Oppenheimer Continues to Show Serious Supervisory Deficiencies

Date: August 7, 2013
The attorneys at Shepherd, Smith, Edwards & Kantas LLP are investigating claims by investors with Oppenheimer & Co.  Although the firm’s investigations are usually target more specifically at particular conduct of a firm or broker, Oppenheimer & Co.’s supervisory system has been found so woefully inadequate by numerous regulators and arbitration Panels over the last several years that almost any trading strategy permitted in Oppenheimer customer accounts becomes suspect.

For example, in 2008 the Massachusetts Securities Division filed suit against Oppenheimer for its sales of Auction Rate Securities (ARSs).  Specifically, the regulator alleged that Oppenheimer marketed ARSs as safe alternatives to money markets and certificate of deposits (CDs).  In actuality, ARSs are complex debt securities that can suffer complete failures and ultimately leave the investor holdings a completely illiquid asset with no way to get their money back out.  The regulator further claimed that Oppenheimer was aware of many disruptions and failures that occurred in the ARS market in 2007, but blithely ignored these warnings.  Oppenheimer did not investigate the potential ramifications for the ARS securities that had been, and were currently being, sold to their clients.  Oppenheimer did not warn its clients of these warning signs.

Oppenheimer later learned that Lehman Brothers, Inc. was trying to get out of the ARS business, and knew that this could result in auction failures, meaning that clients would be left with securities that they could not sell.  Nonetheless, Oppenheimer did not warn its clients, and continued to market the securities as cash equivalents.  At the same time, Oppenheimer executives unloaded millions of dollars of ARS securities that they owned in personal accounts.  When ARS auctions began suffering widespread failures in February 2008, many Oppenheimer customers were left holding the bag.

Ultimately, Oppenheimer agreed to settle this allegation and agreed to buy back the ARS securities sold to Massachusetts investors and pay roughly $250,000 in fees, without specifically admitting or denying the truth of those allegations.

Two years later, Oppenheimer was charged by the Financial Industry Regulatory Authority (FINRA), the regulator of broker dealers, with dealing unfairly with customers purchasing municipal bonds.  Specifically, FINRA alleged that Oppenheimer was buying and selling municipal securities from and to its customers as a dealer, meaning that it was trading securities for its own, corporate account as opposed to facilitating trades between two other investors.  In doing so, Oppenheimer was required to price those trades fairly to the customer, since the trades were not being done over the open market.  FINRA claimed that Oppenheimer failed to do this, and was selling those securities to its customers at prices worse than the customers could have gotten by buying the same security on the open market.  Oppenheimer also repeatedly failed in written disclosures to tell customers that it was acting as a principal in these transactions and other required disclosures.  As a result, Oppenheimer agreed to settle FINRA’s claim and pay $57,500 in fines, as well as compensating the affected customers for the unfair prices they received.

This year, Oppenheimer was charged by FINRA for failing to have proper systems in place to monitor the low priced or “penny” stocks being traded by many of its brokers.  Oppenheimer was supposed to have systems in place to monitor penny stocks that were being traded in customer accounts to determine if those stocks were properly registered and, if not, if there was an applicable exemption from registration to permit the trade.  FINRA claimed that in a roughly two year span between 2008 and 2010, Oppenheimer accounts traded more than a billion shares of penny stocks which were not registered and did not have an exemption.  These trades created “red flags” which Oppenheimer supervisors should have followed up on, yet they failed to do so.

Moreover, Oppenheimer had obligations to ensure that it had adequate anti-money laundering policies in place to detect and report trading activity which was likely being used to funnel illegal money.  An adequate money-laundering policy would have also detected these penny stock trades and reported them to relevant authorities.  Oppenheimer did not do so.  As a result, Oppenheimer agreed to pay $1.425 million in fines, without admitting or denying the truth of the allegations.

Finally, these actions are coupled with numerous actions filed by individual investors for egregious conduct by their Oppenheimer brokers which Oppenheimer supervisors should have picked up on and prevented most, if not all, of the damages.  Many of those claims have been successful, some even resulting in the award of punitive damages.  More details on one of these claims can be found here.

If your account with Oppenheimer & Co. has suffered losses and you believe that your broker may have acted inappropriately, contract the law firm Shepherd, Smith, Edwards & Kantas for a free, no obligation evaluation of your account.  You may have a claim to attempt to recover some or all of your losses.