Articles Posted in Investment Fraud

“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.

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.

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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.

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.

Just yesterday, FINRA announced that it has fined Iowa-based broker-dealer Berthel Fisher $775,000 for failures to adequately train and supervise brokers selling alternative investments, such as real estate investment trusts (“REITs”), and non-traditional exchange traded funds (“ETFs”), including leveraged and inverse ETFs.
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In addition to REITs and ETFs, Berthel brokers also reportedly sold managed futures, oil and gas investments, equipment leasing programs and business developments companies, all while having “inadequate supervisory systems and written procedures for sales” of these investments.

Firms are required to have sufficient supervisory systems and written procedures for the sale of such investments to help ensure that these potentially risky and illiquid investments are only sold to investors for whom they are suitable and appropriate. Oftentimes, these investments are not appropriate for your average investor.

It was reported that Berthel failed to properly review for suitability and may have left investors over-concentrated, meaning that too much of the investor’s savings may have been in just one investment, rather than being spread out in many different investments (i.e. diversified).

Even though these potentially very risky investments may not be appropriate for an average investor, brokers my sell them to average investors anyway because they are often “high-commission products,” meaning that the broker gets paid more for selling them than he or she would for selling a more traditional investment such as a mutual fund. Some commissions paid to brokers and broker-dealers on some of these non-traditional products can be 10% or more of the total amount invested.

All in all, it has been reported that Berthel brokers recommended more than $49 million worth of nontraditional ETFs to over 1,000 clients. It is believed that these sales were sometimes not appropriate for the investor.

Unfortunately, Berthel Fisher is not alone. FINRA’s fine of Berthel comes just two months after the regulator fined PNC Investments for failing to establish and maintain a satisfactory supervisory system with respect to the sale of non-traditional ETFs. The conduct for which PNC was fined was surprisingly similar to that of Berthel. Ultimately, PNC was fined $275,000 and paid restitution of more than $33,000.

If an ETF or other investment is sold to an investor, and it is not suitable for them, the investor may be able to recover for any and all losses caused by that investment.

If you believe you have lost money as a result of an investment in these or any other non-traditional investment, contact an attorney at Malecki Law for a free consultation to determine if you may be able to recover your losses.

blank-coin.jpgBitcoin, and the exchanges that provide a space for trading Bitcoin, have received a lot of press lately. The Wall Street Journal reported on February 11, 2014 that the price of a Bitcoin dropped to approximately $650. This would be a significant drop from a trading high of over $1,100 per Bitcoin in mid-December 2013, according to CoinDesk’s Bitcoin Price Index.

As the Journal reported, the Slovenia-based Bitcoin-trading exchange Bitstamp halted customer withdrawals while Bulgaria-based BTC-e had delays in crediting transactions. This, apparently, came as a result of a hacker attack on the exchanges. Recently, Mt. Gox, a Tokyo-based Bitcoin trading exchange recently reported that it was halting withdrawals for a period of time after it discovered a software glitch that “could give rogue traders a way to falsify transactions,” as reported by the Journal. Incidentally, according to Wired, Mt. Gox stands for “Magic: The Gathering Online Exchange” and prior to 2011 was a digital trading exchange for Magic playing cards. According to that Wired article, in 2011, the website was changed to handle transactions exchanging Bitcoin.

Back in 2011, it was reported by Daily Tech that Mt. Gox was forced to shut down trading and “roll back” trades after 478 accounts were allegedly hacked, resulting in the withdrawal of a total of 25,000 Bitcoins. Mt. Gox reportedly informed investors that they “assume no responsibility should your funds be stolen by someone using your password,” and that the hacker made off with only 1,000 of the Bitcoins stolen. According to the Daily Tech article, the hacker gained access to the investors’ passwords by hacking Mt. Gox’s database.

The Securities and Exchange Commission (SEC) has taken notice of Bitcoin. In 2013, it charged an individual named Trendon T. Shavers for running a Ponzi scheme involving Bitcoin. According to the SEC’s news release, he set up a company called Bitcoin Savings and Trust and raised approximately 700,000 Bitcoin, allegedly offered investors 7% weekly interest as a result of Bitcoin arbitrage activity. However, he used certain investors’ Bitcoins to pay other investors’ interest, as well as his own personal expenses.

The SEC then issued an Investor Alert to inform the public of Ponzi schemes involving virtual currency. In the Investor Alert, the SEC stated that fraudsters may choose to use virtual currencies like Bitcoin, because of the lack of governmental or regulatory oversight. The SEC went on to state that any investments in securities, such as promissory notes or other investments promising regular payments in Bitcoin, remain subject to the SEC’s jurisdiction and continue to require licensure by federal or state agencies.

The Bitcoin, a virtual currency, remains a risky investment, given that exchanges are not yet subject to governmental regulation. 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 and appropriate under each specific investor’s circumstances. If you believe you were not properly informed of the risks associated with an investment based on Bitcoin, please contact the attorneys at Malecki Law to determine if you have a claim for damages.

Just this past week, two brokerages units of Stifel Financial were ordered by the Financial Industry Regulatory Authority (“FINRA”) to pay more than $1 million related to the sale of leveraged and inverse exchange-traded funds (“ETFs”). Of the more than $1 million to be paid, $550,000 comes in the form of a fine to be split by Stifel, Nicolaus & Co., Inc. and Century Securities Associates Inc. The firms were also ordered to pay more than $475,000 in restitution to 65 customers to compensate them for losses incurred on ETF purchases.

According to the Wall Street Journal, FINRA said that some of the brokers who were selling the ETFs did not have a full understanding of the products they were selling, including the risks associated with them.

Brokerage firms can be fined and/or sued when they allow their brokers to sell unsuitable, or inappropriate, investments to customers, especially when the brokers have not been properly trained. Industry regulations require that a broker understand both the product they are selling and the customer to whom they are selling the product. Most importantly a broker must understand the risks of the products being sold and appreciate the customer’s ability (or inability) to tolerate risk. Brokerage firms are also required to train their brokers properly, including what qualifies as a suitable, or appropriate, recommendation to a customer.

Regulators have been looking at the sale of ETFs, especially inverse and leveraged ETFs, in recent years. In the past few years, FINRA has reportedly fined multiple brokerage firms millions of dollars, including Citigroup, Morgan Stanley, UBS and Wells Fargo over the sales of ETFs.

These investments are complex and often not completely understood by the average investor. They use futures and/or derivatives to 1) multiply the return (and loss) of a given index on a given day and/or 2) cause the value of the ETF to rise when the index falls, or vice versa. However, they are largely designed as a product for day-traders and are not typically supposed to be recommended as “buy and hold” investments.

For example, below are twenty five ETFs that lost the most in the past 12 months per Yahoo Finance, many of which are inverse, leveraged, or both. Malecki Law is investigating and/or has recently pursued claims for customers who incurred losses in these ETFs.

1. Direxion Daily Gold Miners Bull 3X Shrs (NUGT)
2. VelocityShares Daily 2x VIX ST ETN (TVIX)
3. C-Tracks Citi Volatility Index TR ETN (CVOL)
4. Barclays Short B Lvgd Inv S&P 500 TR ETN (BXDB)
5. Direxion Daily Semicondct Bear 3X Shares (SOXS)
6. VelocityShares Daily 2x VIX MT ETN (TVIZ)
7. Direxion Daily Small Cap Bear 3X Shares (TZA)
8. ProShares UltraPro Short Russell2000 (SRTY)
9. VelocityShares Long VIX ST ETN (VIIX)
10. ProShares VIX Short-Term Futures ETF (VIXY)
11. ProShares UltraPro Short QQQ (SQQQ)
12. ProShares Ultra Silver (AGQ)
13. Direxion Daily Nat Gas Rltd Bear 3X Shrs (GASX)
14. Direxion Daily Mid Cap Bear 3X Shares (MIDZ)
15. ProShares UltraPro Short MidCap400 (SMDD)
16. Global X Gold Explorers ETF (GLDX)
17. Market Vectors Junior Gold Miners ETF (GDXJ)
18. Direxion Daily S&P500 Bear 3X Shares (SPXS)
19. Direxion Daily China Bear 3X Shares (YANG)
20. ProShares UltraPro Short Dow30 (SDOW)
21. ProShares UltraShort Russell2000 Growth (SKK)
22. Direxion Daily Technology Bear 3X Shares (TECS)
23. Market Vectors Gold Miners ETF (GDX)
24. ProShares UltraShort SmallCap600 (SDD)
25. ProShares UltraShort Health Care (RXD)

If you believe you have lost money as a result of an investment in these or any ETFs, or because of some other investment, contact an attorney at Malecki Law for a free consultation to determine if you may be able to recover your losses.

As reported recently by the Wall Street Journal, investment in non-traded Real Estate Investment Trusts (“REITs”) is at an all-time high and poised to continue to rise. Some estimates anticipate more than $18 billion to be invested in non-traded REITs by the end of this year.

Solicited with the prospect of annual yields of more than 6%, income-seeking investors have had their hard-earned savings steered into non-traded REITs, oftentimes without a complete disclosure of the risks involved. Many brokers and financial advisors pitch REIT investments to their retirement and near-retirement aged customers, emphasizing the perceived “safety” of real estate investment coupled with the higher than normal annual yield, but do not fully explain the associated risks and bloated commissions (as high as 15% in some cases).

What many investors are not told is that because these investments are not publically traded, while the REIT itself may report to them a specific value for their shares, the actual value of their investment may not be readily available – and could even be 10-20% lower if sold on secondary markets. This discount is often caused by the illiquidity of the investment. In other words, sellers are forced to sell for less than what they paid in order to get out of the investment (also called liquidating the investment).

The Financial Industry Regulatory Authority has even posted warnings on its website about the dangers of REIT investing, yet many investors are never made aware of these risks by their brokers.

There is still the potential for big money to be made by the issuers of these products and the brokers who sell them, so firms like LPL Financial and Ameriprise Financial, along with others, continue to market them to their customers.

Unfortunately, illiquidity and large losses have been incurred by REIT investors in the past and may be looming on the horizon for investors who may currently own unsuitable REITs.

If you believe you have lost money as a result of an investment in a REIT, or because of some other investment, please contact an attorney at Malecki Law to determine if you may be able to recover some or all of your losses.

As has been widely reported, Criminal charges were filed against SAC Capital Advisors LP, with accusations that the hedge-fund firm is guilty of a decade long “scheme” of insider trading. In total, prosecutors charged SAC Capital and its business units with a total of four counts of securities fraud and one count of wire fraud. The charges come after a multiyear investigation by the FBI, prosecutors, and the SEC. The government is also accusing former SAC portfolio manager, Richard Lee, of conspiracy to commit securities fraud. The indictment comes only a short time after SAC agreed to a $616 million settlement of insider-trading charges.

Civilly, prosecutors are looking to have SAC and any of its affiliated corporate entities surrender all of their assets. SAC manages some $14 billion in assets, a majority of which does not come from outside investors.

In a separate civil action, the SEC is seeking a lifetime ban for Steven A. Cohen, who started SAC twenty-one years ago with roughly $20 million of personal funds, from managing client money. Mr. Cohen has not been charged criminally but denies any allegation of wrongdoing. Before the financial crisis of 2008, SAC held over $16 billion in assets and reportedly charged some of the highest fees in the business – 3% annually on the total investment, plus as much as 50% of whatever profits the firm generates.

This is just the latest example of the tarnishing of some of the largest and most prestigious names on Wall Street. The revelations of the past five years should serve as an indication to investors that even the most well-known financial firms and well-respected individuals at those firms are not always “doing things by the book” and can still be negligent or even perpetrate a knowing fraud. Investors should also be aware that if they find themselves the victims of a negligent financial advisor or a larger scale fraud, they may have a right to recover some or all of their losses.

If you believe that you or a family member may be the victim of a financial advisor’s negligence or fraud, it is your right to consult with an attorney and explore your options. For a free consultation, contact the investment fraud attorneys at Malecki Law at (212)943-1233. Malecki Law has recovered millions of dollars for victims of financial negligence and fraud.

Maxwell B. Smith was sentenced to serve the next seven years in federal prison for operating a $9 million Ponzi scheme. Maxwell sold investments as a fund that made loans to nursing homes. Smith had previously plead guilty to several counts of mail fraud as well as money laundering.

It is believed that Smith was employed as a financial professional at several financial firms in New Jersey, where he provided financial advice to his clients, many of whom may have lost money to his Ponzi scheme, Health Care Financial Partners (“HCFP”), purportedly a fund with hundreds of millions of dollars in assets. Investors even received a prospectus guaranteeing 7.5% to 9% per year, tax free. Investors could buy bonds in amounts ranging from $25,000 to $300,000.

Investors may not know that broker-dealers, like the ones that it is believed registered Mr. Smith, have a duty to supervise their employees. As a result, in situations like these, investors may be entitled to recover against the financial firms that employed the financial advisor for failing to supervise their employee.

Mr. Smith was apparently employed by Rickel & Associates, Inc., Atlantic Group Securities, Inc., JJB Hilliard, WL Lyons, Inc., PNC Investments, and Cantone Research, Inc. during the Ponzi schemes operation. It is believed that had these firms properly supervised Mr. Smith, they should have caught and stopped this Ponzi scheme.

If you or a family member fell victim to Mr. Smith, it is your right to consult with an attorney and explore your options. For a free consultation, contact the investment fraud attorneys at Malecki Law at (212)943-1233. Malecki Law has recovered millions of dollars for victims of Ponzi Schemes.