Articles Posted in Investment Fraud

The Financial Industry Regulatory Authority (FINRAannounced on March 30, 2015 that it fined H. Beck, Inc., LaSalle St. Securities, LLC, and J.P. Turner & Company, LLC for failing to supervise consolidated reports.  These consolidated reports were provided to public customers, according to the announcement.

According to FINRA, “[a] consolidated report is a single document that combines information regarding most or all of a customer’s financial holdings, regardless of where those assets are held,” and does not replace monthly reports received from the firm.

In the announcement, FINRA cited to FINRA Regulatory Notice 10-19.  A regulatory Notice is used by FINRA to remind its members of obligations required by FINRA Rules and securities laws.  In Regulatory Notice 10-19, FINRA made clear that:

If not rigorously supervised, this activity can raise a number of regulatory concerns, including the potential for communicating inaccurate, confusing or misleading information to customers, lapses in supervisory controls, and the use of these reports for fraudulent or unethical purposes.

Regulatory Notice 10-19, and FINRA’s announcement, make these concerns clear, and also put FINRA member broker-dealer firms on notice of their obligations to perform adequate supervision over these consolidated reports.  In Regulatory Notice 10-19, FINRA states that to the extent brokers are permitted to create consolidated reports, “firms are required to supervise this activity.”

In FINRA’s March 30 announcement, it fined the three firms for inadequate supervision over consolidated reports.  H. Beck, Inc., for example, has approximately 465 offices around the country and approximately 800 brokers.  For a period, H. Beck, Inc. had no system in place to supervise the creation and dissemination of consolidated reports, despite the fact that close to 50 brokers sent them to certain of their respective customers, according to AWC No. 2012031552601.  According to the AWC, certain of these consolidated reports contained inaccuracies.

Likewise, J.P. Turner, a firm of approximately 185 branch offices and 420 brokers, also was fined by FINRA for permitting close to 50 brokers to create and distribute to their customers consolidated reports, while the firm had no supervisory procedures in place addressing the use of consolidated reports, according to AWC No. 2013036404301.

We at Malecki Law have seen how consolidated reports, combined with lax broker-dealer firm oversight, can be used to perpetuate frauds against public investors.  Very often, brokers have the ability to create or modify the consolidated reports to include “investments” that may not be on the broker-dealer’s books and records.  If the firm does not properly supervise the creation and dissemination of these consolidated reports, then brokers may be permitted to give the questionable “investments” an appearance of legitimacy because they appear on a firm document.

Malecki Law has previously investigated and successfully handled securities arbitrations concerning issues related to consolidated reports.  If you believe you have suffered losses as a result of questionable actions taken in your securities account, please contact us immediately for a confidential consultation.

The Financial Industry Regulatory Authority (FINRAannounced on March 26, 2015 that it fined Oppenheimer & Co., Inc. for failing to supervise Mark Hotton, a former broker who allegedly stole money from his clients accounts and excessively traded their accounts.  FINRA had already barred Mr. Hotton from the securities industry in 2013.

According to FINRA’s announcement, Oppenheimer & Co., Inc. failed to supervise Mr. Hotton in many respects, including during his hire and during his employment, as well as failed to supervise the accounts he was trading.  Oppenheimer & Co., Inc. failed to supervise Mr. Hotton during his hire by failing to consider 12 prior reportable events that occurred in Mr. Hotton’s past, including criminal events and seven customer complaints, according to FINRA.

FINRA also announced that Oppenheimer & Co., Inc. failed to supervise Mr. Hotton during his employment by failing to subject him to heightened supervision despite learning that his business partners had allegedly sued him for fraud resulting in several million dollars’ damages.  Oppenheimer & Co., Inc. may have been required to subject Mr. Hotton to heightened supervision, a more expensive and time-consuming manner of supervision, because of the number of past customer complaints against him while employed at other firms or while at Oppenheimer & Co., Inc.  To may matters worse, FINRA noted that Oppenheimer & Co., Inc. further failed to supervise Mr. Hotton by failing to investigate “red flags” in correspondences and wire requests that could have signaled potential violations of securities laws and industry rules.  FINRA alleged that Mr. Hotton was wiring funds out of customers’ accounts to accounts he owned or controlled.

FINRA also announced that Mr. Hotton excessively traded certain of his clients’ accounts.  Excessive trading may occur when purchases and sales of securities are made at such a rapid rate that the purpose is only to increase the broker’s commissions earned from buying and selling.  Excessive trading may be evidenced from such high “turnover rates” as well as high “cost to equity ratios,” a ratio calculated from comparing the costs in the account to the equity.    Customers usually lose large percentages of money when their accounts are excessively traded, and broker-dealers are often best placed to detect and stop such trading, though they rarely do.

Finally, FINRA announced that Oppenheimer & Co., Inc. has failed to make timely disseminations to FINRA regarding their brokers, which meant that the investing public and other broker-dealers did not get necessary information in a timely manner.

Malecki Law has previously investigated and successfully handled securities arbitrations against Oppenheimer & Co., Inc. and certain of the firm’s brokers in the past.  If you believe you have suffered losses as a result of questionable actions taken in your account, please contact us immediately for a confidential consultation.

A memo drafted by Jason Furman, one of President Obama’s top economic advisors, entitled “Draft Conflict of Interest Rule for Retirement Savings” was reportedly obtained by Bloomberg News.

The memo cites research that says investors may lose between $8 billion and $17 billion per year as a result of stockbroker/financial advisor practices, such as excessive trading commissions.  That number, while astonishing, may even be an underestimate according to some people.

As a result, some on Capitol Hill are calling for stricter rules on Wall Street.

One thing being looked at is the imposition of a “fiduciary standard” on brokers when handling retirement accounts.  This would require brokers to act in their clients’ best interests.  Many are surprised to hear that brokers may not always be required to act in a fiduciary manner.  Yet the fact is that based upon the specific circumstances, some brokers may only be held to a lesser “suitability” standard.

Unfortunately, many brokers cave to the temptation presented by conflicts of interest, such as increased commissions for selling one mutual fund over another.  This leads to brokers looking out for themselves, at the expense of their customers.  The memo indicates that some investors lose up to 10% of their long term savings because of such conflicted advice.

Given reports that tens of millions of people have savings in retirement accounts that total more than $11 trillion in total assets, it is no surprise that a push to a fiduciary standard for these accounts is gaining steam.  Given their age and varying levels of diminished capacity, senior citizens tend to be especially vulnerable to the illicit sales practices of an unscrupulous broker.  This makes protecting senior investors a paramount concern.

The attorneys at Malecki Law have significant experience representing victims of investment fraud and negligent financial advisors in arbitration and have successfully recovered millions of dollars on the behalf of individual investors, as well as large groups of investors, who lost money due to inappropriate investment advice.

If you or a family member suffered losses because of inappropriate investment advice, contact the securities fraud lawyers at Malecki Law for a free consultation and case evaluation at (212) 943-1233.

Investors in Diversified Lending Group Inc., allegedly solicited by Tony Russon and other agents who worked under him at Russon Financial Services, may be able to sue Metropolitan Life Insurance Company in FINRA Arbitration after their California class action failed to obtain certification.  In Los Angeles this past week, a California Superior Court judge in Cantor et al. v. MetLife Inc. et al. rejected the class certification bid from 212 investors whose claims were based on being the victims of an alleged Ponzi scheme said to involve fraudulent investments sold by agents of MetLife and subsidiary New England Life Insurance Co.

It has been alleged that MetLife and New England Life failed to properly supervise Mr. Russon and others while they were unlawfully convincing investors to place large sums of money with Diversified Lending Group Inc.  According to reports, DLG was run by alleged Ponzi schemer, Bruce Friedman.  Investors reportedly lost millions to the scheme, devastating themselves and their families.

However, all may not be lost for investors after the class failed certification.  Investors may be able to pursue their claims in FINRA arbitration.  Arbitration works similarly to court proceedings in many ways, and it is a forum in which victimized investors regularly recover losses resulting from Ponzi schemes and other fraudulent investments.

The attorneys at Malecki Law have significant experience representing Ponzi scheme victims in arbitration.  The attorneys at Malecki Law have successfully litigated multiple claims on behalf of individual investors, as well as large groups of investors, who lost millions of dollars in Ponzi and Ponzi-style schemes.

It is the right of any and all investors who believe they may have been the victim of a Ponzi scheme to contact our offices to explore their legal rights and options. If you or a family member invested in DLG, contact the securities fraud lawyers at Malecki Law for a free consultation and case evaluation at (212) 943-1233.


The North American Securities Administrators Association (NASAA), an organization comprised of State securities regulators, recently issued an Investor Alert regarding self-directed IRAs and the third-party custodians who service those accounts.  In fact, the term “custodian” may be a misnomer, because generally the third-party custodian does not custody any property, and only reports information to the IRS, or from an issuer to an investor.

According to the Securities and Exchange Commission’s Self-Directed IRAs Investor Alert, close to $100 billion was held in self-directed IRAs, making them possible targets for fraud.  According to the SEC, self-directed IRAs are tax-deferred Individual Retirement Accounts that carry a financial penalty for premature withdrawals before the requisite age.

Investors certainly need to be wary of self-directed IRAs holding investments recommended by their financial advisor or registered representative.  Increasingly, the attorneys at Malecki Law are seeing self-directed IRAs used as a means to fraudulently take money from investors.  While they can be used for legitimate purposes, Malecki Law has seen self-directed IRAs used to funnel money out of legitimate investments into other investments that may be fraudulent.

Investors often believe that because they receive a monthly summary or statement of their investments from a third-party custodian, their investments are “safe” or that the third-party custodian owes them a high duty as a fiduciary.  In fact, the opposite may be true: the custodian is not a fiduciary and may not even hold the assets.

As outlined by NASAA in its Investor Alert, third-party custodians:

  • Do not research or perform any due diligence regarding recommendations made to investors by brokers or issuers;
  • Are passive companies that merely serve as an intermediary between the investor and the issuer of an investment;
  • The third-party custodian’s only obligation is to report information to the IRS and from the issuer to the investor; and
  • The third-party custodian bills the investor for its record keeping services, but does not hold the investments.

William Beatty, the NASAA President and Washington securities director, was reported by as saying “Fraud promoters can misrepresent the responsibilities of self-directed IRA custodians to deceive investors into believing that their investments are legitimate or protected against losses.”

Unfortunately, public investors can lose money as a result of recommendations to make investments through self-directed IRAs.  As noted by NASAA and the SEC, there is an increased risk in fraudulent conduct through these accounts, and third-party custodians are under no obligation to perform due diligence to ensure investments made through self-directed IRAs are legitimate.  If you believe you may have suffered monetary losses as a result of investments held in a self-directed IRA, please contact the attorneys at Malecki Law to determine if you have a claim for damages.

As oil prices have continued to plummet and commuters across the country have regaled the resulting savings at the pump, investors in oil and gas related stocks, ETFs and master limited partnerships have been shocked by the crushing losses on their brokerage account statements.

With interest rates near all-time lows, some financial advisors with clients seeking income have strayed from the usual safe, reliable treasury bills, high-grade municipal bonds, and the like, instead recommending riskier investments in search of higher yield and more income.  If such investment advisors recommended securities tied to the oil and gas sector, the last few months may have proven disastrous for their clients.

For example, financial advisors have been known to recommend “Master Limited Partnerships” (MLPs), which offer an investor the opportunity by into an oil/natural gas discovery, production and distribution enterprise.  While MLPs offer typically higher rates of income than more traditional investments, investors are frequently not advised by their financial advisor of the significantly higher risks.  Unfortunately, investors who were sold MLPs as safe, income producing investments, may only be learning of these previously hidden risks now that their investment has dropped significantly in value.

MLPs are not the only way to invest in oil and natural gas.  Another way to invest in oil and gas in through “Exchange Traded Funds” (ETFs).  ETFs are typically sold as an alternative to mutual funds that trades like a stock.

Unfortunately, that is not the whole picture.  ETFs can be riskier than traditional mutual funds, and have some features that make them different from stocks.

One classic example is leverage, meaning that the product is structured in a way to amplify gains (and losses).  (You can read more about leveraged ETFs here.)  While more gains may sound good, there is more risk of more losses, which is bad.  For many investors leveraged ETFs are not appropriate.

Investors who have had their portfolio concentrated in leveraged (or even ordinary, non-leveraged) ETFs in the oil and gas sector have probably seen the value of their portfolio drop catastrophically.

For example, the following oil, gas, and energy related ETFs have lost between 30% and 85% of their total value in the last 3 months alone:

  • Direxion Daily Nat Gas Rltd Bull 3X ETF (GASL)
  • VelocityShares 3x Long Crude Oil ETN (UWTI)
  • ProShares Ultra Bloomberg Crude Oil (UCO)
  • Direxion Daily Energy Bull 3X ETF (ERX)
  • First Trust ISE-Revere Natural Gas ETF (FCG)
  • PowerShares S&P SmallCap Energy ETF (PSCE)
  • ProShares Ultra Oil & Gas (DIG)
  • SPDR® S&P Oil & Gas Equipment&Svcs ETF (XES)
  • PowerShares Dynamic Oil & Gas Svcs ETF (PXJ)
  • United States Brent Oil ETF (BNO)
  • Market Vectors® Oil Services ETF (OIH)
  • Market Vectors® Unconvnt Oil & Gas ETF (FRAK)
  • iPath® S&P GSCI® Crude Oil TR ETN (OIL)

To the average investor, losing that much value in such a short amount of time can be shocking and devastating.  When such losses were the result of fraudulent recommendations by a financial advisor, they may be illegal.

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 lost money in exchange traded funds, MLPs or any other oil, natural gas and energy related security, contact the securities fraud lawyers at Malecki Law for a free consultation and case evaluation at (212) 943-1233.

“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.

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.

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.