Broker Fraud

Bank of America’s Merrill Lynch unit agrees to $26.5 million national settlement stemming from Texas securities fraud claim

Published on: September 22, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Following a Texas securities fraud claim that Bank of America‘s Merrill Lynch, Pierce, Fenner & Smith Inc. allowed unregistered sales persons to sell securities, the Bank of America unit has agreed to pay $26.5 million as part of a national settlement over the allegations. The state of Texas’s portion of the settlement is $1.6 million. The other states that were part of the task force, led by the Texas State Securities Board, are Arizona, Colorado, Vermont, Missouri, Delaware, and New Hampshire.

Client associates who accept trade orders must be registered not just in their own state but also in the client’s state. Per the probe, the task force determined that Merrill did not have a supervisory system that was designed in a manner that made sure that associates were in compliance with registration requirements. The task force was investigating a tip, provided in May 2008 by a Merrill Lynch employee, that the company saved money on registration fees by allowing client associates to register only in their home state and in a neighboring state.

Last week, Merrill Lynch agreed to pay the state of Texas another $12.7 million over a Texas securities fraud cause involving auction-rate securities. The settlement ends the state’s probe into the broker-dealer’s handling of ARS and clients’ funds even as the market was collapsing.

The board determined that not only did Merrill Lynch not tell investors that the market could very well collapse, but also that the broker-dealer offered financial associates sales incentives to sell ARS despite knowing that the auction process could fail.

September has been a rough month for Bank of America and Merrill Lynch. On the same day that the Texas securities commissioner announced the $26.5 million settlement, New York Attorney General Andrew Cuomo accused high-level Bank of America Corp. executives of failing to reveal key information about its Merrill Lynch & Co. takeover. Cuomo is threatening to press charges. Bank of America, however, is calling Cuomo’s allegations “spurious.”

BofA’s Merrill to pay US$26.5M in settlement on unregistered salespeople, AP/Yahoo, September 8, 2009
Bank of America Calls Cuomo’s Merrill Allegations ‘Spurious,’ Bloomberg.com, September 10, 2009
Merrill Lynch pays $12.7M to settle Texas auction rate securities case, Taragana.com, September 14, 2009 Continue Reading ›

Former Stifel Nicolaus and AG Edwards Stockbroker Sentenced to 21-Months in Prison for Investment Fraud Scam

Published on: September 21, 2009 | by Shepherd Smith Edwards & Kantas, LLP

A former broker who was fired from both AG Edwards, Inc.and Stifel Nicolaus & Co. has been ordered to serve a 21-month federal prison sentence for selling fraudulent investments to Stifel Nicolaus clients. Neil Rolla Harrison told clients that they were investing in commodities futures or the gold market when in fact the stockbroker was using their money to support his drinking and gambling habits.

A federal grand jury indicted the 54-year-old former broker last May. Harrison pleaded guilty to one count of mail fraud. He has been ordered to pay $91,303 in restitution.

It is not clear, however, whether the investment fraud victims will recoup their losses. One of his targets, 67-year-old Ralph Brock, says that because he has worked as a self-employed trucker for most of his life, the only retirement he had was the one he created through investing.

AG Edwards fired Harrison in 2005 after the broker-dealer discovered that he was borrowing money from clients. Stifel Nicolaus hired him soon after even though the broker-dealer knew that AG Edwards had fired him. Stifel Nicolaus fired Harrison when the thefts were discovered.

Brokers are entrusted with the responsibility of handling a client’s finances. Many investors seek the services of a stockbroker because they don’t have the knowledge and experience to make their own investments in a sound manner.

When a broker breaches that duty of care and money is lost it is usually the victims of securities fraud that suffer. This can be devastating-especially for the many clients who rely on their investments to get them through retirement or put their children through school. Any loss as a result of stockbroker fraud is unacceptable.

Related Web Resources:
Former stockbroker gets 21-month sentence, The Telegraph, September 18, 2009
Stifel broker gets jail time for scam, St. Louis Business Journal, September 18, 2009
United States Postal Inspection Service

Illinois Securities Department
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Texas Securities Commissioner, Appointed New President of Nationwide Association of Regulators, Seeks Additional Investigations into Wall Street Fraud

Published on: September 12, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The incoming head of the North American Securities Administrators Association, Denise Voigt Crawford, is warning brokerage firms that more enforcement actions over Wall Street fraud are likely to follow. Crawford is also the Texas Securities Commissioner. She will formally assume her role as NASAA president on September 15.

In her new role, Crawford plans on playing a key role in the government’s plans for regulatory reform. She wants the states to have a more prominent position when it comes to regulatory oversight.

At this time, state regulators only supervise investment advisors that are managing assets of $25 million or below. She wants states to regulate investment advisors with assets as high as $100 million. Since most of these firms are located in regional areas, Crawford says it is easier for state regulators to oversee them.

SEC Warns Broker-Dealers to be Mindful of Their Recruiting Bonuses

Published on: September 10, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Securities and Exchange Commission Head Mary Shapiro is warning broker-dealers to be careful of the recruiting tactics they employ-especially those involving recruiting bonuses. She cautioned that attractive compensation packages can compel registered representatives to watch out for their own self-interests over the interests of investors, resulting in acts of securities fraud. For example, Shapiro cautioned that a broker who knows that she or he will be given a larger compensation for meeting certain commission goals might make unsuitable investment recommendations, churn customer accounts, or take part in other commission-revenue focused actions that aren’t necessarily in the clients’ benefit.

Shapiro is also asking broker-dealer heads to watch over big up-front bonuses. Brokerage firms continue to offer large recruiting bonuses to top registered representatives at rival investment banks. Recruiting packages at wirehouses Merrill Lynch, UBS, Morgan Stanley, and Wells Fargo Advisers are between 200-250% of trailing 12-month production. In many instances, an investment adviser who satisfies production targets and brings in a certain percentage of assets is frequently rewarded.

Shapiro’s letter to the firm’s CEOs reminded them that it is the broker-dealer’s responsibility to “police such conflicts” and supervise broker-dealer activities, especially those related to sales practices. She reminded the broker-dealers that when a sales group expands, it is the investment bank’s responsibility to not just supervise advisers but to make sure the compliance structure maintains the adequate capacity. She noted that investor interests must always be of prime importance when investment products, such as securities, are sold.

Unfortunately, there are brokers who choose to place their own financial gain over the interests of their clients. This can result in securities fraud losses for investors. A few examples of broker misconduct include churning, misrepresentation, negligence, breach of fiduciary duty, and unauthorized trading.

Related Web Resources:
Read Shapiro’s Letter (PDF)

Schapiro Message to B-D CEOs: Watch Your Recruiting Tactics, Research Mag, September 1, 2009
Chairman Mary Schapiro, SEC Continue Reading ›

Disgruntled Investors Continue to File Securities Fraud Litigation Against Merrill Lynch Even Eight Months After Its Acquisition by Bank of America Corp.

Published on: September 2, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The plaintiffs of some 166 of the 221 cases filed against Merrill Lynch & Co. since January 1, 2009 are alleging securities fraud-related violations. This means that Bank of America Corp, which acquired the broker-dealer at the beginning of the year, has assumed responsibility for the outcome of these civil cases. Some of these investor fraud claims were filed as late as last month.

Some cases discuss Merrill’s involvement in the marketing, underwriting, and selling of securitizations, or asset-backed securities. Other cases delve into Merrill’s dealings in the auction-rate securities market. A number of the securities fraud cases against Merrill are class action lawsuits. Merrill Lynch is the lead defendant in many of the cases and one of several financial firms named in the other complaints.

Some of the Securities Fraud Cases Against Merrill Lynch:

In Investment fraud Lawsuit Against Lehman Brothers, Goldman Sachs and Morgan Stanley, Court Grants Class Certification

Published on: August 31, 2009 | by Shepherd Smith Edwards & Kantas, LLP

A District Court judge has granted class certification in the securities fraud lawsuit against Lehman Brothers, Morgan Stanley, and Goldman Sachs. The plaintiffs are accusing the broker-dealers of putting forth misleading analysts reports about RSL Communications Inc. for the purposes of maintaining or obtaining profitable financial and advisory work from RSL. Per Judge Shira Sheindlin, the class is to be made up of all parties that bought RSL Common stock between April 30, 1999 and December 29, 2000.

RSL investors, who are the plaintiffs, contend that the defendants artificially inflated the market price of RSL common stock, which injured them and other class members.

In July 2005, the court had certified a class that included anyone who had bought or acquired RSL equity shares between the dates noted above after determining that the plaintiffs had made “some showing” that Rule 23 requirements had been satisfied. The broker-dealer defendants appealed.

The US Court of Appeals for the Second Circuit vacated the class certification order and remanded the action for reconsideration. It’s decision in e Initial Public Offering Securities Litigation, 471 F.3d 24 had clarified class certification standards.

Two years later, pending the outcome In re Salomon Analyst Metromedia Litigation, the court issued a stay. Following its opinion, which held that market presumption includes securities fraud allegations against research analysts, the Court lifted the stay, allowing the plaintiffs to renew their motion for class certification. The court granted the motion and noted that the defendants have been unable to “rebut the fraud on the market presumption by the preponderance of the evidence on the basis that the analyst reports” are missing certain key pieces of information. Per their securities fraud claim, plaintiffs can therefore avail of the “fraud on the market presumption to establish transaction causation.”

The court said that the plaintiffs have succeeded in proving that loss causation can be proven on a “class-wide basis.”

Related Web Resources:
Court OKs Class Cert. In Fraud Suit Against Lehman, Law360, August 5, 2009
U.S. District Court for the Southern District of New York (PDF)
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Will Two Former Credit Suisse Group AG Brokers Convicted of Securities Fraud Get More Lenient Sentences Because of Industry’s “Culture of Corruption?”

Published on: August 21, 2009 | by Shepherd Smith Edwards & Kantas, LLP

A federal judge says that when sentencing former Credit Suisse Group AG brokers Eric Butler and Julian Tzolov, he will consider the fact that they committed their securities fraud crimes while working in the securities industry’s “culture of corruption.” He also asked defense and government attorneys to touch upon this issue when they submit their sentencing recommendations.

Earlier this week, a jury found Butler found guilty of conspiracy and securities fraud for his involvement in an alleged scheme to mislead investors about auction-rate securities so that higher commissions could be generated. Butler faces a maximum 45 years in prison.
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According to the government, Butler and Tzolov changed securities’ names on communications with investors so that clients wouldn’t find out that federally guaranteed student loans were not backing their investments. Instead, they put the funds in riskier products that were connected to ARS. Investors lost close to $1 billion when the ARS market collapsed.

Butler’s attorney, however, says the failed market, not his client, is at fault for the investors’ losses. Butler plans to appeal the verdict.

Tzolov was arrested last month in Spain. He was under house arrest in New York City in May but fled the country. Tzolov pleaded guilty to securities fraud, conspiracy, visa fraud, wire fraud, and bail-jumping charges. Tzolov then testified for prosecutors in the criminal case against Butler.

While commenting on these recent developments, Ann Woolner, on Bloomberg.com, noted that just because federal regulators weren’t paying attention to misconduct on Wall Street doesn’t make it okay for brokers to lie to their clients-it just makes it easier for them to not get caught. She also commented that while people don’t die from white collar crimes, securities fraud can cause a great deal of suffering for investors who were robbed.

While the two former Credit Suisse brokers shouldn’t be punished because of the shortcomings within the securities industry, the “culture of corruption” argument shouldn’t be the reason to shorten their prison sentences. Just because everyone’s doing it doesn’t make it okay.

Related Web Resources:
Wall Street ‘Corruption’ Might Buy Crook a Break: Ann Woolner, Bloomberg.com, August 21, 2009
Broker Convicted in Auction-Rate Case, Wall Street Journal, August 19, 2009
Former Wall Street broker pleads guilty to fraud, MSNBC, July 22, 2009 Continue Reading ›

FINRA Bars Ohio Broker Accused of Stealing $90,000 Inheritance from Two Sisters from the Securities Industry

Published on: August 19, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Richard Wood, an Ohio broker, has agreed to be barred from the securities industry for allegedly committing broker misconduct. According to the Financial Industry Regulatory Authority, the broker, working for American General Securities Inc., allegedly stole the $90,000 that a client had left to two of her nieces.

FINRA says that Wood helped liquidate the estate in 2006. He then suggested that the nieces, who are sisters, open a brokerage account and invest in bonds. He was to oversee their investments. Instead, he allegedly misappropriated the money and told the sisters to issue their checks to STL Financial, Inc., an entity that he alone controlled rather than an actual brokerage firm.

The self-regulatory organization claims that Wood gave each of the sisters a bogus account number to a brokerage account that didn’t exist. He also allegedly put together more than one false customer account statement when one of the sisters became suspicious.

UBS AG and Merrill Lynch Collectively Fined $250,000 by FINRA for Closed-End Fund Actions

Published on: August 12, 2009 | by Shepherd Smith Edwards & Kantas, LLP

UBS Financial Services Inc. has agreed to be fined $100,000 and Merrill Lynch, Pierce, Fenner & Smith Inc. has consented to a $150,000 fine, says the Financial Industry Regulatory Authority, for alleged supervisory failures that resulted in the inappropriate short-term sales of closed-end funds that were bought at initial public offerings for the funds. By agreeing to settle, the broker-dealers are not deny or admitting to the FINRA charges. They are, however, consenting to the findings.

FINRA also announced that it was suspending five Merrill Lynch brokers for 15 days. Each of them must pay a $10,000 fine for allegedly making fund recommendations that were unsuitable for investors.

Merrill Lynch brokers that FINRA has sanction include:

• Kenneth C. Iwelumo (his clients lost about $563,000)
• Joseph Miller (approximately $130,000 in client losses)
• Ronald Kemp (about $411,000 in customer losses)
• Michael Kizman (about $210,000 in losses)
• John Ong (about $350,000 in client losses)

The investigation into the activities of a number of former UBS brokers is ongoing.

Closed-End Funds
Closed-End Funds are investment companies that sell a fixed number of shares during an initial public offering. These sales come with built-in sales charges. The CEF’s at issue came with a 4.5% sales charges and a 30-90 day penalty bid period after the IPO. If a client sold the CEF that had been purchased at the IPO during this time period, the broker would lose the commission.

FINRA says that both broker-dealers knew that CEF’s bought at IPO’s are more appropriate for long-term investments and that because of the sales charges that come with their purchases, it is inappropriate to engage in the short-term trading of CEF’s. FINRA claims that Merrill Lynch and UBS did not have the proper supervisory procedures and systems in place so that brokers couldn’t and/or wouldn’t make such unsuitable CEF sales.

FINRA also says that both broker-dealers failed to warn supervisors about the potential issues that could result from such activity and did not properly train registered individuals. Due to this improper supervision, brokers for Merrill and UBS recommended that certain clients engage in short-term sales of CEF’s bought at IPOs without fully understanding the financial ramifications these recommendations would have on their clients’ finances.

FINRA is concerned about brokers who convince customers to buy CEF’s during their IPO’s and then wait until after the penalty bid period is over to recommend that clients sell the CEF’s-usually at a loss. These brokers then recommend that clients use the proceeds from the sale to purchase more CEF’s at initial public offerings.

FINRA Fines Merrill Lynch, UBS for Supervisory Failures in Sales of Closed-End Funds; Customers Get More Than $5 Million in Remediation, FINRA, July 28, 2009
Merrill, UBS Are Fined in Closed-End-Fund Case, The Wall Street Journal, July 29, 2009 Continue Reading ›

SEC Says Prime Capital Services, Inc. Defrauded Elderly Investors in Florida with “Free” Lunch Seminars and Unsuitable Variable Annuity Sales

Published on: August 10, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission is accusing broker-dealer Prime Capital Services Inc., income tax preparation business Gilman Ciocia Inc., and seven individuals of defrauding senior investors in Florida. The agency claims that the two companies, as well as the individuals named, allegedly used “free” lunch seminars that resulted in the sales of unsuitable variable annuities and, on occasion, millions of dollars in commission.

Robert Khuzami, the SEC Enforcement Director, called the free lunches “bait” for the scam. Elderly investors who are persuaded to purchase unsuitable financial products frequently are never able to fully recover their financial losses, which can severely deplete their retirement savings.

In addition to cease and desist proceedings against the respondents, the SEC is seeking remedial action, including civil penalties and disgorgement. According to the attorney representing PCS, Gilman, PCS President Michael P. Ryan, CCO Rose M. Rudden, one of the registered representatives, and one of the supervisors, the conduct under question occurred in the late ’90’s and 2000’s and has been remedied for some time. The respondents plan to defend themselves against the charges.

SEC investigators say the senior investment fraud scam occurred between November 1999 and February 2007 and that during appointments conducted with seminar participants, PCS representatives either left out important information or made misrepresentations about variable annuities. For example, PCS representatives are accused of telling investors they would have unrestricted access to the money they invested but did not tell them that there would be substantial charges if they withdrew their money early.

The SEC claims that representatives’ commissions when selling variable annuities was 6%. Their commission on other investment products was just 3%. The agency also claims that Ryan and a number of supervisors neglected to implement PCS’s supervisory procedure to identify when misconduct was occurring, as well as prevent broker misconduct from happening.

Related Web Resources:
Read the SEC’s Order (PDF)

“Free-Lunch” Seminars Still Baiting Seniors, Retirement Income Journal, July 15, 2009 Continue Reading ›