Broker Fraud

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 ›

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 ›

Citigroup to Pay $1.5 M for Supervisory Violations Related to Broker’s Handling of Trust Funds

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

According to the Financial Industry Regulatory Authority, Citigroup Global Markets Inc. has consented to pay $1.5 million in disgorgement and fines for failing to properly supervise broker Mark Singer and his handling of trust funds belonging to two cemeteries. By agreeing to settle, Citigroup is not denying or admitting to the charges. Also, the disgorgement amount of $750,000 will be given back to the cemetery trusts as partial restitution.

FINRA says that from September 2004 and October 2006, Singer and his clients Craig Bush and Clayton Smith were engaged in securities fraud. Their scheme involved misappropriating some $60 million from cemetery trust funds. Bush and Smart were the successive owners of the group of cemeteries in Michigan that the funds are believed to have been stolen from. Smart bought the cemeteries from Bush in August 2004 using trust funds that were improperly transferred from the cemeteries to a company that Smart owned.

When Singer went to work for Citigroup as a branch manager in September 2004, he brought Bush’s cemetery trust accounts with him. FINRA says that Singer then helped Smart and Bush open a number of Citigroup accounts in their names and in the names of corporate entities that the two men controlled or owned. The broker also helped them deposit cemetery trust funds into some of the accounts, as well as effect improper transfers to third parties. Some of the fund transfers were disguised as fictitious investments made for the cemeteries.

FINRA says that Citigroup failed to properly supervise Singer when it did not respond to “red flags” and that this lack of action allowed the investment scheme to continue until October 2006. As early as September 2004, Singer’s previous employer warned Citigroup of irregular fund movements involving the Michigan cemetery trusts. Within a few months, Citigroup management also noticed the unusual activity.

Citigroup failed to “conduct an adequate inquiry” even after finding out in February 2005 that Smart may have been making misrepresentations about his acquisition of hedge fund investments that belonged to the Michigan cemetery trusts and had used the hedge funds as collateral for a $24 million credit line. Although the investment bank had received a whistleblower letter in May 2006 accusing Singer of broker misconduct related to his handling of the cemetery trusts, it still failed to restrict Singer’s activities or more strictly supervise him.

Related Web Resources:
Citi Sanctioned $1.5M By Finra In Supervisory Lapse, The Wall Street Journal, May 26, 2010
Stealing from the dead, CNN Money, August 13, 2007 Continue Reading ›

Five Years Later Ex- Knight Securities Supervisors are Exonerated? Just Call it “Par for the Course.”

Published on: March 16, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority’s National Adjudicatory Council has dismissed the charges against former Knight Securities, L.P. CEO Ken Pasternak and John Leighton, the investment firm’s ex- Institutional Sales Desk head. The two men were accused of supervisory failures over allegedly fraudulent sales. Specifically, they allegedly inadequately supervised Leighton’s brother Joseph Leighton, who, at the time, was the firm’s top institutional sales trader. Regulators had accused Joseph of inflating the price of securities when selling them to institutional clients and keeping the extra profit.

The National Association of Securities Dealers found that the two former executives failed to take reasonable steps to make sure that Joseph was in compliance with industry standards. He settled with NASD and the Securities and Exchange Commission in 2005.

A lower FINRA panel had also ruled against two men. Pasternak was suspended from supervisory positions for two years and John was barred from supervisory roles. Both men were each ordered to pay $100,000.

Now, however, NAC is disagreeing with the lower panel, claiming that FINRA failed to establish that Joseph Leighton violated regulatory and market standards. The council also found that John Leighton did enforce Knight’s compliance procedures and that there was evidence that does not support allegations accusing Pasternak of not responding properly to “red flags” that surfaced over the way that Joseph handled his institutional client orders. However, institutional clients have come forward to testify that the pricing they received was fair. Also, in 2008, a federal judge threw out similar charges that the SEC filed against Pasternak and Joseph Leighton.

“This is another case at FINRA of the soldiers getting punished while the officers in charge ultimately get a walk,” said Shepherd Smith Edwards and Kantas founder and securities fraud lawyer William Shepherd. “The primary regulator of brokerage firms may have recently changed its name to the ‘Financial Industry Regulatory Authority’ but it remains a ‘National Association of Securities Dealers’ – a non-profit private corporation (similar to a country club) with a vested interest in seeing to it that favored members do not have to answer for misdeeds. After all, a precedent of fines or sanctions for the bosses might affect the treatment of other bosses in the future.”

Related Web Resources:
COMPLIANCE WATCH: Complying As Your Brother’s Keeper, The Wall Street Journal, March 5, 2010
National Adjudicatory Council, FINRA Continue Reading ›

Stifel, Nicolaus, and Co. to Pay Back $78,000 to Missouri Investors for Broker Fraud

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

Stifel, Nicolaus and Co. Inc. has reached an agreement with Missouri Secretary of State Robin Carnahan over the broker fraud committed by former Stifel securities broker Girard Munsch. As part of the deal, the three Missouri investors will get back $78,000 in commissions that they paid and the broker-dealer will pay over $130,000 in payments, penalties, and costs.
Over three years, Munsch made over 500 trades in accounts owned by three Missouri investors. He has admitted that during some of the transactions, he was the only one to benefit. One investor, Marie Ganninger, says that she started investing with the former Stifel broker after her husband passed away. She chose to go with Munsch because he was the broker of one of her relatives. She will be getting back the commissions she paid.
The state of Missouri went after Stifel for failing to properly supervise Munsch and neglecting to notice or take action when he made unsuitable recommendations and excessive trades.
In 2007, the former Stifel broker entered into a consent order. He was ordered to pay $50,000 in investor restitution for broker misconduct, and his license was suspended. He retired and can no longer work as a broker in Missouri.
Please do not despair if you lost money because of broker fraud. There are legal remedies available that can allow you to recoup your investment losses.
Stifel to return $78,000 to investors, pay $130,000 in penalties, St. Louis Business, March 11, 2010
Consent order in the matter of Girard Augustus Munsch, Jr., State of Missouri Continue Reading ›

Texas Securities Fraud: SEC Freezes Assets of Fourth Person Involved in Alleged $485 Million Ponzi Scheme

Published on: December 23, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Earlier this month, the US Securities and Exchange Commission was able to get a temporary restraining order to the freeze the assets of Joseph Blimline, the fourth person accused of masterminding a $485 million Ponzi scheme involving Provident Royalties LLC. The SEC charged three other individuals, Brendan Coughlin, Paul Melbye, and Henry Harrison, in July. Their assets were also frozen.

In its amended complaint, the SEC alleged that Provident, owned by the four defendants, advanced approximately $93 million of investor funds to Blimline and entities that he controlled for the purchase of gas and oil interests. The fund repayments and the title, however, frequently did not go to Provident. The SEC also accuses Blimline of failing to disclose that he received the funds, was involved with Provident management, and had been sanctioned in the past by Michigan securities authorities.

The SEC’s amendment complaint charges the four men with violating the Securities Act of 1933 (Section 17a) and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The SEC is seeking preliminary and permanent injunctions, financial penalties, disgorgement of ill-gotten gains, and prejudgment interest.

Director and officer bars are also being sought against the four defendants for allegedly committing Texas securities fraud. 36 affiliated entities are named as relief defendants for disgorgement purposes.

FINRA Bars Former Piper Jaffray & Co. Broker from Industry for Insider Trading

Published on: November 25, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is barring a former Piper Jaffray & Co. broker from the securities industry. The broker was accused of insider trading. He has agreed to the ban and has settled the FINRA charges without denying or admitting wrongdoing.

From 2007 until this July, the broker worked in Piper Jaffray & Co.’s investment banking department. Piper Jaffray was the confidential adviser of SoftBrands while the company considered potential buyers. Those at the advisory firm with access to information about the acquision were not allowed to buy SoftBrands shares. Yet on June 4 and 5, this broker bought 27,161 SoftBrands shares. On June 12, when SoftBrands announced its acquisition by Golden Gate Capital and Infor Global Solutions-an $80 million transaction. SoftBrands’s stock price almost doubled.

The shares at issue, previously bought at $.42 and.$.45 per share, were then sold at $.89 per share resulting in a profit of $11,955 on the transactions.

Stifel, Nicolaus & Co. and AXA Advisors Broker Charged in Ponzi Scheme Victimizing Church Members

Published on: November 5, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Former Stifel, Nicolaus & Co. and AXA Advisors broker Kenneth Neely has pled guilty to one count of mail fraud for setting up a Ponzi scheme that targeted at least 16 investors. Yesterday, Missouri Secretary of State Robin Carnahan announced that she has shut down the scam.

The 56-year-old St. Peters, Missouri broker got his clients to invest in a bogus St. Charles real estate investment trust. He promised high return rates and “no risk,” raising over $640,000 in investor funds. Federal prosecutors say clients paid about $3,000/share or unit.

At the time Neely was committing securities fraud (from 2001 – July 2009) he worked for broker dealers AXA Advisors and Stifel, Nicolaus & Co. He told clients to make checks payable to him and his wife.

Missouri Securities Law makes it illegal for a broker to “sell away,” which involves selling investments off a firm’s books.

Neely has 30 days to respond to Missouri’s cease-and-desist order. Federal brokers have barred him from working as a broker. Investor victims that lost some $400,000 included people that belonged to his church, friends, relatives, and acquaintances. Some people lost their savings because of the Ponzi scheme. Nealy used some of the money to pay for his personal expenses and debt.

Neely’s sentencing is scheduled for January 2010. He faces up to 20 years in prison, restitution, and up to $250,000 in fines.

Related Web Resources:
Carnahan Uncovers Ponzi Scheme in Saint Charles, SOS.Mo.Gov, November 4, 2009
St. Peters broker admits Ponzi scheme, St. Louis Business Journal, November 4, 2009
FINRA Permanently Bars Former Broker for Stifel, Nicolaus & Co. Inc and AXA Advisors For Ponzi Scheme, Stockbroker Fraud Blog, August 3, 2009 Continue Reading ›