Articles Posted in Regulatory Audits & Investigations

Per Financial Industry Regulatory Authority’s (FINRA) announcement this week, a former registered representative of Caldwell International Securities Corp., Richard Adams aka Rasheed Aree Adams, has been barred permanently from the securities industry for churning customer accounts, other securities violations, and failure to report many unsatisfied judgments and liens on his U4 Registration Form as stipulated in FINRA rules. In addition to Caldwell, he was also previously registered with PHD Capital and E1 Asset Management Inc. from 2002 to 2011.

FINRA’s investigation revealed that Adams excessively traded the accounts of two customers, between July 2013 and June 2014, resulting in profits and commissions in the excess of $57,000 for himself while resulting in losses amounting to over $37,000 for customers. The findings stated that as a result Adams willfully violated section 10(B) of the Securities Exchange Act of 1934 and rule 10B-5, willfully failed to amend Form U4, and failed to provide documents requested by FINRA. Adams neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

Richard Adams is no stranger to regulatory and legal proceedings and has a reported history of customer disputes and violations. According to the CRD 13 judgement/liens, 5 customer disputes, 2 investigations and 1 regulatory disclosures have been reported against him. In 2001 there were allegations of unsuitability, unauthorized trading, and churning made against him while he was employed at The Golden Lender Financial Group, Inc, and this customer dispute was finally settled for $10,000. Currently, there is a pending FINRA investigation against Adams for potential violation of FINRA rules 2010 and 2111, and willful violations of Article V, section 2 from 2014.

FINRA aims to protect retail investors from broker activities such as churning and aggressively pursues brokers who put their own commissions ahead of customer interests. New York securities law attorneys of Malecki Law have successfully represented investors in cases involving account churning and overtrading, i.e. when a broker trades an account too frequently, usually for his or her own profit.

Please contact Malecki Law if you suspect you have been a victim of securities fraud. To assess if your broker is responsible for misconduct, read here for typical signs associated with securities fraud and misconduct. Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA’s BrokerCheck at no cost.

FINRA has announced that it has fined Aegis Capital Corp. $950,000 for sales of unregistered penny stocks and anti-money laundering violations.    According to FINRA, this fine was also related to supervisory failures within the firm.

The firm was not the only one that FINRA appears to have come down hard upon.  Reports show that Charles D. Smulevitz and Kevin C. McKenna, who each served as the firm’s Chief Compliance and AML Compliance Offices were given 30-day and 60-day principal suspensions and fined $5,000 and $10,000, respectively, per FINRA.  Aegis’ president, Robert Eide, was also reportedly given a “time-out” in the form of a 15-day suspension for failing to disclosed more than a half-million dollars in outstanding liens, in violation of FINRA rules.

FINRA reportedly found that from April of 2009 through June of 2011, Aegis liquidated almost 4 billion shares of penny stocks which were neither properly registered nor exempted from registration with the US Securities and Exchanges Commission.  According to FINRA, Aegis committed these violations in spite of a multitude of “red flags” or warning signs that something was amiss.

This does not appear to be the first time Aegis has come under fire from claims of improper supervision.  According to its BrokerCheck Report, Aegis has been the subject of a number of regulatory actions pertaining to violations and failures of its supervisory procedures.

The attorneys at Malecki Law have personally handled cases against broker-dealers like Aegis and others, relating to alleged supervisory failures and other alleged violations of the securities laws and industry rules.  If you or a family member lost money with Aegis Capital Corp., contact the securities fraud lawyers at Malecki Law for a free consultation and case evaluation at (212) 943-1233.

“My broker dealer wants me to meet with its lawyers.”  This is the start of a FINRA registered representative’s worst nightmare.

Your heart is pounding and your head starts to race.  “Why me?” “What do they want to know?”  “What could I have done?”  “Are they going to ask me about the XYZ account?”  “I’m sure that I did everything right and by the book, didn’t I?”

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If you did do something that may have been a violation of the law, FINRA Rules, or the firm’s manual, you will likely begin to think about the potential punishment (fine, suspension, termination) even before you hang up the phone or close the door to your office.  Once an investigation into your conduct starts, you are not able to leave with a “voluntary” termination, but at best would be “permitted to resign during a firm investigation.”

Ultimately, no matter where your mind goes at first, it will almost certainly arrive at the same question eventually: “Do I need a lawyer?” and “If I get a lawyer, can I bring them with me when I meet with the firm’s lawyers?”

The answer to these questions is almost always a “Yes.”  Retaining counsel is generally a good idea in these situations for a number of reasons.

A broker-dealer’s lawyers getting involved is usually a sign that there is a problem.  You may be a part of the problem, a scapegoat for larger supervisory issues, or you may be an innocent by-stander or witness.  Though it can be difficult to know for certain, retaining an experience securities attorney and having an open and candid conversation with them can go a long way toward helping you determine which position you are most likely in.  Having a good idea of which position you are in (target or witness) will help you determine which approach to take before meeting with the firm’s lawyers.

While honesty is always the best policy, it is critical to know if your firm’s lawyers are “friend or foe.”  The cardinal rule for speaking to your firm’s attorneys is to ALWAYS REMEMBER YOUR FIRM’S LAWYERS REPRESENT THE FIRM, NOT YOU.  Therefore, it is possible that your firm’s interests are not aligned with yours, meaning your firm and/or your supervisors may be looking to throw you under the proverbial bus, thereby avoiding blame themselves.

If you did do something against the rules, you need to remember that there is a very real possibility that your firm may turn over some or all of the findings of their internal investigation to either the SEC, FINRA, or both.  So, if you may have committed a violation, you need to treat your conversation with the firm lawyers much in the same way as if you had received an SEC subpoena or a FINRA 8210 request.   This is going to be the first step in your defense.

Ultimately, you need to look out for yourself.  If you did nothing, you should make sure you are not the scapegoat for something you did not do.   Or, if you did commit a violation, you need to ensure that you are well represented throughout the whole process and present a cogent defense, as well as manage your exit from the firm in the best way possible.

 

If your firm has requested that you speak to in-house and/or outside counsel, you should contact the securities lawyers at Malecki Law for a free consultation at (212)943-1233.  The attorneys at Malecki Law have extensive experience representing clients in formal regulatory and internal investigations, and are here to help.

The Securities and Exchange Commission (SEC) announced today that is has formally charged Malcolm Segal with running a Ponzi scheme and stealing investor money from his office in Pennsylvania.  According to his BrokerCheck Report, Mr. Segal was formerly a registered stockbroker with Aegis Capital Corp. and Cumberland Advisors.  Mr. Segal reportedly was a partner in J&M Financial and the president of National CD Sales.

According to the SEC, Mr. Segal allegedly sold what he called certificates of deposit (CDs) to his brokerage customers under the false pretense that he could get them a higher rate of interest than was then available through banks.  Mr. Segal allegedly represented to his victims that his CDs were FDIC insured and risk-free. Mr. Segal reportedly defrauded at least fifty investors out of roughly $15.5 million.

As his scheme was unravelling, Mr. Segal allegedly began to steal from his customers’ brokerage accounts by falsifying fraudulent paperwork such as letters of authorization. This fake paperwork reportedly allowed Mr. Segal to withdraw funds from his customers’ accounts without them knowing.  Ultimately, in July 2014, the scheme collapsed completely.  Mr. Segal has since been barred from the securities industry by the Financial Industry Regulatory Authority.

Because Mr. Segal was registered with a broker-dealer, Aegis, at the time he was operating this scheme, investors may be able to recover against the broker-dealer for supervisory failures and negligence.  In this way, it is possible that Aegis may be responsible to Mr. Segal’s victims for some or even all of their losses.  The same may also apply to Mr. Segal’s prior broker-dealer, Cumberland.

Malecki Law has significant experience representing the victims of Ponzi-schemes and stockbroker theft.  The attorneys at Malecki Law have successfully handled numerous cases on behalf of Ponzi scheme victims.  If you or a family member were a victim of Malcolm Segal or a similar Ponzi scheme, contact the securities fraud lawyers at Malecki Law for a free consultation and case evaluation at (212) 943-1233.

 

 

Broker Dealer Financial Services Corp. (BDFS) based out of West Des Moines, Iowa just learned the hard way that nontraditional Exchange Traded Funds (ETFs) are risky, speculative investments and are not appropriate for all investors.

The Financial Industry Regulatory Authority (FINRA) recently fined BDFS $75,000 for 1. failing to properly supervise the sale of leveraged ETFs to its customers, 2. not properly training its sales force about the appropriate use of leveraged ETFs in customer accounts, and 3. not adequately supervising nontraditional ETF activity in customer accounts.

According the Letter of Acceptance, Waiver, and Consent, from March of 2009 to April of 2012, BDFS “recommended nontraditional ETFs to more than 200 customers” without “a reasonable basis for believing that the nontraditional ETF transactions it recommended were suitable for any investor.”  BDFS’s ETF related misconduct was said to have violated NASD Rules 2310 and 3010 along with FINRA Rules 2010 and 2111.

Traditional ETFs are similar to mutual funds in that they are typically designed to offer returns by tracking an index like the S&P 500 or Dow Jones.  Unlike mutual funds, ETFs trade on an exchange like stocks and typically have lower fees and higher liquidity.

Nontraditional or Leveraged ETFs are complex products and differ from traditional ETFs in that they endeavor to return multiples of a given index’s return – typically double or triple the return – or the inverse of a given index’s return, or both.  For example, a double leveraged “bear” S&P 500 ETF would be designed to return twice the opposite of the S&P 500’s performance.  So if the S&P 500 went down 1, the ETF would (in theory) go up 2, and vice versa.

Because nontraditional ETFs use derivatives such as swaps and futures contracts to achieve their desired performance, they can be especially risky.  The features of nontraditional ETFs more often than not make them useful only to speculative day-traders and completely unsuitable as “buy and hold” investments for average “mom and pop” investors.

Given that nontraditional ETFs can be so dangerous for the average investor, proper supervision by the selling broker-dealer, like BDFS, is critical to ensure that “mom and pop” are not the ones buying them as long term investments in their accounts.  When firms fail at conducting the proper due diligence and supervision, their customers can suffer crushing losses in their accounts as a result.

Examples of nontraditional ETFs that are usually not appropriate for average investors yet improperly sold to them anyway are:

Direxion Daily Nat Gas Rltd Bull 3X                            GASL

Direxion Daily Jr Gld Mnrs Bull 3X                             JNUG

Direxion Daily Brazil Bull 3X                                         BRZU

Direxion Daily Gold Miners Bull 3X                             NUGT

Direxion Daily Russia Bull 3X                                        RUSL

Direxion Daily Latin America Bull 3X                          LBJ

ProShares Ultra MSCI Brazil Capped                          UBR

Direxion Daily Energy Bull 3X                                      ERX

ProShares Ultra Oil & Gas                                              DIG

ProShares Ultra MSCI Mexico Capped IMI               UMX

Direxion Daily FTSE Europe Bull 3X                          EURL

Direxion Daily South Korea Bull 3X                            KORU

ProShares Ultra FTSE Europe                                      UPV

Direxion Daily Dev Mkts Bull 3X                                  DZK

Direxion Daily Emrg Mkts Bull 3X                               EDC

ProShares Ultra MSCI EAFE                                         EFO

ProShares Ultra MSCI Emerging Markets                 EET

If you or a family member invested in nontraditional ETFs such as those listed above or others, contact the securities fraud lawyers at Malecki Law for a free consultation and case evaluation at (212) 943-1233.

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.  The attorneys at Malecki Law have extensive experience representing investors.

 

 

The Financial Industry Regulatory Authority (FINRA) has permanently barred Nicholas Hansen Harper.  Harper worked in Wells Fargo’s Topeka, Kansas branch office from 1997 through 2013 according to his BrokerCheck Report.

Per the Letter of Acceptance Waiver and Consent filed with FINRA, Harper resigned from Wells Fargo on August 7, 2013, shortly after the firm’s compliance department began to review trading in the accounts of certain of his customers.  The timing of Harper’s resignation can only serve to raise suspicions.

Presumably suspicious of Harper, in March of 2015, FINRA requested Harper provide testimony to FINRA investigators pursuant to Rule 8210.   More than one month after the request was issues, FINRA staff spoke to Harper’s attorney, who purportedly indicated that Harper would not be appearing before FINRA to provide testimony at any time.

In response to his violation of FINRA Rule 8210, Harper has agreed to a bar from association with any FINRA member in any capacity.

FINRA investigations are serious matters and for that reason Rule 8210 provides FINRA with a “big stick” to force compliance from registered representatives.

For Harper, this has already become something future employers and clients, alike, in any business can see.  This can affect future employment possibilities, future licensing and the ability to get financing for personal and/or business endeavors.  For a registered person receiving an 8210 request, proper handling of these matters by experienced counsel is essential.

FINRA is one of the few regulators that specifically oversee the securities industry.  Because of that, FINRA’s enforcement division is a crucial part of preventing investment fraud and punishing those who have committed violations.

In addition to the state and federal laws that are on the books, the securities industry is also governed by industry rules promulgated by the Securities and Exchange Commission and FINRA.   These rules, including Rule 8210, are important and must be complied with.

Failure to comply with FINRA and SEC rules can expose a person to civil liability and loss of professional licenses, as in the case of Nicholas Harper.  If a licensed stockbroker or financial advisor has broken the rules with respect to a customer account, that customer could be entitled to recover their losses.

Malecki Law has handled numerous cases stemming from inappropriate trading by brokers in customer accounts.  If you or a family member invested with Nicholas Harper or Wells Fargo and have lost money, contact the securities fraud lawyers at Malecki Law for a free consultation and case evaluation at (212) 943-1233.

What should happen to a financial advisor (FA) if they provide unsuitable and inappropriate investment advice to their clients?

First, if the unsuitable advice given to a customer caused losses to that customer’s account, the customer has the option to sue the FA in FINRA arbitration.  Investors can recover some or all of their losses due to the bad advice – usually against the firm that the FA worked for in a failure to supervise case.  Arbitration is common for aggrieved investors, and this law firm has successfully represented numerous investors who have been the victims of unsuitable investment advice from an FA.

But what about punishing the broker, so he or she doesn’t do it again to someone else?  Can they go to jail? If not, what does happens?

In some more extreme cases, the FA may have committed a crime and may be prosecuted. However, these cases are in the significant minority.  More often, the FA is pursued by a financial industry regulator – usually the Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority (FINRA), but in some cases it could be a state regulator.

These regulators have the power to suspend an FA’s license to sell securities, fine the FA or both.  The regulators also have the ability to punish the firms that employed the FA for failing to supervise the FA properly.

Just yesterday, InvestmentNews reported that FINRA would be toughening its sanctions against firms and FAs for suitability violations.  According to the article, FINRA will be “tightening the screws on its disciplinary responses” against FAs including increasing its suggested suspensions from one year to two years and the potential for barring FAs and firms that commit fraud.  This announcement comes on the heels of a Department of Labor proposal to impose a fiduciary duty upon FAs when dealing with investment accounts – meaning the FA would have to act in his or her client’s best interest.

Ultimately, steps taken in favor of investor protection whether by the DOL, FINRA or otherwise are steps taken in the right direction.

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

 

 

Is it okay for a broker-dealer to use bonuses and other incentives to encourage its financial advisors to steer customers into “in house” and proprietary funds that may not be right for them just to generate more fees for the firm?  Or does this practice improperly (and illegally) incentivize the financial advisor to betray his customer’s trust for his and his firm’s benefit – thereby compromising the integrity of the relationship?

The SEC is asking just those types of questions about the practices of JP Morgan, according to recent reports.  Per InvestmentNews, the SEC and other regulators have subpoenaed and otherwise inquired of JP Morgan about the firm’s sales practices.  Specifically, the reports indicate that the focus seems to be on conflicts of interest related to the sales of mutual funds and other proprietary products to customers.  The SEC is reportedly looking into whether JP Morgan breached duties to its customers and/or applicable laws by unfairly and/or illegally marketing its in house investment products.

The sale of in-house proprietary products can be a very lucrative business for large “wire houses” as they are known in the industry.  Wire houses include such familiar names as JP Morgan, Merrill Lynch, Citigroup, Wells Fargo, etc.  By performing all of the structuring, issuing, lending and selling for their proprietary funds internally, a wire house is able to capture all of the associated fees, commissions and charges.  Therefore, it is important that regulators review the sales of such in house products, to make sure they are being sold fairly and legally to customers.

The regulators are allegedly reviewing pensions and other accounts that are covered by a fiduciary standard at JP Morgan.  Fiduciary duty means that the financial advisor must look out for their customer’s best interests ahead of their own. There is some debate over whether or not all financial advisors have a fiduciary duty to their customers.

Even so, financial advisors should give unconflicted advice to customers and should be looking out for their customer’s best interests.  Fiduciary or not, it is illegal for financial advisors to improperly provide conflicted and misleading investment recommendations to their customers, and for their firm to encourage them to do so.

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.  The attorneys at Malecki Law have extensive experience representing investors in cases that result from conflicted advice from a financial advisor.

If you or a family member lost money and believe your financial advisor was looking out for himself or herself  instead of you or your loved one, contact the securities fraud lawyers at Malecki Law for a free consultation and case evaluation at (212) 943-1233.

 

 

LPL Financial agreed to pay more than $11 million to settle charges in connection with a Financial Industry Regulatory Authority (FINRA) investigation into the firm, as recently reported in the Wall Street Journal.  According to the Letter of Acceptance Waiver and Consent filed with FINRA, LPL Financial was alleged to have supervisory failures, related to non-traditional products such as exchange traded funds (ETFs), variable annuities, and non-traded real estate investment trusts (REITs).

LPL allegedly failed to deliver over 14 million trade confirmations in addition to failing to properly monitor and report trades.  Of the amount collected, $1.7 million is reportedly restitution for customers, while LPL Financial was fined an additional $10 million.

Vigilant supervision over the sale of non-traditional investments is especially important because public customers are typically unfamiliar with the products being sold to them.  In addition, many non-traditional products have higher commissions (meaning a bigger incentive for a broker to sell such products) than their more traditional counterparts.

Non-traditional products may also have a higher degree of risk for the investor than a more traditional product.  In addition to a higher risk of loss of principal, the risks of non-traditional products can also include liquidity risk – such as high surrender charges in the case of an annuity, or the complete inability to sell on a primary market as with non-traded REITs.

LPL is no stranger to regulatory investigations and fines.  In fact, LPL was just the subject of a 2013 Illinois Securities Department investigation, which resulted in LPL being ordered to pay nearly $3 million over violations in connection with the sale of “variable annuities–one of the firm’s top-selling products,” according to a Wall Street Journal article.  Of that amount $2 million was reportedly a fine, with another $820,000 paid as restitution to clients.

Investor losses in non-traditional investments are unfortunately far too common.  Frequently the victims are senior-aged who have lost their retirement savings after being sold a non-traditional investment such as a REIT or variable annuity with promises of “income for life.”

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.  The attorneys at Malecki Law have extensive experience representing investors in cases stemming from the improper recommendation of non-traditional investments to customers and other broker misconduct.  If you or a family member invested in non-traditional investments such as exchange traded funds, variable annuities or REITs, contact the securities fraud lawyers at Malecki Law for a free consultation and case evaluation at (212) 943-1233.

 

A Letter of Acceptance Waiver and Consent was recently accepted by FINRA’s Department of Enforcement from Andre Paul Young.  Mr. Young was accused of borrowing more than $200,000 from customers in violation of FINRA rules while a registered representative of MetLife Securities, Inc.  Specifically, Mr. Young was accused of violating NASD Rule 2370, FINRA Rule 3240 and FINRA Rule 2010.

It was alleged that from June 2010 through June 2012, Mr. Young borrowed roughly $208,000 from two MetLife Securities customers for personal expenses, including those associated with the settlement of certain estate matters.  Per the AWC, the customers issued five checks from their MetLife Securities brokerage account payable to a bank account number for an account owned by Mr. Young.

Per FINRA, this conduct was in violation of MetLife Securities policies and FINRA Rules.  FINRA Rule 3240 (and formerly NASD Rule 2370) expressly prohibits brokers from borrowing funds from customers.  In addition to those violations, Mr. Young allegedly failed to timely and completely respond to requests for documents and information in violation of FINRA Rule 8210.

Ultimately, Mr. Young consented to “a suspension from associating with any FINRA member in any capacity for a period of one year.”

Per his CRD, Mr. Young was also registered with Source Capital Group, Bancnorth Investment Group, Wachovia Securities and Prudential Securities.

Malecki Law has handled numerous cases stemming from loans to brokers from their customers for investment purposes or other, that were ultimately never repaid.  If you or a family member loaned money to your broker and fear that money may be lost, contact the securities fraud lawyers at Malecki Law for a free consultation and case evaluation at (212) 943-1233.