Articles Posted in FINRA

Securities Roundup: FINRA Fines Rodman & Renshaw $315K, Convictions Reached in $1B High Yield Fraud Scam Involving FBI, SEC Sues Wwebnet over $2.1M Fraud, and Ex-Hedge Fund Manager Settles Unsuitable Investment Recommendation Allegations for Over $421K

Published on: September 11, 2012 | by Shepherd Smith Edwards & Kantas, LLP

To settle Financial Industry Regulatory Authority allegations that it committed numerous violations involving dealings between investment banking and research functions, Rodman & Renshaw LLC has agreed to pay a $315,000 fine. According to the SRO, from January 2008 to March 2012, the financial firm did not have an adequate supervisory system in place to properly monitor these interactions. Rodman & Renshaw also allegedly did not keep research analysts from soliciting investment banking business, compensated one analyst for such contributions, and did not stop Rodman’s CEO (he was on its Research Analyst Compensation Committee while taking part investment banking activities) from having control or influence over research analyst evaluations and compensation.

Also fined over this matter are ex-Rodman & Renshaw CCO William A. Iommi Sr., who must pay $15,000, is suspended from serving in a principal capacity for 90 days, and has to requalify as a general securities principal, research analyst Lewis B. Fan, who must pay $10,000 fine and is suspended for 30 business days for allegedly trying to solicit investment banking business from public companies, and research analyst Alka Singh, who must pay $10,000 and is suspended for six months for allegedly trying to set up a concealed fee from a public company that she provided with research coverage. Although all of the parties have consented to an entry of FINRA’s findings, they have not denied or admitted to the securities charges.

In an unrelated securities case, a California jury has found ex-Rodman & Renshaw broker and investment adviser William Ferry and former real estate investment manager Dennis Clinton guilty of conspiracy, wire fraud, and mail fraud in a high-yield investment fraud scam that involved efforts to bilk a rich investor of $1 billion. The investor was actually someone who was working undercover for the Federal Bureau of Investigation.

Merrill Lynch Agrees to Pay $40M Proposed Deferred Compensation Class Action Settlement to Ex-Brokers

Published on: August 27, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Merrill Lynch (MER) has arrived at an “agreement in principle” to resolve the class action lawsuit filed by John Burnette and Scott Chambers over deferred compensation that they contend that the brokerage firm refused to pay them after it merged with Bank of America (BAC) in 2008 and they left its employ. About 1,400 brokers are part of this class. However, some 3,300 ex-Merrill brokers have submitted deferred compensation claims against the brokerage firm for the same reason.

Merrill had refused to give these employees their deferred compensation, which is what a broker usually gets paid for staying with a financial firm for a specific number of years, when they resigned after the merger. These brokers, however, cited “good reason” for their departure, which is another cause they can claim to receive this.

The class action settlement was presented to U.S. District Judge Alison Nathan at Manhattan federal court on Friday. She will decide whether to approve it, as well as certify the class according to the parties’ definition. However, it is not known at this time how many brokers will go for this settlement if it is approved.

It is not unusual for many to opt not to be part of a class action settlement and instead seek to obtain more money via an individual arbitration claim. Having an arbitration lawyer personally representing your case generally leads to bigger results. Already, over a thousand ex-Merrill brokers have filed their FINRA claims. Also, for an ex-Merrill broker whose deferred compensation was above six figures, they are likely to get much less by going the class action route. Meantime, ex-Merrill brokers with revenues that exceeded $500,000 during a certain timeframe before they left the financial firm cannot participate in a class action settlement. Neither can those that accepted bonuses and waived certain rights related to deferred compensation claims from Merrill after the deal with Bank of America.

That said, even the ex-Merrill brokers that decide to opt out of the class are likely to benefit from this settlement because it establishes a floor for payouts while serving as Merrill’s public acknowledgement that it had a financial duty to pay the former brokers upon their departure.

Under the class action settlement, the majority of advisers would get 40-60% of the value of their account. According to OnWallStreet.com, for a broker to receive 60%, advisors must have already made a request for reimbursement, whether via lawsuit, arbitration, or some other way and left the financial firm prior to January 30, 2010. To be eligible to receive 50%, these advisers too will have had to have made some type of legal action and resigned by June 30, 2010. If no action was taken, and the former broker still wants to opt in, they would turn in a form and seek 40% of compensation–dependent upon when they exited the firm. Other ex-advisors might also be able to receive 40 to 60% of payment depending on when they left Merrill, whether they had filed a deferred compensation claim, and in what compensation plans they were participants. Ex-dvisers that had an agreement with the Advisor Transition Program, however, would not be able to participate.)

Merrill to Make Good on Former Brokers’ Deferred Comp, On Wall Street, August 24, 2012
Merrill to pay $40 mln in deferred compensation suit, Reuters, August 25, 2012

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Merrill Lynch to Pay Brokers Over $10M for Alleged Fraud Over Deferred Compensation Plans, Institutional Investor Securities Blog, April 5, 2012

Advanced Equities Ordered by FINRA Arbitration Panel to Pay $4.5M to Ex-Broker, Stockbroker Fraud Blog, June 12, 2012

Claims Continue over MasterShare – Prudential Securities’ Deferred Compensation Plan, Stockbroker Fraud Blog, August 13, 2008 Continue Reading ›

FINRA Seeking to Create a Bigger, More Diverse Arbitrator Roster

Published on: August 23, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to the Financial Industry Regulatory Authority ‘s lead arbitrator recruiter, the self-regulatory organization is taking active steps to create a roster of arbitrators that is not only larger than its current one, but also more professionally and culturally diverse. Barbara Brady spoke at a Practicing Law Institute seminar this month.

Arbitrators are who that preside over FINRA arbitration cases on numerous matters, including financial fraud claims by investors and broker-brokerage firm disputes. Last year, arbitrators made more than 1,270 securities arbitration decisions that led to over $19 million in repayment to investors, over $63 million in fines, and 475 broker suspensions. Only a court can overturn an arbitrator’s securities ruling and this would have to be due to extenuating circumstances.

“Outcomes in arbitration vary greatly based on the quality of the arbitrators,” said William Shepherd, a Houston-based attorney, whose firm has represented investors in more than 1,000 arbitration claims over the past twenty years. “If securities arbitration is to have any integrity at all FINRA must make certain that the arbitrator decides cases fairly.”

Choosing who should be named an arbitrator can lead to disagreement over how much securities industry/brokerage firm experience or ties a candidate should have. For example, while an arbitrator who used to be a broker or a securities attorney may have certain technical expertise and experience that could prove helpful in deciding a case, he/she may also be biased.

“Having savvy arbitrators may streamline the process a bit with less reliance on expert testimony,” said Shepherd, “but it is difficult for such arbitrators to understand the lack of understanding of investments by the ordinary investor. I often point to my client’s own experiences to demonstrate this to arbitrators. For example, my client’s understanding of machinery at his workplace keeps him from getting hurt, but if you walked into that factory you might be killed the first day. It’s not that you’re stupid, just that you lack experience in that environment. The dangers of investing were foreign to my client. That is why he or she hired an expert. ”

Securities panels with three arbitrators usually handle arbitration disputes when over $100,000 is involved. Customers are allowed to opt for two of the three arbitrators or all three of them to not have a securities industry background. That said, just because someone is a non-industry arbitrator doesn’t mean he/she lacks biases.

While FINRA chooses not to reveal the demographics of its arbitrator pool, Brady claims that the SRO does try to select a diverse range of arbitrators from different backgrounds. She said FINRA is making an effort to make sure that women, minorities, and professors of economics, law, and real estate are represented.

Who makes a good arbitrator?, Reuters, August 20, 2012

Arbitrator Appointment Frequently Asked Questions, FINRA

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Apple REIT Arbitration: FINRA Rules Against David Lerner Associates in First of Hundreds of Cases, Stockbroker Fraud Blog, May 26, 2012

UBS, Citigroup FINRA Arbitration with Nonprofit Over ARS Cannot Be Halted, Said District Court, Institutional Investor Securities Blog, August 6, 2012 Continue Reading ›

Institutional Investor Securities Roundup: Biremis, Corp. Settles Securities Violation Charges with Industry Bar, FINRA Contacts Broker-Dealers About Conflicts of Interest Via Sweeps Letters, & Regulators Examine Financial Market Infrastructures

Published on: August 8, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Broker-dealer Biremis Corp. and its CEO and president Peter Beck agreed to be barred from the securities industry to settle Financial Industry Regulatory Authority allegations that they committed supervisory violations related to the prevention of manipulative trading, securities law violations, and money laundering. The SRO says that even though the financial firm’s specialty was executing trades for day traders, it had only obtained order flow from two clients outside the US from June 2007 through June 2010 and that both had connections to Beck.

FINRA contends that the broker-dealer and Beck did not set up a supervisory system that could be expected to comply with the regulations and laws that prohibit trading activity that is manipulative, such as “layering,” which involves making non-bona-fide orders on one side of the market to create a reaction that will lead to an order being executed on the other side. The SRO also says that Beck and Biremis did not set up an anti-money laundering system that was adequate, which caused the brokerage firm to miss warning signs of certain suspect activity so that it could report them in a timely manner.

Meanwhile, FINRA has also been attempting to deal with the issue of conflicts of interests via sweep letters, which it sent to a number of broker-dealers. The SRO is seeking information about how the financial firms manage and identify conflicts of interest. In addition to requesting meetings with each of them, FINRA wants the brokerage firms to provide, by September 14, the department and employee names of those in charge of conflict reviews, information about the kinds of documents that are prepared after such evaluations, and the names of who gets the final documents and reports after the conflict reviews.

Another area where regulators have been taking a hard look is the financial market infrastructures. The International Organization of Securities Commissions and the
Committee on Payment and Settlement Systems put out a joint report last month providing guidance about resolution and recovery regimes that apply to financial market infrastructures. The “Recovery and resolution of financial market infrastructures” is a follow-up report to the “Key Attributes of Effective Resolution Regimes for Financial Institutions” by the Financial Stability Board.

The board had said that financial market infrastructures needed to be subject to resolution regimes in a manner that was appropriate to them. This report tackles these matters as they apply to financial market infrastructures, including important payment systems, central counterparties, central securities depositories, trade repositories, and securities settlement systems.

FINRA Expels Biremis, Corp. and Bars President and CEO Peter Beck, FINRA, July 31, 2012

Recovery and resolution of financial market infrastructures (PDF)

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Texas Securities Roundup: Morgan Stanley Smith Barney Sued Over Financial Adviser’s Ponzi Scam, Judge Dismisses Ex-GE Executive Whistleblower’s Lawsuit Over His Firing, & Ex-Stanford Financial Group CIO Pleads Guilty to Obstructing the SEC’s Probe, Stockbroker Fraud Blog, July 3, 2012

$1.2 Billion of MF Global Inc.’s Clients Money Still Missing, Stockbroker Fraud Blog, December 10, 2011

FINRA, SEC Need to Employ Better Oversight Over Investor Education Funds, Says District Court

Published on: July 30, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Southern District of New York says that the Securities and Exchange Commission is not a doing a good enough job in providing oversight of $55 million in investor education funds and the way that the money is being disbursed. The funds come from the $1.4 Global Research Analyst Settlement that was reached with top investment banks, including Citigroup (C), JPMorgan Chase & Co. (JPM), Goldman Sachs Group Inc. (GS), and others, in 2003, over securities research that had been allegedly flawed and biased. The case is SEC v. Bear Stearns & Co.

Now, Judge William H. Pauley III, who is tasked with supervising how the settlement is implemented, is contending that the SEC should have been raising red flags about the FINRA Investor Education Foundation’s “opaque” project spending and operational expenses. The court is asking the foundation and the SEC to turn in certain information, including detailed accounting of receipts and spending for 2011 and 2010, by the end of August. The foundation also has provided additional details about its operating costs.

The court has said that disbursing the funds has been a challenging process. After the Investor Education Entity, which was created to use the funds, failed to take off, in 2005 the court let the SEC move the $55 million to the foundation under the premise that the regulator would provide oversight while turning in quarterly reports.( As of December 31, 2011 the foundation had given out approximately $44.7 million of the funds through education and grant programs.)

However, in an opinion that issued in 2009, the court questioned why the foundation paid $800,000 in administrative expenses while giving just $6.5 million to grantees. And in this most recent decision, the court is once again asking why, considering the type of projects involved, the foundation seems to spend a “disproportionately high” amount. Pauley pointed to several examples, including a daylong seminar involving 130 attendees in West Virginia that cost $58,000 and a financial fraud conference last November that the foundation co-sponsored in DC that took place at a posh hotel.

The court also said that the quarterly reports that it has received are “bereft” of the details that they should provide, and it is wondering why the eight “primary” states that have been the target of the foundation’s educational activities don’t necessarily appear to be the ones with the “greatest investor education needs.”

FINRA Investor Education Foundation spokesperson George Smaragdis has said that the foundation will give over the information that the court is asking for but that it doesn’t agree with the majority of the court’s statements.

SEC v. Bear Stearns

FINRA Investor Education Foundation

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SEC’s Delay in Adopting Conflict Minerals Disclosure Rule is Impeding the Development of Initiatives for Issuer Compliance, Says GAO, Stockbroker Fraud Blog, July 27, 2012
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FINRA Sustained $84.1M Net Loss in 2011

Published on: July 14, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to its yearly financial report, in 2011 the Financial Industry Regulatory Authority sustained an $84 million net loss last year primarily because of “non-recurring costs” involving new data centers in Maryland and New York and a rise in integration expenses related to the enhancement of cross market surveillance capabilities. A poor economy also reportedly played a role in the SRO’s decrease in revenues. The report came out on June 29.

FINRA Chairman and Chief Executive Officer Richard Ketchum attributed the decrease of regulatory fees of close to $50 million-a 10% drop since the financial crisis hit in 2008-to a drop in transaction volumes and industry revenues, as well as lower investment returns because of overall market returns and a more conservative investment allocation policy. (FINRA also noted net losses of $696.3 million in 2008, $48.6 million in 2009, and $54.6 million in 2010. )

Ketchum said that due to its “static funding levels,” FINRA is closely examining the organization’s spending habits, which it plans to lower by approximately $35 million this year. He expects that this will creative cumulative savings of close to $60 million by the end of next year while keeping the SRO’s regulatory mission intact.

Goldman Sachs Execution and Clearing Must Pay $20.5M Arbitration Award in Bayou Ponzi Scam, Upholds 2nd Circuit

Published on: July 14, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Court of Appeals for the Second Circuit is allowing a $20.5M award issued by a Financial Industry Regulatory Authority arbitration panel against Goldman Sachs Execution & Clearing LP to stand. The court turned down Goldman’s claim that the award should be vacated because it was issued in “manifest disregard of the law” and said that the clearing arm must pay this amount to the unsecured creditors of the now failed Bayou hedge fund group known as the Bayou Funds, which proved to be a large scale Ponzi scam.

Goldman was the prime broker and only clearing broker for the funds. After the scheme collapsed in 2005, the Bayou Funds sought bankruptcy protection the following year. Regulators would go on to sue the fund’s funders over the Ponzi scam and the losses sustained by investors. Meantime, an Official Unsecured Creditors’ Committee of Bayou Group was appointed to represent the debtors’ unsecured debtors. Blaming Goldman for not noticing the red flags that a Ponzi fraud was in the works, the committee proceeded to bring its arbitration claims against the clearing firm through FINRA. In 2010, the FINRA arbitration panel awarded the committee $20.58M against Goldman.

In affirming the arbitration award, the 2nd Circuit said that in this case, Goldman did not satisfy the manifest disregard standard. As an example, the court pointed to the $6.7M that was moved into the Bayou Funds from outside accounts in June 2005 and June 2004. While the committee had contended during arbitration that these deposits were “fraudulent transfers” and could be recovered from Goldman because they were an “initial transferee” under 11 U.S.C. §550(a), Goldman did not counter that the deposits weren’t fraudulent or that it was on inquiry notice of fraud. Instead, it claimed the deposits were not an “initial transferee” under 11 U.S.C. §550 and the panel had ignored the law by finding that it was.

Institutional Investor Roundup: Evergreen Ultra Short Investor Lawsuit Settled for $25M, FINRA Launches Pilot Program for Huge Claims, Ex-AmeriFirst Funding Manager’s Conviction Appeal is Rejected, & EU Regulator Examines Credit Raters’ Bank Downgrade

Published on: July 12, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Evergreen Investment Management Co. LLC and related entities have consented to pay $25 million to settle a class action securities settlement involving plaintiff investors who contend that the Evergreen Ultra Short Opportunities Fund was improperly marketed and sold to them. The plaintiffs, which include five institutional investors, claim that between 2005 and 2008 the defendants presented the fund as “stable” and providing income in line with “preservation of capital and low principal fluctuation” when actually it was invested in highly risky, volatile, and speculative securities, including mortgage-backed securities. Evergreen is Wachovia’s investment management business and part of Wells Fargo (WFC).

The plaintiffs claim that even after the MBS market started to fail, the Ultra Short Fund continued to invest in these securities, while hiding the portfolio’s decreasing value by artificially inflating the individual securities’ asset value in its portfolio. They say that they sustained significant losses when Evergreen liquidated the Ultra Short Fund four years ago after the defendants’ alleged scam collapsed. By settling, however, no one is agreeing to or denying any wrongdoing.

Meantime, seeking to generally move investors’ claims forward faster, the Financial Industry Regulatory Authority has launched a pilot arbitration program that will specifically deal with securities cases of $10 million and greater. The program was created because of the growing number of very big cases.

Securities Law Roundup: Merrill Lynch Pays Customers $32M For Allegedly Overcharging Them with Unwarranted Fees, Brookstone Securities is Accused of $1.6M in Fraudulent CMO Sales to Elderly Retirees, and Planner Loses CFP Designation Following After Maine

Published on: June 28, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority says that it is fining Merrill Lynch, Pierce, Fenner & Smith, Inc. $2.8M in the wake of certain alleged supervisory failures that the SRO says led to the financial firm billing clients unwarranted fees. The financial firm paid back the $32M in remediation to affected clients, in addition to interest.

According to FINRA, from 4/03 to 12/11, Merrill Lynch lacked a satisfactory supervisory system that could ensure that certain investment advisory program clients were billed per the terms of their disclosure documents and contract. As a result, close to 95,000 client account fees were charged.

Also, due to programming mistakes, Merrill Lynch allegedly did not give certain clients timely trade confirmations. These errors caused them to not get confirmations for over 10.6 million trades in more than 230,000 customer accounts from 7/06 to 11/10. Additionally, FINRA contends that Merrill Lynch failed to properly identify when it played the role of principal or agent on account statements and trade confirmations involving at least 7.5 million mutual fund buy transactions. By settling, Merrill Lynch is not denying nor admitting to the charges. It is, however, agreeing to the entry of FINRA’s findings.

Ex-Morgan Stanley Smith Barney Broker Settles with FINRA for Allegedly Failing to Notify Firm of Previous Arrest

Published on: June 16, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Broker Bruce Parish Hutson has turned in a Letter of Acceptance, Waver, and Consent to settle allegations of Financial Industry Regulatory Authority rule violations involving his alleged failure to advise Morgan Stanley Smith Barney (MS) of his arrest for retail theft at a store in Wisconsin. FINRA has accepted the AWC, which Hutson submitted without denying or admitting to the findings and without adjudicating any issue.

The Ex-Morgan Stanley Smith Barney broker (and before that he worked for predecessor company Citigroup Global Markets Inc. ((ASBXL)), had entered a “no contest” plea to the misdemeanor charge in February 2010. He received a jail sentence of nine months, which was reduced to 12 months probation. On August 16, 2010, Hutson, turned in a Form UT (Uniform Termination Notice for Securities Industry Registration) stating that he was voluntarily let go from Morgan Stanley Smith Barney because the financial firm accused him of not properly reporting the arrest.

Also, although Form U4 (Uniform Application for Securities Industry Registration or Transfer) doesn’t mandate the disclosure of a mere arrest but does contemplate a criminal charge (at least), many industry members obligate employees to disclose any arrests. Yet when it was time to update this form by March 18, 2010, FINRA says that Hutson did not report the misdemeanor theft plea. Then, when he filled out Morgan Stanley Smith Barney’s yearly compliance questionnaire on May 19, 2010, he again denied having been arrested or charged with a crime in the past year or that he was statutorily disqualified.

FINRA contends that Hutson willfully violated its Article V, Section 2 (C) by-laws by not disclosing the criminal charge. The SRO also says that his later “no contest” plea to the misdemeanor theft violated FINRA Rule 2010 (when he made the false statement that he hadn’t been charged with any crime in the 12 months leading up to his completion of the compliance questionnaire) and he again violated this same rule when it was time to fill out the questionnaire. Per the AWC terms, Hutson is suspended from associating with any FINRA member for five months and he must pay a $5,000 fine.

“A broker can have a dozen complaints by investors and lose a half-dozen claims of wrongdoing, in which arbitrators reimburse these investors only part of their millions in collective losses, yet the broker is neither fined nor suspended,” said Shepherd Smith Edwards and Kantas, LTD, LLP founder and Securities Attorney William Shepherd. “A shoplifting charge in one’s past – very bad. Repeated misrepresentations to investors – so what. Perhaps FINRA should get its priorities straight.”

Broker Bruce Parish Hutson, Forbes, June 27, 2012

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Accused Texas Ponzi Scammer May Have Defrauded Investors of $2M, Stockbroker Fraud, August 3, 2011