Wall Street Journal Investigation Uncovers "Hot Spots" Where Brokers With "Disciplinary Red Flags" Accumulate

November 14, 2014,

On November 12, 2014, the Wall Street Journal reported the results of an investigation performed of broker records. The article disclosed that the paper identified 16 "hot spots" where "troubled brokers tend to concentrate," after analyzing about 550,000 records of brokers.

The list of these 16 hot spots include: Fort Lauderdale/Boca Raton, FL; Long Island, NY; Sarasota FL; Collier/Lee Counties, FL; Treasure Coast, FL; Southern Manhattan, NY; Greater Las Vegas, NV; Eastern Maricopa County, AZ; Staten Island, NY/Middlesex & Monmouth Counties, NJ; Greater Sacramento, CA; Southern Miami-Dade County, FL; Greater San Diego, CA; Metro Detroit, MI; North L.A./San Fernando Valley, CA; Orange County, CA; and Western Maricopa County, AZ. The results of the plots on the WSJ's map show that these hot spots appear to collect around the metro New York area, Southern Florida and Southern California.

The WSJ reported that "troubled brokers" were determined as having three or more disciplinary red flags over their career, including regulatory actions, criminal charges, client complaints, recent bankruptcies and terminations. Regulatory actions include proceedings commenced by regulators, including the Securities and Exchange Commission and Financial Industry Regulatory Authority, which generally seek financial penalties and/or temporary or permanent bars from the securities industry. The article also noted that three red flags is also three times the national average for brokers, many of whom maintain clean records.

For the metro New York area particularly, the WSJ article reported that the New York Attorney General overseas a broker workforce of approximately 95,000 brokers, including 11,000 brokers in the three hot spots identified in that area. Despite the fact that approximately 15% of all registered brokers work in New York, the NYAG assessed only $5,500 in sanctions against brokers, representing about 1% of the total sanctions assessed nationwide, the WSJ reported. The article quoted a NYAG spokesperson as stating that New York's securities law does not provide the NYAG with review procedures or authority to "regularly examine" brokerage firms, unlike FINRA and other states.

The WSJ article also noted that there were 50% more households than average run by individuals over the age of 65 and income over $100,000 in the "hot spots" where the troubled brokers tended to accumulate. The incidence of elevated levels of brokers with three or more "red flags" in communities that also contain larger than average wealthy elderly populations is a potentially troubling phenomenon that may only become more pronounced with the ageing of the baby boomers generation. The WSJ article noted that it was hard to determine whether there is a correlation between larger than average communities of troubled brokers and wealthy elderly individuals.

The attorneys at Malecki Law represent investors who have lost money in their brokerage accounts as a result of brokers who are often driven by self-interest, including overcharging or overtrading their clients accounts, or recommending investments solely to earn large upfront commissions. If you believe you were not properly recommended investments, please contact the attorneys at Malecki Law to determine if you have a claim for damages.

Malecki Law is Investigating Possible Claims Against Craig Scott Capital

September 15, 2014,

Malecki Law is investigating possible claims against Craig Scott Capital, based in Long Island, NY.

According to FINRA BrokerCheck, some customers of the firm have recently filed arbitrations related to the conduct of the firm's brokers alleging "unsuitability, excessive trading and misrepresentation" against the firm. According to his CRD, the firm's President and CEO, Craig Scott Taddonio, intends to vigorously defend himself in at least two arbitrations. Craig Scott Capital has also recently been the subject of a FINRA regulatory investigation resulting in the firm paying a fine.

Sources have reported that some brokers from Craig Scott Capital are alleged to be "cold-calling" investors with no prior relationship with the firm and soliciting sales of investments that may be unsuitable for the investor. These investments may include non-traded real estate investment trusts ("REITs").

Non-traded REITs are well-known in the financial industry for paying high commissions to the selling broker, but have run into problems in the past, causing investors to suffer significant losses. These products should only be sold to investors for whom they are suitable. Unfortunately, they are frequently sold to investors for whom they are not appropriate.

It is the right of any and all investors who believe they may have suffered losses as a result of recommendations of their financial advisor to contact our offices to explore their legal rights and options. If you or a family member has suffered losses, contact the securities fraud lawyers at Malecki Law for a free consultation and case evaluation at (212) 943-1233.

Malecki Law takes a proactive and informed approach to the financial news of today: actively engaging in fact-finding analysis on prospective cases from around the world. Our thorough knowledge of securities law's history and fine points makes us ideal consultants for investors who have suffered losses due to misadvice from their broker or other financial counsel. Information on a selection of funds and companies currently under investigation by Malecki Law can be found below.

SEC Charges Robare Group with Fraud For Failing to Disclose Fee Arrangement with Broker-Dealer

September 12, 2014,

handshake.jpgHow do you know your investment adviser is solely acting in your best interest? Sadly, even when it comes to picking mutual funds, your investment adviser may still only be thinking of himself or herself.

Take for example the allegations in a recent proceeding instituted by the SEC on September 2, 2014 against the Robare Group, Ltd. and two individual principals of the firm for failing to disclose a fee arrangement in which Robare was paid between 2 and 12 basis points on the client's assets investments in no-transaction-fee (NTF) mutual funds on a broker's platform, as reported by InvestmentNews. One basis point is equal to 1/100th of one 1%, so 10 basis points would equal .1%.

The SEC alleged that Robare earned close to $500,000 in fees over eight years, and failed to disclose the arrangement on the firm's Form ADV. The SEC further alleged that in 2013, Robare managed approximately 350 separately managed discretionary accounts and had assets under management of approximately $150 million.

The SEC alleged that the fee arrangement created an incentive for Robare to favor mutual funds available on the broker's platform when giving investment advice to its clients. Robare's alleged incentive to favor these mutual funds created a conflict of interest with its clients, a fact that was not disclosed, or only partially and incompletely disclosed, by the firm, according to the SEC's allegations.

The SEC alleged that Robare violated Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 (Advisers Act), which make it unlawful for an investment adviser to defraud or engage in a practice that would operate as a fraud upon any client. Regarding the false or incomplete filings on the firm's ADV, the SEC alleged that all respondents violated Section 207 of the Advisers Act) by making untrue statements in an application or report filed with the SEC.

According to the InvestmentNews article, the SEC's Asset Management Unit charged a different adviser in 2012 with also failing to disclose a revenue-sharing arrangement.

Investment Advisers are considered fiduciaries of their customers, and therefore hold various fiduciary duties, including to act in the client's best interest. If an investment adviser places his or her own interest ahead of their client, they risk breaching those duties, and as illustrated in the allegations made by the SEC in proceedings against Robare, fraud charges by regulators. Investment Advisers who are also registered representatives with a broker-dealer may face private actions brought by their clients for recommending unsuitable investments (i.e. investments that are not proper for the client given their risk tolerance, age and other circumstances).

It is not uncommon for clients to learn that unsatisfactory performance in their brokerage accounts often mask further and more damaging securities law violations. If you believe you were not properly recommended investments, please contact the attorneys at Malecki Law to determine if you have a claim for damages.

Are Some Customers Paying Too Much In Fees? The SEC Cracks Down on Linkbrokers

August 15, 2014,

"Is my stockbroker charging me too much in commissions and fees?" This is a common question many investors frequently have. Unfortunately, all too often, the answer to this question is "Yes."

In fact, just yesterday, the SEC announced that it had fined a New York based broker-dealer, Linkbrokers (an affiliate of London-based ICAP), $14 million for over-charging its customers in the form of markups (and markdowns), among other things.

Markups are the difference between the lower price a broker-dealer can buy an investment for and the higher price charged to a retail customer when they buy investments directly from the broker-dealer's inventory, rather than on the open market. For example, if a broker-dealer were able to buy a stock at $10 per share and charge a retail customer $11 for that same share, the markup would be $1. Markups are common in the financial services industry, but to be acceptable, they must not be excessive and must be appropriately disclosed to the customer.

According to the SEC, from 2005 through February 2009, Linkbrokers did not properly disclose the markups and markdowns, nor were many of the markups (and markdowns) reasonable. Instead, Linkbrokers is said to have defrauded customers by claiming to charge them minimal commissions, while in fact charging them excessive markups that could be as much as 10-times what the customers believed they were paying. The SEC alleged that Linkbrokers charged markups that were as high as $228,000.

Linkbrokers also allegedly defrauded customers by using a version of a scheme known commonly as "cherry-picking." Such a scheme involves trading for both customer accounts and "house" accounts, which hold the broker-dealer's money. The cherry picker then chooses the profitable trades and assigns them to the house accounts, while dumping the losing trades into the customer accounts, causing the broker-dealer to profit and the customer to lose money.

Linkbrokers is said to have placed orders for customers to either buy or sell at a specific price, known as a "limit order," and executed such trades accordingly. However, depending on how the market moved after that point in time, Linkbrokers allegedly bought or sold those positions back into the market at a profit, which it kept for its own house accounts. They then allegedly lied to the customers, telling them that the limit orders had never been executed, causing the customers to suffer losses.

Remarkably, too many stockbrokers and investment advisers continue to charge their clients excessive fees and commissions. Such conduct is against the law and against financial industry rules. Investors who have been charged excessive fees and commissions may be entitled to a return of some or all of the commissions and fees paid in the account, along with a reimbursement for some or all of any losses that were suffered in the account as well.

If you believe that you may have been charged excessive fees or commissions on your investment account, contact an attorney at Malecki Law for a free consultation to find out if you may be entitled to recover some or all of your losses. The attorneys at Malecki Law have decades of experience representing investors.

Are We Coming Up On A "Sweet Spot" for SEC Whistleblowers?

August 1, 2014,

In only three years, the Dodd-Frank whistleblower program, which promises cash rewards for those whose tips lead to a successful investigation by the SEC, has yielded more than 6,500 tips according to a recent article in the Wall Street Journal. Though traditionally thought of as insiders, tipsters do not just come from only inside the companies targeted. Rather, whistleblowers are coming forward from all walks of life, including investors and retirees, in addition to insiders and the family of insiders according to the article. businessman-with-the-notebook-1-1362246-m.jpg

The rate at which individuals are submitting tips also seems to be rising. As a firm that represents whistleblowers, Malecki Law has also seen a growth in calls from prospective whistleblowers seeking legal counsel to file a tip with the SEC. Just recently Jenice Malecki, Esq. was interviewed by Rob Lenihan of Thomson Reuters: "'I can tell you that whistleblowers as potential clients have increased over the last year -- substantially,' Malecki said. 'There's definitely an increase, and everybody who is somehow involved in the securities industry either as a customer or otherwise feels like they have some information they could tip on.'"

Although some individuals may have initially been reluctant to come forward for fear of retaliation, a recent push to protect the rights of whistleblowers has helped to alleviate many of those concerns. Such a positive development coupled with the mechanisms in place that allows whistleblowers to report securities laws violations anonymously has allowed tipsters to come forward without unnecessary fear of retribution.

In addition to ensuring that the rules are followed and that rule-breakers are held accountable, whistleblowers would appear to have more good reason to come forward. Even though $15 million has already been awarded to whistleblowers, it would appear that this is just the tip of the ice berg. Mr. Sean McKessey, head of the SEC's whistleblower program, was quoted by the Wall Street Journal as saying that the numbers will soon grow and that a "'critical mass' of tips will soon yield more investigations, fines and bounties." According to Mr. McKessey, "we're getting close to the sweet spot." This would mean more money for whistleblowers.

If you believe you may have valuable information and are thinking about blowing the whistle, contact an attorney at Malecki Law for a free consultation. The attorneys at Malecki Law have experience representing whistleblowers, and can help you file your whistleblower complaint with the appropriate agency to maximize your chances at getting the reward to which you may be entitled.

Bitcoin Update: Alerts and Guidance Issued by the SEC, FINRA and IRS

May 9, 2014,

It's Buyer Beware, according to guidance and alerts issued recently by the SEC, FINRA and IRS concerning risks inherent in Bitcoin. Bitcoin is described by all three offices as a decentralized, peer-to-peer virtual currency that can be used in place of, and traded for, traditional currencies, though is not backed by any central authority, government bank or otherwise.

First, the IRS released Notice 2014-21 on March 25, 2014 in question and answer format to describe the tax implications of Bitcoin. Generally speaking, the IRS has taken the stance that Bitcoin will be considered property, and for investors, may constitute a capital asset, requiring reporting of gain or loss based on fair market value. Given the opaque nature of Bitcoin, this may cause further risks to investing, as investors may be required, by themselves, to calculate gains and losses, a job typically taken up by banks, wire houses and clearing firms.

The SEC, in its second Bitcoin alert dated May 7, 2014, reiterated risks associated with investments in the digital medium. Given that Bitcoin is a relatively new innovation, the SEC warned that it has a potential to give rise to frauds that may propose "guaranteed" high rates of return.

The SEC alert listed several warning signs of potentially fraudulent conduct, in addition to promises or "guarantees" on return:
• Unsolicited offers, including cold-calls or emails;
• Unlicensed sellers, or individuals or businesses that are not registered with FINRA, the SEC or other regulators;
• No net worth or income requirements;
• Any offer that sounds too good to be true (these sorts of investments often are); and
• Pressure to buy immediately.

The SEC alert also highlighted the very large volatility in the valuation of Bitcoin, noting that the exchange rate has dropped more than 50% in a single day. Given this extreme volatility, even reputable businesses may inappropriately attempt to solicit investment via Bitcoin. The SEC noted that in March 2014, the Texas State Securities Board issued an emergency order against an oil and gas company for soliciting investments via Bitcoin for exploratory wells in West Texas. While oil well exploration is well-known to be a risky endeavor, the emergency order was made because the solicitations were deemed unregistered securities, and if the business held Bitcoin, it could affect the amount of money available for business operations, a risk not disclosed in its solicitations.

The FINRA investor alert noted other risks, including that due to the international and anonymous nature of Bitcoin, investments are not guaranteed, are irreversible, and may be implicated in illegal activities. If an investment is made that turns out to be fraudulent, it may be hard or impossible to recover your losses, as the investment/currency is not backed by any U.S. banks or federal regulatory agencies.

Investments based on bitcoin must still be marketed and sold in accordance with securities laws and related regulations, and so must be suitable for investors appropriate under each specific investor's circumstances. If you believe you were not properly informed of the risks associated with an investment involving bitcoin, please contact the attorneys at Malecki Law to determine if you have a claim for damages.

Oil and Gas Limited Partnerships Can Be Extremely Risky Investments

April 25, 2014,

oil-pumps.jpgMuch has been made in the recent months about supposed growth in the oil and gas markets, including speculation, such as the recent article on www.forbes.com that increasing demand will be preceded by increased investment in infrastructure that would bring the product to market.

Regardless of the potential growth as an investment, limited partnerships and business development corporations have historically been, and will likely continue to be, extremely risky investments that demand a careful suitability analysis and due diligence by financial professionals before they are recommended for public investors. In addition to the risks listed in the Forbes article, such as "acts of God and man" (environmental, terrorist, war, etc.), there are the risks that the investment never yields the promised gains, or that the investment itself is completely false, fictional and fraudulent.

Further, these investments also tend to be highly illiquid and require long holding periods. This fact alone can render an investment unsuitable for a particular investor, if they are at an age or place in their lives where access to cash is important, or if the investor actually told their financial professional that liquidity was important to them.

Oil and gas limited partnerships, like other alternative investments, also tend to be high-commission products, giving brokers an incentive to recommend and sell to unsuspecting investors without making the necessary suitability analysis required of them by FINRA Rules and applicable securities laws.

The North American Securities Administrators Association (NASAA) cites potential tax consequences and fraudulent sales techniques of investments in oil and gas as additional concerns for investors. For example, while cold-callers may claim that springtime weather will bring more motorists that will demand more oil, the increased use of oil and gas in good weather is a known fact and usually already built into the market price, so such claims can be half-truths with serious omissions. Sometimes, as NASAA points out, these investments are marketed in high-pressure sales calls from "boiler rooms" to market the investments. Investors should be extremely weary if they receive such unsolicited phone calls.

As reported by MarketWatch, while yields may look or sound promising, the fine print of the limited partnership investment structure may include substantial layers of fees and expenses that could "erode" returns to the investors. Further, MarketWatch noted that certain such investments may merely return principal back to the investor, rather than any actual income on the investment. Other "investments" that return principal are typically known as Ponzi schemes.

We at Malecki Law have unfortunately seen poor marketing and solicitation tactics involved when recommending alternative investments like oil and gas limited partnerships. It is also not uncommon for financial professionals to fail to disclose all of the attendant risks of these investments, including any lock-up periods, relative illiquidity of the investments generally, as well as tax drawbacks. Securities rules require that a broker fully advise the investor of all risks when recommending investments in oil and gas limited partnerships and other similar alternative investments. If you believe you were not properly informed of these risks, or feel you were subjected to high-pressure sales tactics that forced you into unsuitable investments, please contact the attorneys at Malecki Law to determine if you have a claim for damages.

Is Your Broker Charging You A Fair Commission?

April 25, 2014,

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Is your broker charging you a fair commission? Not surprisingly, many investors do not fully understand how much they are paying in fees and commissions to their broker-dealer, and disparities from firm to firm can be wide and difficult to decipher. A recent study conducted by the North American Securities Administrators Association ("NASAA"), an association of state securities regulators, highlighted this issue, finding that investors would benefit from a "greater consistency and transparency in the disclosure of fees."

The focus of the study was to examine the fee disclosures at thirty four (34) different broker dealers to compare methods of disclosure between firms and determine whether the customers were being adequately informed of the fee structure within their accounts.
As a result of the study, NASAA recommended that model fee disclosures be adopted to ensure that investors are accurately advised. The goal for model fee disclosures is to create something that will be simple and straight-forward, making it easier for customers to understand.

The problem now is that there is a great disparity in the way fees are disclosed to customers. Fee disclosures can range in size from one paragraph to up to seven pages, and such disclosures can be in a document between one and forty-five pages long, making them hard to find. Fee disclosures are also oftentimes buried in fine print where investors are unlikely to read.

The fear is that this wide discrepancy between how firms disclose their fees to investors can be misleading, whether done intentionally or unintentionally. In the past four years alone, seven firms (including Woodstock Financial Group, JHS Capital Advisors f/k/a Pointe Capital, Salomon Whitney, Newbridge Securities, John Thomas Financial, A&F Financial Securities, and First Midwest Securities) have been sanctioned for issues regarding charges to customers. For reasons such as that, investors need to be wary of what they are paying and why.

Churning is currently a problem for investors who have their trust abused by their broker. Churning refers to when a broker makes excessive trades in an account to earn more commissions. If an investor is paying commissions per trade, it is in the broker's financial interest to trade as much as possible in the account, since more trades means more commissions. For the broker, more commissions mean a bigger pay check.
For the customer, more trades can mean more risk, since in theory many, if not all, of the profits earned by the account will be eaten up by the higher commissions. Often churning results in significant losses in the account due in whole or in part to these high commissions.

Brokers who are churning a customer account also frequently charge higher commissions than they would or should otherwise charge per trade. Both of these practices are against the law and a violation of securities industry rules.
When a customer account is being traded frequently, a broker is supposed to recommend to the customer to put that account on what is called a fixed management fee (often 1-2% of the total account assets). This will keep the fees paid by the customer to a minimum. However, brokers who are looking out for their own interests will not do that, causing the customer to pay exorbitant fees. Churning victims can wind up paying their broker and broker-dealer hundreds of thousands of dollars per year in commissions and miscellaneous fees.

Any investor who believes that they or a family member have lost money as a result of churning may be able to recover some or all of their losses. The attorneys at Malecki Law are experienced in representing investors in churning cases. For a free consultation, contact us.

Biggest Recent FINRA Fines Point to Poor Supervision at Large Broker-Dealers

April 11, 2014,

Apparently the opportunity for bad brokers to engage in wrongful conduct is enabled by big brokerage firms, as recent Financial Industry Regulatory Authority (FINRA) fines indicate that these businesses fail to properly supervise their foot soldiers. The FINRA Rules, including Rule 3010, make clear that broker-dealers are the securities gatekeepers, because they are ultimately responsible for supervision of their brokers. Not all brokers take advantage of their customers, but those who do will certainly feel emboldened to continue their schemes if they know they can print account statements listing fictitious investments, or make misrepresentations to clients over emails they know will never be supervised.

InvestmentNews recent reported regarding the largest recent fines handed out by FINRA. The fines, some mentioned in prior blog posts, point to continued poor supervision at large broker-dealers.

For instance, we recently commented regarding FINRA's announcement on February 24, 2014 of a $775,000 fine for Berthel Fisher & Company Financial Services, Inc. and its subsidiary for failure to supervise brokers on recommendations and sales of alternative investments such as non-traded real estate investment trusts (REITs) and leveraged and inverse exchange-traded funds (ETFs).

Then, one month later on March 24, 2014, FINRA announced that it had fined LPL Financial LLC $950,000 for supervisory deficiencies related to brokers' recommendations and sales to public investors of alternative investments, including non-traded REITs, oil and gas partnerships, business development companies (BDCs), hedge funds, managed futures and other illiquid pass-through investments.

Other broker-dealers on InvestmentNews' notorious list include FINRA's report of a fine and ordered restitution in the amount of $1.2 million against Triad Advisors and Securities America for those companies' failure to supervise the use of consolidated reporting systems and inaccurate valuations being sent to customers, and for failure to retain the consolidated reports, in violation of applicable securities recordkeeping laws. These types of failures are particularly problematic, because they allowed brokers to sell potentially fraudulent investments with the appearance of legitimacy, since they were printed on firm account statements. Such investments, according to FINRA, included those held "away" from the broker-dealers, which sometimes included fictitious promissory note schemes or other fraudulent or Ponzi-like investments. FINRA reported that the supervisory failures extended to "hundreds of brokers."

The FINRA fine that topped the list was that handed to, again, LPL Financial LLC in the amount of $9 million (including a fund set up to compensate customers) for "systemic email failures" and "misstatements to FINRA," reported on May 21, 2013. FINRA found that from 2007 to 2013, LPL Financial, which had completed numerous mergers to become one of the country's largest independent broker-dealers, experienced repeated failures in their policies and procedures for supervising the email system. FINRA reported that LPL was unable, on many occasions, to capture email, supervise its brokers or even to respond to regulatory requests. Included in the supervisory oversights were 28 million emails sent or received from brokers acting as independent contractors through a DBA entity.

The attorneys at Malecki Law have prosecuted several failure to supervise cases over the years. Cases involving independent contracts acting through DBAs, or brokers peddling unsuitable alternative investments or issuing false reports, are some of the issues we have seen repeatedly. If you believe you have lost money as a result of inappropriately marketed or unsuitable investments, please contact an attorney at Malecki Law to determine if you may be able to recover some or all of your losses.

Managed Futures Fund Fees: When Is Enough Enough?

April 4, 2014,


When are money management fees too much? It is hard to imagine that any investor who has sought the guidance of professional financial advisors has not asked himself or herself this question at least once - most likely more. In the case of managed futures, the CFTC is asking that question for investors right now. Following an article in Bloomberg Magazine in the Fall of last year, 2013, the CFTC has launched a probe in to the fees charged by those who manage the more than $300 billion in the managed futures market.

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According to the Bloomberg report, investors in 63 managed futures funds paid out 89% of the $11.51 billion in gains from managed futures investors in the form of fees, commissions and expenses from January 1, 2003 to December 31, 2012 - more than $10.2 billion.

Bloomberg quoted Mr. Bart Chilton, a member of the Commodity Futures Trading Commission as saying:

""The big news here is, the fees are so outlandish, they can actually wipe out all the profits . . . We absolutely need to do a better job of letting consumers know in plain English what's going on. . . Those numbers tell a story. It's astounding."

For example, Spectrum Technical LP, run by Morgan Stanley, reportedly managed more than $1 billion, making gross profits of $490.3 million. Apparently, what seemed like a great gain for investors shockingly became a loss. It seems that all $490.3 million was eaten up in fees, which totaled $498.7 million - meaning an $8+ million loss for investors. However those charging the fees pocketed nearly half-a-billion dollars over the same time frame. Over ten years, Bloomberg reported that twenty nine Citigroup and Morgan Stanley funds charged over $1.5 billion in fees to investors.

One might ask, "Why would anyone invest in a fund where they could potentially lose money, and where an overwhelming majority of any gains would be eaten up by fees?" Many are introduced to managed futures by their broker or financial advisor. These funds are typically sold as an alternative to traditional investments such as stocks and bonds and as a way to further diversify a portfolio. However, many investors might not realize that managed futures funds reportedly pay commissions to the selling broker that can be as high as 4% of total assets invested annually. Total costs and fees to the investor can run as high as 9% of total assets invested per year.

Even more shocking misleading marketing information that is allegedly used to sell managed futures to investors. According to the Bloomberg report, charts produced by BarclayHedge (not related to Barclays PLC) show astonishing gains in the managed futures market to the tune of 29 fold growth in some cases. However, BarclayHedge reportedly only uses information volunteered by managed-futures traders, and the firm does not include the fees charged to investors in its calculations. Therefore, given the exorbitant fees associated with these funds, when shown to investors, these charts can be grossly misleading.

Ultimately, the sale of any security, including managed futures fund, to any investor through misrepresentations or omissions is not ok. Nor is it ok for a broker or financial advisor to solicit unsuitable investments to their customer solely to reap a high commission payout for himself or herself.

Any investor who believes that they have lost money as a result of a misrepresentation, omission or unsuitable solicitation may be able to recover some or all of their losses. The attorneys at Malecki Law are experienced in representing investors. For a free consultation, contact us.

FINRA Files LPL Financial for Failures to Supervise Alternative Investments

March 27, 2014,

LPL Financial LLC has been hit again for supervisory failures stemming from the recommendation of non-traded real estate investment trusts (REITs), as well as other illiquid investments, begging the question whether the fines are large enough to deter future bad conduct. According to a news release dated March 24, 2014, the Financial Industry Regulatory Authority (FINRA) announced that LPL Financial has been fined $950,000 for the firm's failures in supervision over alternative investments, including non-traded REITs, oil and gas partnerships, business development companies, hedge funds, managed futures and other illiquid pass-through investments.

LPL Financial submitted a Letter of Acceptance, Waiver and Consent No. 2011027170901 (AWC), in which it admitted to "fail[ing] to have a reasonable supervisory system and procedures to identify and determine whether purchases of [alternative investments] caused a customer's account to be unsuitably concentrated in Alternative Investments in contravention of LPL, prospectus or certain state suitability standards." LPL also admitted in the AWC that though it had a computer system to assist and supervision, this computer system did not consistently identify alternative investments that fell outside of the firm's suitability guidelines. Additionally, LPL stated that its written compliance and written supervisory procedures failed to achieve compliance with NASD Rule 2310 and state suitability standards.

NASD Rule 2310 has since been superseded by FINRA Rule 2111. The current rule establishes the industry standard that FINRA members and their employees must have a reasonable basis to believe their recommendations are suitable for their customers. The Rule further dictates that the firm must establish suitability for each customer by considering the customer's age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information, though this list is not exclusive.

LPL Financial's AWC was not the first time it was fined for selling non-traded REITs. In the AWC, LPL Financial disclosed that it entered into a prior settlement with the Massachusetts Securities Division wherein it consented to a $500,000 fine and approximately $2 million in restitution for the firm's role in selling such products in contravention of state rules concerning prospectus net worth, annual income requirements and state concentration limits.

Many State securities divisions limit the percentage of investors' investible assets that may be invested in such alternative investments such as REITs. Ohio, for instance, sets its concentration limit to 10%. The Ohio Division of Securities has in the past noted in a Securities Bulletin that Direct Participation Programs such as non-traded REITs involve substantial risks, including "severe restrictions on liquidity, ... upfront fees and expenses ranging between 12%-18% of the initial offering price and substantial ongoing fees thereafter,... and distributions to shareholders paid from borrowings or a return of the shareholder's investment after deducting fees paid to insiders. Broker-dealers are highly incentivized to sell these products by the 7%-10% commissions commonly charged to investors, some of the highest selling commissions of any investment product available."

Due to the very risky nature of alternative investments such as non-traded REITs, it is imperative that firms conduct appropriate suitability inquiries to determine whether a recommendation for the purchase of such a product is actually appropriate for each customer. According to FINRA Rules, it is also imperative that an investor be informed of all risks and costs associated with such an investment, though this is rarely done. If you believe you were not properly informed of the risks associated with alternative investments, or were recommended such an investment that may not be suitable for you, please contact the attorneys at Malecki Law to determine if you have a claim for damages.

Whistleblower Due To Receive $63+ Million Reward

March 21, 2014,

Keith Edwards, a former J.P. Morgan employee is due to receive a nearly $64 million payment from the U.S. government for the tips he provided as a whistleblower. Mr. Edwards provided information that led to a payment by J.P. Morgan to the government in the amount of $614 million stemming from insurance on home loans.
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Allegedly, J.P. Morgan had been falsifying certifications for Federal Housing Administration and Department of Veterans Affairs loans, going back as far as 2002. As a result, the agencies reportedly suffered substantial losses.

It was reported that the $614 million was paid by J.P. Morgan to settle the charges levied against it as a result of Mr. Edwards' tips. In settling, J.P. Morgan reportedly admitted to approving thousands of FHA and hundreds of VA loans that did not pass normal underwriting requirements.

Mr. Edwards was able to collect his reward under the False Claims Act. Under the False Claims Act, the government reportedly collected roughly $3.8 billion in 2013 alone - a big year for the Justice Department. Under this act, individuals can sue the target company directly. The government may elect to join the whistleblower in pursuit of the target company in court.

Whistleblowers can also benefit from a myriad of other whistleblower reward programs, including Dodd-Frank and Sarbanes-Oxley. Unlike the False Claims Act, whistleblowers under these acts will not bring suit against the target company directly. Rather, whistleblowers will simply provide the government with the "tip." It is then up to the government to pursue the bad actor or not.

Nonetheless, whistleblowers under these acts can also reap large rewards for the information they provide. Under Dodd-Frank, the Securities and Exchange Commission (SEC) has paid over $14 million in rewards in the past two years alone. Under Dodd-Frank the SEC is looking for tips that will aid in the successful investigation of securities laws violations. In return, a whistleblower may be entitled to between 10% and 30% of all monies recovered.

Once you have made the decision to be a whistleblower, a major concern should be to make sure that you have maximized your potential to receive your reward. It is important to know how to present your "tip" to the appropriate government agency. A properly prepared and presented "tip" may increase the chances that the government pursues the case. Whistleblowers should also be aware of potential pitfalls that may compromise their ability to collect an award.

Like anything else, it is important to be diligent and protect your rights when making the decision to blow the whistle. This decision is often not an easy one and should be made carefully and diligently. You should speak with a knowledgeable attorney first to ensure that you are protected that maximize your chances at receiving an award for your information.

If you believe you may have valuable information and are thinking about blowing the whistle, contact an attorney at Malecki Law for a free consultation. The attorneys at Malecki Law have experience representing whistleblowers, and can help you file your whistleblower complaint with the appropriate agency to maximize your chances at getting the reward to which you may be entitled.

Jenice Malecki Of Malecki Law Heads To Washington To Meet With Congressmen And Senators About Investor Protection

March 13, 2014,

Jenice Malecki of Malecki Law will be in Washington, D.C. tomorrow to meet with Congressmen and Senators along with others from the Public Investors Arbitration Bar Association (PIABA) to advocate for the Investor Choice Act and federal legislation to increase transparency and accountability from our financial regulators.

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Ms. Malecki will be meeting with Rep. John Dingell (D-MI), Senator Kirsten Gillibrand (D-NY), Rep. Stephen Lynch (D-MA), Senator Charles Schumer (D-NY), and Rep. Blaine Luetkemeyer (R-MO).

The primary significance of the Investor Choice Act will be the elimination of pre-dispute arbitration agreements that are commonly used in broker-dealer and investment advisor contracts. These agreements force customers who sue their broker, advisor or firm to pursue their claims only in arbitration. By eliminating these agreements, customers who have a dispute with their advisor, broker, or firm will have the option of electing to sue in arbitration or go to court and have their case heard by a jury.

Talking points will include: 1) the problems with mandatory arbitration, 2) who are the people bringing claims against their brokers, financial advisors, etc., and 3) why choosing arbitration over court should be the choice of the investor, not the broker-dealer.

Ms. Malecki will also be discussing the need for more transparency among our financial regulators like the Securities and Exchange Commission (SEC) as well as the Financial Industry Regulatory Authority (FINRA).

This discussion will center around the benefits and need for the public at large to have access to information about how the securities industry is regulated and to be able to verify the fairness of FINRA's arbitration forum, with a focus on how the lack of transparency harms the investing public.

United States Supreme Court Holding Applies Retaliation Protections to Employees of Contractors who Contract for Publicly-Traded Companies

March 11, 2014,

clooney.jpgApparently, you do not need to be George Clooney to enjoy whistleblower protections.

Employees of private contractors and subcontractors who provide services to publicly traded companies including mutual funds are protected by the whistleblower provisions of Sarbanes-Oxley Act of 2002 ("Act"), the United States Supreme Court held in its decision dated March 4, 2014. See 18 U.S.C. § 1514A; Lawson v. FMR LLC, --- S. Ct. ---, 2014 WL 813701, *7, 2014 U.S. LEXIS 1783 (2014). The majority decision, written by Justice Ginsburg, relied on the language of the Act, applying "their ordinary meaning." Lawson, *7.

The case involved two employees who formerly worked for "privately held companies that provide advisory and management services to" Fidelity funds. Id. at *6. One of the employees worked for Fidelity Brokerage Services, LLC, a subsidiary of the Respondents, for 14 years. Id. This employee alleged that she suffered a series of adverse employment actions, eventually being constructively discharged, after raising concerns about certain cost accounting methodologies that may have overstated expenses associated with operating the mutual funds. Id. The second employee worked for Fidelity Management & Research Co. and later by a different subsidiary, FMR, Co., Inc. for eight years, and alleged he was fired after raising concerns about inaccuracies in a draft SEC registration statement concerning certain Fidelity funds. Id.

The Respondents argued that the intent of Congress was to include only those contractors who fire employees of public companies, such as the "ax-wielding specialist" exemplified by George Clooney's character in the movie Up in the Air. Id. at *7. In that movie, Mr. Clooney was hired by companies for the sole purpose of passing on the news that certain employees had been fired. The Court reasoned that if the company made the decisions about who would be fired, as they did in Up in the Air, they would not be insulated from liability by the contractor, who would merely be communicating the information to the employees. Id.

The holding of the Supreme Court has a significant impact in the area of whistleblower protections. This decision solidifies whistleblower protection to employees of contractors. This is significant for mutual funds, which the Supreme Court noted do not generally employ any of their own employees and are "managed, instead, by independent investment advisors. Id. at *12.

The Court held that the plain language of the Act and the treatment of a similar whistleblower provision protecting employees who complain about violations relating to air carrier safety supported its conclusion. The Act stated "[n]o [public] company... or any officer, employee, contractor, or subcontractor ... may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against any employee in the terms and conditions of employment because of [whistleblowing or other protected activity]." Id. at *3 (citing § 1514A(a) (2006 ed.)). Separately, the Court in a minority decision cited the legislative history for the Act, but this part was not joined by Justices Scalia and Thomas, and therefore was not a part of the holding of the majority.

The attorneys at Malecki Law are committed to providing advocacy to whistleblowers who courageously wave the flag about fraudulent conduct occurring in the securities industry. If you believe you have original information about potentially fraudulent conduct, contact Malecki Law for a confidential consultation.

Bitcoin Appears Headed for Regulation

March 6, 2014,

As the old adage goes, one good deed deserves another. And so it is for bitcoin, which the Wall Street Journal reported may receive regulatory oversight in the not-too-distant future. It seems that enough people complained about what appears to have been a hacker-theft that led to the bankruptcy filing by Mt. Gox, until recently one of the major bitcoin exchanges. While the Federal Reserve appear unwilling, the WSJ noted that the Federal Trade Commission recently stated their goal "is to protect consumers, whether they pay by credit card, check, by some sort of virtual currency." Despite Mt. Gox's bankruptcy filing, the market for bitcoin continues to be routed through exchanges that up until now have operated with minimal to no oversight and bitcoins continue to be used to purchase services and goods, and likely, as a basis for investment.

The nature of Mt. Gox's collapse is noteworthy. As reported on Tech Crunch, over the course of approximately one month, a supposed software bug caused Mt. Gox to lose approximately $500 million worth of bitcoin, including 750,000 bitcoin owned by investors and 100,000 bitcoin owned by Mt. Gox itself. Realizing the theft, Mt. Gox ceased investor transfers and shut down at the end of February 2014 and applied for bankruptcy protection from creditors. The WSJ reported on March 5, 2014 that the shutdown may have been caused by Mt. Gox's bank refusing to process wire transfers after its repeated requests that Mt. Gox close its account.

Mt. Gox's predicament may be the most publicized, but it certainly is not alone. According to the WSJ article on March 3, 2014, a recent study found that of 40 bitcoin exchanges, 18 have closed in the past three years, generally causing customer accounts to be completely wiped out. The WSJ reported that fraud is sometimes the cause of such closures. In other related bitcoin news, it was reported by the New York Post on March 5, 2014 that Autumn Radke, the CEO of bitcoin exchange firm First Meta, as a result of what may have been suicide.

As of the end of February 2014, Bitcoin has slid in value to approximately $550, half of its value from a high of over $1,100 in mid-December 2013, according to CoinDesk's Bitcoin Price Index. Given this significant volatility, it is amazing that only now are regulators looking in to whether they have the ability to provide regulation over the currency. Currently, it is estimated that there is approximately $6.9 billion in bitcoin in the world.

In addition to the risk of total loss of one's investment, bitcoin holds other hallmarks that make it a particularly risky investment, including that it is often effected in anonymous transactions and that transactions are irreversible, meaning defrauded parties often have no or limited recourse, as noted by the WSJ.

Investments based on bitcoin must still be marketed and sold in accordance with securities laws and related regulations, and so must be suitable for investors appropriate under each specific investor's circumstances. If you believe you were not properly informed of the risks associated with an investment involving bitcoin, please contact the attorneys at Malecki Law to determine if you have a claim for damages.