FINRA

FINRA Goes After Two Brokers for Variable Annuity Replacement Fraud

Published on: October 18, 2017 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority has suspended broker Cecil Ernest Nivens for two years for allegedly causing harm variable annuity (VA) investors who were his customers. According to the self-regulatory organization’s filing, Nivens failed to abide by his firm’s written supervisory procedures when he didn’t properly process certain variable universal life purchase transactions as replacement trades even though he was the one who recommended that each purchase be paid for from an existing variable annuity fund.

Nivens earned over $185K in commissions for the variable annuity life purchase transactions, in addition to commissions he was already paid for the variable annuities when they were sold to the same customers. Now, Nivens must disgorge those commissions.

FINRA accused Nivens of causing “considerable” harm to customers. In addition to the excessive commissions, eight of his customers paid over $4K in unnecessary surrender charges. His former firm has paid over $55K to settle VUL fraud customer complaints involving him.

Morgan Stanley to Pay $13M Over Improper Supervision of Unit Investment Trust Sales

Published on: September 25, 2017 | by Shepherd Smith Edwards & Kantas, LLP

FINRA is ordering Morgan Stanley Smith Barney LLC (MS) to pay about $9.8M in restitution to and a $3.25M fine for purportedly not properly supervising hundreds of financial representatives who sold short-term trades of UITs. The firm settled without denying or admitting to the regulator’s charges.

According to the self-regulatory organization, from 2/2012 through 6/2015, the brokerage firm’s representatives effected short-term UIT rollovers, including a number of them more than 100 days prior to maturity, in customer accounts. FINRA said that the firm did not properly supervise these reps, when they engaged in the UIT sales, nor did it properly train them regarding the investments. It also purportedly failed to give supervisors adequate guidance about how to study transactions for signs of unsuitable short-term trading. Morgan Stanley is accused of failing to put into effect a system “adequate” enough to identify short-term UIT rollovers and of not providing supervisory assessment for UIT rollovers before execution.

UITs
Unit investment trusts are investment companies that offer units in a securities of a portfolio. They are subject to termination on a certain maturity date, usually after 15 months or 24 months. They typically come with certain fees, including a creation fee and a deferred sales charge. According to FINRA, when a new UIT compels a customer to be pay higher sales charges over time, this could be a red flag indicating suitability issues.

Hilliard Lyons Ordered to Pay $569K For Allegedly Overconcentrating Accounts in Breitburn Energy Partners

Published on: September 25, 2017 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority arbitration panel has ruled that Hilliard Lyons LLC must pay claimants Troy and Elizabeth Benitone $569K. Hilliard Lyons, the wealth investment firm is accused of overconcentrating the Benitones’ accounts in Breitburn Energy Partners stock.

The claimants, in their oil and gas fraud case, alleged breach of fiduciary duty, negligent misrepresentation and omission, common law fraud, breach of contract, and negligence supervision. The Benitones contend that Hilliard Lyons and its registered representative sold all of the claimants’ blue chip stocks, investing the money that was in their joint account and in Troy’s IRA in Breitburn. They lost $350K, with statutory damages at 10% on the purchase cost at $441K, from being over-concentrated in Breitburn.

The Benitones believe that it was the lack of diversification in their investments that put them at high risk of loss, especially as they had conservative investment goals and could not handle much risk at all. Also, Hilliard Lyons was the underwriter for the Breitburn Energy Partners stock.

Securities Cases: SunTrust Settles Improper Mutual Fund Fee Charges for $1.1M, Ex-Morgan Stanley Barred Over Client He Later Married, and Two RIAs Are Barred for Cherry Picking

Published on: September 14, 2017 | by Shepherd Smith Edwards & Kantas, LLP

SEC Charges SunTrust With Collecting Over $1.1M in Excess Mutual Fund Fees

The US Securities and Exchange Commission has filed charges accusing SunTrust Investment Services of collecting over $1.1M in unwarranted fees from mutual fund clients. The SunTrust Banks subsidiary will pay an over $1.1M penalty to resolve the regulator’s civil charges.

According to the regulator’s order, SunTrust Investment Services improperly recommended costlier mutual fund share classes to clients when less expensive shares of these funds were available. The SEC says this was a breach of the investment services firm’s fiduciary duty to take actions in the client’s best interests.

FINRA Hearing Panel Orders C.L. King & Associates to Pay $750K Over Inadequate AML Program

Published on: September 13, 2017 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority extended hearing panel has ordered brokerage firm C.L. King & Associates, Inc. to pay a $750,000 for purportedly acting negligently by making material representations and omissions to issuers in connections with debt securities redemptions for a hedge fund customer. The panel said that the broker-dealer and Gregg Alan Miller, its Anti-Money Laundering Compliance Officer, did not put into place a reasonable AML program and failed to adequately react to red flags indicating that the liquidation of billions of penny stock shares involving two customers might be signs of suspect activity. Miller has been suspended from fulfilling a principal role for half a year and he must pay a $20K fine.

Per the hearing panel’s ruling, the hedge fund’s manager set up joint accounts at the firm. A number of terminally ill people were given joint tenancy with survivorship rights to the accounts and they were paid $10K, after which they gave up their ownership rights to the assets in the accounts.

The accounts were used to buy corporate bonds at reduced rates that came with a survivor option. This feature made it possible for the manager, as the survivor of the joint account, to redeem investments from issuers through the brokerage firm for the full principal figure prior to maturity once the joint tenant had died. The FINRA panel said that CL King had a duty to let issuers know when the redemption process was taking place that the joint tenants that were terminally ill and not beneficiaries of the investments.

Securities Fraud: Mike Tyson’s Ex-Financial Adviser Gets 33-Month Prison Term, Alleged $15M Oil Drilling Investment Scam Leads to SEC Charges, and FINRA Warns Investors of Possible Stock Schemes After Hurricane Harvey

Published on: September 12, 2017 | by Shepherd Smith Edwards & Kantas, LLP

Financial Adviser Who Bilked Athletes, Including Mike Tyson, is Sentenced

Former SFX Financial Advisory Management Enterprises financial advisor Brian Ourand is sentenced to thirty years behind bars after he bilked a number of professional athletes, including former heavyweight champion Mike Tyson, ex-NBA basketball players Glen Rice and Dikembe Mutombo, and others. Ourand must also pay back $1M of what he stole.

Not only is he accused of forging the pro athletes’ signatures on checks that he cashed but also of taking credit cards out against these clients’ accounts to cover his own spending, including restaurants, clothing, and other bills. SFX fired him in 2011.

In 2015, Ourand was charged with wire fraud, federal mail fraud, and aggravated identity theft charges. He pleaded guilty to one criminal count of wire fraud.

FINRA Bars Ex-HSBC Securities Broker Over Alleged $200K Senior Financial Fraud

Published on: August 30, 2017 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is barring Jaime R. Rodriguez, an ex-HSBC Securities (HSBC) broker, in the wake of a charge accusing him of bilking an older customer, who is also legally blind, of $200K. HSBC fired Rodriguez in 2014.

Rodriguez is accused of using about $70K of the client’s money in 2012 to buy an apartment that was supposed to be for the customer. However, because the man couldn’t read or see the documents related to the purchase, he did not know that Rodriguez had named himself as the sole beneficial owner.

According to InvestmentNews, Rodriguez met the man in 2010 and began helping him with his errands. Also in 2012, Rodriguez purportedly recommended to the client that they set up a joint account together so that the then-HSBC broker could assist him in paying his bills. The account was opened using about $42K of the client’s money and at one point it held $153K.

Former Investment Adviser Gets Five Years in Prison for Stealing Over $600K From Clients

Published on: August 29, 2017 | by Shepherd Smith Edwards & Kantas, LLP

Aaron J. Johnson, a former registered investment adviser who ran Capital Advisors until state regulators took back his firm’s registration in 2013, is sentenced to five years behind bars for financial fraud. Johnson, 37, claimed that he stole over $600K from clients because he suffered a mental health breakdown.

According to prosecutors, Johnson took money from middle-class clients’ retirement accounts and charged them excessive fees to the point that he’d practically drained their funds. After Capital Advisors lost its registration, Johnson became affiliated with Trade PMR, a Florida-based firm that offers custody and brokerage services for investment advisers that are registered. Prosecutors contend that even then Johnson kept stealing from clients despite the fact that he was now under investigation. Prosecutors said that after Trade PMR began to question the fees that Johnson charged clients, including $3200 in client fees for an account that only held $13K in assets, the ex-adviser generated fraudulent documents as proof that his actions were warranted. He drained the account of the client, who was a single mom with three kids, until there was only $5 left.

Johnson has been ordered to pay back everyone that he defrauded.

Five Cetera Broker-Dealers Settle With FINRA for $3.3M Overcharging Mutual Fund Sales Fees to Charitable Organizations and Retirement Plans

Published on: August 23, 2017 | by Shepherd Smith Edwards & Kantas, LLP

In a settlement with the Financial Industry Regulatory Authority, a number of Cetera Financial Group brokerage firms have agreed to collectively pay $3.3M for not properly supervising whether mutual fund sales charge waivers were applied correctly clients at charitable organizations and in retirement plans. The firms that have settled include Cetera Financial Specialists, Cetera Investment Services, Summit Brokerage Services, First Allied Securities, and Girard Securities.

The $3.3M is how much these clients were excessively charged plus interest for the mutual funds that they bought from July 2009 to July 2017. According to the self-regulatory organization, the brokerage firms either: charged front-end sales charges to charitable organization and retirement plan customers that bought A shares in mutual funds even though they were eligible to have these fees waived or sold them class C/B shares while charging them back-end sales charges and “higher ongoing fees and expenses.”

FINRA accused the Cetera firms of not reasonably supervising the way the sales charges waivers were applied to the mutual fund sales and leaving it up to financial advisers to decide whether the waivers should be applied. The SRO also contends that the broker-dealers did not maintain written policies and procedures that were adequate enough to help financial advisers in making such determinations.

Despite FINRA Securities Arbitration Victory Against Wine Mogul, Fidelity is Accused of Prioritizing Its Own Interests

Published on: August 21, 2017 | by Shepherd Smith Edwards & Kantas, LLP

In the securities arbitration claim brought by a wine mogul against Fidelity Brokerage Services, a Financial Industry Regulatory panel may not have ordered the financial firm to pay claimant Peter Deutsch compensation but that doesn’t mean the panelists believe that the broker-dealer placed its former client’s interests before its own.

Deutsch’s family’s company, Deutsch Family Wine & Spirits, markets Yellow Tail and Beaujolais Nouveau wines. He is accusing Fidelity of not handling his account properly when he bet on Chinese shares. He claims that this cost him up to $436M.

Deutsch contends that he believed Fidelity unit Fidelity Family Office when it told him his best interests were the firm’s priority but they then allegedly proceeded to ignore what he wanted and lent out shares belonging to him. The brokerage unit also stopped Deutsch’s trading in China Medical Technology shares when it prevented him from buying an additional 50 million stock shares. Now he claims that this foiled his attempt to gain a controlling stake in the company.

Ruling on Deutsch’s bid for damages last month, the arbitrators turned down that request “in its entirety” on the grounds that they believe he would have lost money anyway even if Fidelity had dealt with his account differently. The panel agreed with the firm in that calculating damages could not be done in a way that wasn’t based on hypotheticals. The arbitrators didn’t weigh in on his claim that the broker-dealer acted inappropriately by lending his shares to short-sellers.