Articles Posted in Securities Fraud & Unsuitable Investments

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.

Unfortunately, the elderly and the inexperienced investors are oftentimes the ones who find themselves victimized by unscrupulous and predatory brokers. Foreign persons – from Europe, South America, and elsewhere – also appear to be increasingly victimized by such U.S.-based brokers as well.

On April 28, 2015 the Financial Industry Regulatory Authority Department of Enforcement filed a complaint against Mr. Lawrence LaBine. According to the Complaint, Mr. Labine is accused of having violated NASD Rules 2310 and 2110 and FINRA Rule 2010 in making unsuitable recommendations to customers, Section 17(a) of the Securities Act and FINRA Rule 2010 in making misrepresentations and omissions concerning Domin-8 and D8, and Section 10(b) of the Exchange Act, Rule 10b-5 thereunder and FINRA Rules 2020 and 2010 by making fraudulent misrepresentations and omissions concerning Domin-8 and D8.

The Complaint alleges that Mr. LaBine made the subject fraudulent misrepresentations and omissions to customers, as well as unsuitable investment recommendations to customers while registered with DeWaay Financial Network. Many of Mr. LaBine’s customers at DeWaay to whom he sold unsuitable investments were said to be elderly and/or inexperienced investors.

Per the Complaint, Mr. LaBine sold senior debentures issued by a company called Domin-8, which purportedly developed real estate management related software. At the time he sold the debentures to his customers, FINRA alleges that Mr. LaBine withheld from his customers information about the perilous financial condition of Domin-8. Reportedly, Domin-8 filed for bankruptcy shortly after the sales in question.

Speculative debentures, such as those allegedly sold by Mr. LaBine, can be especially unsuitable for elderly investors. Frequently, these investments are difficult to value and experience high price volatility – meaning that prices can go up and down very quickly. This all adds up to increased risk of loss that is usually not appropriate for retirement or near-retirement aged investors.

In addition to the Domin-8d debentures, FINRA alleges that Mr. LaBine recommended other investments that were unsuitable for his clients, including non-traded Real Estate Investment Trusts. Non-traded investments such as REITs carry with them an extra risk above and beyond a traditional publically traded investment. While most people believe that investment risk is limited just to a drop in the price of the investment, non-traded investments also have liquidity risk.

Liquidity risk is important to note because given that there is no publicly traded market, investors who need to sell their investment (a REIT, for example) may not be able to. In this situation, an investor who really needs to get their money out of the investment may be forced to offer to sell it at a very steep discount in order to entice another investor to buy it. In some cases, there may not even be a buyer, meaning the investor’s money is completely locked up. This can be scary for someone who may desperately need the money for unforeseen medical or other expenses.

Malecki Law has handled numerous cases stemming from unsuitable investment recommendations. 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.

In what appears to be another example of broker-dealers continuing to ensure that the wrong speculative securities are sold to the wrong investors, the Financial Industry Regulatory Authority (FINRA) announced in a News Release on April 23, 2015 that RBC Capital Markets, LLC was fined approximately $1 million and ordered to pay restitution of approximately $400,000 for the firm’s failure to supervise the unsuitable sale of reverse convertible securities to public investors.  According to FINRA Letter of Acceptance, Waiver and Consent No. 2010022918701 (AWC), a reverse convertible securities are “a complex structured product” that are interest-bearing notes in which principal repayment is linked to the performance of an underlying asset like a stock, a basket of stocks, or an index like the S&P 500.

In the News Release, FINRA’s Chief of Enforcement is quoted as stating: “[s]ecurities firms must ensure that their brokers understand the inherent risks associated with the complex products they are selling, and be able to determine if they are suitable for investors before recommending them to retail customers. When the firm establishes suitability guidelines, it must police the transactions to ensure they appropriately meet their own criteria.”

According to the AWC, RBC had faulty policies and procedures in place that did not appropriately supervise the recommendation of reverse convertibles to public investors.  RBC’s failure to supervise the recommendation of reverse convertibles also occurred because the policies and procedures in place were not effectively enforced, according to the AWC.  The AWC detailed that RBC failed to detect that more than a quarter of transactions in reverse convertibles “were unsuitable” and were inappropriately recommended to public investors with lower than necessary income, net assets, net worth and/or investment experience, or risk tolerances.

Broker-dealers are the gatekeepers of the securities markets for most public investors, and are thus charged by the securities laws and industry rules to reasonably ensure that registered representatives, who are licensed to recommend securities purchases and sales, do not engage in violative behavior.  These rules, including NASD Rule 3010 (now FINRA Rule 3110) set forth that “[f]inal responsibility for proper supervision shall rest with the member.”  RBC was fined by FINRA because it failed in these responsibilities related to reverse convertible securities, a complex structured product.

Malecki Law has successfully handled securities arbitrations concerning issues related to unsuitable complex securities recommendations and sales by registered representatives of 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.

Reuters reported on February 6, 2015 that UBS in Puerto Rico held a meeting during which executives of the firm, including Miguel Ferrer, then the Chairman of UBS Financial Services Inc. of Puerto Rico, threatened financial advisors to sell UBS originated Puerto Rico closed-end bond funds despite the brokers’ and their customers’ growing concerns about “low liquidity, excessive leverage, oversupply and instability.”  According to the Reuters article, Mr. Ferrer found “unacceptable” the view of UBS financial advisors who were wary of recommending UBS funds that were loaded with debt of the Puerto Rican government.

According to the Reuters article, in a recording made by an attendee of the meeting, Mr. Ferrer reprimanded the brokers to focus on the positive aspects of the products available or “get a new job,” continuing that it was “bullshit” for brokers to claim that there were no products to sell.  Portions of the recorded meeting are available online in the Reuters article.

At the time of the recording, according to Reuters, many of UBS’s funds were highly concentrated in Puerto Rico’s debt at a time when there were concerns about the size of that debt and the weakness of the overall economy.  This recording may be beneficial to both claimants and brokers who each have hundreds of millions of dollars in damages because their claims generally alleged that there was a lack of disclosure regarding the attendant risks of bond funds underwritten by UBS.

Investor claims surrounding the PR bond funds have skyrocketed in the past two years.  Now, in light of the published details about the meeting by Reuters, it appears the financial advisors who recommended the bond funds to their clients may have also been misled and pressured by UBS.  As we have written previously, where proprietary products result in substantial losses to investors, they also damage the registered representatives who must rely on the firm’s marketing and research to sell the products.  According to the Reuters article, UBS also pressured its financial advisors with termination if they did not continue to sell the Puerto Rico bond funds.  Because of this, those financial advisors may have claims against UBS PR for losses to their business, the muddying of their professional records and any damages suffered as a result of the investor claims that are reported on the FINRA CRD reports.

Malecki Law has also previously written about duties owed by employing firms to their registered representatives.

Financial advisors and registered representatives have obtained favorable judgments against their employing firms in the recent past.  In the early- and mid-2000s, there was a plethora of litigation surrounding the Morgan Keegan bond funds, which were found to have been misleading to both customers as well as the financial advisors who suffered employment and reputational damage as a result of recommendations made based on firm advice and directives.

Financial advisors who worked for and sold Morgan Keegan bond funds that failed in 2008 were often successful in obtaining expungement of the customer disputes from their CRD record, because arbitration panels found that they were not involved in the complained of investment-related sales practice violations and did not know of their employing firm’s failure to perform adequate due diligence on the products they originated and offered for sale to the investing public.