deficient WSPs and inadequate supervision, the firm did not perform proper due diligence on the offerings and that this stopped GlobaLink and Liao from finding out that the issuer had previous payment problems on other note offerings, which resulted in the private placement memorandum misrepresenting the past performance of that issuer. Liao consented to the described sanctions as well as to the SRO’s entry of findings. In addition to the fine, he received a one-month suspension from associating with any other FINRA member in any type of principal role.

Registered Representatives Get FINRA Bar Following Securities Fraud Allegations

Published on: September 13, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Texas Registered Rep Under Investigation for Financial Fraud Declined to Turn in Supplementary Documents

Conrad Tambalo Bautista, a registered representative in Texas, is now barred from associating with any other Financial Industry Regulatory Authority member in any capacity. While not denying or admitting to the SRO’s findings, Bautista agreed to the described sanction as well as the entry of findings.

According to FINRA’s findings, Bautista would not respond to its requests for supplemental documents related to a customer complaint about him. The SRO had asked for certain financial data for an investigation into whether/not he took part in fraudulent financial scams, private securities transactions or external business activities, borrowed customers’ money, or failed to disclose an IRS tax lien.

“Ask and It Shall Be Received”: Securities Brokers Can Wipe Complaints and Even Legal Claims Off Their Public Records

Published on: June 20, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The New York Times is reporting that on May 24, a Financial Industry Regulatory Authority panel of arbitrators granted Wells Fargo (WFC) broker Michele Kief ‘s request that it recommend that the securities complaint, in which the bank settled for $125,000 allegations of fraud and negligence related to her actions, be deleted from her record. They also agreed that it be noted that the investments at issue were “suitable and safe. “There at least eight other client disputes on BrokerCheck against Kief. BrokerCheck is FINRA’s regulatory database.

Just two months before, FINRA arbitrators also consented to recommend the deletion of a securities arbitration complaint against ex-Charles Schwab (SCHW) executive Kimon P. Daifotis. This was the eighth such recommendation against Daifotis, who ran the Schwab Yield Plus fund that led investors to lose hundreds of millions of dollars.

“As FINRA publishes, advertises and encourages investors to check a broker’s record to gain information about their broker or a prospective broker, FINRA arbitrators often wipe that record clean.” Says William S, Shepherd, a securities attorney who represents investors in cases against brokers. “Everyone would like to wipe our credit record clean, maybe we just need to ask. Also, there is no educational requirement to become a securities broker, not even a high school degree. The only requirements are a 4-month apprenticeship and passing a multi-state state and a FINRA examination. Yet, securities brokers manage millions, some even hundreds of millions, of investors’ money. Their average six-figure income brokers places them in the highest percentiles of earnings in the U.S, along with other licensed professionals. Public disclosures are, and should be, important for those who often turn over their retirement accounts and even entire life savings to be handled by those who call to extoll their expertise.”

Securities Fraud Roundup: FINRA Examiners See Rise in Brokers Engaging in Improper Activities, SEC Chairman Backs Stronger Enforcement of Civil Penalties Act, & About 800 Investor Fraud Scam Defendants Accounted for Since 2011

Published on: November 26, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to Financial Industry Regulatory Authority EVP Susan Axelrod, the SRO’s examiners are reporting an increase in how many brokers appear to be taking part in questionable actions outside their firms or improperly selling securities. Speaking at the Securities Industry and Financial Markets Association’s complex products forum, she pressed brokerage firms to make sure its compliance programs will sniff out such violations.

Axelrod also said that FINRA examiners are noticing issues with the firms’ complex product sales, including those involving reverse convertibles and non-traded real estate investment trusts. For example, several firms did not conduct reasonable due diligence before selling non-traded REITs or make sure they were suitable for the investors. As for the reverse convertibles, examiners reportedly discovered an overconcentration of products in certain investor portfolios primarily due to poor recommendations. Failure to detect such problems appeared to have played a factor in this happening. Other problems discovered included inadequate training regarding products, product misrepresentation via sales and advertising, and failure to notify investors well in advance that products’ per-share estimated values had been repriced at figures significantly lower than the offering price.

In other securities news, Securities and Exchange Commission Chairman Mary Schapiro wants Congress to grant the SEC the power to impose penalties that are more reflective of the losses sustained by investors. Right now, the agency can only pursue ill-gotten gains’ disgorgement and impose per-violation penalties. Schapiro said that the Stronger Enforcement of Civil Penalties Act of 2012, which was introduced by Senators Jack Reed and Charles Grassley, would give the Commission the authority it needs to make violators “think twice” about abusing investors’ funds while allowing the regulator to recover significantly more for victims. She expressed her views at the New England Securities Conference last month.

Securities Roundup: FINRA Tells Broker Dealer to Cease-a-Desist Its Allegedly Fraudulent Sales, SEC Supports Creation of Variable Annuities Summary Prospectus, & US Supreme Court Hears Amgen & Comcast Appeals to Shut Down Class Action Lawsuits

Published on: November 15, 2012 | by Shepherd Smith Edwards & Kantas, LLP

FINRA has filed a temporary cease-and-desist order barring WR Rice Financial Services Inc. and Joel I. Wilson, its owner, from taking part in allegedly fraudulent sales activities and the conversion of assets or funds. The SRO is also filing a securities complaint accusing both the Michigan based-brokerage firm, Wilson, and other registered representatives of selling over $4.5 million in limited partnership interests to approximately 100 investors while leaving out or misrepresenting material facts.

Per the broker fraud case, the broker-dealer and Wilson got investors to participate by promising them that their funds would be placed in land contracts in Michigan on residential real estate and that the interest rate they would get would be 9.9%. The money was instead allegedly used for unsecured loans to companies under Wilson’s ownership or control.

In other securities news, the SEC’s Division of Investment Management director Norm Champ recently stated that the Commission’s report on retail investors and their financial literacy gives basis for creating a summary prospectus for variable annuities. Speaking via teleconference at the American Law Institute-Continuing Legal Education Group conference on life insurance products on November 1, Champ reported that investors in the study agreed that the mutual fund summary prospectuses were user-friendly. He expressed optimism that a summary prospectus for variable annuities could give significant disclosures and related benefits if designed and implemented well and that the framework used for the mutual fund summary prospectus should prove to be an effective model.

Appeal of Stockbroker Found Liable in Unauthorized Trades of Cyberonics Stock is Rejected by 7th Circuit

Published on: August 18, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Court of Appeals for the Seventh Circuit is rejecting the appeal filed by stockbroker Kevin Wells, who was found liable for making unauthorized trades of Cyberonics Inc. (CYBX) in a customer’s account. In an initial default judgment, the customer, plaintiff William Wehrs, was awarded approximately $49,861 in damages.

Per the court, Wehrs sued Wells after the alleged unauthorized trades occurred and cost him “significant losses.” When Wells did not appear in court or respond to the securities fraud lawsuit, a default judgment was entered in Wehrs’s favor. Meantime, Wells’ supervisor and his financial firm chose to settle with Wehrs.

Following the default judgment, Wells filed an appeal, challenging the decision by the district court to deny his motion to vacate the default judgment as it pertains to liability. He also contended that the district court abused its discretion when it did not consider evidence that he believes demonstrates he not the proximate cause of a large amount of the losses that Wehrs suffered.

Do Brokers Owe a Fiduciary Duty to Clients?

Published on: January 27, 2011 | by Shepherd Smith Edwards & Kantas, LLP

An article published this week in Slate talks about how despite what many might think, brokers in fact do not owe clients a fiduciary duty to give them the best advice possible. This could very well explain why some brokers don’t believe they are really crossing the line-or, at the very least, that they can get away with it-when giving advice that isn’t necessarily bad but doesn’t take into account a client’s best interests.

In the olden days, giving a broker this much leeway made more sense. Brokers were there to sell or buy bonds and stocks and it was the investment adviser whose job it was (and still is) to give advice about financial goals and investment strategy. The latter is already upheld to a fiduciary standard requiring that he/she act in a customer’s best interests without regard to personal interest.

Now, however, the distinction between investment advisers and brokers has gotten blurrier. Brokers also now give advice and investment advisers also buy for clients the securities that they’ve recommended.

The Securities and Exchange Commission is now recommend a common fiduciary standard that would apply to both brokers and investment advisers. The Dodd-Frank Wall Street Reform and Consumer Protection Act gave the SEC the power to set up a uniform fiduciary standard, which would hold brokers much more accountable than the current “suitability standard” that they must meet. Under the suitability standard, a broker can meet the standard just by recommending a suitable financial product to the investor even if it isn’t the best one for that client.

With the current lack of a fiduciary standard for brokers, it is the investor who suffers when sustaining losses because of investing in a product that was recommended but not necessarily the most suitable. This lack of standard can also negatively impact how much a broker fraud victim can recover in arbitration or in court. For many investors, not being able to recoup their losses can mean the loss of their life savings, no early retirement, a decreased standard of living, and other consequences.

Related Web Resources:
Does Your Broker Love You?, Slate, Monday, January 24, 2011
SEC Recommends Common Standard for Brokers, Advisers, BusinessWeek, January 22, 2011
Study on Investment Advisers and Broker Dealers, SEC, January 11, 2011 (PDF)

Most Investors Want Fiduciary Standard for Investment Advisers and Broker-Dealers, Say Trade Groups to SEC, Stockbroker Fraud Blog, October 12, 2010 Continue Reading ›

Broker Settles SEC Charges He Defrauded Elderly Nuns

Published on: January 13, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Broker Paul Chironis has agreed to settle charges that he defrauded the Sisters of Charity. The US Securities and Exchange Commission is accusing the broker of churning of millions of dollars in mortgage-backed securities in the congregation of elderly nuns’ two accounts. One account supports the nuns’ charitable efforts. The other helps take care of nuns living in nursing homes.

The SEC says that Chironis defrauded the nuns between January 2007 and January 2008. The accounts that he allegedly churned held mostly mortgage-backed securities that Freddie Mac, Fannie Mae, and Ginnie Mae had issued, as well as closed-end bonds. The SEC contends that the broker charged the nuns’ account undisclosed and excessive markups and markdowns in riskless principal transactions.

The federal agency says that Chironis’s actions violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Section 17(a) of the Securities Act of 1933. By agreeing to settle, Chironis is not admitting to or denying the charges. He has, however, consented to a permanent bar from the securities industry. He also has agreed to disgorge $250,000 in illegal gains and pay a $100,000 civil penalty. The money, which will be put in a Fair Fund, will be distributed to the congregation of nuns.

Churning
Churning is an act of securities fraud that involves a broker making excessive trades to make commissions and other revenue regardless of whether such transactions fulfills the clients’ investment objectives. Our securities fraud lawyers can help you determine whether you were a victim of churning.

Related Web Resources:
SEC Settles With Broker for Allegedly Defrauding Bronx Nuns, Wall Street Journal, January 6, 2011
Broker Accused of Defrauding Elderly Nuns Settles Case With SEC, SEC, January 6, 2011
Read the SEC Litigation (PDF)
Continue Reading ›

Ex-Financial Adviser Pleads Guilty to Unauthorized Trading Involving Disabled Children’s Assets

Published on: December 28, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Charles Winitch has pleaded guilty to involvement in a securities fraud scam that victimized disabled children. In the U.S. District Court for the Southern District of New York, the ex-financial adviser and “wealth manager” entered a guilty plea to the charge of wire fraud involving unauthorized trading for commissions. While federal prosecutors and United States Attorney for the Southern District of New York Preet Bharara did not name the financial firm that Winitch had been working for at the time, The New York Daily News identified him in 2008 as a stockbroker with Morgan Stanley.

WInitch is accused of taking $198,784 from a trust held by the guardians of disabled children called the Guardian Account. The trust, which is supposed to provide children with long-term income and comes from the youths’ medical malpractice settlements, was only supposed to invest in New York Municipal Bonds or US Treasury Bonds. However, Winitch made unauthorized trades in 11 accounts in the millions of dollars to generate higher commissions even though he lacked the authority or consent to take such actions. According to Bharara, Winitch and co-conspirators made about $198,000 in ill-gotten commissions. Meantime, the fund lost somewhere between $400,000 and $1 million.

Winitch’s criminal defense lawyer says that the former stockbroker did not know that the accounts contained the money of disabled kids. The ex-Morgan Stanley broker is facing up to 63 months behind bars, hefty fines, forfeiture of ill-gotten gains, and restitution. Continue Reading ›