The investment and securities fraud attorneys at Malecki Law are currently investigating UBS’s Yield Enhancement Strategy (“YES”) for the purpose of investor recoveries. Our attorneys are interested in hearing from investors and others who have information and/or have experienced losses due to UBS YES or other complex yield enhancing investments regardless of the brokerage firm.

It appears that the YES strategy may have been sold to UBS clients as a conservative and low-risk investment strategy that would provide them with an increased yield (income) in their portfolio. In fact, in our opinion, the strategy was an esoteric leveraged options strategy that utilized an options strategy known as the Iron Condor, which is inherently risky as it relies on consistent stability in the markets.

USB YES employing the esoteric Iron Condor strategy uses a leveraged options strategy in a client’s portfolio. UBS would use the client’s assets as collateral in a margin account then execute four different options trades, simultaneously selling calls and puts in an attempt to generate income and buying calls and puts in an attempt to hedge risk. This resulted in the creation of a price spread. If the price of the index or security the options were a derivative of stayed within the spread it would produce a premium to the investor. However, the excessive volatility experienced by the markets recently and most notably in the fourth quarter of 2018 blew through these spreads resulting in serious losses to investors.

In the “worst day of 2019” for the market, the Dow Jones Industrial Average dropped 767 points by closing on Monday. When the market suddenly drops, investment portfolios will reflect not only the fluctuations but also the risks inherent in that particular strategy. All securities carry risk, but some investment products have more than others. Risk tolerance refers to the level of uncertainty in investment performance that is acceptable to the investor. An investor’s risk tolerance is reflective of their financial situation, needs, age, objectives, time requirements, and other considerations. Generally, investors can be categorized within varying levels of conservative, moderate, or aggressive. The types of investments in an investor’s portfolio should reflect their risk tolerance. The changes that investors noticed in their portfolio during market shifts could be indicative of where their portfolio falls on this spectrum.

Investors with the lower risk tolerances should have a conservative investment strategy in place that shields their portfolio from significant declines in market downturns. The goal of conservative investors is to prioritize principal protection and liquidity over risky appreciation. A conservative investment portfolio will be mainly comprised of safer, low-risk fixed-income investments, such as bonds and certificates of deposits. While low-risk investments do not generate the highest returns, the chances of losing principal are much lower. Older individuals closer to retirement should have investment profiles that reflect a more conservative investment portfolio. It is a huge red flag for any conservative investors to have noticed a complete decline in their portfolio from the market downturn.

Aggressive investment portfolios consist of substantially riskier investments that could potentially produce higher returns. However, these speculative investments come at the cost of potentially losing most or almost all of their principal. Younger investors with the time to recover losses are the demographic group that may be able and/or willing to weather a more aggressive investment strategy. Younger investors can usually benefit from saving as much as possible in retirement accounts in anticipation of the market’s eventual recovery and benefit from the compounding returns. However, investors of all ages who are more apt to want to sell at market downturns immediately should not be in this speculative investment strategy.

FINRA-registered brokerage firm, Nomura Securities International, Inc., will pay over $25 million to settle the SEC’s allegations that its supervisory shortcomings permitted traders to defraud customers in transactions involving mortgage-backed securities. In two related enforcement actions, the SEC details how five former Nomura brokers allegedly made misrepresentations to customers while selling non-agency commercial real estate (CMBS) and residential mortgage-backed securities (RMBS) between 2010 and 2014. As part of the settlement, Nomura will pay $20.7 million to RMBS customers and $4.2 million to CMBS customers as reimbursement for profits obtained from the brokers’ misrepresentations along with a$1.5 million regulatory fine. Our investor fraud lawyers highlight this case as an example of the potential fraud that could occur in markets as opaque as that for mortgage-backed securities.

According to the SEC, Nomura traders allegedly mislead customers about the cost of the securities and the profit the firm would receive from transactions. Notably, the traders reportedly inflated the prices of securities by sometimes even doubling the actual cost. The SEC also alleges that the Nomura brokers would sometimes claim to still be in negotiations with a third party while already having the mortgage-backed securities in their possession. The traders were able to get away with their misrepresentations because the secondary trading market for mortgage-backed securities does not make trade prices public. Therefore, customers can only rely on the words of their financial professionals. The trust should have been safeguarded by proper oversight by the brokerage firm. However, Nomura’s alleged “weak” supervisory procedures enabled otherwise discernible and preventable fraud to go undetected.

Mortgage-backed securities are fixed-income investments collateralized by a pool of residential or commercial real estate loans. The creation process of these asset-backed securities entails banks selling mortgages to an entity that securitizes the pool for sale to investors. Entities that issue mortgage-backed securities could be a federal government agency, government-sponsored enterprise, or a securities firm. Investing in mortgage-backed securities entitles the investor to the interest payments and principal paid by the original burrower. Investors can expect a coupon rate, known as the yield, equivalent to the borrower’s payments to their mortgage. The amount of risk involved in mortgage-backed securities depends on the issuer. Mortgage-backed securities issued by the Government National Mortgage Association, a U.S government agency guarantee that investors receive timely payments. However, private institution-issued mortgage-backed securities do not have such protections.

The House of Representatives has voted to block funding for the highly contentious four-pronged investment advice reform package deemed “Regulation Best Interest” through an amendment to the Financial Services and General Government Appropriations Act. Huge fiduciary duty proponent, Rep.  Maxine Waters, D-California proposed this amendment which prevents the SEC from using any funds under the Act to enforce Regulation Best Interest. The amendment could halt the SEC’s recently approved advice package, which includes Regulation Best Interest, Form CRS Relationship Summary and the agency’s interpretations of two concepts under the Investment Advisors Act. Our investor fraud attorneys echo Maxine Waters sentiments that the final rules fail to include the much-needed fiduciary duty and only facilitates further confusion, which is a far cry from strengthening investor protection.

Regulation Best Interest emerges a year the courts repealed Obama Era’s Department of Labor’s fiduciary standard, which required advisors to put their client interests first. Historically, the regulatory landscape distinguished between financial advisors who were obligated to legitimately act as fiduciaries and brokers not held to as stringent of a standard. Investment advisors are required to show an ongoing duty of loyalty and care, in serving their clients best interests at all times under the Investment Advisors Act of 1940. Meanwhile, brokers were only obliged to meet a “suitability standard,” according to FINRA rules, when recommending securities to investors. Under FINRA rule 2111, brokers must have a “reasonable” belief that a potential investment product or strategy is “suitable” for the investor based on the customer’s age, objectives, risk tolerance, and other information.

The most significant rule included in the standards reform package, Regulation Best Interest is intended to strengthen the duty of care owed by brokers above just the suitability standard. The SEC claims that the regulations would disclose conflicts and clarify the duties owed to investors. However, under these rules, broker-dealers are only required to disclose, but not necessarily mitigate any conflicts of interests with investors, unless state law is more strict. With this in mind, brokers are still not required to put their client’s interests entirely before their own genuinely if state law does not provide protection. Essentially, brokers can now advertise themselves as serving their clients’ “best interest” while not putting their clients’ interests first absent state prohibitions. While more disclosures are always beneficial, Regulation Best Interest fails to raise the standard of care enough to help investors not get taken advantage of by unscrupulous financial professionals.

Former Windsor Capital broker, Jovannie Aquino has been barred from working in the industry by the Securities and Exchange Commission after allegedly churning his retail customers’ accounts. The SEC further alleged that Mr. Aquino executed trades in client’s accounts during his time as a registered representative at Windsor Capital between May 2014 and November 2017. While at least seven customers incurred at least $881,000 in losses, Mr. Aquino generated $935,000 in profits, according to the SEC. A recent administrative proceeding order issued by the SEC reveals that Mr. Aquino consented to a final judgment enjoining him from future violations. Our securities attorneys have investigated into the SEC’s findings on Jovannie and many other brokers accused of engaging in fraud involving churning claims.

According to the SEC’s complaint, Mr. Aquino allegedly gained control of these customer accounts through cold-calls using publicly-available databases. Once Mr. Aquino held these seven customer accounts, he reportedly recommended a series of frequent, short term-trades. Even though the customer accounts were non-discretionary, Mr. Aquino allegedly made trades without their explicit permission. Allegedly, Mr. Aquino profited through excessive markups/markdowns, commissions, and other fees from churning these accounts.

Churning is when a broker frequently trades in a customer’s account to profit from the commissions. Although there is no exact formula to demonstrate churning, the securities industry informally considers turnover rates and cost-to-equity ratios to be indicative of this behavior. The average turnover rate, defined as the percentage of securities replaced in a given year was 28.9 for these customer accounts. Such a number is well above the minimum of 6, that usually suggests excessive trading. Additionally, the average annualized cost-to-equity, the break-even ratio for Mr. Aquino’s seven customer accounts was 87%. Based on that metric, the customers’ portfolio values would have to increase by at least 87% on average to see any profits.

Elite ivy league schools, Princeton and Harvard are the latest to join the growing number of universities offering personal finance training to their students, according to the Wall Street Journal. This past April, Harvard’s economic department led its first workshop covering major personal finance topics such as debt, credit, and retirement. Similarly, Princeton had its first annual Financial Literacy day, which offered information on basic financial terms, money management and planning for the future. The growing interest in including personal finance as part of educational curriculums coincides with America’s rising inequality and massive student debt, with over $1.5 trillion owed. Our investor fraud law team applauds the greater inclusion of personal finance in university education as an excellent starting point for life long self-education. Financial literacy empowers people to make smarter decisions rather than depending on someone who may not have their best interests in mind.

Everyone should have a basic understanding of proper saving, investing, debt management, budgeting and other basic financial concepts to maintain their livelihood. However, an alarmingly high number of Americans do not have a grasp on the financial fundamentals needed to make good decisions when handling their money. In their National Capability Study, FINRA found that around two-thirds of Americans have low levels of financial literacy based on their answers in a quiz. Of the 27,564 Americans participating in the study, most were unable to correctly answer questions pertaining to everyday financial concepts. The quiz questions included calculating interest rates and risk principles meant to provide insight into American financial decision-making. Interestingly, the study found that many respondents overestimated their knowledge.

There are steep consequences to not having adequate knowledge about everyday personal finance concepts. Without financial literacy, individuals will be more likely to make poor decisions with their money and be more susceptible to ill-intentioned securities industry employees. Studies across the board suggest that a significant number of Americans do not have the finances to deal with emergencies and medical expenses. According to the Federal Reserve, 4 in 10 adults would have difficulty covering an unexpected $400 emergency expense. Even more, at least a quarter of survey respondents had to forego a needed medical procedure from not having the sufficient funds to pay the bill.

A significant way that the Securities and Exchange Commission enforces federal securities laws is through levying fines on wrongdoers in the financial services industry.  Within the past few years, the SEC has issued billions of dollars in civil penalties and disgorgements in civil enforcement proceedings against defendants. The SEC allocates received fines, amongst other things, to compensate victims of securities violations. The unfortunate reality, however, is that the SEC only collects a little over half of the fines imposed through settlements and judgments according to agency statistics reported by Wall Street Journal.

In a five-year fiscal period ending in September 2018, the SEC reportedly collected 55% of the 20 billion dollars in fines imposed upon wrongdoers in the industry. Between 2009 and 2013, the SEC issued $14.6 billion in fines but collected 60% from the defendants. In the fiscal year 2018 alone, the SEC only received about 28% of their 4 billion dollars in fines levied through 821 enforcement actions. Out of the total owed fines, $1.7 billion comes from a settlement with an international oil company, Petrobras and the SEC is permitting this owed money to go to Brazilian authorities instead. Therefore, it is not unlikely that the SEC will never collect this significant fine that could have gone to funds meant for harmed investors.

The SEC has struggled with collecting civil penalties and disgorgement ordered in enforcement proceedings for quite some time. Based on the kinds of people and entities fined, the SEC often holds a low chance of actually getting the money. Fined defendants often do not have the money to pay, on top of dealing with the other consequences of their actions such as serving prison time and owing civil suits. After all, several fraud perpetrators, such as Ponzi Schemers get charged for their actions only after losing money needed to maintain their scheme. Even if the defendants can afford to pay the fine, the SEC does not have the right to force payment by seizing a debtor’s property or assets. Instead, the SEC must go through the long, tedious process of collecting money through liens and other court remedies to collect on the judgments.

Getting called by the SEC can be a frightening experience for anyone. Such a call is especially serious for financial professionals including those that trade in stock or work for public companies or companies which had stock that sold in private offerings. The SEC can oblige any American citizen to comply with any demands for information that could assist in their enforcement of federal securities laws. One of the more frequently asked questions that our securities regulatory law team answers in our free consultations is: “Should I respond to the SEC’s phone call?”  The answer is yes, but only after retaining an experienced securities regulatory attorney to represent you in the process and be your intermediary. The contacted party should take down the SEC caller’s name and information to call back later.

Our securities regulatory attorneys advise individuals not to respond immediately and without a lawyer to mitigate risks. Through this course of action, contacted parties are more protected from unwarranted charges and other risks that arise when speaking with the SEC unprepared.  The SEC may tell you that you are not a target, but they will not make any enforceable promises in that regard. It is up to you to make sure that you do not become a target.  Remember, the English language can be tricky, and lawyers’ use of it is different from that of the average layperson. A point to keep in mind is that when the SEC calls, it has an agenda that prioritizes their mission and not your specific interests.

The SEC reaches out to people to gather facts to determine whether any provisions of federal securities laws or rules have been violated. Thus, financial professionals contacted by the SEC are either the target of an investigation or believed to have related knowledge. The SEC may use the information you provide in the testimony to pursue civil charges through administrative or court proceedings. Additionally, the SEC may provide information to other agencies for their own separate federal, state, local or foreign administrative, civil or criminal proceedings. Individuals contacted by the SEC must respond fully, truthfully, and honestly or risk receiving fines and even possibly terms of imprisonment. In certain cases, it may be in your best interest to asset your fifth amendment rights and not testify at all.

San Diego-based investment advisor, Christopher Dougherty has been arrested for allegedly defrauding mostly senior investors in a multi-million-dollar Ponzi Scheme. The District Attorney’s office charged Mr. Dougherty with 82 felonies that include grand theft, financial elder abuse and securities fraud for activity between 2015 and 2018. According to allegations, Dougherty offered his clients the “opportunity” to invest in his private companies and non-existent tax-free private placements, promising around 5% in quarterly dividends. Meanwhile, Dougherty allegedly used investor money for his expenses and to pay some falsified “returns” to maintain the scam. For this alleged conduct, the SEC has charged Christopher Dougherty, along with his entities, C&D Professional Services, JTA Farm Enterprises, and JTA Real Estate Holdings for securities laws violations. Upon investigation, our securities fraud lawyers find many similarities between the alleged activities and other Ponzi Schemes.

A Ponzi Scheme is a type of investment fraud that uses investors’ money to pay falsified “returns” to other investors. The falsified returns provide the investors with the illusion that their money is producing genuine profits from investments. In reality, Ponzi Scheme perpetrators use the money meant for investments on personal expenses and maintaining the fraud, as suggested with this case. Ponzi Schemers usually gain the trust of their unsuspecting victims to get the funds. All Ponzi Schemes end when the perpetrator is not able to pay the investors their requested money, as seen with Mr. Dougherty. Eventually, there are not enough new funds coming in that can be used to maintain the Ponzi Scheme.

The SEC complaint alleges that Mr. Dougherty raised over $7 million through providing fraudulent advisory services through his firm, C&D Professional Services, Inc. Investors were allegedly offered the opportunity to invest in his organic beef ranch, a marijuana cultivation plan, and real estate holdings. Rather than using the investor funds to generate profits, Mr. Dougherty allegedly just shuffled the money around at his discretion.  Mr. Dougherty allegedly used received investor funds to pay falsified returns to others, including payments to anyone who complained. Additionally, Dougherty spent the money on traveling, home remodeling, college tuition, and other personal expenses.

Former Ameriprise Financial Services, Inc broker Corey Lee Mireau (CRD#3046777) has recently been suspended for two years from the industry after having agreed to the entry of findings alleging his failure to disclose loans from customers, private securities transactions, and outside business activities. As part of his letter of Acceptance, Waiver, and Consent, (“AWC”), Mr. Mireau will also pay a $15,000 fine and $154,458.85 in restitution to one of the clients that he borrowed money from without approval. Malecki Law’s securities lawyer team has been investigating into Corey Lee Mireau’s blemished background as well as his alleged violations of securities regulations including FINRA Rules 3240, FINRA Rule 3270, NASD Rule 3040 and subsequently FINRA Rule 2010.

The AWC claims that Mr. Mireau burrowed money from two of his Ameriprise Financial Services customers, without complying with relevant FINRA rules and internal firm policies. In September 2013, Mr. Mireau allegedly borrowed $150,000 from a customer and invested most of the money in a wholesale company in the e-cigarette business. A broker generally should not borrow money from their customers without the arrangement meeting requirements set forth by FINRA Rule 3240(A) and following firm required procedures. Furthermore, Mr. Mireau should have sought written approval for using the borrowed money in a private securities transaction under NASD Rule 3040. In May 2017, Mr. Mireau allegedly borrowed $500 from another customer and also failed to disclose the details to Ameriprise Financial.

In addition to the aforementioned, Mr. Mireau allegedly provided consulting services to a customer in 2014 and 2015, which would have been considered an outside business activity under the law. According to FINRA Rule 3270, brokers must provide disclosure and seek approval for outside business activities. Specifically, “No registered person may be an employee, independent contractor, sole proprietor, officer, director or partner of another person, or be compensated, or have the reasonable expectation of compensation, from any other person as a result of any business activity outside the scope of the relationship with his or her member firm, unless he or she has provided prior written notice to the member, in such form as specified by the member.” However, Mr. Mireau allegedly did not provide written notice, and instead made false statements in multiple annual compliance questionnaires with Ameriprise Financial.