Articles Posted in Regulatory Audits & Investigations

The Financial Industry Regulatory Authority (FINRA) has announced that Merrill Lynch has been fined $1.9 million and ordered to pay restitution in the amount of $540,000 for fair pricing violations as well as supervisory violations related to the purchase of certain distressed securities.

According to FINRA, more than 700 transactions in Motors Liquidation Company (MLC) Senior Notes with retail customers were affected over a two year period.   FINRA found that “Merrill Lynch purchased MLC Notes at prices that were not fair to its retail customers.”   Specifically, Merrill Lynch was found to have purchased the notes from retail customers for anywhere between 5.3% and 61.5% below market price, leaving customers significantly disadvantaged.  Merrill Lynch would later selling those shared purchased from retail customers to other broker-dealers at the prevailing market price.

Another problem FINRA found was that Merrill Lynch failed to have an adequate supervisory system in place to detect whether the prices paid to retail customers on the MLC Notes were fair and consistent with prevailing market prices.

Proper supervision is critical in the brokerage industry for the protection of investors.  Unfortunately many financial firms have significant lapses in their supervision over their personnel.  When that happens, customers can incur substantial losses unnecessarily.

Customers who lose money as a result of supervisory failings on the part of their broker-dealer may be entitled to recover those losses.

If you or a family member may have lost money and you believe the account was not properly supervised, 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.

Citigroup, Inc. has reportedly agreed to pay a $3 million fine for failing to properly deliver prospectuses to some customers.  Specifically, according to the Financial Industry Regulatory Authority (FINRA), Citigroup failed to deliver prospectuses to customers who bought shares in one or more of 160 exchange traded funds (ETFs) in late 2010.  It has also been said that Citi may have not delivered prospectuses related to more than 1.5 million ETF purchases between 2009 and early 2011.  Citigroup was also fined by the New York Stock Exchange in 2007 for similar issues.  FINRA, according to reports, said Citigroup failed to have proper procedures in place to supervise the process.

This is the second such snafu by a major American bank resulting in a fine this year.  Just this past September, Morgan Stanley said that it would pay for the losses incurred by customers who purchased certain mutual funds, after the bank admitted that it failed to make prospectuses for those funds available on its website.  In total, this is believed to have cost Morgan Stanley roughly $50 million.

Financial firms have significant duties to their customers – risk disclosure being one of the most important.  Transparency, including risk disclosure, is critical to the efficient functioning of the markets.  So, when major financial firms fail to fulfill their duties, meaningful fines should be imposed.  Whether or not the fines in these instances are meaningful remains up for debate.

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“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.

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.

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.

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.

In recent weeks, attention has turned to the Securities and Exchange Commission‘s declining success rate when going to trial against alleged wrongdoers. Publications such as the New York Times and Wall Street Journal have run multiple articles recently about this surprising decline. Per the Wall Street Journal, the SEC’s success rate has dropped to 55% since October, as opposed to the more than 75% success rate in the three consecutive years prior.

While the cases at the center of this decline were in the works well before Mary Jo White took the helm at the SEC, many are beginning to speculate how the Commission will react. Ms. White recently touted the then 80% success rate last year, citing it as a potential reason why attorneys counsel their clients to settle rather than face trial. However, this may be on the verge of changing. Emboldened by the newfound success of defendants in defending trials against the Commission, those who may find themselves in the SEC’s crosshairs may begin to opt to go to trial.

Recent cases, such as the insider-trading investigation and trial of billionaire Dallas Mavericks owner, Mark Cuban, have only intensified the public interest in the Commission and the work it does to investigate violations of the securities laws.

Manhattan U.S. Attorney Preet Bharara’s reported 79-0 record in securing convictions or guilty pleas in the U.S. Attorney’s Office’s recent crackdown on insider trading has only increased the pressure on the SEC in the public eye. While the two are not identical, to the casual observer, there may not be an apparent difference.

Complicating this situation even further is the agency’s stated objective of pursuing admissions of wrongdoing in some cases, even when settling. Since this could potentially expose the defendant to liability in separate civil suits, it bears watching whether or not those against whom the SEC pursues an admission of wrongdoing choose to take their chances at trial.

If targeted individuals and companies begin to opt for trial rather than settlement, the question then may become whether or not the Commission has sufficient resources to handle the increased caseload. For those who find themselves the subject of an SEC investigation, the impact could potentially mean better settlement offers for those against whom the Commission believes its case to be less strong.

There is also the potential for the SEC to triage resources, allocating the most resources to the cases it believe have the greatest likelihood of success. If this were to happen, it could very well mean that those against whom the SEC has the weakest cases may find that their cases are dropped following some pressure by their defense attorney.

Ultimately, the SEC will have to determine how to properly strike the balance between dropping cases that it will not win, settling those that it can, and pursuing cases that are going to have a result that is worth the effort. Most importantly, the Commission will have to learn to tell the difference between the three.

The attorneys at Malecki Law have experience representing individuals in regulatory actions before the SEC as well as FINRA. Contact us for a free consultation. Various hourly-billing and flat-fee based options are available to make smart decisions from inception to the completion of your matter.

The recent string of cases brought by the Securities and Exchange Commission in connection with the US Attorney’s Office against members of SAC Capital for insider trading has shone a bright light on the world of SEC investigations. Though all financial professionals surely hope that they will never be involved in an SEC investigation, the truth of the matter is that many unfortunately will.

Receiving a subpoena from any government agency can be a worrisome event in anyone’s life, but for a financial professional, receiving a subpoena from the Securities and Exchange Commission can be especially intimidating. More often than not, the recipient may be confused as to, “Why is the SEC contacting me?”

Individuals are typically contacted by the SEC for two reasons: 1) You are the subject of its investigation; or 2) The SEC believes you may have valuable information related to its investigation of an entity or someone else.

In either case, you may be subpoenaed to provide documents (called a subpoena “duces tecum”) or to testify (called a subpoena “ad testificandum”), or both.

Subpoenas for documents are generally straightforward in that they list specific types or categories of documents that must be produced to the SEC by a specific date. To comply with the subpoena, the recipient must produce all responsive documents by the due date.

When the SEC calls individuals in to provide testimony, it will be in what is commonly referred to as an “on the record” interview (or “OTR” for short). Subpoenas for testimony will also be rather straightforward in that the recipient will know when and where they will need to appear to testify, but will typically not contain any clues as to what the testimony will be about. However, in advance of the OTR, you may be required to provide documents related to certain transactions, individuals, businesses, etc. that you will likely be questioned on in your OTR. You also may be questioned on documents or testimony provided by others.

When you receive a subpoena, the first thing you should do is contact a securities industry law firm that understands these matters. It is important to get a copy of the formal order of investigation, which will tell you some more detail about the investigation about which you have been called to testify or produce documents.

It is important to be properly prepared for responses to subpoenas, both for testimony and for documents. Now that you are involved in an investigation and potential litigation, ordinary words could have new meaning. Something that may seem harmless in an ordinary discussion could have a different meaning in a legal context – potentially exposing you to liability.

Once you have responded to subpoena and/or appeared at your OTR, the SEC may choose to formally charge you or it may determine that it will not pursue any action against you. While, the latter is certainly the preferred option, the former is certainly the most concerning. The SEC may pursue you civilly or criminally (typically through the U.S. Attorney’s Office).

More often than not, individuals are pursued civilly, either in court or in an administrative proceeding before an administrative law judge. Prior to being formally charged, individuals are often given the opportunity to settle their matter and consent to certain sanctions. The more common civil sanctions usually include revocation/suspension of professional licenses (i.e. Series 7, 24, etc.), disgorgement (i.e. paying back any profits earned from the illegal conduct), and monetary fines. Criminal charges can also result in imprisonment among other penalties.

Given the magnitude of the potential penalties you may be facing, from the moment you receive an SEC subpoena, your focus needs to be on protecting yourself, your savings, your reputation, and your license(s).

To do that, the very first questions that need to be addressed are: Who is the target of the SEC’s investigation? Is it definitely me? Could it be me? Is it someone I work for/with? Is it someone I did business with? Is it someone I continue to do business with?

Unfortunately, the answers to these questions are often not readily apparent. While SEC subpoenas are usually specific in what they request, they are often equally as vague with respect to the subject of the investigation and offer few clues to the untrained eye.

As a result, from the very first moment the SEC contacts you, experience can be your best ally. For most people, when they receive a subpoena from the SEC it is their first (and hopefully only) experience being subpoenaed. If you have do not have experience in dealing with the SEC, you may be unaware of protections available to you in both producing documents and when testifying. As a result, an unfortunate reality is that all too often, individuals may get themselves into more trouble by trying to handle the situation themselves.

Consulting with an experience attorney could be the best move that you make when faced with such a potentially life-changing event. Now is not the time to be penny wise and pound foolish. The attorneys at Malecki Law have experience representing individuals in regulatory actions before the SEC as well as FINRA. Contact us for a free consultation. Various hourly-billing and flat-fee based options are available to make smart decisions from inception to the completion of your matter.

Jenice Malecki of Malecki Law will be appearing at 10:45 am on Varney & Co. on Fox Business on Tuesday, October 22, to discuss the proposed $13 billion J.P. Morgan Chase settlement.

Ms. Malecki will be discussing whether J.P. Morgan and others should be surprised that the firm is being subjected to penalties relating to conduct that occurred at Bear Stearns and Washington Mutual, which J.P. Morgan acquired during the recent financial crisis.

Ms. Malecki will speak on central issues at the heart of the present debate such as the role of the government in these two acquisitions, including what promises, if any, were made to J.P. Morgan by government officials, as well as the overall price paid for the two companies relative to their actual value.

The role the acquisitions of these two companies played in J.P. Morgan’s assent to its position as one of the largest banks in world also can not be overlooked.

Jenice Malecki of Malecki Law will be appearing on Fox Business News at 12pm today, speaking with Dennis Kneale about whether or not banks, such as JP Morgan, should be getting amnesty from regulators.

In the fallout from the financial crisis, banks, such as JP Morgan have seen their legal fees related to defending complaints from both customers and the SEC, along with other regulators, rise substantially. JP Morgan shocked many in the marketplace when it recently revealed that its “litigation reserve” was $23 billion, and that it had paid out roughly $8 billion in recent settlements and judgments.

In light of this revelation, some have called for amnesty to be provided to large banks, in an effort to relieve them of these substantial legal burdens and jumpstart the markets by freeing up large reserves of capital.

Unfortunately, many of these proponents overlook the value provided to the marketplace by the punitive measures imposed by the SEC and other financial market regulators.

Ms. Malecki will discuss how relieving these banks of their liabilities for past bad acts would eliminate accountability from the marketplace and only serve to embolden the bad actors in the future. Accountability is necessary for the efficient operation of the marketplace and consumer protection.

Americans cannot afford another financial crisis.