Articles Posted in Securities Fraud & Unsuitable Investments

The Wall Street Journal reported on July 2, 2015 that many investors may suffer losses as a result of the attempts by Puerto Rico Electric Power Authority (PREPA) to restructure its debt with its creditors in order to avoid a default and other Puerto Rico economic woes.

While clearly many investors are and will continue to be harmed in this market, the pain is likely to be harder felt by two sets of victims of UBS’s closed-end bond funds that are tied to debt issued by PREPA, other utilities and Puerto Rico’s general obligation bonds.

We recently wrote regarding how the brokers who recommend products such as UBS’s closed-end funds may have also been given faulty information from the firm.  Then, Reuters ran an article describing a taped meeting at UBS where leadership threatened the UBS Puerto Rico brokers to sell the closed-end funds at all costs despite growing concerns about the products.  In one of the first arbitration awards to be announced in which UBS was ordered to pay $1 million to an investor related to the UBS closed-end bond funds, a Financial Industry Regulatory Authority (FINRA) arbitrator stated that a recommendation of the bond fund was unsuitable because it was “grossly overconcentrated… any proper UBS branch office or other review should have detected such obvious unsuitability.”

Alleging supervision and other firm failures, Malecki filed a case on behalf of two former UBS Puerto Rico brokers, Jorge Bravo and Teresa Bravo, and anticipates filing other cases on behalf of additional brokers.  The Bravos alleged in their Statement of Claim against UBS that they were both misled and induced by the firm into selling the closed-end bond funds to their clients and were harmed because Teresa Bravo purchased $100,000 of the bond funds herself.

We have been informed that additional brokers may be terminated in the future as a result of the continued fallout over the UBS closed-end bond funds.  These brokers should contact an attorney to discuss their legal options upon their termination, because UBS may be liable for damages to them, as a result of the well-publicized catastrophe that has resulted from the products the brokers were misled and induced to sell, and their clients bough, both upon false pretenses.

It was recently reported that Keith M. Rogers, formerly employed by GLS & Associates, Inc., a FINRA broker-dealer, has been indicted and held on $2 million bond on securities fraud charges, where it was reported that he took investors’ money to pay for personal expenses and repay other investors, a classic Ponzi scheme scenario.  Previously, it was reported that Mr. Rogers was ordered by the Alabama Securities Commission to cease and desist from dealing in securities in the State of Alabama.  In September 2014, Mr. Rogers apparently consented to a bar from the securities industry was barred from the securities industry by the Financial Industry Regulatory Authority (FINRA) for failing to cooperate in FINRA’s investigation into Mr. Roger’s alleged diversion of customer funds away from GLS brokerage accounts.  According to the Administrative Order filed by the Alabama Securities Commission Mr. Rogers facilitated transactions in a company called R&P Development LLC from 2009 through 2013, when he was registered by GLS & Associates, Inc. and Warren Averett Asset Management.

FINRA specifies strict rules on a broker’s ability to solicit business to businesses that are not run by their employing broker-dealer.  Malecki Law attorneys have seen instances where employing broker-dealers fail to properly supervise a broker’s activities.  According to FINRA Rules, Broker-dealers like GLS & Associates Inc. have an important non-delegable duty to supervise the conduct of their financial advisors and employees.  The firm may be held liable for customer losses if the firm failed to properly supervise their employees.  If a broker violates FINRA Rules or securities laws, both the broker and the broker’s employing firm may be held liable for the customer’s losses.

Malecki Law has previously represented many investors successfully in FINRA arbitration proceedings involving outside business activities and firms’ failures to supervise their registered representatives and financial advisors.  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.

As the U.S. baby boomers look toward retirement, a larger percentage of the population will become senior-aged individuals who will have a substantial amount of savings that may be used to fund investments.  It is more important than ever to keep in mind that everyone needs to take as much care over their retirement nest egg now as they did when they were diligently saving.  The New Jersey Bureau of Securities has issued a new release to commemorate World Elder Abuse Awareness Day and remind senior-aged investors to be wary of financial fraud.

In the news release, the NJ Bureau noted that one in five Americans over the age of 65 are victims of financial fraud, making it one of the fastest growing forms of elder abuse.  However, the news release noted that anyone over than 55, whether working or retired, may be viewed as a potential target for financial fraud.

The NJ Bureau of Securities listed several types of financial fraud to be careful of, including:

  • Unsuitable Investments: this involve placing their senior clients with investments that are not suitable for their needs or age. For example, annuities and private placements are often inappropriately sold to seniors.  These products may include significant penalties for withdrawing money before a certain date, or for transferring the annuity to another person.  The also may provide high annual expenses as well as the loss of principal – leaving little or nothing for the investor to leave to his or her heirs.
  • Affinity Fraud: this happens when victims make investment decisions based on the recommendation of a trusted “friend” based on their similar age, ethnic background, religious affiliation, or other affinity. There is nothing inherently wrong about sharing deeply held traits or interests with your financial professional.  But there are plenty of scammers who have no qualms about using these connections to lure and keep victims.  One could certainly argue that Bernie Madoff, exploited victims he had an affinity to, his clients, who trusted him because he seemed to understand their specific concerns and support their causes.  We at Malecki Law have represented many groups of investors who were each led to trust a financial advisor based on common ties such as neighborhood involvement and church affiliation.
  • Free Lunch/Dinner Seminars: there is no such thing as a free lunch. Offers like this are sometimes made by scammers who invite senior citizens to “free lunch” seminars at which the guests are treated to a sales pitch for an unsuitable investment. Anyone who attends a “free lunch” event should be prepared for what follows the meal – and should remember that accepting the free lunch does not obligate anyone to make an investment.  Consumers should not confuse a sales pitch for sound financial advice. The presenter will not know each attendee’s specific financial circumstances and will not be in a position to know how they should best invest their money.  Finally, seniors should never provide their personal information at these events.
  • Telemarketing Scams: Telemarketing scammers often target seniors, knowing that seniors who live alone may be lonely, have time to listen and talk, and look forward to receiving telephone calls.  Anyone who listens to a telemarketing pitch should be very cautious.  Never buy anything over the phone or provide any personal or financial information to a caller.  If you are pressured in any way to answer questions or accept an offer, simply end the conversation and hang up.

The NJ Bureau of Securities also noted the following red flags to watch out for, which may be an indication of fraudulent conduct in a brokerage or investment account:

  • You cannot locate the person to whom you gave your investment money or power of attorney over your account.
  • You wrote the salesperson a check in his or her name, or the name of a business you do not recognize as a widely known company.
  • Your account has experienced unexplained, excessive losses.
  • You no longer receive brokerage statements.
  • You did not receive any documents in writing regarding your investment.
  • You signed investment documents that you did not understand.
  • You have added a new friend to a joint account, property title, will or mortgage. Or you have given a new friend power of attorney.

Malecki Law has previously represented many senior-aged investors successfully in FINRA arbitration proceedings involving unsuitable investments and fraudulent securities schemes, as well as others.  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.

Foreign investors continue to be targets of investment fraud.  Bloomberg Business has reported that broker-dealer Arjent LLC Chief Executive Officer Robert DePalo has been indicted by a New York Grand Jury on charges related to misappropriation of $6.5 million from U.K. investors for personal expenses, including his mortgage and luxury cars.  In addition to the action brought by the New York Manhattan District Attorney, the Securities and Exchange Commission has announced that it also brought its own parallel action in Manhattan federal court.

According to the article, Mr. DePalo is alleged to have misappropriated millions from foreign investors in a holding company called Pangaea Trading Partners LLC.  Mr. DePalo is alleged to have engaged in high-pressure sales tactics and stating falsehoods about the company’s assets and how it would invest the money received.  The Bloomberg article reported that according to the SEC, the Mr. DePalo transferred the money directly into bank accounts controlled by himself and his partner Joshua Gladtke.  The SEC is reported to also have alleged that Mr. DePalo sought to cover up the fraud from regulators.

Lately, the attorneys at Malecki Law have noticed an uptick in schemes, including high-pressure sales tactics, targeting foreign investors.  These tactics may include little-known securities investments, repeated calls and emails to the targeted investors and misrepresentations made concerning the viability of the company that issued the underlying securities.

According to Bloomberg, Mr. Depalo attempted to retaliate against the SEC by suing them in New York federal court in 2013 claiming injustice against small broker-dealers.  The court dismissed that case, stating the SEC was immune from such lawsuits.  Bloomberg reported that at the time of the scheme is accused of perpetrating, Mr. DePalo was near insolvency in his business.

Bankruptcies, both person or business-related, can serve as a major catalyst for unscrupulous activities by brokers and financial advisors.  When these financial professionals are pushed to the brink financially in their personal lives, they may be enticed to offer unsuitable investments, or even enter into wholly fraudulent schemes that serve only to line their own pockets at the expense of their customers.  Unfortunately, lax supervision and self-reporting at firms often does not uncover or report to regulators these bankruptcies.

Malecki Law has previously investigated and successfully handled securities arbitrations concerning investment advisors and brokers who were under financial hardships as a result of bankruptcies, then choosing to unsuitable or fraudulent investments.  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.

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.

 

 

A former University of Washington faculty member pled guilty in connection with a Ponzi scheme that lasted at least six years.  It has been reported by the Washington State Sky Valley Chronicle on May 20, 2015 that Satyen Chatterjee, who owned and operated a financial advisory business called Strategic Capital Management, Inc. for more than twenty years.  The news article reported that the Washington State Department of Financial Operations ordered the business to cease operating illegally in 2013.  The guilty plea was also announced by the Federal Bureau of Investigations in a press release dated May 18, 2015.

According to the article, Mr. Chatterjee used his faculty post at the University of Washington to promote his advisory business.  The article went on the detail that Mr. Chatterjee convinced investors to transfer funds on the belief they were purchasing fixed rate securities, when in reality he transferred the money to personal bank accounts to fund his lifestyle or lost the money day trading.  Also detailed in the article was another scheme whereby Mr. Chatterjee solicited investments in a nutrient supplement company, but used that money to pay off investors who thought they invested in the fixed rate securities.

According to the FBI press release, Mr. Chatterjee admitted to the scheme to defraud investors during a period of 2007 to 2013.  The FBI press release estimates that at least six investors were defrauded out of more than $600,000.

The FBI press release also detailed that Mr. Chatterjee fabricated account statements for at least one investor, and blamed some of the investor losses on investment associates who defaulted on agreements they had with Mr. Chatterjee, as well as blaming them for certain of the losses.

Malecki Law has previously investigated and successfully handled securities arbitrations concerning Ponzi schemes and fraudulent investments perpetrated by financial advisors.  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.

Not far from the home of the original “Ponzi scheme” in Boston, the SEC filed a complaint in the United States District Court for the District of Rhode Island on May 7, 2015 alleging that financial advisor and former broker Patrick Churchville operated a Ponzi scheme that defrauded investors out of $11 million.  The SEC complaint alleged that the fraud was run out of a company called Clearpath Wealth Management, LLC.

According to the SEC complaint, Mr. Churchville operated a Ponzi scheme by using investments from new investors to pay the distribution claims of old investors.  The SEC also alleged that Mr. Churchville diverted approximately $2.5 million of investor funds to purchase his home overlooking Narragansett Bay.  Local News Station WPRI reported on its website that the home is now up for sale for $3.5 million.

The SEC alleged that the fraud began in around December of 2010.  According to his publicly available Financial Industry Regulatory Authority (FINRA) CRD report, Mr. Churchville was registered by Spire Securities, LLC from August 2009 through February 2011, during the time that the SEC alleged fraudulent conduct occurred.  Broker-dealers generally have an obligation to supervise the offices where their registered employees such as Mr. Churchville work.  It is unclear from the SEC’s complaint or FINRA CRD what, if any, disclosure was made to Mr. Churchville’s investors by the firm.

Malecki Law has previously investigated and successfully handled securities arbitrations concerning private securities transactions and other fraudulent conduct by brokers who are employed by FINRA member broker-dealers.  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.

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.

 

 

On the heels of an announcement from the Financial Industry Regulatory Authority (FINRA) that LPL Financial LLC has been fined approximately $12 million as a result of lax supervision, FINRA barred former LPL broker Charles Fackrell as a result of him refusing to comply with FINRA’s request for information.  Mr. Fackrell was employed by LPL Financial in North Carolina from 2010 through 2014, according to a review of publicly available records.

According to a Letter of Acceptance, Waiver and Consent No. 20140437052 (AWC), the results of a FINRA investigation into Mr. Fackrell’s activities while employed at LPL Financial allegedly uncovered securities rule violations for selling private securities offerings.

In the AWC, Mr. Fackrell consented to the finding that he violated FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade).  Rule 2010 requires that all FINRA members shall observe high standards of commercial honor and just and equitable principles of trade.

Selling private securities offerings without the required disclosures and approval of a FINRA member broker-dealer are a very serious violation of the securities laws and rules.  Any investors who invested in these potentially fraudulent investments may have claims against both the broker, and perhaps the broker-dealer LPL Financial.  LPL, as Mr. Fackrell’s employer, is obligated to supervise Mr. Fackrell’s recommendations to his customers, and must perform regular audits to root out potentially fraudulent conduct.

Any investor who lost money while working with Mr. Fackrell are urged to contact the Attorneys at Malecki Law for a free consultation to determine if they have claims related to their investments.  LPL reported on Mr. Fackrell’s publicly available CRD Report that Mr. Fackrell faces felony charges related to obtaining property by false pretenses.

Malecki Law has previously investigated and successfully handled securities arbitrations concerning private securities transactions and other fraudulent conduct by brokers who are employed by FINRA member broker-dealers.  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.

Senior-aged investors continue to dominate securities related news coming out of the Financial Industry Regulatory Authority (FINRA).   Though Avenir Financial Group, a New York-based broker-dealer, has only been a FINRA member for three years, the regulator has alleged substantial fraud claims against the firm, the firm’s Chief Executive Officer and Chief Compliance Officer Michael Clemens and several registered representatives.

In a New Release dated April 27, 2015, FINRA alleged that Avenir and registered representative Karim Ibrahim (a/k/a Chris Allen) defrauded a 92 year old customer of the firm by selling equity interests in the firm based on misleading and fraudulent terms.  FINRA alleged that Mr. Ibrahim was aware that the firm was financially struggling, yet offered 5% of the company for $250,000, a valuation that was materially misleading because other investors had previously been offered lower prices and there was no basis for the change in the prices.  FINRA alleged that Mr. Clemens aided and abetted the fraud by instructing Mr. Ibrahim regarding the proposed sale to the senior-aged customer.

In the related FINRA Complaint, FINRA detailed that Avenir “inexplicably” increased the equity share offerings.  For example, the Complaint stated that a one percent share increased from an initial offer of $2,600 to a third offering costing $50,000.  During this time, Avenir was allegedly suspended from operating a securities business when its net capital decreased below regulatory thresholds, and the firm faced an approximate $200,000 margin call that would have closed the firm had it not been for the investor who purchased the third offering.

FINRA alleged in the Complaint that Avenir, Mr. Clemens and Mr. Ibrahim violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(b), as well as FINRA Rules 2020 (Use of Manipulative, Deceptive or Other Fraudulent Devices) and 2010 (Standards of Commercial Honor and Principles of Trade).  Rule 10b-5 is the main tool that regulators use to prosecute securities fraud.

In a separate matter also involving defrauded investors at Avenir, FINRA detailed that broker Cesar Rodriguez consented to being barred from association with any FINRA member firm for fraudulent investments.  According to the Letter of Acceptance, Waiver and Consent No. 2015044960502 (AWC), Mr. Rodriguez sold promissory notes and equity self-offerings, telling investors he would use the proceeds raised for operations at an Avenir branch office he ran in Illinois.  Instead, the AWC described that he used the proceeds for personal needs.  In the News Release, FINRA stated that many of the defrauded investors were senior-aged.

Malecki Law has previously investigated and successfully handled securities arbitrations concerning senior-aged and other investors who have been defrauded by brokers and broker-dealers.  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.